THE GLOBAL DEFENSE INDUSTRY IN THE 21ST CENTURY

 

1. The geostrategic context.

In the twenty-three years of this century, extraordinary geostrategic circumstances have occurred that will imply, in the very short term, a revolution in the world we know and that was born from the dominance of the West that emerged in the 18th century. Five elements explain this statement.

a) The 9/11 attacks and the wars in Iraq and Afghanistan, which cost the United States 4 trillion dollars (trillions from Spain) and 10,000 deaths, caused a cataclysm in North American society, tremendously polarized today as it had never been before. state since 1865. However, neither Russia nor China were affected by this tremendous wear and tear and were able to embark on very long-term challenges without the economic or political cost that the West suffered.

b) Islamist terrorism and its political implications in the Maghreb with numerous coups d'état directed from Moscow and Beijing. Added to this is widespread violence, civil conflicts in Sudan, Libya and Ethiopia and France's loss of regional influence. Further East, we find the everlasting instability in the Middle East with the civil wars in Syria and Yemen, the latter, with its consequences on navigation in the Red Sea, and the climate of generalized violence against Israel and the war response that can alter the entire scheme of friendly relations generated in recent years. Although Russia intervened directly in the Syrian conflict with a significant military presence, the results were favorable since its ally Assad is still in power and did not suffer any wear and tear. China, for its part, has remained in the shadows, reaping the harvest of the conflicts and strengthening its alliance with Iran, which may now be in question if the Houthi attacks in the Red Sea do not stop, which are especially harming Chinese trade with Europe.

c) The disparity in economic growth. While the Chinese economy so far this century has multiplied by 15, reaching a GDP of 20 trillion dollars, and the Russian economy by 7, the United States multiplied its GDP by 6, the Euro zone by 2.5 and Japan has not grown in real terms in these years. In short, democracies, and especially European ones, have lost their role in the world economy, with all kinds of implications that this revolution can entail.

d) The military expansionism of China especially, and Russia, and nuclear proliferation in North Korea and Iran have also substantially modified the military balance. The spending evolution data in Table 1 explain this. China has a clear ambition to lead the world's warfighting capacity in two decades and it is important to know in more detail what is happening in a country that is too opaque. So far this century, the race between the United States and China can be summarized in the incorporation of the following platforms (the first number corresponds to China and the second to the US): 7/0 strategic nuclear submarines; Attack submarines 43/22; Aircraft carrier 3/3; Destroyers 46/47, Frigates 40/0, LPD-LHT-Assault 53/39. Likewise, China has incorporated 700 fourth and fifth generation aircraft for about 300 from the United States. On the other hand, the Chinese military space program is advancing at breakneck speed with 45 satellites launched in 2022 alone. Finally, note the Chinese technological leadership with programs such as space warfare, unmanned systems, directed energy weapons, electromagnetic rail guns, maneuverable re-entry vehicles that aspire to be the definitive solution, that is, the suppression of the enemy's nuclear response capacity.

e) The war in Ukraine, although it does not have as strategic a component as the previous ones, has demonstrated the aggressiveness of the totalitarian powers and their resolution to destroy their enemies by violating borders and without the slightest moral restriction. The last military invasion of a country in Europe was precisely that of the USSR in 1941. The more powerful China is, the more resolve we will see in Moscow when it comes to threatening Europe. In a way, both powers need each other and complement each other in the same way as the European fascisms of the 1930s.

In my opinion, the main challenge in the coming decades will correspond to Europe. If it is not capable of generating more sustained economic growth and if there is no political integration with greater strategic ambition, it will pass into irrelevance, almost converted into a theme park for Asians and North Americans, and with a cultural mix that will have denatured it more than expected. which has been for two thousand years, the lighthouse of the world.

2. Military spending

The evolution of defense spending so far this century is additional evidence of this aforementioned geostrategic change. Democracies, even despite recent events in Ukraine, spend less and less relatively and authoritarian nations increasingly.

In Table 1, you can see the evolution of Defense spending between 2000 and 2023 in some countries that I have considered of greatest interest for this analysis. It is true that China and the United States have continued at a similar pace of growth, but we must keep in mind that China's real purchasing capacity cannot be understood in terms of exchange rates. Likewise, the composition of spending is very different. China already spends more in purchasing parity than the United States on Defense and invests in modernization more than the United States even at official exchange rates, and the tendency to diverge grows every year, which will lead to clear Chinese superiority in equipment and technology at the same time. end of this decade. I will return to this table when commenting on the situation of Spain, the country on the list that has grown the least in defense spending in this period, despite the increase this last year.

So far this century, China has multiplied its defense spending by three, Russia by 10, including in the figures the expenses of the war in Ukraine, and Iran by 7, compared to multipliers of less than 2 in all European countries. minus Poland, which already spends three times more than Spain on defense, which is conditioned by the certainty of the Russian threat on its territory. As I have been arguing for more than ten years, the race between Morocco and Algeria continues unstoppable. Algeria has multiplied its defense spending by 8 and Morocco by 11, since the beginning of the century, circumstances to which we cannot be oblivious, and which represent an enormous wake-up call.

3. The defense industry

The defense turnover of the hundred largest companies in the sector worldwide amounted to 158,000 million dollars in 2000, while in 2023 it amounted to 445,000 million Euros. So far this century it has tripled, according to annual data published by Defense News.

The total production of the world defense industry is somewhat higher since these statistics do not include the almost 80 billion that the Chinese and Russian industry invoices.

Total global defense spending has multiplied by 2 in this period, reaching a figure of two trillion Euros by 2023, so an estimate of consolidated production of the defense industry worldwide around 500,000 million Euros would be quite precise.

Of the total of the hundred companies with the highest turnover, table 2 includes some that I have selected in order to better illustrate the different problems and circumstances through their evolution. The billing data from 2014, the exact year of the invasion of Crimea, is compared with the latest available in 2022, which already includes the initial effect of the war in Ukraine.

The Defense billing of these companies grew by 39% in the aforementioned period. Excluding the case of Dassault, which thanks to the export success of the Rafale has multiplied its turnover by 278%, we observe that the major companies in the United States sector have grown well above the average, between 58% of Lockheed Martin, 88 % from Raytheon and 64% from General Dynamics. Only Boeing, with a lower weight of Defense in the company's total, has seen growth much lower than the United States and global average. All European companies have grown below average, which is a clear consequence of the budgetary situation mentioned previously.

Consolidation bets have not been very successful in Europe. Bae Systems and Leonardo under the concept of national champion, KDNS, Safrán and Naval Group with different consolidation approaches have grown below the world average. Rheinmetall, however, has benefited from Germany's new export policy and the war in Ukraine as well as a very active company acquisition policy, as have Israeli companies from the growth of their exports in very different markets. from the Far East to Latin America.

To better refine the information, it must be considered that Western statistics only partially collect data from Chinese and Russian companies. According to various estimates, Chinese industries have multiplied their turnover by three in the last fifteen years. In Russia, the war in Ukraine has accelerated the pace of production, which in some fields such as ammunition, unmanned systems and vehicles, already exceeds that of Europe as a whole.

The United States industry gains weight every year in the international context and benefits tremendously when tense situations occur such as the current one with Russia in which even European countries look to the United States as a reference supplier. The fragmentation of the European industry has largely been overcome and yet the problems remain, and the reason is strictly budgetary. If Europe fails to make steady progress with the FCAS, it could even lose its co-leadership position in the military aeronautical market in ten years. Exports are only relevant to France's industry. For the rest of the European countries, the export of defense material is not critical given the greater dependence on domestic markets.

The trend in the coming years will be a continuous loss of weight in the European industry, although we will see acquisitions of medium-sized companies to capture product or market share, but they will be very specific. The North American industry will maintain its leadership with a notable growth in exports, while emerging industries, especially from Korea and Turkey, will begin to compete in many markets traditionally in the Western orbit with already notable successes, such as the entry of the Korean Hanwha in Australia. in the armored vehicle program.

While the United States will maintain a level of spending on GDP of around 3.2% in the coming years, large European countries will have to accelerate plans to acquire land platforms mainly to replace the most obsolete equipment and maintain an adequate deterrent capacity. Europe currently finds itself with a weakness unknown since the end of the Second World War and with a threat as real as it was in 1945. If rearmament does not occur in every sense, Europe may face its definitive decline on the ground. geostrategic.

As can be seen in this table, European industries have grown in turnover in the period by 4% and North American industries by 53%. If we take the data from the rest of the industries, those of South Korea, Turkey, India, Russia, China, Israel have grown by close to 50%, which shows the loss of European weight, which has nothing to do with their lower competitiveness, since they are the most exporting companies, but because of the weakness of their domestic demand.

4. Outlook for the global defense industry

Except for a fall of the current Chinese and Russian regimes, which does not seem very foreseeable, in the coming years we will witness growing tension in the international sphere that will focus on the same three axes of the Second World War: the Far East, Europe and North Africa and the Middle East. The increase in the military power of these countries and their growing expansionist commitment will force the West to reinforce its capabilities until it manages to convince all countries that there is no victory in war; only then will we be able to avoid an outbreak. war of unimaginable proportions.

Steps in this direction are currently evident in the United States, Japan and allies in the Far East and are beginning to be seen in Europe. Therefore, the demand for defense goods, and especially seeking technological superiority, will grow in double digits for the remainder of the decade, at least.

However, the different growth rates of military spending by countries will have an enormous impact on the development of their defense industries. The states that are going to make extraordinary efforts for their security are going to accentuate the demands for local content in contracts, so we will see, as we already see today, a development of the industries of the Far East, India, Central Asia and in some African countries such as Morocco, Egypt, Nigeria, Ethiopia and Angola, which are already developing new industrial compensation policies to generate local capabilities.

European industries will reduce their export presence but will see a growth in domestic production to meet their own needs, so depending on the demand of each country in Europe we will observe different trajectories in the industries. Industries in Eastern Europe, the Nordics and Turkey will see their companies grow, encouraged by the growth of their military budgets.

Europe's lower weight in the world will have repercussions on all aspects of life. Germany will go from being the fifth economy in the world to the ninth in 2050, the British from being the ninth to the tenth, France from the tenth to the twelfth, Italy from 12th to 21st and Spain from 16th to 26th. Clearly the Mediterranean decline in Europe will be abysmal in the next three decades. We must take into consideration that the participation of the European economy in the planet will be less than 10% in 2050.

Latin America will increasingly be irrelevant in the defense market, despite the fact that Brazil and Mexico will be, in 2030, the eighth and ninth largest economies on the planet, but there are no compelling reasons for an increase in military spending as We will see in other regions.

On the other hand, the economic development of sub-Saharan Africa, where one billion people live, will have clear repercussions on the acquisition of new military capabilities, especially in Nigeria, the Democratic Republic of the Congo, Ethiopia and Tanzania, markets that will show enormous strength.

According to GDP projections according to purchasing parity (PPP), the fifth largest economy in the world in 2030 will be Indonesia with USD 5,424 billion and the fourth largest economy in the world in 2050. Five of the ten most populous countries in the world in 2100 will be in Africa, with Nigeria that will reach 545 million inhabitants.

But the two great axes of the world will be Asia and the United States. By 2050, the United States will be the third largest economy in the world, with India and China ahead and Indonesia behind. The rest of the world will have to adapt to this new reality.

Europe's great strategic problem, in addition to the internal ones, is Russia. Europe, with a GDP that is ten times that of Russia and with three times the defense budget combined, is much superior, but lacks an effective nuclear deterrent; As long as this deficiency persists, Europe will always be in a weak situation.

Our companies must reorient their strategies towards the emerging markets of the next twenty years, states towards which our economic diplomacy must set priority. Those who are not successful in these new markets, which are very foreign to us historically and culturally, will, in the best of cases, survive.