7. Arms production

Summary

The arms industry underwent a profound restructuring after the cold war. In the first half of the 1990s it experienced a significant cut in orders, both domestically and from foreign governments. The level of arms production declined sharply in all major arms-producing countries. The reduction in demand for military equipment during the 1990s was significant, both in the aggregate and for some individual countries.

NATO statistics show that the combined military equipment expenditures of all NATO countries dropped by 40% in real terms from the peak levels of 1987 to 2001—by 43% in the USA and by 35% in NATO Europe, although with great variations between countries. In Europe the reductions took place during the first half of the 1990s. Since 1997 equipment expenditure in NATO Europe has increased by 6% in real terms. According to NATO statistics, the decline in total NATO equipment expenditure since 1997 is due to the continuing reduction in US expenditure.

Estimates of national arms sales—used as an approximation of arms production—for the 7 largest arms-producing countries in Western Europe show a sharp decline between 1990 and 1995 in most countries, and a slower decline thereafter. Arms production has increased only in Sweden, a reflection of the JAS-39 Gripen combat aircraft programme. In recent years, the decline in arms exports has been sharper than in arms production. Attempts to compensate for decreased domestic arms procurement by increased arms exports do not appear to have been successful.

Since the mid-1990s the main goal of the large arms-producing companies has been to expand and to improve capacity to win arms procurement contracts, through takeovers, mergers, joint ventures and other forms of company-to-company cooperation, both nationally and internationally. These developments, combined with the processes of commercialization and privatization, are resulting in fundamental changes in the global system of arms production and trade. The increased commercialization of arms production is a result of changes in technology but also of privatization of the arms industry and outsourcing of an increasing range and amount of military services and functions.

The process of concentration of ownership within the arms industry has moved from the national to the international level, driven by the largest companies in their search for access to military markets. A limited number of extraordinarily large companies have emerged, each producing military goods and services with an annual value of $5 billion to $19 billion. Internationalization efforts in Europe are seen as a prerequisite for becoming competitive with the USA and for establishing military–industrial partnerships with US companies. However, European industrial integration is proceeding slowly, and there has been renewed interest in the establishment of transatlantic industrial links, largely within the context of government-to-government programmes for the development and production of specific weapon systems.

Market access is the predominant motive for European and US acquisitions of arms-producing companies in minor producer countries that constitute potential markets. The increased acceptance of foreign ownership in the arms industry by governments in these countries primarily reflects their search for access to advanced technology and to some extent to foreign markets. Both the commercialization and the internationalization of arms production are driven by companies in search of higher profit margins.

Private arms-producing companies have assumed an important role in defence industrial policy decisions. Governments have maintained their role as key supporters of arms-producing activities within their countries—through R&D funding, procurement and export support. This raises the question of the extent to which the role of national governments is diminished with regard to the control and regulation of the supply of armaments to national and foreign armed forces. It also raises the issue of transparency in the development of military technology and the production of equipment and services that increasingly take place in large, powerful, privately owned companies.

Elisabeth Sköns (Sweden) is the Leader of the SIPRI Military Expenditure and Arms Production Project. She is the author of chapters on the economics of arms production and the internationalization of arms production for the SIPRI volume Arms Industry Limited (1993) and other publications. She is also the author of chapters on military expenditure and their determinants and economic impact, including in New Millennium, New Perspectives (UN University, 2000). She has contributed to most editions of the SIPRI Yearbook since 1983

Reinhilde Weidacher (Italy) is a Researcher on the SIPRI Military Expenditure and Arms Production Project. She is the author of a report for the Swedish Defence Research Establishment on the Italian arms industry (1998) and co-author (with Elisabeth Sköns) of a chapter on the economics of arms production for the Encyclopedia of Violence, Peace and Conflict (1999).