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 outsourcing of functions that were once carried out within the military establishment.

Recent trends in the arms industry

The arms sales of the 100 largest arms-producing companies in the world apart from China in 2006—the SIPRI Top 100—increased by 4 per cent in real terms over the arms sales of the Top 100 for 2005 and by 32 per cent over those of the Top 100 for 2002. (See table below). US companies dominate the SIPRI Top 100: 41 US firms accounted for 63 per cent of the combined Top 100 arms sales of $315 billion in 2006. Some 34 West European companies accounted for another 29 per cent and 8 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. Six US companies, one French company and one Trans-European company increased their arms sales by more than $1 billion in 2006 and 16 companies increased their arms sales by more than 30 per cent. Of these, three were Russian companies, six were companies that increased their arms sales in the areas of information technology and services, and five were companies producing military vehicles and other equipment directly relevant for military campaigns in Afghanistan and Iraq. These sharp increases were the result of varying combinations of organic growth and acquisitions of other companies (or parts of other companies).

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. Both the European Defence Agency and the European Commission brought forth policy proposals addressing the challenges facing the European arms industry, aimed at promoting European collaboration in armaments development and production, and opening up EU arms procurement to intra-community competition.

For more information on restructuring of the arms industry in 2007, see here.

Table: Trends in the arms sales of the SIPRI Top 100, 2002–2006

NB: figures refer to the companies that constituted the SIPRI Top 100 in each year, based on the most recently available data.

For more information on recent trends, see Perlo–Freeman, S. & Sköns, E., Arms Production, Chapter 6 in SIPRI Yearbook 2008: Armaments, Disarmament & International Security, Oxford: OUP.

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 and outsourcing 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. One growth area is the provision of security—guarding people and buildings, for which both states and non-state bodies may be customers. However, the majority of revenue for this military services industry comes from support roles such as logistics, training, maintenance repairs & overhaul, IT services, facilities management, etc. Such services have been the focus of outsourcing in the US and the UK for some time now, and are increasingly becoming so in other western countries. Providers of such services include both traditional major equipment providers—who have for a long time provided services such as maintenance, but are increasingly expanding into other service areas—and specialist military services companies.

A more detailed discussion of the military services industry is found here. See also Perlo–Freeman, S. and Sköns, E., ‘The Private Military Services Industry’, SIPRI Research Paper 001, 2008.

For more on these trends, 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.