Global defense spending
Previously in this series, we learned that security threats and economic growth are two important factors that shape a country’s defense spending. In recent years, the Middle East and South East Asian nations have witnessed an increase in both. High economic growth has generated incremental wealth, but there’s also been an increase in security threats. As a result, defense spending has increased in these regions as well.
The US and Europe may soon no longer command the lion’s share of global defense spending. Military expenditures by the West are falling for a number of economic reasons such as the global economic crisis, ensuing austerity measures, and the need to control budget deficits.
The decline is adversely affecting the revenues of many defense companies in the US. Raytheon Company’s (RTN) revenues fell from $24.41 billion in 2012 to $23.71 billion in 2013. L-3 Communications Holdings Inc.’s (LLL) revenues dropped from $13.15 billion in 2012 to $12.63 billion in 2013. Lockheed Martin Corporation’s (LMT) revenues sagged from $47.18 billion in 2012 to $45.36 billion in 2013.
To sum up, there are two distinct trends in global defense spending at the moment—reduced spending in the West, and increased spending in the Middle East and Asia. As defense companies recognize this shift, the focus of business strategies is likewise shifting toward emerging and non-western economies.
Southeast Asian countries are the world’s fastest growing economies, ahead of Latin America and Africa. Urbanization and rising per capita incomes are driving this growth. In terms of military spending, it’s expected that among these countries, Indonesia and Vietnam will spend most on defense in the near future.
Meanwhile, few countries in this region have developed the kind of defense industry that can produce advanced defense equipment. As a result, most of these countries depend on foreign players. So clearly, this is a huge growth opportunity for foreign countries in terms of exports and technology transfers.
Though imports will continue to rise as Asian and Middle East nations develop defenses, many countries aspire to produce defense equipment at home. To this end, some have adopted offset policies that require foreign partners to source some equipment from local industry. Such requirements have led to a few successes, For example, Turkey is now producing 50% of its own military equipment and also exporting many of its products.