Trends in Arms Production

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Introduction

Important changes are still taking place in the international arms industry, although the post-cold war restructuring of the international arms industry has shown some signs of subsiding. Current developments in the arms industry include the increasing concentration and internationalization of production, the increasing importance of IT and electronics companies within the defence sector and the ‘privatization’ of services that were once provided by the military.

Recent trends in the arms industry

The arms sales of the 100 largest arms-producing companies in the world apart from China in 2005—the SIPRI Top 100—increased by 3 per cent in real terms over the arms sales of the Top 100 for 2004 and by 18 per cent over those of the Top 100 for 2002. US companies dominate the SIPRI Top 100: 40 US firms accounted for 63 per cent of the combined Top 100 arms sales of $290 billion in 2005. Some 32 West European companies accounted for another 29 per cent and 9 Russian companies for 2 per cent. Companies based in Japan, Israel and India, in descending order, accounted for most of the remaining 6 per cent of world arms sales. Four US companies, one British company and one Italian company increased their arms sales by more than $1 billion in 2005 and 11 companies increased their arms sales by more than 30 per cent. Of these, four were Russian companies and five were companies that increased their arms sales in the areas of information technology and services. Most of these sharp increases were the result of acquisitions of other companies (or parts of other companies) rather than of organic growth.

Parts of the US arms industry have benefited substantially from the USA’s post-September 2001 policies, particularly the increased demand for new equipment generated by the military operations in Afghanistan and Iraq. These policies have also stimulated strong growth in government expenditure on homeland security, thereby increasing demand in the broader security industry.

A major factor behind current developments in the arms industry has been the high and rising fixed costs of advanced weapon systems. Companies use mergers and acquisitions to achieve economies of scale, but the increased concentration of production can also lead to reduced competition and thus remove incentives to keep prices down and innovation up. Government strategies to deal with this economic dilemma have included international collaboration and arms exports; using commercial technology in weapon systems; and outsourcing, privatization and partnerships with the private sector. However, most governments still cannot afford to maintain their current levels of arms procurement and have had to make choices affecting their defence policies and the structure of their arms industries. The debate in the UK in 2006 over a new defence industrial strategy provided a good illustration of the challenges confronting the European arms industry. One of the tasks of the European Defence Agency, established in 2004, is to achieve cost savings, primarily by promoting European collaboration in armaments development and production.

Long-term trends in the arms industry

Considering the longer-term developments in the arms industry, during the post-cold war period, three main types of changes are apparent: structural, technological and compositional. At the same time, there is also continuity.

Structural

For a general background on arms industry concentration, see Concentration in the arms industry.

The arms industry has become increasingly concentrated, nationally as well as internationally. The share of the top 5 companies in the total arms sales of the SIPRI Top 100 increased from 22 per cent in 1990 to 43 per cent in 2005.

Technological

There has been a clear and significant qualitative change in the nature of technology because civil technology has become increasingly important for weapon systems. This has led to an increasing importance of IT and electronics companies, often previously civil companies, in the defence sector and an increased number of civil companies in the supply chains of main contractors. The demands of the USA’s ‘global war on terrorism’ have reinforced this trend. Whereas in the past the spin-off of military technology to the civil sector tended to be an important argument for the value of military production, the focus is now more on ‘spinning-in’ civil technology to the military. In addition, the use of standard commercial components is an increasing feature of the arms industry: many components of major weapon systems are commercial off-the-shelf products, produced by manufacturers that would not consider themselves part of the arms industry. The major contractors have become increasingly systems integrators, retaining the characteristics of defence specialized firms.

Compositional

The privatization of defence services and support is drawing new kinds of suppliers into military contracting. This has been made apparent in Iraq, with companies taking on support roles that in the past the armed forces would have undertaken. A big growth area is the provision of security—guarding people and buildings. While some of these activities can be seen as an expansion of the arms industry, other support activities are not military services but general security services and construction, creating a periphery of private companies around the core arms industry.

See also excerpt from: Sköns, E. and Weidacher, R., ‘Arms Production’, SIPRI Yearbook 2002, (Oxford University Press: Oxford, 2002), pp. 341-346.

Continuity

These developments have resulted in marked changes in the arms industry and further changes can be expected. It is, however, important to recognize that arms contractors continue to have a set of unique characteristics, due to the nature of the arms market, making them different to firms in other industrial segments. The nature of arms procurement and its elaborate rules and regulations mean that they face considerable barriers to exit, while non-specialist companies continue to face considerable barriers to entry for the same reasons. In spite of internationalization in terms of markets and supply chains, the home market and home government support remains vital to arms-producing companies.