Addressing the “headwinds” faced by the European arms industry

ABSTRACT

The European arms industry is challenged by several adverse “headwinds.” Fragmentation leads to costly duplications and, in conjunction with stagnating budgets and sharply increasing costs, prevents firms from exploiting economies of scale and learning. This is exacerbated by size differentials vis-a-vis the leading US arms manufacturers and competition from emerging producers. As some “headwinds” are self-enforcing, far-reaching industrial and policy responses are required to improve the industry's outlook. As exports may not indefinitely compensate for low domestic demand, there is an economic imperative for further cross-border collaboration and consolidation. Despite various EU policy initiatives, progresses regarding the European Defence Equipment Market and strengthening the European Defence Technological Industrial Base have been relatively slow. It remains to be seen whether the European Defence Fund will be the proclaimed “game-changer,” raising competitiveness of the European arms industry. At the same time, the UK's withdrawal from the EU adds uncertainties.     

Perspectives for the development of key industrial capabilities for Canada’s defence sector

With the Canada First Defence Strategy, Canada has put forth a major opportunity to reconcile national security imperatives and industrial policy. The Jenkins Report (2013) set out to examine ways to use that procurement effort to foster key industrial capabilities (KICs) that would put the Canadian defence industry at an advantage both nationally and internationally. The Canadian defence industry should then develop highly focused capabilities with a view to moving up global value chains. As such, KICs that hold the best potential should be selected. They should be sustained through a range of strategies that are however contingent on the elimination of policy gaps. This leads to a balancing act between the need to control intellectual property assets versus accessing them in a world where national boundaries are eroded. Canada’s industry should target opportunities outside North America while continuing to focus on better integration with the North American industry.     

Country survey X: Defence spending in Turkey

This paper provides a country survey of the Turkish defence economy. Turkey is a member of NATO alliance and is strategically located between Europe and Middle East. Moreover, Turkey has a high defence burden and high economic growth. The first part of the survey presents a brief economic background of Turkey, its armed forces, the defence industry, its modernisation and trends in Turkish defence expenditure. The rest of the paper focuses on the relationships between defence spending and economic growth. The effect of defence spending on economic growth is econometrically estimated using a supply side model. Both externality effects and the size effect of defence spending are estimated for Turkey. The study concludes that defence expenditure stimulates economic growth while externalities from the defence sector to the rest of economy are negative for Turkey.     

Globalisation in the defence industry: An exploration of the paradigm for us and European defence firms and the implications for being global players

This paper explores some of the key issues associated with the restructuring of the defence industry. A comparison is made between the US and the European Defence Industrial Bases in terms of the drivers for change and the paradigms within which change has taken place. Having shown that some very important differences exist, the paper then explores the approaches that have been adopted for industry consolidation and references them to the academic literature on mergers and acquisitions (M&As) and strategic alliances (SAs). Given that most of the key defence players recognise the need to be global players, the paper presents an argument that the European firms’ experience of operating with a wide range of forms of corporate alliance will serve them in good stead for operating on a global defence scale. US firms, in contrast, have focused largely on M&A activity.     

Book reviews

The Political Economy of Military Spending in the United States, Alex Mintz (ed), London and New York: Routledge, 1992, pp x, 334; ISBN 0–415–07595–5

Penser La Guerre, Penser L'Economie, Christian Schmidt, (Paris: Odile Jacob, 1991), 350p.

Military Production and Innovation in Spain, Jordi Molas‐Gallart, Chur (CH): Harwood Academic Publishers, 1992, pp. vii, 212; ISBN 3–7186–5280–3     

Turkey’s strategic choice: buy or make weapons?

Turkey has been investing in its national defence industrial base since the 1980s. As with other developing countries, Turkey’s motivations for investing in national defence industries can be boiled down to the pursuit of defence autarky, economic benefits and international prestige. However, after 40 years of investment, Turkey is unable to reach the primary goals of defence industrialisation. We argue that three factors are important to understanding Turkey’s persistence in these primary goals. First, Turkey believes that there is an overall improvement in its defence industrial capabilities and the goal of autarky is still reachable. Second, increased defence exports support the belief that Turkish defence industries have become sustainable and the trend will continue in the future. The third reason, perhaps most important of all, has to do with the domestic political gains of defence industrialisation: the AKP uses defence industry and indigenous weapon systems for prestige and, therefore, garners broader support.     

The future of the defence firm in small and medium countries

The Western European defence industry used to be characterized by numerous constraints, especially in the small countries, subject to uneconomic defence production policies. It faces, since the end of the Cold War, a succession of new challenges such as budget restrictions, armament reductions and geopolitical upheavals. The EU is pushing in the direction of a cohesive foreign policy, including security and defence. Today, the emergence of a more consolidated European defence industry and the presence of oligopolistic European companies imply the definition of new roles for the EU and for its European Security and Defence Policy (ESDP). The solution is not protectionism, but more co‐operation to ensure effective defence production at a socially acceptable cost. In the framework of this co‐operation, defence companies in small and medium countries have a role to play as part of the supply chain to major weapon system integrators.     

Defence industrial policy – a sound security strategy or an economic fallacy?

This article explores whether it makes sense for national governments to employ defence industrial policies – such as offsets and discriminatory procurement practices – to support their domestic defence industries. This question has so far primarily been discussed by economists, who have argued strongly against the use of defence industrial policies. This article maintains that these economists fail to address the often complex motivation behind the introduction of these policies. It illustrates these shortcomings by contrasting their arguments against a case study of Norway, which accounts for the country’s use of defence industrial polices from the early post-Second World War era up until today. The article concludes that, depending on their objectives, defence industrial policies can be seen as either a sound security strategy or an economic fallacy.     

Change as a cost driver in defence procurement

This paper discusses change transactions that occur in connection with the procurement of defence systems. The bases for the reasoning are the ideas of Miller and Vollman (1985 Miller JG Vollman TE (1985) The hidden factory – cutting the explosive growth of overhead costs requires mastery of more than just what happens on the shop floor Harvard Business Review Sept–Oct 142 150  [Google Scholar]) and Eppinger (2001 Eppinger DE (2001) Innovation at the speed of information Harvard Business Review January 149 158  [Google Scholar]). These researchers argue that unplanned flows of information lead to change transactions, causing significant overhead costs. According to this paper, change transactions in defence procurement could be caused by (a) the changes in technology taking place during the long lifetime of a defence system and (b) the structure and contents of the agreements between the defence agent (the procurer) and the defence industry (the supplier).     

Defence and firm performance in the UK

The UK Ministry of Defence is British industry's largest single customer and a number of firms and industries are highly dependent on defence sales. Various hypotheses have been proposed about the impact of defence procurement on firms and these are investigated using four performance indicators: financial structure, investment, productivity and profitability. With regard to the borrowing ratio, capital investment and the rate of return, there is no statistically significant difference between the mean financial ratios for low and high dependence firms. However, non‐dependents appear to have a higher level and rate of growth of labour productivity than dependents.     

Country survey IX: Spain

From the early 1980s Spain embarked on a wide‐ranging process of military reform, from organisational changes to defence industrial policies. Investment in military equipment was set to grow, policies were drawn up to foster the domestic defence industrial base, defence R&D rocketed, and Spain joined a myriad of international arms development programmes. Yet, by 1991 the process of reform had run out of steam. Expenditure planning proved unreliable, and firms suffered from sharp cutbacks in procurement expenditure. The model of defence industrial growth sketched in the mid‐1980s had floundered. The Spanish case provides an example of how the quest to maximise defence procurement from domestic sources can fall victim to industrial and budgetary constraints. Spanish defence producers are now becoming increasingly intertwined with foreign defence companies.     

‘I have seen the future and it works’: The US defence industry transformation – lessons for the UK defence industrial base

The US has embarked upon a major transformation of its approach to defence industrial base planning. Although bureaucratic and industrial inertia, as well as budgetary constraints, may delay transformation, its effects will lead to radical changes in the US defence industrial base with new entrants and new combinations of players. The UK, with more modest defence ambitions, capabilities and budget, will seek to keep in touch with the US. However, a commercially‐led drive to embed UK industry even more deeply in the US defence market could be the last step in creating a largely US–UK North Atlantic relationship, with much of Europe very much a subsidiary business concern. This contains a risk that the UK will become increasingly dependent on the US for design and integration of major systems and national defence industrial capability focused on a limited number of niche technologies.