Defence Industry - A Key Resource to Defence Industry

Market Analysis

Market Analysis gives you the information to understand the opportunities in the defence industry.

Defence industry underwent a redefinition with the end of cold war (mid 1940s to early 1990s), which transformed the global defence economy only to reinforce the dominance of the United States in terms of military expenditure and technology. But the September 11 attack on United States questioned the US homeland security system resulting in an overhaul of the entire security processes in the country. This also sent a caution to rest of the world to strengthen its security systems. Terrorist risks have become a global phenomenon and an unconventional approach and cooperation is the new call. Power and territorial expansion no longer remain the motives but the emerging real concerns are the threats of global terrorism, proliferation of weapons of mass destruction and organized crime, and add to that local and regional conflict.

The perceived threats have given way to technological innovations and have paved way for development of new doctrines. Furthermore, the roles of traditional military and internal security function have blurred. The scenario has thus generated further demand from both civil and military sectors. It has resulted in the internationalisation of production, IT companies finding new grounds within the defence sector, consolidation and the privatisation of military services.

These changes in the defence sector are inevitable as scientific innovation is fast seeping into civilian economy especially in the areas of electronics, software and information and communication technology. Major advances in the fields of nanotechnology, robotics, computer simulation and stealth technology have led the arms producing companies into commercial sector.

Current Market Scenario

Supply of arms and armament production has become a global phenomenon. The current scenario finds western mega firms carving lucrative business niches for themselves, thus it would be difficult for new entrants to gain foothold in the production of major weapons systems and grab the market share of existing giants. However, market entrants may find new areas that are opening up within the sector, due to the increasing importance of network oriented warfare and of communications and control technologies in the field of military operations. With the growth of technology and costs, defence equipment manufacturers are likely to turn increasingly to licensing, collaboration and joint ventures, thereby stimulating further internationalisation of the industry.

It is estimated that yearly global military expenditure is over 1 trillion dollars which is about 2 per cent of World GDP. World military expenditure in 2006 was estimated at US$ 1,158 billion USD. The United States is the top supplier of weapons to the developing world, accounting for around 36 per cent of worldwide weapons sales, followed by Russia, Britain, Germany and China. The US budget for procurement and R & D was US$ 160 billion in FY 2007. These five countries account for over 50 per cent and other fifteen major spenders account for over 50 per cent of world's military expenditure. The high-income countries, the industrialised countries and those in the Middle East have the highest per capita spending on military. The developing countries particularly those in Africa and the Middle east have the heaviest economic burden in terms of its share of GDP.

Future Global Defence Spending

With or without troop withdrawals, the wars in Iraq and Afghanistan will strain global defence budgets. America will lead the way in world defence budget as much as the rest of the world combined. President George Bush has requested a 10 per cent increase in regular Pentagon spending in 2008 amounting to US$ 481 billion to cover war in these two regions. The total US spending for the year would be more than US$ 681billion including homeland security costs. Britain's defence budget by contrast would receive an increase of 1.5 per cent annually between 2008 and 2011, though the navy can look forward to two new 65,000 tonne aircraft carriers as part of the budget.

Natural resource rich countries such as Algeria, Azerbaijan, Saudi Arabia, Chile and Peru will spend more on defence; thanks to rising revenue from oil, gas and minerals. Israeli spending will rise to US$ 11.8 billion from US$ 10.7 billion, including a US$ 3 billion of defence aid from America, a 25 per cent rise. Putting up a brave face, Russia will boost defense spending by 16.3 per cent to 965 billion roubles (US$ 36.8 billion) with more investments to come in the next two years. It plans to double the production of combat aircraft by 2025 while adding more nuclear missiles, aircraft carriers and tanks.

With Olympics in the offing, analysts put China's defence budget at just over US$ 100 billion which is enough to keep Taiwan on the tenterhooks. India with its booming economy is spending vigorously on arms as India has raised its defense spending by 10% to $26.5 billion for the fiscal year 2008-2009. Indian defence market is estimated to reach US$ 36.2 billion by 2013. The total procurement costs are expected to exceed US$ 100 billion by 2022, including the maintenance, repair and overhaul (MRO) market, while the offset potential during the forecast period for India is expected to reach US$ 10 billion by 2013.

Thus, the world military expenditure is likely to rise much faster in the coming years, owing to the growing threat of terrorism which is ushering countries worldwide to ramp up their respective security systems, coupled with the war on terror led by US and allies.