10. Arms production
Restructuring of the arms industry continues worldwide as it adjusts to a lower level of demand for its products. The process of reducing production capacity for military equipment is reasonably smooth except in China, Russia and Ukraine, which are facing great difficulties in transforming their military industries.
Viewing the global arms industry through the sample of the 'top 100' arms-producing companies in the Organisation for Economic Co-operation and Development (OECD) and developing countries, the decline in arms sales has decelerated. Their combined arms sales declined by 2 per cent in 1994, as compared with 6 per cent in 1993. Since it is generally agreed that the combined excess capacity in these countries is far from having been eliminated, production and sales are expected to continue to fall, although possibly at a lower rate. Concentration, both national and international, facilitates reductions in capacity but also leads to less competition.
In the USA restructuring takes the form primarily of concentration into a few dominant players in each field and is associated with substantial cuts in production capacity. In Western Europe companies focus on costs, fearing competition from large US corporations. Because there are barriers to mergers into international company structures, military industrial concentration in Europe tends to take the form of international joint ventures, focused on specific weapon projects or categories of weapon.
In few other major arms-producing countries has military production dropped as sharply during the 1990s as in Russia. By 1995 military production had declined to one-sixth its level in 1991. Only Ukraine has experienced a sharper drop: to one-tenth its 1991 level. The decline in Russian military production has been chaotic and to a great extent beyond government control. Some diversification into civilian production has taken place, but much less than was expected. During 1995 the government continued its efforts to come to grips with the situation through a more focused defence industrial policy, the three main goals of which are: to define the top-priority technology areas for the arms industry; to maintain programmes for dual-use technologies; and to guarantee continued technological progress in areas critical to national security.
China is also facing the difficulties of downsizing. With domestic procurement in considerable decline and few export options, China's military industries must contract but are ill-prepared to meet commercial challenges. Taking advantage of contraction at the international level, China may be able to use its impressive economic growth to secure access to foreign military technology, especially from Russia and Israel.
Of the four industrializing countries examined, India's arms industry is marked by productivity and excess capacity and has few links to civilian production. It accounts for a small share of GNP but is still absorbing a disproportionate share of national science and technology resources. There is a significant dependence on foreign technologies through licensed assembly and production.
Israel and South Africa are no longer regarded as politically sensitive partners and are trying to exploit the emerging niche on the international market for refurbishing military equipment. Israel has a technologically advanced arms industry, which has been built up in close cooperation with the USA. The size of the arms industry is being reduced as a matter of conscious policy, but there is little interest in diversification and the companies are strongly oriented to increasing their share on the international market.
The excess capacity of South Africa's arms industry is partly an effect of reduced military budgets but also of its goal of self-sufficiency in armaments during the embargo period. A broad range of armaments are developed and produced, but the level of technology is lower than that of many of its competitors. The choice for South Africa is between diversification into civilian products and military exports.
South Korea has launched an effort to expand its indigenous arms production capability on the basis of its achievements in civilian industry. Four companies in South Korea would be included in the list of the top 100 companies in 1994 if data were available. Like Japan in many ways, South Korea has given priority to civilian production and only recently decided to raise the technological level of its defence industrial base.
Appendix 10A. The 100 largest arms-producing companies, 1994
Appendix 10A contains contains data on the 100 largest companies in the OECD and developing countries in 1994.