10. Arms production

Summary

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

ELISABETH SKÖNS

Appendix 10A contains contains data on the 100 largest
companies in the OECD and developing countries in 1994.