Chapter 9. Arms production
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.
Elisabeth Sköns (Sweden) is the Leader of the SIPRI Military Expenditure and Arms Production projects.
Eamon Surry (Australia) is a Research Associate with the SIPRI Arms Production Project.