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External Environment Assessment
03/05
DefenseEconomics
Frank KilleleaNational Security Analysis Department
Johns Hopkins University Applied Physics Laboratory
March 2005
Note: Additional explanatory material can be found in the Notes view
Distribution Statement A – Approved for Public Release;
Distribution is Unlimited
External Environment Assessment
03/05 2
Abstract
This analysis identifies economics factors and conditions that are important to a nation-state’s ability to develop, acquire and sustain significant military forces and capabilities. It examines readily available economic data which influence the size and direction of a country’s defense spending. It is less applicable to subnational and transnational threats whose financial and arms requirements tend to get lost in the background noise.
This report is an occasional paper of the APL National Security Analysis DepartmentIts ideas are intended to stimulate and provoke serious thinking.
Not everyone will agree with them. Therefore it should be noted that thisreport reflects the views of the author alone and does not necessarily implyconcurrence by APL or any other organization or agency, public or private.
External Environment Assessment
03/05 3
Executive Summary (1of 4)
This analysis identifies economics factors and conditions that are important to a nation-state’s ability to develop, acquire and sustain significant military forces and capabilities. It examines readily available economic data which influence the size and direction of a country’s defense spending. It is less applicable to subnational and transnational threats whose financial and arms requirements tend to get lost in the background noise.
The base year for this update is 2002, the latest year for which data were available. Where available, pertinent data on subsequent years have been included.
This analysis addresses: Economic factors that support or inhibit defense spending Defense and military R&D spending and trends Weapon costs and trends Arms transfers and trends Defense industries and trends Defense economics impact on military capabilities Defense economics impact on US military spending An economically influenced view of global threats. (Asymmetric threats are included to
remain consistent with data contained in the previous external environment assessment.)
External Environment Assessment
03/05 4
Executive Summary Continued (2 of 4)
Since last updated: Global defense and R&D spending has trended upward led by the US, China, and Russia to a
lesser degree. Other countries spending more include India, Iran, Brazil and South Korea. Most countries spending, however, has either remained flat or increased/decreased slightly.
The value of global arms transfers, which decreased over 70% from the mid-80s through 2002, has shown no signs of leveling off.
Escalating weapons costs have continued to outpace defense budget growth making it difficult (actually impossible) for nations, including the US, to replace aging systems with new models on a one-for-one basis. Few countries can afford to purchase large numbers of modern combat systems.
Global defense industries have continued to contract and consolidate via mergers and acquisitions, with current trends favoring national and cross-border collaborations (teaming) in an effort to share development and production costs, and gain market access.
Some insights: Defense economics analysis remains useful as a means of identifying countries capable of
acquiring significant military capabilities that could challenge US forces. It can alert decision-makers to countries with changing military aspirations, and in effect
provide years of early warning to developing threats. Defense economics can also help decision-makers prioritize weapons spending based upon
global weapons development and acquisition efforts.
External Environment Assessment
03/05 5
Executive Summary Continued (3 of 4)
Findings: Developing military capabilities in nation states is largely a function of defense spending. In 2002,
73% of the countries worldwide spent under $2B on defense. Eleven countries besides the US spent in excess of $10B, including four over $30B (China ~ $62B). Among the countries spending over $4B, Syria, Iran, Russia and China are probably the only ones that could be considered potential adversaries. (By way of comparison, the US defense budget in FY2002 was $344.8B.)
Escalating costs of all things military including weapons development and acquisition, personnel, operations and maintenance, and infrastructure have led many countries to smaller forces with mixed inventories, retaining older systems longer.
The high cost of military R&D has significantly limited the number of countries capable of developing and producing modern, sophisticated combat systems. Few new state-of-the-art systems, in all major weapon categories are being developed worldwide.
Many countries rely on others to develop the new systems and hope they can afford a few. Unfortunately, the cost of the latest models has escalated beyond the reach of most countries, resulting in a growing market for less costly used and/or upgraded combat systems.
The ratio of defense spending and escalating weapons costs is the most significant influence affecting acquisitions, force size and mix, arms sales, and the global defense industry.
External Environment Assessment
03/05 6
Executive Summary Continued (4 of 4)
Findings Continued: Without the amortization of weapon costs across large unit buys, there is little hope to
reduce the cost of new sophisticated combat systems to affordable levels. It will become increasingly difficult to prevent sensitive technology transfers because of
industrial offsets related to arms sales, and cross-border industrial collaborations to develop, produce modern weapon systems.
In the US, large federal budget and trade deficits, growing national debt and related servicing costs, and increasing social, welfare, health, infrastructure and domestic security costs will likely pressure non-war related defense spending downward as early as FY2006.
Defense modernization (R&D, Acquisition) will like absorb most cuts as military personnel, medical, and O&M accounts continue to grow as a share of the defense budget. Expensive programs will likely be reduced, stretched or cancelled to accommodate the reduced funding. Likely candidates include the F/A-22, Joint Strike Fighter, National Missile Defense, DD(X), Littoral Combat Ship, Airborne Laser, Army Future Combat System (FCS), and space systems.
Transnational threats are not dependent on large budgets to further their aims. Their employment of asymmetric tactics and inexpensive and readily available weapons and explosives make them a continuing and dangerous threat.
External Environment Assessment
03/05 7
Current and Near-Term GEO-POL OverviewUnsettled and Challenging
• Post Cold War Period Unsettled and Dangerous
• Regional Conflicts Could Involve US
• Transnational Threats More Prominent
• Russia’s National Interests Still Uncertain
• China Perceives Greater Regional Role
• NATO’s Future Role Unclear – Europe More Introspective
• US Engaged– Countering Transnational Threats– Supporting Developing Democracies– Will Preempt to Defend Interests
• Emphasis on Coalition OPS
• Conflicting National Interests Challenge Coalition Solidarity, Effectiveness
External Environment Assessment
03/05 8
International Defense EconomicsOverview
• Economics Analysis Applicable to Nation-States; Much Less To Transnational Threats
• Defense Economics Analysis– Identifies Countries Able to Acquire Significant Capabilities, Develop
Sophisticated Systems– Provides Early I&W of Countries’ Changing Military Aspirations
• Understanding the Economically Feasible Threat – That Which is Available, Affordable and Sustainable – Can Help Defense Planners
– Focus on Potential Adversaries with Significant Capabilities– Prioritize Weapons Spending Based on Global Weapons Development
and Acquisition Efforts Few State-of-Art Systems in All Major Categories Being Developed
• Not As Useful Assessing Transnational/Terrorist Threats– Other Than WMD, Most Arms Are Low Tech, Inexpensive and Available– Data Not Readily Available
External Environment Assessment
03/05 9
International Defense Economics (Cont'd)Overview
• Global Defense Spending– Affected by Strategic and Economic Considerations– Driven by Big Spenders, i.e., US, Western Europe, Japan, Russia, China– Unlikely to Return to Cold War Levels in Foreseeable Future
• Defense Forces– Smaller Personnel- and Equipment-wise– Mixed Inventories, with Fewer Modern Systems– Growing Personnel and Operating Costs Pressure Procurement
• Military R&D– Investment Driven by US; Western Europe to Lesser Degree– Few Can Afford– Few New Sophisticated Combat Systems Being Developed Worldwide– Europe Needs to Consolidate R&D Efforts to Reduce Duplication and Achieve
Greater Investment Mass
• Arm Sales– Fewer Domestic Sales for National Forces– Stiff Competition Among Defense Industries for Shrinking Foreign Sales– Prohibitive New Weapons Costs Increasing Market for Cheaper, Used, and
Upgraded Systems Upgrades and Maintenance are Not Cheap; Pool of Used Systems Growing Smaller
– An Area in Distress and In Need of Realistic Market Analysis
External Environment Assessment
03/05 10
• Ratio of Defense Spending and Escalating Weapons Costs the Single Most Significant Influence on Acquisitions, Force Size and Mix, Arms Sales, and the Global Defense Industry
• Previous Efforts to Reduce Costs Largely Unsuccessful– Major Defense Industrial Restructuring Has Not Slowed Price
Escalation– Streamlined Acquisition Procedures, Including Less Oversight, Use of
Commercial Products, Capabilities-Based Process Not The Answer– Still Waiting for Significant Hi-Tech Solutions
• Without Significantly Lower Weapon Costs, Foreign Sales Will Continue to Decrease
• Without Foreign Sales and Significant National Demand, Production Runs Will Be Short, Fewer Units Produced, and Unit Costs Will Continue To Outpace Defense Budgets
• Amortization of Weapons Costs Critical To Lower Prices– Easy Answer is to Reduce Costs and Sell More – But – The Devil is in
the Details
International Defense Economics (Cont'd)Overview
External Environment Assessment
03/05 11
• Defense Spending Decline Bottomed in ’98 – Slow Climb Since
• Military R&D Spending Also Bottomed in ’98
• Arms Transfers Trend Still Down Since Mid-80s
• Higher Priority Economic Considerations Gaining Greater Share of National Budgets
• Sophisticated Weapons Cost More Than Systems Being Replaced
• Fewer Costly New Hi-Tech Systems Being Acquired, Developed
• Greater Competition For Fewer Arms Sales
• Leaner Defense Industries
• Sophisticated Systems Available, but Few Can Afford Many
• Transnational/Terrorist Threats Don’t Need Large Budgets, Expensive Weapons
Defense EconomicsSummary
Global Defense Spending
External Environment Assessment
03/05 12
Notional Worldwide Defense Spending Trends
DEFENSE BUDGETS
R&DWEAPONSTRANSFERS
1998 2010MID-80s
CONSTANT 2000 $ TIME
$
WEAPON COSTS
2002
VG#7
External Environment Assessment
03/05 13
Defense Spending Economic Factors
• Economic Factors Impact World-Wide Defense Aspirations
– Increasing Social, Welfare, Infrastructure Competition for Limited Revenues
• Varying Combinations of Stagnant Economies, Budget Deficits, Large External Debt, Currency Devaluation, High Inflation, Trade Deficits, Limited Foreign Reserves, and Growing Population Drive Defense Budgets Down. Autocratic Regimes Can Delay This For Awhile.
External Environment Assessment
03/05 14
Defense SpendingKey Economic Data
• Economic Factors That Affect Defense Spending– Gross Domestic Product (GDP)*– Population/Growth Rate/Literacy Rate– Per Capita Income– Natural Resources– Industrial/Agricultural/Output– Exports/Imports – Balance of Payments– Revenues*– Budget Surplus or Deficit*– External Debt*– Inflation*– Currency Devaluation*– Defense Budget/Allocation*
*Major Influences
External Environment Assessment
03/05 15
Macro-Economic Factors InhibitDefense Budgets
• Sustained annual Gross Domestic Product (GDP) growth below 3%, ornegative growth
• Sustained annual inflation rate over 15%• External debt equal to or greater than annual gov’t revenues• External debt equal to or greater than 50% of GDP
Note: Presence of more than one factor increases negative pressure on defense budget.
Current year +1 +2 +3 +4
Economic Factors
Current defensebudget level
Less $
More $
External Environment Assessment
03/05 16
Worldwide GDP & Defense Spending Trends
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
140
120
100
80
60
40
20
0
Index: 1986 = 100
Note: Over this period, worldwide GDP, excluding the U.S. increased by around 36 percent while defense spending decreased by over 30 percent.
Source: DIA DI-1912-15-00, Defense Intelligence Reference Document, “Worldwide Defense Expenditures, 1999(U),” Jun 2000 The World Bank: “2004 World Development Indicators”
SIPRI Yearbook-2003World Bank Development Indicators Data Bank, 4 Jun 2004 query
1998 1999
DEFENSE SPENDING
GDP
2000 2001 2002
VG#11
External Environment Assessment
03/05 17
2002 Economic Data (1of 4)
Source: The World Bank “World Development Indicators – 04” SIPRI Yearbook – 2003 CIA “The World Factbook 2003” IISS “The Military Balance 2003/2004”Note: *Range of values reflect differing defense budget estimates in source documents.
Country GDP$B U.S.
Revenues$B U.S.
Defense Budget$B U.S. – 2000 $
Nat’l Budget±$B U.S.
External Debt$B U.S.
Current AccountTrade Balance
$B U.S.
Foreign Exchange
$B U.S.
Argentina
Brazil
Chile
South Africa
Egypt
Iran
Israel
Saudi Arabia
Syria
Greece
Turkey
France
Germany
Italy
$102.0
452.4
64.2
104.2
89.8
108.2
103.7
188.5
20.8
132.8
183.7
1,431.3
1,984.1
1,184.3
44.0
100.6
17.0
22.6
21.5
29.5
38.5
46.0
6.0
45.0
42.4
286.0
802.0
504.0
2.9
9.96
2.3
2.2
2.7
8.7
9.8
21.6
1-5.4*
5.3
10.1
33.6
27.7
21.1
-4.0
9.0
−
-2.1
-0.4
-2.1
-6.6
-10.5
-1.0
-2.6
-26.7
-44.0
-23.0
-13.0
132.3
227.9
19.2
25.0
30.8
9.2
43.0 (01$) est.
25.9
21.5
63.4
131.6
−
−
−
9.6
-7.7
-0.6
0.3
0.7
12.6
-1.2
11.7
1.1
-10.4
3.4
25.7
46.6
-6.7
10.5
37.8
15.3
7.8
14.1
−
24.1
22.2
−
9.4
28.3
61.7
89.1
55.6
External Environment Assessment
03/05 18
2002 Economic Data (2 of 4)
Country GDP$B U.S.
Revenues$B U.S.
Defense Budget$B U.S. – 2000 $
NATL Budget±$B U.S.
External Debt$B U.S.
Current AccountTrade Balance
$B U.S.
Foreign Exchange
$B U.S.
Spain
U.K.
India
Pakistan
Indonesia
Malaysia
Singapore
China
South Korea
North Korea
Taiwan
Japan
Russia
U.S.
653.1
1,566.3
510.2
59.1
172.9
94.9
87.0
1,266.0
467.7
−
406.0
3,993.4
346.5
10,383.1
105.0
565.0
48.3
12.6
26.0
20.3
27.9
224.8
118.1
−
36.0
441.0
70.0
1946.0
7.1
36.0
12.9
3.2
1.8
1.9
4.7
61.5
13.5
1.5
7.3
46.7
15.7
336.0
-4.0
25.0
-27.9
-2.2
-4.0
-6.9
8.4
-42.3
22.4
−
-0.1
-277.0
8.0
-106.0
−
−
104.5
33.7
132.2
48.6
8.2
168.2
132.5 (01$)
−
24.7
−
147.5
−
-15.9
-14.4
4.6
3.9
7.8
7.2
18.7
35.4
6.1
−
17.0
112.4
29.9
-480.9
40.3
42.8
71.6
8.8
32.0
34.6
82.0
297.7
121.5
−
−
469.6
48.3
157.8
Source: The World Bank “World Development Indicators – 04” SIPRI Yearbook – 2003 CIA “The World Factbook 2003” IISS “The Military Balance 2003/2004”Note: *Range of values reflect differing defense budget estimates in source documents.
External Environment Assessment
03/05 19
2002 Economic Data (Cont’d) (3 of 4)
NegativeInfluences
GDP Growth – Population Growth <3% >20% >10% >15% ≥50% ≥100%
Def. SpendingProjectionCountry
% Population
Growth
% GDP Growth
Def. Share of
Revenues
Debt Service Share of
Revenues
Inflation%
Debt as % of GDP
Debt as % of Revenues
Argentina
Brazil
Chile
South Africa
Egypt
Iran
Israel
Saudi Arabia
Syria
Greece
Turkey
France
Germany
Italy
1.2%
1.6
1.5
2.3
2.2
2.3
2.4
3.9
3.0
0.4
2.0
0.4
0.2
0.1
-10.9%
1.5
2.1
3.0
3.0
6.7
0.8
1.0
2.7
4.0
7.8
1.2
0.2
0.4
6.6%
9.9
13.5
9.7
12.6
29.5
25.4
47.0
17-90.0*
11.8
23.8
11.7
3.4
4.2
27.5%
11.3
2.1
17.5
12.0 est.
0.7
12.9
2.3 est.
17.9 est.
7.0 est.
27.6 est.
−
−
2.4
41%
8.3
2.5
9.9
4.3
15.3
5.7
1.0
0.9
3.6
45.2
1.8
1.3
2.4
130%
50.4
30.3
24.4
34.0
8.5
41.0
14.0
103.0
48.0
72.0
−
−
−
300%
228.0
113.0
111.0
143.0
31.0
112.0
56.0
358.0
141.0
310.0
−
−
−
↓
↓
-
-↓
-↓
↑
-↓
-↑
↓
-
↓
?
?
?Source: The World Bank “World Development Indicators – 04” SIPRI Yearbook – 2003 CIA “The World Factbook 2003” IISS “The Military Balance 2003/2004”Note: *Range of values reflect differing defense budget estimates in source documents.
External Environment Assessment
03/05 20
2002 Economic Data (Cont’d) (4 of 4)
Source: The World Bank “World Development Indicators – 04” SIPRI Yearbook – 2003 CIA “The World Factbook 2003” IISS “The Military Balance 2003/2004”Note: *Range of values reflect differing defense budget estimates in source documents.
NegativeInfluences
GDP Growth – Population Growth <3% >20% >10% >15% ≥50% ≥100%
Def. SpendingProjectionCountry
% Population
Growth
% GDP Growth
Def. Share of
Revenues
Debt Service Share of
Revenues
Inflation%
Debt as % of GDP
Debt as % of
Revenues
Spain
U.K.
India
Pakistan
Indonesia
Malaysia
Singapore
China
South Korea
North Korea
Taiwan
Japan
Russia
U.S.
0.4
0.2
1.9
2.5
1.6
2.6
2.5
1.2
1.0
1.2
0.65
0.4
0.2
0.92
2.0
1.8
4.6
2.8
3.7
4.1
2.2
8.0
6.3
1.0
3.5
0.3
4.3
2.4
6.8
6.4
26.7
25.4
6.9
9.4
16.8
27.4
11.4
−
20.3
10.6
22.4
17.3
−
7.7
37.1
58.4
21.6
11.9 est.
1.3
3.7 est.
5.6 est.
−
3.4 est.
−
9.5
10.8
3.0
2.1
5.4
3.9
11.9
1.9
-0.4
-0.8
2.8
−
-0.2
-0.9
15.0
1.6
−
−
20.0
57.0
76.0
51.0
19.0
13.0
28.0
−
6.1
−
43.0
4.0
−
−
216.0
267.0
508.0
239.0
29.0
75.0
112.0
−
69.0
−
210.0
−
?
?
−↓
↓
↓
-↓
↑
↑
↑
-↑
↑
?
-↓
−
External Environment Assessment
03/05
DefenseSpending
External Environment Assessment
03/05 22
Defense Spending Overview
• Worldwide Defense Spending Bottomed in 1998– Fewer Producers of High End systems– More Emphasis on Affordability and International Collaboration
and Consolidation in Production and R&D– US, Western Europe, Japan, Russia Produce High Technology
Systems; ROW Countries Don’t– R&D Down 60% from 1986 to 1998; Up 12% from ’98– System Upgrades, Software Modifications, Dual Use
Technology, Asymmetric and Terrorist Threats Emphasized
• Arms Transfers Down over 70% Since Mid 1980s– Greater Competition for Fewer Sales as Industries Fight for
Survival– Major Suppliers: US, Russia, France, UK, Germany
External Environment Assessment
03/05 23
Defense SpendingSmaller Inventories and Upgrades
• New Weapon Systems 2-5 Times More Costly Than Older Systems. Few One-for-One Replacements
• Most Weapon Sales Require Hard Cash, Pay-Back Loans, or Barter at Market Prices. Few Discounts or Grant-Aid. Many Countries Lack Foreign Reserves to Buy New Systems.
• Sophisticated Weapon Systems Available But Few Can Afford Them
• Seventy-Three Percent of Countries 2002 Defense Budgets Under $2B in US 2000$
– Under $800 Million For Procurement– Emphasis On System Upgrades, and More Capable Used
Systems
• Sustained Defense Spending Over $2 Billion Buys Some Sophisticated Systems
External Environment Assessment
03/05 24
Worldwide Defense Budgets – 2002
Ref: 9800648B_UK.PPT-4
0
10
20
30
40
50
60
70
80
90
100
Defense Budgets in Billions Constant U.S. 2000 Dollars
Nu
mb
er o
f C
ou
ntr
ies
0 $0.5 1.0 2.0 3.0 4.0 5.0 7.0 10.0 15.0 30.0 >30.0
N. KOREAINDONESIA EGYPT
KUWAITCOLOMBIABELGIUMPOLANDNORWAYPAKISTAN SWEDEN
SINGAPORE
NETHERLANDS
SYRIA
AUSTRALIA
GREECE
IRANBRAZILTAIWANCANADASPAINISRAEL
TURKEYS. KOREAINDIA
S. ARABIAGERMANYRUSSIAITALY
CHINA 61.5JAPAN 46.7U.K. 36FRANCE 33.6
Notes: Includes all countries less the U.S.,Sources: “SIPRI Yearbook 2003” and “The Military Balance 2003/2004”
90
14
4
13
62 6 3 4 4
9
VG#19
External Environment Assessment
03/05 25
10-Year Defense Budget Growth (%)1993 → 2002
0
5
10
15
20
25N
um
ber
of
Co
un
trie
s
LIBYA
BELARUS
CROATIA
ZAMBIA
TAIWAN
ARGENTINA
VENEZUELA
N. KOREA
THAILAND
ANGOLA
CHAD
SIERRA LEONE
GUATEMALA
URUGUAY
PARAGUAY
AZERBAIJAN
U.K.
GERMANY
CANADA
SWITZERLAND
PERU
MOZAMBIQUE
RWANDA
SEYCHELLES
ZIMBABWE
BRUNEI
MONGOLIA
ALBANIA
KAZAKHSTAN
USA
RUSSIA
SPAIN
NETHERLANDS
AUSTRALIA
BELGIUM
AUSTRIA
FINLAND
SENEGAL
EL SALVADOR
BULGARIA
YEMEN
JAPAN
PAKISTAN
DENMARK
NORWAY
POLAND
SWEDEN
EGYPT
MOROCCO
HUNGARY
ROMANIA
LEBANON
GHANA
NICARAGUA
MALTA
ITALY
KUWAIT
MALAYSIA
CZECH REP.
PHILIPPINES
BURKINA FASO
CAMEROON
MADAGASCAR
BOLIVIA
INDIA
BRAZIL
COLOMBIA
SINGAPORE
LETHOSO
MALI
NAMIBIA
NIGERIA
TANZANIA
ECUADOR
ARMENIA
LUXEMBOURGE
CHINA
ALGERIA
SUDAN
UGANDA
NEPAL
UKRAINE
ETHIOPIA
ESTONIA
LATVIA
LITHUANIA
10 Year Growth -100% -50% -25% -10% 0% +10% +20% +50% +100% +150% +250%
Avg. Ann. Growth -10% -5% -2.5% -1% 0% +1% +2% +5% +10% +15% +25%
Source: SIPRI 2003; Military Balance 2003-2004
>$10B
$5-10B
$2-5B
$1-2B
$0.5-1B
<$0.5B
CONSTANT U.S. 2000 $
VG#20
S. KOREA
SAUDI ARABIA
TURKEY
GREECE
IRAN
ISRAEL
SYRIA
MEXICO
CHILE
PORTUGAL
OMAN
BANGLADESH
SRI LANKA
IRELAND
JORDAN
TUNISIA
BOTSWANA
BURUNDI
KENYA
PANAMA
CAMBODIA
CYPRUS
SLOVAKIA
BAHRAIN
External Environment Assessment
03/05 26
Estimated Worldwide Defense ModernizationFunding – 2002
Ref: 9800648B_UK.PPT-4
Notes: Modernization includes all forces (Ground, Air, Naval Platforms, Weapons, Sensors)$ in billions of constant U.S. 2000 dollarsIncludes most countries less the U.S.
Primary Sources: “SIPRI Yearbook 2003” and “The Military Balance 2003/2004”
Defense Budgets>30.0
0
10
20
30
40
50
60
70
80
90
100
Nu
mb
er o
f C
ou
ntr
ies
0 $0.5 1.0 2.0 3.0 4.0 5.0 7.0 10.0 15.0 30.0
N. KOREAINDONESIA
EGYPT
KUWAITCOLOMBIABELGIUMPOLANDNORWAYPAKISTAN
SWEDENSINGAPORE
NETHERLANDS
SYRIAI
AUSTRALIA
GREECE
IRANBRAZILTAIWANCANADASPAINISRAEL
TURKEYS. KOREAINDIA
S. ARABIAGERMANYRUSSIAITALY
CHINA 61.5JAPAN 46.7U.K. 36FRANCE 33.6
90
14 136 2 6 3 4 4
94
Defense Funds for Force Modernization @20 and 40%
$ @ 20% $0.1 0.2 0.4 0.6 0.8 1.0 1.4 2.0 3.0 6.0 >6.0$ @ 40% $0.2 0.4 0.8 1.2 1.6 2.0 2.8 4.0 6.0 12.0 >12.0
VG#21
External Environment Assessment
03/05 27
Defense Spending Trends
• Trending Upward Since 1998, Led By US (+46B), China (+13.3B), Iran (+8.1B), Russia (+4.3B), India (+3.5B), Brazil (+2.1B)
• Likely to Continue Upward Near-Term, Influenced By US, China, Russia, South Korea, and India. Economic Developments Could Slow or Reverse Trend
Worldwide Defense Spending in Billions US 2000$
1988 1993 1998 2002 909 762 690 784
Sources: SIPR1 2001, 2002, 2003IUSS Military Balance 2003-2004
External Environment Assessment
03/05 28
• Fewer New High-Technology Weapon Systems Likely to be Developed and Fielded Over Next 10-20 Years Because of Costs
• Most Countries’ Defense Spending Flat or Negative Over Time Unless Involved in or Preparing for Conflict, Insurgencies, or the War on Terrorism
Sources: SIPRI Yearbooks – 2001, 2002, 2003The Military Balance – 2003-2004
Defense Spending (Cont'd) Trends
External Environment Assessment
03/05
Defense R&D/S&T
External Environment Assessment
03/05 30
• R&D Down 60% from 86 to 98: Up 12% from 98 to 2002
• 2002 Estimated Spending at $66 Billion in 2000$– $50.6 B by US; $57.4 B by NATO– Most for Aircraft Related Programs
• Nine Besides US Spending Over $500 Million on R&D
• US, Russia, China* Spending More in 2002
• R&D Budgets Compete with Procurement, Personnel, Maintenance and Operational Readiness Accounts
• Aggregate Worldwide Defense R&D Spending Likely to Increase Near-Term as US, Russia, China* Spend More
• European R&D Likely to Decrease Somewhat as Major Aircraft Programs (RAFAEL, EUROFIGHTER, A400 Transport) Transition to Production
Worldwide Military R&D Spending Overview
Note: *China Has Made R&D a Priority; Chinese R&D Funding Figures Are Best EstimatesSources: SIPRI Yearbooks – 2001, 2002, 2003
IISS “The Military Balance 2003-2004”
External Environment Assessment
03/05 31
Estimated Worldwide Military R&D Spending - 2002
0
1
2
3
4
5
6
7
8
9
10
R&D Spending in Constant 2000 U.S. Dollars
Nu
mb
er o
f C
ou
ntr
ies
$50M 100M 200M 500M 1.0B 2.0B 5.0B
PAKISTAN
SWITZERLAND
NORWAY
NETHERLANDS
POLAND
UKRAINE
ISRAEL
ARGENTINA
GREECE
SPAIN
AUSTRALIA
S. AFRICA
CANADA
SINGAPORE
BRAZIL
TAIWAN
SWEDEN
ITALY
INDIA
IRAN
FRANCE
S. KOREA
GERMANY
CHINA
JAPAN
RUSSIA U.K.
Notes: Includes only countries spending >$50 millionSources: SIPRI Yearbooks – 2001, 2002, 2003 Defense News, 2 Feb 04
Ref: 9800648_UK.PPT-7
U.S. @ $50.6B66.3B in 2004
External Environment Assessment
03/05 32
Worldwide Military R&D Spending
1989*
($)
1997
($)
1999
($)
2001
($)
2002
($)
US 51.0 42.5 42.6 44.5 50.6
UK 4.1 3.9 3.7 3.9 --
Japan 1.1 1.8* 1.2**** -- --
Russia -- 0.970* -- -- 1.04
China -- 1.0** -- -- --
Germany 3.1 1.7 1.4 1.2 0.749
France 7.1 3.4 3.1 3.5 0.707
India 0.410 0.630* 0.632**** 0.695 0.625
S. Korea 0.170 0.510* -- -- --
Sweden 0.680 0.570*** 0.100 0.300 0.400
Italy 0.750 0.400 0.100 0.400 --
Spain 0.460 0.700 1.2 1.7 0.167
S. Africa 0.480 0.150*** -- -- --
Canada 0.230 0.120*** 0.114**** -- --
Norway -- 0.100 0.100 0.100 0.100
Netherlands -- 0.100 0.100 0.100 --
Billions of US Constant 2000$
*1995$
**1994$
***1996$
****1997$
Source: SIPRI “Yearbook 2001, 2003”
IISS “The Military Balance” 2003-2004
Various Defense News Editions
External Environment Assessment
03/05 33
Worldwide R&D Sophisticated Systems Costly
• High Technology Weapons Development Programs Costly
– Most in US, Western Europe, Japan, and Russia
• Situation Not Expected to Change Because of High R&D and Manufacturing Infrastructure Costs Associated with High Technology Development Programs
• Most ROW Countries Rely on Foreign Acquisition of Complex Weapon Systems
– State-of-the-Art Combat Aircraft, Naval Combatants, Main Battle Tanks, IADs, etc.
External Environment Assessment
03/05 34
Worldwide R&D (Cont'd)Sophisticated Systems Costly
• Most ROW Countries Can’t Develop High Tech Systems
• Main Impediments to High Technology Development:– Funding– Technical Education and Pool of Scientists and Engineers– Well-Equipped Research, Laboratory, and Test Facilities– Natural Resources– Manufacturing Facilities and Capabilities– Skilled Work Force– Quality Control– Technology Base and Infrastructure
External Environment Assessment
03/05 35
Worldwide R&D (Cont'd)Sophisticated Systems Costly
• Some ROW Countries Produce Low to Medium Technology Systems Based on Co-Production and Reverse Engineering of Acquired Systems
– Ground Force Weapons, Vehicles, MLRS, Small Patrol Craft, Training Aircraft
• Some Produce Niche High Technology Systems with Foreign Assistance
– TBMs, WMD, Helicopters, UAVs, Anti-Ship Cruise Missiles, Diesel Subs
• Industrial Offsets, Collaborations and Consolidations Future Wild Cards?
Source: SCCS
External Environment Assessment
03/05 36
Worldwide High Technology Weapon Design andDevelopment Capabilities
None
Very limited. Dependent on foreign weapons acq. and related co-production, reverse eng, and tech transfer to produce a few low to medium technology systems.
Some low to medium tech. design, development, production capability. Needs foreign assistance in some areas.
Few niche high tech. capabilities. Relies on foreign weapons acquisition and related co-production, reverse engineering and tech. transfer. Broad low to med. tech. capabilities.
Broad med-tech. capabilities; capable of designing, developing, producing many high-tech systems; external assistance required for high performance aircraft and other complex systems.
Broad high-tech. design, development and production capabilities. Indigenous capability to develop, produce high performance combat aircraft, missiles and other highly complex systems.
Ref: 0400346_UK.ai
External Environment Assessment
03/05 37
Worldwide Military R&D Trends
• Without a Clear Technologically Advanced Threat, or a Market for Costly High Tech Systems, R&D Investment Will Decrease, and the Pace of Technology Development Will Slow
– More for Counter-Terrorism, Homeland Defense, Asymmetric Threats
• Fewer High Tech Weapon Systems Will be Developed in all Major Categories
• Development and Availability of New Generation Systems Delayed
• Fewer Producers of High-End Systems
• More Cross-Border/International Cooperation, Pooling of R&D Resources
External Environment Assessment
03/05 38
Worldwide Military R&D Trends (Cont'd)
• Emphasis on Affordability, Technologies that Reduce Development, Manufacturing Costs
• Emphasis on Dual-Use Technologies, COTS, System Upgrades
• Future Threats Include Fewer High-Tech, Many Low-Medium Tech Systems
• Adversaries Can Leverage Small Defense Budgets with Less Costly Asymmetrical Threats, i.e., IW, TBMs, C/B Weapons, Mines, CCMs, Small Boats, Terrorism, etc., to Complicate, Impede US Military Ops
• Caution: A Resurgent Near-Peer Type Threat Would Negate Some of These Trends
External Environment Assessment
03/05 39
Foreign Science & Technology Overview
• Technology “Haves” and “Have Nots” Persist
• Technology Increasingly Dual Use
• Technology’s Economic Impact More Important Than Military’s
• Nations and Industries Will Sell Technology for Political and Economic Reasons
• Credible Asymmetric Threats Can Offset Some Technological Advantage
External Environment Assessment
03/05 40
Foreign S&TAreas of Interest
• Areas of Foreign Technological Interest:– Anti-Navigation/GPS Systems– Remote Sensors and Weapons– Standoff Weapons and Penetration Aids
Ballistic Missiles Cruise Missiles
– Information Systems and CM Data Transfer and Interoperability Data Blocking/Corruption False Target Generation High-Power Microwave (HPM) Encryption
– Antiterrorism Systems Aircraft Protection Harbor Protection Helicopter Protection Improvised Explosive Device Detection, Neutralization Precision Airdrop Systems CBR and Nuclear Weapons Detection, Protection and Defeat
Systems ISR and Target Acquisition Systems to Counter Terrorists Explosive Ordnance Disposal
External Environment Assessment
03/05 41
Foreign S&T (Cont'd) Areas of Interest
• Areas of Foreign Technological Interest:– Nanotechnology– Robotics– Low Observable and Masking Technologies
and CM– Diesel Submarine Endurance– Biotechnology– Increased Lethality
Conventional Explosives Weapons of Mass Destruction
External Environment Assessment
03/05 42
Foreign S&T TrendsCommercial Technologies Available to All
• Technology Available to Buyers
• Commercial Sector Drives Technology Development
• Emphasis on Technologies That Make Things Happen
• Micro-Miniaturization More Important
• Biotechnology A Breakthrough Area
• Ubiquitous Access to Communications
• Greater Access to Space Based Sensors, and Related CM
• Broader, More Timely Access to Information
• Sophisticated/Interdependent Systems Increasingly Vulnerable To Single Point Failures
External Environment Assessment
03/05
Weapons Costs
External Environment Assessment
03/05 44
Weapon System CostsFew Can Afford to Develop or Buy
• Sophisticated System Costs Escalate Faster Than Annual Inflation Rates
– Techinflation Affects Development Costs of Aerospace, Ship, Submarine, Armor Systems
• Major Program Initial Costs Underestimated
• Cost Overruns Lead to Stretched Schedules, Smaller buys, increased unit costs
• Sophisticated Programs Expensive – Not Many Countries Can Develop Them
• Representative Program Costs• F-35 JSF ~200B• *F/A-22 Raptor ~72B• *V-22 Osprey ~46B• *RAH-66 Commanche ~39B• *Evolved Expendable Launch Vehicle ~31.8B• Eurofighter Up $20B since ’96; ½ fewer a/c
• *Space Based Radar ~30B• Multi-Mission Maritime Aircraft ~26B• European A-400M Transport ~23.7B• *SBIR ~8B• Kinetic Energy Interceptor ~4.5B• *Airborne Laser Program more than
doubledNote: *Significant cost overruns
Multiple Sources
External Environment Assessment
03/05 45
Weapon System CostsFew Can Afford to Develop or Buy
• Sophisticated System Costs Escalate Faster Than Annual Inflation Rates
– Techinflation Affects Development Costs of Aerospace, Ship, Submarine, Armor Systems
• Major Program Initial Costs Underestimated
• Cost Overruns Lead to Stretched Schedules, Smaller buys, increased unit costs
• Sophisticated Programs Expensive – Not Many Countries Can Develop Them
• Representative Program Costs• F-35 JSF ~200B• *F/A-22 Raptor ~72B• *V-22 Osprey ~46B• *RAH-66 Commanche ~39B• *Evolved Expendable Launch Vehicle ~31.8B• Eurofighter Up $20B since ’96; ½ fewer a/c
• *Space Based Radar ~30B• Multi-Mission Maritime Aircraft ~26B• European A-400M Transport ~23.7B• *SBIR ~8B• Kinetic Energy Interceptor ~4.5B• *Airborne Laser Program more than
doubledNote: *Significant cost overruns
Multiple Sources
External Environment Assessment
03/05 46
Weapon System CostsFew Can Afford to Develop or Buy
• Sophisticated System Costs Escalate Faster Than Annual Inflation Rates
– Techinflation Affects Development Costs of Aerospace, Ship, Submarine, Armor Systems
• Major Program Initial Costs Underestimated
• Cost Overruns Lead to Stretched Schedules, Smaller buys, increased unit costs
• Sophisticated Programs Expensive – Not Many Countries Can Develop Them
• Representative Program Costs• F-35 JSF ~200B• *F/A-22 Raptor ~72B• *V-22 Osprey ~46B• *RAH-66 Commanche ~39B• *Evolved Expendable Launch Vehicle ~31.8B• Eurofighter Up $20B since ’96; ½ fewer a/c
• *Space Based Radar ~30B• Multi-Mission Maritime Aircraft ~26B• European A-400M Transport ~23.7B• *SBIR ~8B• Kinetic Energy Interceptor ~4.5B• *Airborne Laser Program more than
doubledNote: *Significant cost overruns
Multiple Sources
External Environment Assessment
03/05 47
Ball Park Weapons Cost Data
Non-Stealth Bomber
Stealth Bomber
$50 – 150M
1.5 – 2B
Aircraft Carriers
CVN
CV
$4.9 – 11B
2.4 - 3.5B
Non-Stealth Fighter
Stealth Fighter
30 – 80M
80 – 120M
Amphib/VSTOL 1.5 – 3B
Non-Stealth Attack a/c
Stealth Attack a/c
20 – 50M
75 – 150M
Aegis DDG
DD(X)
LCS
~1.2B
1.2 -1.4B
Target<250M
Non-Stealth Fighter/Attack a/c
Stealth Fighter/Attack a/c
75 – 100M
150 – 300M
Frigate
Corvette
300 – 480M
150 – 300M
AEW a/c (AWACS)
Maritime Surveillance a/c*
100 – 500M
20 – 40M
SSNs
SS
1.5 – 3.0B
225 – 475M
Military Transport – Med. Range
Military Transport – Long Range
40 – 75M
50 – 280M
UAVs
Global Hawk w/full sensors
Predator unit cost
28 – 50M
2.5 – 3M
ASW Helicopter
Attack Helicopter
Tactical Ballistic Missile
25 – 46M
25 – 60M
3 – 6M
Land-Based Surv. Radars
Low Tech
Medium Tech
Aerostat
2 – 4M
7.5 – 15M
30 – 50M
Long-Range Land Attack Cruise Missile
*Old data circa 1996
1 – 2M Army Heavy Tank
Stryker Combat Vehicle
Armored Humvee
2 – 6M
>1.5M
180K
External Environment Assessment
03/05 48
F/A-22 Program
1980 85 90 95 2000 2005
80
70
60
50
40
30
20
10
0
800
700
600
500
400
300
200
100
Nu
mb
er o
f A
ircr
aft
Pro
gra
m C
ost
s $B
260
240
200
180
140
80
50
30
220
160
120
100
60
40
20
750
#a/c
Number a/c a/c cost Program Cost
Program $
$38B
$72B
277
218$100M
a/c Cost
$179M
$257M
(GAO)
Un
it C
ost
$M
Note: Program chg to F/A-22 in 2002 DoD Estimate #a/c
Sources: Multiple
External Environment Assessment
03/05 49
F/A-22 Program Acquisition Numbers
0
100
200
300
400
500
600
700
800
1981 85 90 95 2000 2005
750
277 2218 3
381
762
1
180
226
Notes: 1 USAF requirement for 381-762 aircraft
2 USAF Plan
3 Affordable within Funding ceilingBlack figures/lines are DODBlue figures/lines are USAF
Nu
mb
er A
ircr
aft
YEARSources: Defense News, “Beyond F-22 Decision” 2 Aug 99
Defense News, “Meet the F/A-22”, 16-22 Sep 2002Inside Defense, “Rumsfeld Staff Moves Closer to AF Size of F/A-22 Fleet”, 31 Oct 02Inside Defense, “GAO Doubts DOD’s Readiness to Make F-22 Production Decision”, 15 Mar 04
External Environment Assessment
03/05 50
Weapon Systems Cost TrendsNew Systems Cost More
• Trends Upward
• Most Prominent Microeconomic Force Affecting Defense Industries is The Rapidly Rising Cost of Weapons R&D and Production
• New Systems Cost Far More In Real Terms Than Units Being Replaced
• Smaller Production Runs Resulting From Smaller National Requirements and Fewer Export Sales Increase Unit Costs
• Inflation and Currency Devaluation in Buyer Countries Raise System Costs Accordingly
• Typically, Weapon Costs Increase About 10% Per Year, Doubling Every 7.25 Years
• Ratio of Increasing New Unit Costs To Defense Budgets Affects Numbers Acquired
Sources:
•“Hand Book of Defense Economics, Vol. I”; K.J. Arrow and M.D. Intriligator, 1995
•“Global Arms Trade – Commerce in Advanced Military Technology and Weapons”, Congress of the US – Defense News, LGEN M. Davison, USA, US Defense Security Assistance Agency, 9-15 Feb 1998
•SIPRI Yearbook – 2003
External Environment Assessment
03/05
WorldwideArms Transfers
External Environment Assessment
03/05 52
Worldwide Arms TransfersOverview
• Arms Transfers Down 72% Since Mid-80sTime Frame
1981 – 881989 – 911992 – 931992 – 961994 – 981995 – 991998 - 02
Average Annual Transfers$66B in 91$$40B in 91$$21B in 91$
$23.8B in 90$$22.5B in 90$$22.3B in 90$$18.5B in 90$
CommentCold War
Post Cold War
• US (41%), Russia, France, Germany, UK, Ukraine Account for 86% of Worldwide Transfers During 98-02
• Major Recipients, China, Taiwan, India, Turkey, Saudi Arabia, Greece, South Korea, Egypt, UK, Israel, Pakistan, Japan, UAE, Australia, Account for 83% of Total Deliveries During 98-02
• Greater Competition for Fewer Arms Sales
• Many National Arms Industries Need Arms Exports to Survive– Leads to Creative Financing to Close Sales
Sources: SIPRI Yearbooks 2001, 2002, 2003Military Balance 2003-2004Multiple Issues of Defense News, Armed Forces Journal 2001→2004
External Environment Assessment
03/05 53
Worldwide Arms TransfersMore Flexible Financing
• Major Market for Used and Modernized Systems
• Most Post Cold War Period Sales for Cash
• High Weapons Costs and Intensive Competition for Sales Lead to More Flexible Arms Transfer Arrangements
– Grant Aid – Primarily by US – Egypt ($1.3B in 03), Israel ($2.1B in 03), and Jordan for Mid-East Peace Agreements; South, Latin American Countries for Counter-narcotics Ops; Pakistan, Philippines and Others for Counter- terrorism Support
– Loans – US Loaned Poland $3.8B to Purchase 48 F-16s; Poland Paying Only Interest First 8 Yrs of 15-Yr Loan
– US FMS Reached ~$14B in 2003; at a Flat Fee of 2.5%– Barter – Russian a/c Sales to Malaysia, Indonesia for Commodities and
Cash– French Tanks to Saudi Arabia for Oil
– Debt – Russian Exchange of Arms for Debt with China, South Korea, Czech Republic, Other Former East European Countries
– Lease – Czech Republic, Hungary Leasing Gripen Fighters from Sweden; Italy F-16s from US; Denmark APCs from Finland; India an AKULA SSN from Russia for 3 Yrs at ~$100M/Yr
Sources: SIPRI Yearbook – 2003
Defense News – Multiple Issues
External Environment Assessment
03/05 54
Worldwide Arms TransfersOffsets
• More Countries Purchasing Major Weapon Systems Demand Industrial Offsets or Compensation to Defray Purchase Cost, Increase Domestic Employment, Acquire Technologies and Develop Local Industries
– Direct offsets Require Production of Some Weapon Components in the Buyer Country
– Indirect Offsets Include Tech Transfer, Local Investment and Counter-trade
• Offsets Becoming Increasingly Expensive – Some at 100% - 200% of Weapons’ Purchase Price
• Offsets Controversial– House Armed Services Committee Would Ban Industrial Offsets– Without Offsets, US Defense Industries Would Lose Arms Sales to
Foreign Competitors– Europe Views Offset Ban As Protectionist, Challenge to Free Trade
• Despite Availability of More Flexible Arms Transfer Arrangements, Global Arms Transfers Remain Depressed
Sources: Defense News, 24 May 04, 14 June 04, 28 June 04
External Environment Assessment
03/05 55
Worldwide Arms TransfersOffsets
• More Countries Purchasing Major Weapon Systems Demand Industrial Offsets or Compensation to Defray Purchase Cost, Increase Domestic Employment, Acquire Technologies and Develop Local Industries
– Direct offsets Require Production of Some Weapon Components in the Buyer Country
– Indirect Offsets Include Tech Transfer, Local Investment and Counter-trade
• Offsets Becoming Increasingly Expensive – Some at 100% - 200% of Weapons’ Purchase Price
• Offsets Controversial– House Armed Services Committee Would Ban Industrial Offsets– Without Offsets, US Defense Industries Would Lose Arms Sales to
Foreign Competitors– Europe Views Offset Ban As Protectionist, Challenge to Free Trade
• Despite Availability of More Flexible Arms Transfer Arrangements, Global Arms Transfers Remain Depressed
Sources: Defense News, 24 May 04, 14 June 04, 28 June 04
External Environment Assessment
03/05 56
Worldwide Arms Transfer TrendsNearing Bottom ??
• Near Term: Likely to Increase Slightly if Asian Economic Problems Continue to Ease, European Economies Strengthen, Oil Prices Support Increased Spending
• Mid Term: Probably Will Stabilize Around $20-25B in 1990$
• Defense Industries’ Survival More and More Dependent on Foreign Sales
• Continued Strong Competition for Fewer Sales
Sources: SIPRI Yearbooks 2001, 2002, 2003
The World Bank “World Development Indicators – 2004”
External Environment Assessment
03/05 57
Notional Arms Export Market
140
130
110
100
70
60
40
20
10
120
90
80
50
30
05% 10 20 40 60 100
Market Access
1400
1300
1100
1000
700
600
400
200
100
1200
900
800
500
300
0
5.0
4.0
2.5
2.0
1.4
1.2
.8
.4
.2
3.0
1.8
1.6
1.0
.6
0
Co
mb
at A
ircr
aft
$M
Tan
ks $
M
Nav
al C
om
bat
ants
$M
Combat Aircraft
Tanks
Naval Combatants
External Environment Assessment
03/05
WorldwideDefense
Industries
External Environment Assessment
03/05 59
Defense IndustriesOverview
• Post Cold War Search for Peace Dividends Led to Reduced Defense Spending
– Diminishing National Requirements and Foreign Arms Sales
– Industries Faced with Overcapacity, Obsolescence, Large and Underutilized Work Force
• Worldwide Defense Industry Comprised of Public, Private, and Gov’t Owned/Controlled Companies
– Most State Owned When Cold War Ended– More Public or Private Today
External Environment Assessment
03/05 60
Selected Worldwide Defense Industries – 2004Nationalized vs. Privatized
5
10
15
GOVT. PUBLIC/PRIVATE
OWNERSHIP/CONROL
CO
UN
TR
IES
State Owned/Controlled
State/Public Mix
Transitioning from State to Public/Private
Public/Private
CHILE
CHINA*
FINLAND
INDONESIA
IRAN
ITALY*
MALALYSIA*
N. KOREA
PAKISTAN
SPAIN*
SYRIA
TURKEY
UKRAINE*
EGYPTFRANCE*INDIAPORTUGALRUSSIASINGAPORE
AUSTRALIABRAZILGREECEISRAELPOLANDS. AFRICATAIWAN
AUSTRIACANADADENMARKGERMANYJAPANNETHERLANDSNORWAYSWEDENU.K.
Note: *Considering Privatization Multiple Unclassified Sources
External Environment Assessment
03/05 61
• Supply, Demand and Profitability Issues Led to Major Restructuring
– Rationalization Leading to Plant Closures and Downsizing of Work Force
– Consolidation Via Mergers and Acquisitions with Competitors and Suppliers to Reduce Overcapacity and Redundant Production Lines – In All Major Weapons Categories – Especially Aerospace and Electronics
Cross-Border Consolidations More Difficult as Nations Protect Defense Industries from Foreign Control (UK an Exception)
– Collaboration Among National and Cross-Border Companies Based Upon Workshares and Units Purchased
• Future Will See More Collaboration and Consolidation, Especially in Naval Shipbuilding and Land Combat Systems
• Issues Remain– Problem with Gov’t Owned/Controlled Companies– Protectionism vs. Free Trade– Tech Transfer– Does Less Competition Mean Less Innovation– Reducing Unit Costs
Defense IndustriesIn Transition
External Environment Assessment
03/05 62
• Supply, Demand and Profitability Issues Led to Major Restructuring
– Rationalization Leading to Plant Closures and Downsizing of Work Force
– Consolidation Via Mergers and Acquisitions with Competitors and Suppliers to Reduce Overcapacity and Redundant Production Lines – In All Major Weapons Categories – Especially Aerospace and Electronics
Cross-Border Consolidations More Difficult as Nations Protect Defense Industries from Foreign Control (UK an Exception)
– Collaboration Among National and Cross-Border Companies Based Upon Workshares and Units Purchased
• Future Will See More Collaboration and Consolidation, Especially in Naval Shipbuilding and Land Combat Systems
• Issues Remain– Problem with Gov’t Owned/Controlled Companies– Protectionism vs. Free Trade– Tech Transfer– Does Less Competition Mean Less Innovation– Reducing Unit Costs
Defense IndustriesIn Transition
External Environment Assessment
03/05 63
• Supply, Demand and Profitability Issues Led to Major Restructuring
– Rationalization Leading to Plant Closures and Downsizing of Work Force
– Consolidation Via Mergers and Acquisitions with Competitors and Suppliers to Reduce Overcapacity and Redundant Production Lines – In All Major Weapons Categories – Especially Aerospace and Electronics
Cross-Border Consolidations More Difficult as Nations Protect Defense Industries from Foreign Control (UK an Exception)
– Collaboration Among National and Cross-Border Companies Based Upon Workshares and Units Purchased
• Future Will See More Collaboration and Consolidation, Especially in Naval Shipbuilding and Land Combat Systems
• Issues Remain– Problem with Gov’t Owned/Controlled Companies– Protectionism vs. Free Trade– Tech Transfer– Does Less Competition Mean Less Innovation– Reducing Unit Costs
Defense IndustriesIn Transition
External Environment Assessment
03/05 64
Worldwide Defense Industry Trends
• Privatization – Slow Process
• Consolidation – More National and Cross-Border Mergers and Acquisitions
• Collaboration – Sharing The Load (and Cost)
• Cessation – Survival of Fittest
• Fewer Developers, Manufactures of Air, Space, Land, Naval and Electronics Systems
External Environment Assessment
03/05
Defense Economics Summary
External Environment Assessment
03/05 66
Defense Economics SummaryImpact on Military Capabilities
• Sustained (2+ yrs) Combinations of Following Economic Conditions Will Pressure Defense Spending Downward
– GDP Growth Less Population Growth <3%– Budget Deficit >3% of GDP– Defense Budget >20% of Revenues– Debt Interest Payment >10% of Revenues– Inflation >20%– Debt >50% of GDP– Debt ≥ Revenues
• Many Countries, Especially in Europe, South America More Likely to Cut Defense Budgets Before Public Health, Schools, Welfare, Security and Infrastructure to Accommodate National Budget Deficits, Debt, Inflation and Other Impediments to Spending
• Sustained Lower Defense Spending Leads to:– Reduced Force Levels – Russia, Spain, Greece, Netherlands, Switzerland, Belgium, Sweden,
Germany, etc.– Retiring Older Systems Early to Reduce Maintenance Costs – UK, Canada, Belgium, etc.– Retiring Systems Because Can’t Afford to Upgrade Them– Canceling, Reducing, Delaying Planned Acquisitions – Argentina, Brazil, Singapore, UK,
Sweden, Norway, Greece, Egypt, Turkey, etc.– Upgrading Rather Than Buying New Systems – Italy, Israel, India, Denmark, Finland, Greece,
Germany, India, Turkey, Saudi Arabia, China, Germany, Algeria, Australia– Buying Used Systems – India, Pakistan, Algeria, Australia, Austria, Brazil, Canada, Chile,
China, Czech Republic, Egypt, Greece, Indonesia, Israel, Saudi Arabia, Malaysia, etc.
Sources: The World Bank “World Development Indicators – 2004”IMF “International Financial Statistics Yearbook – 2002”IMF “Government Finance Statistics Yearbook – 2002” Various Editions of Defense News and The Washington Post
External Environment Assessment
03/05 67
Defense Economics SummaryImpact on US Military Spending
• Increasing Competition for Defense Share of US Revenues– Balancing the Budget (FY 04 Deficit est. $413B)– Servicing and Paying Down Debt (FY04 Debt ~$7.4T; Interest
Payment ~$159B)– Paying for Tax Cuts– Increasing Cost of Retiring Baby-Boomers Medical and Social
Security Expenses– Homeland Defense– Infrastructure– HEW
• Increasing Competition for Modernization Share of Defense Budget
– Rising Personnel Pay, Benefits, Health Care Costs– Cost Estimates for 10-20 Thousand Troop Increase Range from
$1.2 > $2B Per Yr– Afghanistan, Iraq, Other Peacekeeping Ops– Increasing O&M
Source: Washington Post OPED “A Bad Way to Cut the Debt”, Michael Kinsley, 2 Jul 04
External Environment Assessment
03/05 68
Defense Economics SummaryImpact on US Military Spending
• Increasing Competition for Defense Share of US Revenues– Balancing the Budget (FY 04 Deficit est. $413B)– Servicing and Paying Down Debt (FY04 Debt ~$7.4T; Interest
Payment ~$159B)– Paying for Tax Cuts– Increasing Cost of Retiring Baby-Boomers Medical and Social
Security Expenses– Homeland Defense– Infrastructure– HEW
• Increasing Competition for Modernization Share of Defense Budget
– Rising Personnel Pay, Benefits, Health Care Costs– Cost Estimates for 10-20 Thousand Troop Increase Range from
$1.2 > $2B Per Yr– Afghanistan, Iraq, Other Peacekeeping Ops– Increasing O&M
Source: Washington Post OPED “A Bad Way to Cut the Debt”, Michael Kinsley, 2 Jul 04
External Environment Assessment
03/05 69
Trends ImplicationsSpending Trends Have Wide Impact
• Fewer Producers of High-End Systems and Fewer New Systems Produced
• More Cross-Border/International Cooperation, Sharing of R&D, Production and Acquisitions
• Wider Access to Technologies
• Increased Emphasis on Affordability Strategies, Technologies that Reduce Development, Manufacturing Costs
• Small Market for Costly New Systems
• Big Market for Less Capable, More Affordable Combat Systems
• Increasing Competition for Foreign Sales
• Emphasis on Dual-Use Technologies, COTS, System Upgrades
• Escalating Weapons Costs Affect Military Forces, Capabilities
• Future Conventional Threats Include Fewer High-Tech, Many Low-Medium Tech Systems
• Adversaries Can Leverage Small Defense Budgets with Less Costly Asymmetric Threats, i.e., IW, TBMs, C/B Weapons, Mines, CCMs, Small Boats, Terrorism, Insurgencies and Urban Warfare, etc., to Complicate, Impede US Military Ops
External Environment Assessment
03/05
Threats
External Environment Assessment
03/05 71
Worldwide Threat OverviewSmaller Forces with Mixed Inventories
• 75% of Today’s Threats Are Older Systems
• Potential Adversaries Will Replace Some With More Capable Systems
• Technology Inserts During System Upgrades Complicate Threats, Extend Life 10-15 Years
• Wide Variety of Modern Weapon Systems Available for Those that Can Afford Them
• Economic Factors Preclude One-for-One Replacements, Lead to Smaller Forces
External Environment Assessment
03/05 72
Worldwide Threat Overview (Cont'd)Smaller Forces with Mixed Inventories
• Year 2010 Threat Composition– 85% with Pre-1995 IOCs; 1960-1980 Technologies– 15% with Post-1995 IOCs; 1980-1995 Technologies
• Coastal Countries that Consider the US a Threat Will Acquire Capabilities to Attack Forces in Littoral Waters
• Asymmetric Threats are In Play – More Affordable – Can Complicate, Slow US Mission Accomplishment
External Environment Assessment
03/05 73
Year 2010 Military Systems
AIRCRAFTMIG-21/23
F-4/F-5A-4/A-7
MIRAGE F-1
SHIPSFFG-7
KASHIN FFKONI FFLFF-1056
OSA PTGKRESTA I/II CG
SUBSFOXTROTROMEO
209 TYPES
MSLSSTYX
HARPOONEXOCET BL 1 30%*
AIRCRAFTMIG-25/29
Su-24/25/27F-14/15F-16/18
MIRAGE 2000HAWK 100/200
SHIPSKHUKRI FFLKRIVAK FF
LEANDER FFB’DSWORD FF
SOV*MNYY
SUBSUPHOLDER
KILO SSMSLS
SS-N-22 B1
35%
AIRCRAFTMIRAGE 2000-5
Su-30/35GRIPPEN
SHIPSNEUST*MYY FFJIANGHU III FF
LUHU DDHALIFAX FF
FLYVEFISHLEN FFLDELHI DDGSAAR V FFL
LAFAYETTE FFLOREAL FFL
SUBS209 SS TYPECOLLINS SS
AGOSTA B SSKILO FO SS
MSLSEXOCET BI-II
C801/C802SS-N-22 BL 2
HARPOONUPGRADES
SS-NX-25
1950 1960 1970 1980 1990 2000 2005 2010 2015 20201995
1950 1960 1970 1980 1990 2000 2005 2010 2015 20201995
20%
AIRCRAFTF/A-18 E/FRAFAEL
EFAFSX (JA)
SHIPSMALAY FF
KONGU DDG(JA)
KDX DD (SK)YS 2000
MSLSSS-N-26SS-N-27 10%
AIRCRAFTF-22MFI
XF-10SU-37
SHIPSHORIZON FFNEW GEN FFCOMMON FF
5%
*(U) NOTE: PERCENTAGE (%) IS ESTIMATED YEAR 2010 COMPOSITION.
TECHNOLOGY
DEVELOPMENT
PRODUCTION
OPERATIONAL
UPGRADE
EXTENDED OPERATIONAL LIFE
LEGEND
Ref: 9800648_UK.PPT-4
External Environment Assessment
03/05 74
A/CF/A-18 E/FGRIPPENRAFAEL
EFAFSX (JA)
SHIPSMALAY FF
KONGU DDG(JA)
KDX DD (SX)YS-2000
MISSILESSS-N-26SS-N-27
A/CF-22MFI
XF-10
SHIPSHORIZON NEW GEN FF
COMMON FFDD(X)LCS
Year 2025 – 2030 Military Systems
1950 1960 1970 1980 1995 2000 2005 2010 2015 2020 2025 2030 2040
TECH-NOLOGY DEVELOP PRODUCE OPERATIONAL
1990
UPGRADE EXTENDED OPERATIONAL LIFE
A/CMIG-21/23
F-4/-5A-4/-7
MIRAGE F-1
SHIPSMIG 21/23
F-4/-5A-4/-7
MIRAGE F-1
SUBSFOXTROTROMEO
209 TYPES
MISSILESSTYX
HARPOONEXOCET BL 1
5%
20%A/C
MIG-25/23Su-24/25/27
F-14/15F-16/18
MIRAGE 2000
SHIPSKHUKRI FFLKRIVAK FF
LEANDER FFBDSWORD FFSOV’MNYY DDG
SUBSUPHOLDER
KILO SS
MISSILESSS-N-22 BL 1
40%A/C
MIRAGE 2000Su-30/35
HAWK 100/20
SHIPSNEUST’MYY FF DELHI DDG
JIANGHU III FF SAAR V FFL
LHU DD LAFAYETTE FF
HALIFAX FF LOREAL FF
FLYVEFISHLEN FFL
SUBS209 SS TYPECOLLINS SSAGOSTA SSKILO FO SS
MISSILESEXOCET BL-II
C801/C802SS-N-22 BL-II
SS-N-25HARPOON UPGRADES
20%
10%
5%
NOTE: % REFLECTS EST. YEAR 2025-2030 COMPOSITION
SUBS
?? ???? ??
External Environment Assessment
03/05 75
Threat Summary
• Mixed Technology Forces in 2010
• Wide Variety of Modern Weapon Systems Including WMD Available
• Smaller Conventional Forces
• Asymmetric Threats In Play
External Environment Assessment
03/05 76
Asymmetric WarfareTarget Vulnerabilities
• Exploits an Adversary’s Strategic, Tactical, Technical Vulnerabilities by Innovative, Unexpected, and/or Less Costly Means in Order to Deter Action, Deny Access and/or Delay Mission Accomplishment
• An Attractive Option for National, Sub-National and Transnational Groups to Employ Against Stronger Adversaries
Source: Institute for National Strategic Studies, National Defense University; 1998 Strategic Assessment “Engaging Power for Peace”
External Environment Assessment
03/05 77
Asymmetric WarfareApplications
• Exploits National Will, Public Aversion to Casualties
• Targets Coalition Cohesiveness
• Employs IW for Perception Management
• Threatens US Homeland, Nationals, Allies
• Attacks National Infrastructure, Civil Facilities, Population
• Employs Low Cost, Low Technology Solutions to Counter High Cost, High Technology Threats
External Environment Assessment
03/05 78
Asymmetric Warfare (Cont'd)Applications
• Selectively Acquires, Uses, Threatens to Use Niche High Tech Sensors, Weapon Systems, i.e.,
– WMD and Delivery Systems– Cyberweapons to Disrupt C4ISR Systems– IW Countermeasures
• Fights in Environment Less Favorable to US Capabilities
External Environment Assessment
03/05 79
Asymmetric ThreatsExamples
• Naval, Land and Anti-Helo Mines
• Cheap Aircraft with Explosives or Precision Guided Munitions
• UAVs Equipped with Explosives
• Terrorists with Small Arms, Rockets, Explosives, Chemical/Biological Agents
• Remotely Controlled Explosive Devices
• Swimmers with Limpet Mines, Explosive Charges
• Pier-Side Attacks
External Environment Assessment
03/05 80
Asymmetric Threats (Cont'd)Examples
• Chemical, Biological Warheads for Coastal Cruise Missiles, Anti-Ship Cruise Missiles (ASCMs), Theater Ballistic Missiles (TBMs), Artillery, Mines, Bombs
• Urban Warfare
• Information Warfare
• Cyberwarfare
• Satellite Interference, Denial
• Etc.
External Environment Assessment
03/05 81
2002 Defense Budgets(US 2000 Dollars)
<$500M
$500M − <$1B
$1B − $2B
$2B − <$5B
$5B − <$10B
$10B − <$20B
>$20B
VG#70