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Strategic Analysis:
A Monthly Journal of the IDSA
Defence Industries in a Changing World: Trends and Options
By Deba R. Mohanty
*
Introduction
Before examining the general patterns of global defence industrial behaviour, a few qualifications are in order concerning the value of military expenditure data and the problem of comparability thereby posed: a problem, that has remained unresolved despite the best efforts of internationally recognised institutions like Arms Control and Disarmament Agency (ACDA), Stockholm International Peace Research Institute (SIPRI), 1 International Institute for Strategic Studies (IISS), and others. Moreover, the content of ‘military expenditure’ and its valuation often appear ambiguous. In terms of the former, the magnitude of the whole defence effort of a country may vary by alarming proportions depending on the criteria adopted. 2 To simplify, budgetary allocations for ‘national defence’ under a single category is just a part of the whole defence effort of a country where several other departments also get funds whose end products are used for national defence. Though the transparency factor in military expenditure claimed by the powerful industrialised countries tries to reduce this problem, a lot still remain to be done, even in the case of these countries. The problem persists, even gets worse, in the case of countries like China, where not only is it difficult to obtain data on military expenditure it is even more difficult to interpret them. The latter, if examined closely, creates severe difficulties. Serious problems in valuation can be occasioned by inflation and exchange rate effects, not to speak of the distortions caused by the difficulties of pricing non-marketable commodities. One dollar of military expenditure in one country does not necessarily deliver the same amount of capability as a dollar spent in another country owing to widely differing technological, production, and manpower endowments. All told, then, any utilisation of aggregate military expenditure data, whether from international agencies or directly from national government accounts, must be treated with utmost caution.
Caution notwithstanding, some aggregate trends are immensely worrying. Most salutory is the sustained increase in world military spending despite sluggish and uneven growth in the global economy, especially during the 1970s and 1980s. The Cold War confrontation caused nations on both sides of the iron curtain to dramatically increase their nuclear and conventional military capabilities. A number of states, being dragged into the big game in one way or the other, also registered substantial increase in their military spending. Thus, while the average annual real growth of world military expenditure between 1975 and 1980 registered 1.5 per cent, the figure had leapt to 3.2 per cent in the succeeding half a decade-and did so despite a rate of increase in world GDP of only 2.4 per cent. These aggregate figures, however obscure, offer considerable geographical variations. For the developing countries as a whole, the GDP grew at an annual rate of 1.8 per cent where as military expenditure grew at 3.1 per cent. Yet, most weight must be attached to the activities of the NATO and the Warsaw Pact, which together accounted for 73.5 per cent of global defence outlays in roughly equal proportions. 3 A principal outcome was the increase in the share of defence outlays earmarked for equipment. Another trend being the incessant drive on the part of the advanced industrial countries to generate and maintain technological advantage and its corresponding response, the desire of the newly industrialising countries to acquire as much defence production capabilities as possible. Thus, the post-World War II division of labour in defence production, marked by the overwhelming dominance of the USA and the USSR, had given way to a more stratified division among a great number of new producers. 4
This period has seen enormous effort by countries to build up their arsenal to meet the challenges posed by the Cold War. Consequently, defence budgets were increased substantially, millions of men and women were in the armed forces, constantly training for the high-tech demands of modern warfare; thousands of nuclear-tipped missiles and nuclear-stocked bombers were kept in constant readiness for instantaneous launch; massive tank battalions and fighter plane squadrons were poised on both sides of the Central European dividing line; and defence industries pressed ahead, producing still greater quantities of more advanced weapons.
Changing Scenario
Quite unexpectedly, peace broke out in the late 1980s. The Berlin Wall fell; and after more than four decades of Cold War that began with the Berlin Blockade in 1948 and climaxed with the Reagan defence build up in the 1980s, the world suddenly witnessed the disintegration of not only the Warsaw Pact but of the powerful Soviet Union as well. With the end of the Cold War, there has been an enormous reduction in the levels of military effort by the major powers. The demand for military equipment has gone down considerably. The global military expenditure that stood at $1360 billion (in constant 1995 prices) in 1987, was down to $864.5 billion in 1995; further slid to $727 billion in 1996, and stood at $714.2 billion in 1997. 5 It is to be noted here that the world military expenditure is declining but the rate of decline is slowing down. It stands at 0.6 percent in real terms in 1997, compared to an average of 2.5 percent during the period 1993-97. If one takes a 10-year period, one may find that the decline in world military spending that began roughly from 1988, is slightly more than 1/3rd in real terms, which corresponds to an average annual decrease of nearly 4.5 per cent (1988-97). 6 While regions like America, Europe, and Africa have witnessed a decline in military expenditure, Asia, Middle East and Oceania have witnessed a slight increase despite overall declining trend. In brief, while the late 1980s and the early 1990s show a significant decrease in military spending, the consequent period (1993-97) has witnessed a lesser degree of decline.
There is no single indicator that captures the scale of change in world military expenditure in the present times. Some of the major indicators have been explained elsewhere. Perhaps indicative are sales and employment figures of the largest defence companies and manufacturers. Arms sales by 100 largest arms producing companies in the OECD and developing countries fell by 15 per cent between 1991 and 1994. 7 It has fallen further in subsequent years and has come down to 11.5 per cent in 1996. According to the Bonn International Center for Conversion (BICC), worldwide employment in the arms industry has fallen from 17.5 million workers in 1987 to 11.1 million in 1995. 8 More than 90 per cent of the reductions have occurred in member countries of NATO and the former Warsaw Treaty Organisation. 9
The dramatic changes in the conditions for arms production beginning in the late 1980s continue to have a strong impact on overall production and the defence industry during the mid and late 1990s. However, the declining trend in the demand for military equipment appears to be slowing down, and in several major arms producing countries, the decline has indeed turned into growth (Table 2 illustrates this). Even so, the level of demand today is significantly lower than it was in 1987, the peak year of global military expenditure. Analysis of trends in the main centres of demand suggests that global demand for weapons dropped between one-third and one-half between 1988 and 1997. 10 While NATO expenditure on military equipment fell by one-third and Russia’s arms procurement budget has been reduced by more than two-thirds over the period 1988-97, arms import by developing countries, despite increasing demands from some specific countries, has fallen by 33 per cent during the same period.
Trends in Military R&D Expenditure
Global military research and development (R&D) expenditure continues to decline. This is primarily because of reductions in the US budget. Only South Korea has continued to increase its effort despite economic difficulties. Its military R&D funding for the year 1997 was increased by 10 per cent in real terms. 11 Almost all other major investors have reduced their respective budgets. Among the most notable developments in 1997 are the Japan Defence Agency’s decision to reduce research and development (R&D) investment (it stood at 143.7 billion yen, a 17.6 per cent cut in real terms), the Russian government’s new approaches to diversify funding of the military technology base, and the US Quadrennial Defense Review (QDR), 12 which continued the controversial post-Cold War policy of reducing R&D less than other accounts, especially procurement. The annual global expenditure on military R&D stands roughly at $58 billion in 1997, 13 of which $37 billion is accounted for by the US.
Globally, military expenditure on R&D has witnessed reductions, yet the degree has not been substantial. It still remains slightly above the 1983 level. However, the global trend suggests some encouraging indications. Most of the major investors are much less likely to contribute to vertical proliferation with possible exception of the US, the largest share holder of the R&D expenditure. They seem to emulate parts of the US technology for reasons based on their political and economic situations. Thus, the main concern is not their contribution to vertical but more importantly horizontal proliferation as new suppliers of technology have been able to reach the users to whom US technology is not available either due to denial and/or sanctions and other means or due to high prices which the buyers cannot afford. Countries like Italy, Japan, South Korea, Sweden, and possibly China increased their military R&D budgets between 1991 and 1993. Horizontal proliferation has contributed marginally till date but it is difficult to say whether this trend will continue for long. Advocates in favour of such a trend argue that the post-Gulf War period did not lead second-tier arms producers to increase their R&D budgets in the hope of developing or countering technologies developed by the US. Yet, it can be argued that there is a profusion of second-tier arms producers that has led to a more complex situation as it has considerable capacity to alter the existing balance. As mentioned earlier, the apparent unwillingness on the part of the major investors in military R&D to contribute to vertical proliferation (case studies include Japan, G-7 and other countries), and with the nature of horizontal proliferation still unclear, it may be assumed that the international scenario is likely to be characterised by a greater degree of dependence on US technology by the friendly militaries on the one hand, and still greater possibility of emergence of a complex horizontal proliferation on the other. The latter, in all probability, seems to be a future trend.
Table 3: Government Expenditure on Military R&D in Selected Countries: 1992-96
(including percentage of total R&D expenditure)
(Figures are in US $ million at 1995 prices)
| Countries | 1992 | 1993 | 1994 | 1995 | 1996 |
|---|---|---|---|---|---|
| USA | 44000 (58.6) | 43000 (59) | 39000 (55.3) | 37000 (54.1) | 37000 (53.7) |
| France | 6800 (35.7) | 6200 (33.3) | 6000 (33.1) | 5200 (30.3) | 4900 (29) |
| UK | 3500 (40.7) | 3800 (42) | 3300 (38.9) | 3500 (40.8) | 3200 (37) |
| Germany | 2400 (10) | 1900 (8.5) | 1900 (8.6) | 2000 (9.1) | 2200 (9.8) |
| Japan | 1400 (5.9) | 1500 (6.1) | 1500 (6) | 1600 (6.2) | 1800 (5.9) |
| Sweden | 690 (24.3) | 650 (23.5) | 500 (18.9) | 570 (20.9) | |
| Italy | 600 (7.1) | 620 (8.5) | 590 (8.9) | 300 (4.7) | |
| S. Korea | 330 (20.1) | 400 (21.4) | 400 (19) | 440 (16) | 460 (13.1) |
| Spain | 410 (14.6) | 340 (12.5) | 280 (10.6) | 300 (10.4) | 310 (10.8) |
| S. Africa* | 210 | 170 | 160 | 160 | 150 |
| Canada | 190 (6) | 180 (5.5) | 180 (5.5) | 150 (4.9) | 120 (4.3) |
Figures for fraction of total government expenditure are not available.
Source: Derived from tables 7.2 and 7.3, SIPRI Yearbook 1998, pp. 269-70.
Trends in Demand and Supply
Declining trend in the demand for military equipment has been noted for quite some time, especially since 1994. It appeared to have slowed down during the period 1995-96 as mentioned elsewhere. Yet, the level of demand is significantly lower than what it was in the pre-1987 period. This trend has had a major impact on arms producing companies. The vast arms indstry, for decades nortured by the Cold War, is now faced with unprecedented contractions in arms procurement orders. It may take many more years to stabilise the industry as it has been in the process of adjusting its production to a situation which is fundamentally different from that of the late 1980s. Undeniably, the process has been painful so far.
The total volume of arms sales of the 100 largest companies in the OECD and developing countries stood at $156 billion in 1996. 14 It was in comparison to the previous year which had witnessed a slight increase. This was mainly due to the fact that the US arms industry witnessed a rapid concentration through mergers and acquisitions that contributed significantly to an increase in the overall arms sales. The US topped the list with its 38 top companies contributing 55 per cent of the total arms sales ($86.3 billion in 1996), while top companies (54) of the combined OECD countries contributing 42.2 per cent (sales amounting to $66.1 billion), and those of non-OECD countries contributing only 2.5 per cent (with sales worth $4 billion). 15
The overall decline in the defence market has resulted in reduced arms sales by most of the companies. The combined arms sales of the US companies have slowed down in 1996. As a result of the completion of a large number of major mergers and acquisitions initiated during 1996 and 1997, both, the shares of arms sales the and number of companies are likely to go down in the near future. In comparison, the West European companies have shown a better result primarily due to significant growth in the sales of the British and German companies. Other OECD companies have suffered as their total share has also fallen by nearly 0.3 per cent.
Table 4: Shares of arms sales for top 100 arms producing companies in the OECD and the developing countries in 1996
| No. of Companies | Country/Group | % of Total Arms sales in 1995 |
% of Total Arms sales in 1996 |
Total Arms Sales in 1996 (in US$b.) |
|---|---|---|---|---|
| 38 | USA | 55.4 | 55.2 | 86.3 |
| 40 | West Europe OECD | 35 | 35.5 | 55.6 |
| 14 | Other OECD | 6.9 | 6.7 | 10.5 |
| 8 | Non-OECD | 2.8 | 2.5 | 4 |
Source: Derived from Appendix 6.E, SIPRI Yearbook 1998, pp. 261-66.
Inconsistent performance coupled with considerable decrease in demands for military equipment have led to a situation in which fundamental changes in the defence industry are required. It seems that the defence industry has almost reached its limits under the existing condition. It is also a possibility that fast changes in military technology have not only given a new dimension to weapons production but have also made most of the existing industries producing an array of conventional weapons obsolete acquiring radical reforms in order to survive. In such a scenario, several steps like down-sizing, restructuring, conversion, and diversion are being contemplated. Before we analyse the major trends of the defence industry in the 1990s, it would be worthwhile to take a close look at the major factors that have contributed to the squeeze that the industry is experiencing now and the changes in the long established trend that lasted for over four decades.
The changed political climate in Europe culminating in the dismantling of the Warsaw Pact (WTO) and the collapse of the Soviet Union could be taken as the first such factor. Change of the political climate in other parts of the world have also played a role but not to the extent to which the transformations in. The end of the Cold War drastically changed the security scenario. Disarmament efforts and reduction in armed forces, which till the early 1990s were modest, became the buzzwords. There are indications that gradual reduction in military manpower, spending, and production rates are becoming the beginning of a long-term trend. Second, financial constraints have become quite visible. In the contemporary security environment, value of military budgets has fallen in real terms. This is perhaps due to the fact that other economic priorities seem to be competing successfully against the military needs. Also, it is argued that reasonable cuts in military spending may not necessarily affect the defence preparedness of a state. Huge arms build-up seem no longer credible or feasible. If one examines the past record of arms procurement growth rates, one can notice that the pre-1987 growth has almost taken a negative turn around in the post-1987 period. Another setback for arms producing companies shows that their ill-fated policy of expansion and growth projection have indeed exacerbated the present strains on the whole industry. Reversal of growth rates have forced the defence industry to reduce over-capacity. The process of down-sizing has already begun, even in countries like China. As things stand now, there seems to be no alternative for the defence industry but to rationalise existing capacity further. Third, arms exports reduction. There is every indication that the volume of arms exports have been going down since 1987. The period between 1987 and 1992 witnessed a major decrease in the volume of major conventional weapons exports and since then it has shown a fluctuating trend with the year 1997 showing a considerable upward jump. 16 Yet, it can fairly be said that the volume is going to decrease in the next few years. Today, the industry is faced with reductions in both domestic and international demand for arms. In brief, political and economic factors have contributed to a drastically changed international environment, with reduced business prospects for the defence industry. This is witnessed in several core areas-shrinking arms sales, loss of jobs, and reduced profit opportunities. How does the defence industry cope with such a scenario?
As things stand, the defence industry has been in the process of adjusting production to a completely different international environment. The adjustment process which is both time consuming and painful, is now moving from the early stage of rapid down-sizing, rationalisation, and concentration into a stage in which top individual companies that have maintained a strong defence orientation are positioning themselves in the smaller market for their survival. Among the developed countries, downsizing and consolidation have been most pronounced in the United States. As a result of this process, the US has now witnessed the formation of a few very large conglomerates. In comparison to this, consolidation has been found to be slower in Western Europe. A new development in this part of the world is that defence industries have been trying for cross-border consolidation to strengthen their position vis-à-vis the US and other industries and to remain competitive at the international level. Industry watchers argue that the balance between cooperation and competition among the US and western European industries will finally determine the future structure of the global defence industry. This is evident from the fact that industry tycoons have recently been hinting at the need for a transatlantic armament cooperation. 17 Also evident is the fact that a number of transatlantic cooperative armament programs have taken place within the framework of NATO with special emphasis on standardisation, and harmonisation primarily of military equipment.
Apart from top arms producing companies which are generally concentrated in the US and west Europe, there are several companies in the OECD and developing countries that have been active in the international weapons market. 18 The issue of size and competitiveness are now found on their agenda. Consolidation, standardisation, and privatisation of large state-owned military industrial units are now being contemplated in many countries like Australia, Israel, Greece, and Spain. Also indicative is a trend in the reverse direction by countries like Finland which has combined major domestic arms industrial units into a newly established state-owned holding company. 19
Uneven Regional Development
Global patterns of defence industry have varied connotations. While severe cuts in arms procurement and production have been made in some countries, others have tried to move in the opposite direction, that is, expanding arms industrial bases at a time when over capacity is a political and economic burden in global terms. The most far-reaching reductions have been experienced in the two largest centres of arms production-the United States and the Russian Federation.
Concentration and restructuring processes in the US defence industry have gone on at a rapid pace especially since the early 1990s. In 1997 alone, a number of take-over and mergers have taken place. The most important cases include completion of the process of take-over of McDonnel Douglas by Boeing, of military business of Hughes by Raytheon, and of Northrop Grumman by Lockheed Martin. A preliminary estimate reveals that these merged groups would account for at least 60 per cent of the top 100 Department of Defense (DoD) prime contracts in future. 20 It is also expected that the share of prime defence contractors, after these mergers, in the total volume of DoD prime contract awards, will increase significantly. In several sectors like the aerospace and military vehicle, the concentration process has probably neared completion. In other sectors, there is still room for further consolidation. In the field of military electronics and information technology, Northrop Grumman and Raytheon have acquired large assets recently. A large number of minor military electronic units were also purchased by conglomerates like Litton, ITT industries, and TRW. Even at the sub-system supplier level, the rate of consolidation has been noticed.
After nearly a decade of restructuring process in the US defence industry, a final picture is only gradually emerging. This is marked by rapid concentration including acquisitions and mergers. Both vertical and horizontal integration have been taken place with the prime objective of stress on efficiency gains. Along with this, fear of the ill-effects of integration has also been witnessed sporadically. A Defense Science Board report of May 1997 about the impact of vertical integration is a case in point. 21 Another important case of integration was fuelled by anti-trust concerns. In sum, the restructuring process had so far produced mixed results where high hopes for the future mingled with problems. At the same time, it is felt that the inevitability of the process itself will determine the fate of the future defence industrial scenario in the US.
Profound structural and commercial changes have been witnessed in the Russian defence industry. The trend that has been noticed in the US and other major centers of arms production has been contemplated by the Russians for quite some time. It is predicted that the Russian defence industry will become more competitive with the trend towards new corporate structure and strong concentration in fewer and larger weapons-producing enterprises. But, this change has yet to produce results so far. Since the collapse of the Soviet Union, the defence industry has been neglected with very little support coming for it from different quarters. State Committee for the Defense Branches of Industry, Ministry of Economics, Federal Commission for Review of Privatisation in the defence sector-all have been undergoing changes in their structures, objectives, and management. This, more than any thing else, has had a strong impact on the fate of the defence industry.
Ownership structure of the Russian defence industry has undergone substantial changes in recent times. More than 60 per cent of the industrial units under the Ministry of Defence Industry have left the defence sector. 22
State-owned enterprises have been trimmed to size with reduced production output. Conversion programme has suffered. By the end of 1996, military output was just one-eighth of the 1991 level and civilian production was down by 70 per cent. 23 The decline was not uniform across the branches of the defence industry with electronics and communication industries suffering most. Contraction of the labour force of the defence industry was also considerable with the number going down to less than 3 million in 1996 (it was 6.4 million in 1991), showing a decline of approximately 13 per cent. 24 It is reported that severe budgetary constraints, cuts in arms procurement, substandard civilian goods produced by the defence industry, lack of working and back-up capital-all these have contributed significantly to such a scenario with very little hope for the better.
Compared to these two giant centres of arms production, the defence industry of western Europe is experiencing a slower restructuring process, with great national variations. Arms production and arms industrial policy in this region is largely decided at national level. The possibilities of national horizontal integration are exhausted in most countries while recent mergers and acquisitions show a definite trend toward vertical integration but at a national level. Limited nature of internationalisation of the process has made it necessary at least at a regional level. Despite their best intentions, the governments have not yet been able to down-size their large over-capacities. Down-sizing in this part of the world has made the governments to make tough decisions.
Experiences of restructuring in the third-tier countries are mixed. Countries like Argentina, Brazil, and South Africa have developed ambitious programmes of arms production. But, arms development and production facilities have indeed faced severe difficulties both in keeping abreast of modern technology and fully utilising their existing capacities. Some countries that had hitherto been producing and exporting considerable quantum of weapons, are now faced with a new dilemma of reduction in domestic demand as well as a shrinking export market. In other words, these countries have already been experiencing an economically painful process of restructuring which is inevitable for them. Countries like Egypt, South Korea, and Taiwan have started late to develop arms industrial bases which are still in the process of expansion despite negative experiences. Yet, there are countries like Israel and Singapore that have specialised in certain sectors of arms production and with considerable international cooperation, have been able to gain commercial success. Countries like Brazil, South Africa, South Korea, Singapore, and Taiwan have been moving fast toward privatisation and commercialisation of arms production and development.
Employment Scenario
Perhaps the most notable area in which the defence industry is struggling today is employment. Any assessment on employment in the defence industry involves a series of complicated methods. Whatever data is available for a proper assessment is insufficient and hence methods applied to come to an agreeable conclusion are also incomplete. Though information on the military sector has considerably improved over the years, this is not true for employment data. Methodological problems occur when one examines employment data. Comparative global data are not available but for the fact that the defence industry is not a general industry. It is a complex structure and there does not exist a clear-cut borderline between the military and civilian industry. Also, global data emanating from a country-to-country analysis is based on different methodologies and often on rough estimates. 25 The problem gets complicated further when evaluation and comparison of the number of jobs created by military expenditure is undertaken. This requires both direct and indirect effect. Here, the problem is that it is not known whether the data published in open sources refers only to the direct or indirect effects or to both. Such effects “Employment effects (consequences) need not simply mean the number of jobs created; the composition of the change in employment is also important. The sex mix of the jobs, the number of full-time and part-time, the number of skilled and unskilled, geographical distribution, even the duration, will all have differing economic implications”. 26
Given these problems, an estimate of the order of the magnitude of employment in the defence industry has to be carried out with an eye on minimisation of speculative calculations. After careful considerations, however, some conclusions can be drawn. First, the defence industry employment fluctuated during the 1980s at around 15 million employees. 27 According to another estimate, from a high of 17.5 million workforce in 1987, it has fallen down to 11.1 million in 1995. Taking both decades into consideration, it can fairly be said that while the 1980s witnessed inconsistencies in fluctuation, the first half of 1990s has seen a steady decline. Most of these cuts in manpower have been witnessed in the United States and west Europe. Second, the number of defence industry employees is lower than the number of soldiers, armed forces and paramilitary forces, which were estimated to be approximately 32 million in 1990, not taking into account the active reserves. 28 This trend has continued throughout the 1990s and is expected to continue further. Third, the peak of defence industry employment was in the mid-1980s. It is interesting to note here that the early 1980s witnessed the first cut and continued till mid-1980s when the employment figures went up only to come down during the late 1980s. Corresponding figures for the armed forces tell the same story (with very minor fluctuations). Last, the largest defence production centres are in only eight countries that account for nearly 90 per cent of the total employment. 29 Around 40-odd countries that have weapon-producing capability account for the remaining 10 per cent of the total employment.
Another way of assessing recent effects on employment in the defence industry is a comparison of employment figures in the largest arms producing companies over a period of time. This assessment gives a clearer picture as primary sources for employment data are available but for the fact that most of the companies are either privately owned or government undertakings/autonomous factories. Most front-ranking companies are giant conglomerates: they are not exclusively engaged in weapons production. Some of the companies’ arms sales contribute less than 10 per cent of their total sales. 30 General Motors (US), Boeing (US), United Technologies (US), Daimler Benz (FRG), Mitsubishi Heavy Industries (Japan), IRI (Italy), Alcatel Alsthom (France), General Electric (US), Allied Signal (US), Samsung (South Korea), Siemens (FRG) are some of the major companies whose arms sales have not crossed 15 per cent of their total sales. All these companies are ranked between top one to 40 largest arms producing companies by SIPRI (1996 data). Because most of these companies are not exclusively engaged in weapons production, changes in employment might thus not be the result of changes in arms sales. These companies’ employment cuts are usually only, to a very limited extent, due to reduced arms sales.
To arrive at an assessment on employment effects on the defence industry, only those companies are chosen here that are heavily dependent on weapons production. Among the 100 largest arms producing companies in 1988 and their 25 largest subsidiaries, there were 43 companies or subsidiaries whose shares of arms sales were more than half of their total sales. 31 Information on employment changes up to 1990-91 is available for 35 of these companies. The first quarter of the 1990s witnessed a major talk about possible mergers or acquisitions among most of the top companies or their subsidiaries. This process has been initiated and even implemented by some while only contemplated by others. Hence, real employment change and its implications are difficult to substantiate in these cases. A clear picture will only emerge after complete implementation of these programmes.
Table 7: Employment Figures of Defence Industries of Selected Countries: Early 1980s to Early 1990s
| Country | Early 1980s | Mid-1980s | Early 1990s |
|---|---|---|---|
| Former Soviet Union | 5 800 000 | 6 000 000 | 5 900 000 |
| Russia | 4 500 000 | ||
| Ukraine | 800 000 | ||
| China | 4 000 000 | 5 000 000 | |
| US | 2 085 000 | 3 100 000 | 2 750 000 |
| UK | 560 000 | 470 000 | 400 000 |
| France | 340 000 | 290 000 | 255 000 |
| Germany | 268 000 | 307 000 | 200 000 |
| Spain | 40 000 | 66 000 | 100 000 |
| Italy | 78 000 | 86 000 | 80 000 |
| South Africa | 100 000 | 100 000 | 80 000 |
| Israel | 90 000 | 90 000 | 60 000 |
| Canada | 46 000 | 50 000 | 50 000 |
| Japan | 33 000 | 39 000 | 45 000 |
| Brazil | 75 000 | 75 000 | |
| South Korea | 30 000 | 30 000 | 40 000 |
| Sweden | 29 000 | 35 000 | 30 000 |
| Netherlands | 13 000 | 18 000 | 20 000 |
Source: Derived from (Table 1.1) Herbert Wulf (ed.), Arms Industry Limited (Oxford : Oxford University Press; 1993), pp.14-5.
Of the 35 companies whose information on employment changes up to the early 1990s are available, 28 companies (80 per cent) have reported redundancies of up to one-quarter of their 1988 level work-force. This includes 11 US arms manufacturers which also recorded the largest number of job losses. It is quite possible that the US companies were more severely affected by budget cuts and because it is much more common immediately to apply a ‘hire and fire’ policy in the United States. Job loss has not only occurred in the United States alone. Companies from other countries are also among the list of those having reported heavy job losses. Only seven companies increased their workforce during this period. However, employment increase was, on an average, much smaller than job losses. In some cases, it has been reported that increase in the number of jobs is not due to hiring new people but due to company restructuring. Companies that have either merged their subsidiaries or have bought smaller firms, have increased their arms production base and employment. The mid-1990s has witnessed a number of mergers/acquisitions. This has been explained elsewhere.
It is also noted that only a few companies from other countries are listed among those with a high dependency on arms sales. This is typical of most US and French companies. In other countries, arms manufacturers diversified and therefore less dependent on arms sales. In these cases, contraction does not necessarily mean redundancy because it is easier for diversified companies with a limited interest in arms production to relocate workers in other non-military production divisions of the company.
It is noted, after examining the trend between the period mid-1980s and mid-1990s, that the massive production over capacity built up on the basis of over optimistic planning is bearing down on the financially unsound companies. Major arms producing companies have reported profits during this period but the results of the development of profits within companies and their subsidiaries are mixed. Many companies, although having reported profits, have failed to improve their profits in absolute terms and in some cases, they have run into serious difficulties. It is also to be noted here that not in all cases is this due to reduced arms sales alone but also due to financial difficulties in the non-military sectors of the companies. Because most such big companies seldom report their profits in both military and non-military sectors separately, profit figures are not a healthy indicator of the state of the arms business in these cases.
It is a fact that the defence industry is facing a lot of difficulties in the present era. It does not see a great optimistic future in the next millennium either. Problems generally faced by the defence industry are in the fields of production, marketing, demand and supply, technology, and profitability. Top companies increasingly realise that growth is no longer inevitable or feasible. They are, instead, choosing different strategies to improve their profit situation. One such important strategy adopted by many US and European companies is called ‘divestment’ : they sell part of their assets to improve liquidity-to survive and improve profits for the benefit of their stock-holders. Part of this strategy is meant to reduce dependence on arms sales and strengthen the non-military part of company activity by selling arms production facilities and attempting to diversify the range of products. This strategy is also called ‘pragmatic conversion’. In stark contrast to this, an opposite strategy has been chosen by some companies that have decided to increase the performance of their arms market production and operation. Some companies with both military and civilian production facilities have even sold their civil production facilities in order to raise capital for military production or in some cases compensating financial difficulties. General Dynamics (US), and Finmeccanica (a subsidiary of IRI of Italy) have followed this strategy. This strategy is presumed to have been applied keeping two primary objectives in mind : selling non-strategic operations which do not fit the expectation to generate capital or profit, and focussing on core defence expertise to strengthen the position of the company in an already shrinking and very competitive arms market.
There do exist industrial sectors within the defence industry. In general, big companies produce six categories of products : land systems and infantry weapons, aerospace, electronics, diversified products including spare parts and machinery, ships, and others. Among these, only the small ship building sector has reported consistency in profits while others have recorded mixed results with very pessimistic prospects for future. More than half of the companies dealing with land systems and infantry weapons have reported marginal profits. Aerospace industry has reported mixed result-while less than half have reported profits, others have suffered severe losses. Even electronics sector, the sector of the future as predicted by many, has reported mixed results-half recording substantial profits while others making marginal losses. It is safe to predict a not-so-dismal picture for this sector. The same is the case with diversified companies whose net result is mixed. In brief, the current trend of reductions in arms production and sales has affected almost all the sectors of the industry. This trend is likely to continue for the next decade or even two. Only the future of the electronics industry seems an exception.
Assessment
Visible reduction in the levels of military effort, especially by major powers, has been witnessed in the 1990s. With the possible exception of China and a few other countries whose precise nature of military effort are difficult to visualise, almost all other powers have been trying hard to adjust their defence industries to a changed global arms market. The reduction in military effort has been primarily reflected in the diminishing demand for military equipment.
If the present environment in which the defence industry must operate has changed dramatically, there is still an uncertainty about the precise nature of the future demand for military equipment and most importantly, the particular variety, thanks due to smart improvements in military technology. This, also, in turn, reflects the deeper uncertainties of political, technological, and economic conditions especially in the major centres of arms production. At a global level, the defence industry is facing two types of challenges : first is how to reduce production capacity in line with the reduction in demand, and second, the urgent raising of the level of technological sophistication of particular products in demand. These are very likely to dominate the market for the next foreseeable future. The latter, indeed, shows that the demand for military equipment is not depressed for all equipment types, despite shrinking global military expenditure or demand for weapons.
At a general level, some defence industrial trends are visible. First, the combined excess capacities of the global arms production has not been eliminated. There are symptoms that this excess capacity has been tried hard to be dispersed or even dismantled but the fact remains that this has been a headache for several countries. Much of this is lying unutilised but still operational. There are industries which churn out not so sophisticated weapons that have found ways to reach several third world countries that can not afford to buy modern high priced weapons. Contraction process has been continuing in several countries including Russia, Central Europe and Western countries. It is very likely to continue well into the future. Second, the process of concentration that has taken place especially in the western world and will in all probability leave a smaller number of companies to compete among each other in the squeezed market. This would lead to two possible consequences : companies will be very large, powerful entities with considerable amount of production for the market and their quality will witness a remarkable change with inputs coming from new and sophisticated technologies. Third, information revolution which is a new entrant in the global weapons scenario is bound not only to dominate the next decade or two, thereby, compelling the defence industry to adapt to its dictat, but also will in all probability further squeeze the size of the defence industry. Fourth, consolidation of the industry will only occur where the level of sophistication is comparatively high. This will leave only a few countries like the US and other industrial giants in the future field. It is also reasonably predicted that the combination of sustained demand and industrial concentration will consolidate the predominance of the US and a few others as major defence industrial powers. Fifth, consolidation and its success may force some countries to adopt alternative strategies for survival. European states are cited as a good example. The concentration process has been very slow in this part of the world due to the fragmented nature of the state system where a common foreign and defence policy is still being debated and may delay the process further. It may well lead to a confusing scenario, one never knows. The European Defense Industries Group observed that ‘it is highly unlikely that any single nation will be able to contemplate the research and development and production costs of a major item of defence equipment’. 32 Pragmatic approach for these states should be to explore close partnerships with the US or others like Canada than with each other where it is found that the necessary input for such a process is lacking. Russian and Central European industries face the same problem but domestic factors and other compulsions hold them back and thus act in a manner that the global market expects them to.
The post-Cold War environment has not been kind to the global defence industry. National governments have only paid lip service to the idea of special measures tailored to the problems of defence industry-conversion-but few have elaborated systematic programmes. Some of the programme that did emerge were not fully funded. There were domestic compulsions as well. Arms producers have received broadly the same type of support as those engaged in any economic activity that experiences a sudden and significant reduction in demand. National governments in general have not given high priority to the formulation of new armament programmes under the changed environment. However, there is some evidence of contemplation about a new form of defence industrial policy based on civil-military integration which may provide a new trend in the early years of the next millennium. But, again, it is just another part of this sorry tale, not sufficient enough to change the face of the industry.
Notes:
*: Associate Fellow, IDSA Back.
Note 1: Most countries are sensitive to allowing free flow of information on their defence expenditure, equipment, procurement, and arms transfers, which creates major handicap for a proper assessment. According to Air Commodore Jasjit Singh, the problem has been perpetuated by leading institutions like SIPRI that adopt criteria that are arbitrary and hence distort the picture further. For details, see, Jasjit Singh, ‘Conventional Arms Transfers : The Search for Representative Data’, in Jasjit Singh (ed.), Conventional Arms Transfers (New Delhi: Institute for Defence Studies and Analyses; 1995), pp. 34-47. Also see, Jasjit Singh, ‘Trends in Defence Expenditure’, in Jasjit Singh (ed.) Asian Strategic Review : 1997-98 (New Delhi: IDSA; 1998), p. 39. Back.
Note 2: This problem still exists in many leading arms producing countries like the United States where, for example, the official DoD figures do not include defence related activities of NASA or the Department of Energy. Consequently, the US military expenditure may exceed the figure given in official statistics by up to 200 per cent. See, J. Cypher, ‘The Basic Economics of Rearming America’, Monthly Review, No. 23, June 1981, pp. 11-27. Back.
Note 3: These figure have been cited by Daniel Todd. For details, see, Daniel Todd, Defence Industries : A Global Perspective (London : Routledge; 1988), pp. 1-37. Back.
Note 4: See the introductory comments in J.E. Katz (ed.), The Implications of Third World Military Industrialization (Lexington, Massachusetts : Lexington Books; 1986). Back.
Note 5: Jasjit Singh, ‘Trends in Defence Expenditure’, in note 1, p. 30. The SIPRI estimate for the year 1997 stood at US $ 740 billion. See, SIPRI Yearbook 1998 (Oxford : Oxford University Press; 1998), p. 185. Back.
Note 6: SIPRI Yearbook 1998, pp. 185-86. Back.
Note 7: This and subsequent data on top arms producing companies are taken from various editions of SIPRI Yearbook (1992, 1993, 1994, 1995, 1996, 1997, and 1998). It is to be noted that no Chinese arms manufacturing company figures in the list due to non-availability of information. Back.
Note 8: See, Bonn International Conversion Center, Conversion Survey : 1996 (Oxford: Oxford University Press; 1996), p. 4. Back.
Note 9: Ian Anthony, ‘Politics and Economics of Defence Industries in a Changing World’, in Efraim Inbar and Benzion Zilberfarb (eds.), The Politics and Economics of Defence Industries (London: Frank Cass; 1998), p. 1. Back.
Note 11: Aviation Week and Space Technology, March 16, 1998, p. 13. Back.
Note 12: For details, see, Eric Arnett, ‘Military Research and Development’ in SIPRI Yearbook 1998, pp. 276-88. Back.
Note 14: E. Skons and J. Cooper, ‘Arms Production’, in SIPRI Yearbook 1997, pp. 248-9. Back.
Note 16: For data on the volume of exports of major conventional weapons for a ten-year period (1988-97), see, note 6, pp.318-9. Back.
Note 17: For example, Van D. Coffman, Chief Executive Officer of Lockheed Martin, the world’s largest arms manufacturing company, has been arguing in favour of transatlantic industry partnerships. See, note 6, pp. 318-19. Back.
Note 18: According to Ian Anthony, those countries are known as ‘third-tier’ arms producing countries which have substantial industrial bases. They number around twenty, including Australia, Israel, South Korea, South Africa, and Spain. For details, see, Ian Anthony, “The ‘Third-tier’ Countries : Production of Major weapons”, in Herbert Wulf (ed.) Arms Industry Limited (Oxford: Oxford University Press; 1993), pp. 362-64. Back.
Note 20: Jane’s Defence Weekly, October 22, 1997, p. 22. Back.
Note 21: For details, see, Defense News, September 1-7, 1997, pp. 1-2. Back.
Note 22: Till the end of 1996, the Ministry of Defence Industry (Minoboronprom) had 1700 enterprises and organisations under its control, employing a total of over 3 million people. Out of this 41 per cent were in full state ownership, 32 per cent were joint stock companies with state participation, and the remaining 27 per cent were fully privatised companies retaining links with the Ministry. In July 1996, a government decree approved a list of 480 industrial enterprises and R&D organisations that would remain in full state ownership. See, n. 14, p. 254. Back.
Note 24: Summary of World Broadcasts (SWB), SU/2395, C/1, August 30, 1995, p. 32. Back.
Note 25: On the different methodologies and problems associated with these on global defence industry employment data, see, J. P. Danne, ‘Quantifying the Relation of Defence Expenditure to Employment’ in L. Parker and P. Richard (eds.) Defence Expenditure, Industrial Conversion and Local Employment (Geneva: International Labour Office; 1991). Back.
Note 27: See, Herbert Wulf, ‘Arms Industry Limited : the Turning Point in the 1990s’ in note 18, p. 13. Back.
Note 28: Arms Control and Disarmament Agency (ACDA), World Military Expenditure and Arms Trade : 1990 (Washington, D.C.: US Government Printing Office; 1991), p. 27 Back.
Note 29: Largest Arms production centres are in the United States, the successor republics of the former Soviet Union (primarily Russia, Ukrains, and Belarus), China, and European countries (with a high concentration in the UK, France, and Germany). See, n. 27, p. 13. Back.
Note 30: n. 6, pp. 261-62. Back.
Note 31: n. 27, pp. 14-15. Back.
Note 32: See, The European Armament Agency : Reply to the Thirty-Ninth Annual Report of the Council, WEU Assembly Document 1419 (May 19, 1994), p. 15. Back.