GLOBAL DEFENSE MARKET
DSEI NEWS: Global Defense Spending Rises; Ukraine War Changes Industrial Landscape
Josh Luckenbaugh photo
LONDON — Global non-U.S. defense spending is expected to rise 4 percent annually through 2028 — outpacing past trends — with Japan and South Korea leading the way with huge plus-ups, according to the latest figures provided Sept. 11 by McKinsey and Company on the eve of the DSEI trade show in London.
Japan and South Korea boosted their defense budgets by 40 percent over the past decade, and Japan is expected to go even further with annual 14 percent increases through 2028, the report, “Shifts in a Changing International Market,” stated.
The Ukraine war has shifted the nations benefitting from the global growth in defense spending, with Russia suffering a steep 21 percent decline in the amount of annual defense contracts with overseas customers, and U.S., French, German and Italian arms sellers claiming Russia’s lost business, the report noted.
David Chinn, McKinsey senior partner, said there are several reasons behind Russia’s steep decline. First, the war is consuming some of its industrial capacity. Also, much of its previous business went to its neighbors.
“Russia made their neighbors feel threatened by that situation, and they’re now rethinking some of their export relationships,” he told reporters in a briefing.
Further, there is a reputation problem. Buying weapons from the international pariah might not be the best look for a country, he said.
The United States took the biggest share of Russia’s pie at 11 percent in 2022, with France following at 5 percent and Germany and Italy at 3 percent. These figures exclude F-35 sales.
Also claiming larger shares of the non-U.S. defense markets are South Korea and Turkey, which are offering lower-price military hardware, the report noted.
Overall, Europe’s defense spending is expected to rise, with NATO countries projected to spend a cumulative $660 billion to $830 billion more from 2022 to 2028, the report said.
South Korean and Israeli defense companies are garnering more of the European defense contracts, although European weapon manufacturers continue to do well with orders and revenue both trending upwards over the last year, the report said.
A separate report released on the eve of DSEI, “Perspective on the State of European Defense,” showed that Europe remains a highly fragmented market, with most countries operating their own systems — and despite lip service about more cooperative weapon programs, the trend is going the opposite way.
For example, the European Defence Agency countries operate 21 different main battle tank models and versions, 20 different fighter jets and 27 different destroyers and frigates, the report noted. Sixty percent of the continent’s weapon systems are only operated in one nation, the report added.
European Defence Agency countries set a goal that 35 percent of new defense systems are cooperative programs where at least two ministries of defense develop a new platform or defense system. That only reached 18 percent in 2021. And the goal of 20 percent of research-and-development programs being cooperative similarly only reached 7 percent in 2021.
Chinn said McKinsey has taken a lot of time to study collaborative defense programs in Europe; some are successful, some are not. Reluctance to engage with allies and partners often rests with jobs and the need to keep them within their own borders.
“This is one of the few places where government can create high-tech jobs,” he said.
And then there is the differing lifecycles. One country might have to develop a new tank for example, but its ally’s tank might have another 15 years of life left on it, he noted. “Then there are just disagreements between countries and their industrial partners. Europe is just like one big family, and like most families, they don’t always agree,” he added.
Yet, collaboration continues. There are two jet fighter programs in their early stages: the Global Combat Air Programme between the United Kingdom, Italy and Japan, and the Future Combat Air System, a joint Germany, France, Spain program.
Chinn said such programs are necessary for nations to maintain their skills in producing weapon systems. Yet, there are often disagreements as to how to share the work and where the jobs go, he said.
The F-35 Joint Strike Fighter is a good example of a collaborative program that worked out for all of those involved. The key difference was that there was no doubt as to who was in charge of the program — the United States. But today, all the development partners have great jobs and are supporting their industries by being part of the program.
“There are many ways to play this,” he added.
The high cost of research and development will play a role in bringing countries together, he predicted. If each country goes their own way in the development phase, it leaves them less money for procurement. “The logic here is well understood. Let’s wait and see what happens,” he added.