GLOBAL DEFENSE MARKET
U.S. Retains No. 1 Ranking in Global Arms Sales, Other Countries Closing the Gap
New data on global arms sales show steady dominance of the market by U.S. manufacturers even as the volume of transactions by American and European companies has slipped over the past several years.
Sales by the top 100 firms have dipped by 1.5 percent in real terms between 2013 and 2014, and most of the drop came from companies in North America and Western Europe, whereas companies located in other regions of the world have collectively increased their military and defense sales, says a new report by the Stockholm International Peace Research Institute.
This is the fourth consecutive year in which the largest arms producers have seen a drop in sales, according to the SIPRI survey released Dec. 14.
Excluding China, deals by the world’s top 100 arms exporters reached $401 billion in 2014, and U.S. companies captured 54.4 percent. U.S. companies saw business decrease by 4.1 per cent between 2013 and 2014, which is similar to the rate of decline seen from 2012 to 2013.
One company bucking the downward trend is Lockheed Martin, whose sales grew by 3.9 percent in 2014 to $37.5 billion. Lockheed Martin’s lead over the second ranked company Boeing — which had total arms sales of $28.3 billion — increased by $4.4 billion in 2014.
“With the acquisition of helicopter manufacturer Sikorsky Aircraft Corp. in 2015, the gap between Lockheed Martin and other companies ranked in the top 10 will widen even further next year,” said Aude Fleurant, director of SIPRI’s arms and military expenditure program.
Western European companies’ arms sales decreased by 7.4 percent in 2014, SIPRI estimated. The exceptions were German and Swiss companies, whose business grew last year.
The SIPRI report confirms what many U.S. industry analysts have said for years about the global defense market becoming more competitive and creating long-term challenges for American firms.
Russia’s arms industry sales continued to rise in 2014 despite difficult national economic conditions, the report said. The number of Russian companies ranked in the top 100 went up from 9 to 11. “Russian companies are riding the wave of increasing national military spending and exports,” said SIPRI Senior Researcher Siemon Wezeman.
The survey identified several “emerging producers” that continue to strengthen their presence in the top 100. They include Brazil, India, South Korea and Turkey. Although their combined arms sales represent only 3.7 percent of the top 100, their revenues rose by 5.1 percent between 2013 and 2014.
American companies account for seven of the top 10 firms, and the other three are European: 1) Lockheed Martin 2) Boeing 3) BAE Systems 4) Raytheon 5) Northrop Grumman 6) General Dynamics 7) Airbus Group 8) United Technologies Corp. 9) Finmeccanica 10) L-3 Communications.
While American defense contractors are not expected to relinquish their grip on the market any time soon, U.S. analysts have raised red flags.
“The appreciation of the U.S. dollar could be a huge problem” as U.S. defense contractors try to grow internationally, said Frank Finelli, managing director of The Carlyle Group, a private equity firm. If today’s currency trends continue, European and Russian weapons could become 30 percent cheaper than those made by the United States, Finelli said during a panel discussion at the Center for Strategic and International Studies.
Currency issues aside, U.S. companies will retain their advantage as long as foreign buyers continue to value their military ties with the United States, observed Joel Johnson, executive director of The Teal Group, a market analysis firm.
“Obviously, the exchange rate is not helpful, but I don't think it is critical,” Johnson told National Defense. “Countries that want a U.S. weapon system because of performance and long-term relationships with the U.S. military are likely to go our way anyway.”
A more worrisome trend for American companies is the commercialization of defense technology. “I do think in the future we will see competition from countries that can provide an ’80 percent solution’ at 80 percent of the price, which may affect both us and our traditional European competitors,” Johnson noted. “Turkey, Ukraine, South Korea are worth watching, particularly with respect to ground equipment.”
The international arms market spotlight in the coming years will be on the F-35 joint strike fighter. Manufacturer Lockheed Martin and its major subcontractors have to be worried that if the Pentagon decides to cut back on future orders, the unit price of the aircraft could increase and make it unaffordable vis-à-vis other global competitors, Johnson said. “I suspect the problem is less about the exchange rate and more about U.S. budget restraints." If the United States decides to curtail F-35 buys, “it could scare off foreign buyers,” he said. “The unit cost impact will be greater than exchange rate impact.”