- Armament and disarmament
- Conflict, peace and security
- Peace and development
ELISABETH SKÖNS AND HANNES BAUMANN
II. Overview of trends
III. The concentration process in 2002
IV. Defence industrial policies
A survey of military expenditure and arms exports data suggests that arms production has increased in the USA and Russia and declined slightly in Western Europe. Expenditure on military equipment in the USA increased by 26% in real terms between 2000 and 2002. Although US arms exports declined, the net effect is most likely to be an increase in the level of US arms production during these years. The combined equipment expenditure of West European NATO member states declined by 3% in real terms between 2000 and 2002, while arms exports continued to decline, but only slightly. The spending gap on military equipment between the USA and NATO Western Europe reached a ratio of 3 : 1 in 2002, according to NATO data. In military R&D the gap is greater, exceeding a ratio of 4 : 1 between the USA and the European Union countries in the 1990s, according to the Organisation for Economic Co-operation and Development. Russian arms production has been increasing since 1998. The average annual rate of increase was 28% during the period 1998–2002.
The concentration of the US arms industry continued in 2002 through a series of mergers and acquisitions. The largest deal was Northrop Grumman’s acquisition of TRW. Northrop Grumman aimed to increase its market share in advanced military technologies such as unmanned air vehicles, space-based technologies, and ballistic missile defence. During the 1990s the main purpose of acquisitions was to eliminate redundant arms production capacities or overheads in R&D in order to reduce procurement costs. With increasing concentration a new risk of cost growth emerged because of reduced competition in many sectors of the US arms industry. For instance, the number of suppliers of tactical missiles declined from 13 in 1990 to only 3 in 2000. This may give increased bargaining power to the few remaining companies when negotiating arms contracts with governments. The US Department of Defense expects that the ‘transformation’ of warfare will enable many non-traditional defence suppliers to rise to the ranks of major arms producers and thus ensure competition in the long run. However, a survey of the production of unmanned air vehicles suggests that this is unlikely to happen.
In Europe, the process of industrial restructuring continued with a number of smaller cross-border transactions, primarily in the aerospace sectors (aircraft, missiles and space) and to a lesser extent in the vehicle and shipbuilding sectors. The European Union is increasing its influence on defence industrial policy through initiatives, such as its Strategic Aerospace Review for the 21st Century (the STAR 21 Report) and the renewed proposal for an EU arms procurement agency in the context of the European Convention. Despite their aim of further integration, European governments still differ on issues such as procurement policy, competition policy and foreign ownership of arms production assets. They also disagree on whether to pursue a ‘buy European’ policy or to strengthen transatlantic industrial links as ways to overcome the perceived technology gap with the USA.
The goal of the Russian Government’s restructuring plan is to establish 35–40 major groups of holding companies that will constitute the core of the Russian arms industry. However, this is being implemented very slowly. Many issues still need to be resolved, including the role of the state in the restructuring, appropriate legislation for the holding companies, opposition by regional leaders concerned about centralization, and inter-firm rivalries. The Russian arms industry continues to depend heavily on arms exports. However, there is no mechanism for redistributing export earnings to companies that produce mainly for domestic needs.
The rapid development of military technology and the processes of concentration, internationalization and privatization in the arms production industry present new challenges regarding affordability and the control of arms procurement. The emerging structure of arms production may make it more difficult for governments to control cost, competition and technology. The increasing cost of advanced military technology has also made it impossible for countries to avoid at least some dependence on foreign arms suppliers. Governments have difficulties keeping pace with the strategies developed by companies regarding technology, sales and marketing. In particular, it is more difficult to monitor and control international technology transfers if they take place within large transnational corporations. There is therefore a need for greater transparency in these companies, preferably laid down in international agreements.
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 a chapter in New Millennium, New Perspectives: The United Nations, Security and Governance (UN University, 2000). She has contributed to most editions of the SIPRI Yearbook since 1983.
Hannes Baumann (Germany) is a Research Assistant on the SIPRI Military Expenditure and Arms Production Project. He is responsible for maintaining the SIPRI Arms Industry Database.