Tag Archives: aerospace and defense industry

The Arms Race: Who Lacks an Indigenous Defense Industry

XM1203 Non-Line-of-Sight Cannon (NLOS-C) prototype in 2009. image from wikipedia

Even though Colombia, Kuwait, Malaysia, Morocco and Singapore have very different perspectives and agendas, they are all expected to sharply increase their defence spending over the next 10 years. Due to the arms race and an increasing threat perception, the effects of the 2008 financial slowdown on defence spending in these transitioning markets are gradually reducing.

“Unlike leading transitioning economies like India, South Korea, Turkey, the United Arab Emirates and Brazil, the five countries selected for this study are still attempting to develop an industrial base …,” said Frost & Sullivan Aerospace & Defence Industry AnalystAlix Leboulanger. “Upon a closer look at these countries’ dynamics, it is found that their political intent is stronger than their financial and infrastructure capabilities.”  Several factors are dampening indigenisation plans. The increasingly competitive marketplace has left little room for emerging local players unless they can distinguish themselves appropriately – for instance, with price in Colombia and technology in Singapore. Moreover, weak market prospects beyond local demand, along with the absence of small- and medium-sized enterprises, have restricted partnership opportunities and transfer-of-technology ventures with foreign companies.

Investing in high-end foreign technology is perceived as the way forward to fulfil three objectives: achieving modernisation programmes, consolidating the domestic industrial base, and providing employment to locals,” explained Leboulanger. “This will require efficient and easily-applicable regulations to create an attractive and stable environment for foreign investments and industrial partnerships. The lack of skilled personnel and infrastructure, also need to be addressed.”… Financial constraints mean that governments will try to reduce armed forces and invest in combat-proven platforms, surplus material and second-hand equipment…

“As a matter of fact Colombia, Kuwait, Malaysia, Morocco and Singapore are expected to spend 21 percent of their total budget, circa 9.77 billion USD per year, on new equipment.”

Combat Readiness Plans Win Over Defence Indigenisation Targets in Select Markets, Finds Frost & Sullivan, PR Newswire, July 22, 2015

Where the Money Goes: 2015 US Military Spending

Railgun. Image from wikipedia

U.S. Deputy Defense Secretary Robert Work on Wednesday, Jan. 28, 2015 urged NATO allies to develop and make more innovative weapons, and said bold action was needed to stay ahead of rapid weapons development by China, Russia and other countries.  Work said the Pentagon has a new plan called “Defense Innovation Initiative” and a separate effort targeting longer-term projects to ensure that the United States continues to have a decisive competitive advantage against potential foes.

Work said concerns about advances by other countries were a key reason that the Pentagon’s fiscal 2016 budget plan to be delivered to Congress will exceed budget caps set by Congress and reverse five years of declines in U.S. military spending.   He said the budget would include “significant” investments in nuclear weapons, space control capabilities, advanced sensors, missile defense and cyber, as well as unmanned undersea vehicles, high-speed strike weapons, a new jet engine, high-energy lasers and rail gun technology…..Lockheed Martin Corp  and Boeing  and other key weapons makers have repeatedly urged the Pentagon to step up investments in key technologies….

Kendall said the department would also earmark funds for development and prototyping of a new “next-generation X-plane” that would eventually succeed the F-35 fighter jet, and a new engine.

Excerpts, ANDREA SHALAL, Pentagon official urges NATO to focus on innovative weapons. Jan 28, 2015

Hypersonic Weapons

space shuttle. Image from wikipedia

Payloads on hypersonic aircraft, whether they are weapons or sensors, could reach their destination within minutes, rather than hours, said Mark Lewis, former chief scientist of the Air Force and now director of the Science and Technology Institute at the Institute for Defense Analyses, a federally funded research-and-development center.  Hypersonic speed is generally defined as beginning at Mach 5, which is the point where aerodynamic heating caused by the speed of the vehicle cutting through the atmosphere becomes a factor.

The Air Force concluded its successful X-51 WaveRider program last year. The final test had the missile-like aircraft flying at Mach 5.1 for about 200 seconds.  Meanwhile, the Army is testing the advanced hypersonic weapon, a missile designed for vertical launch. It suffered a failed test seconds after takeoff in August 2014, but that was caused by a faulty booster, not the missile or hypersonic technology itself, Lewis noted….

Hypersonic technology could be seen as a follow-on to stealth, Lewis said. Even if an aircraft has that kind of technology, it doesn’t mean it is invisible, he said. Adversaries are growing better at spotting stealthy aircraft, he said. Speed might compensate for that, he said. “If I can fly really fast, it makes it harder to act against me. It doesn’t make it impossible. But it makes it harder.”

Top Air Force leaders are indicating that they want to move hypersonic technology to the next level.  Air Force Chief of Staff Gen. Mark Welsh and Secretary Deborah Lee James in the document “America’s Air Force: A Call to the Future,” said hypersonic development was number one on the service’s list of top five technology priorities.  [T]the Air Force sees hypersonic weapons as a potential means to break through anti-access/area-denied battlefields where adversaries have robust defenses.

The Air Force will team with the Defense Advanced Research Projects Agency on two new hypersonic programs, he said. The first will be a cruise missile called HAWC, the hypersonic air-breathing weapons concept. The other is called tactical boost glide, which will accelerate an aircraft to Mach 5 plus speeds, then let it glide to its target.

Similarly, space planes could deliver payloads in minutes. The reusable space plane concept has been proposed many times over the years, and received a new lease on life when DARPA awarded three contracts to Boeing, Masten Space Systems and Northrop Grumman to study the idea of a two-stage launch system that could rapidly place 3,000 to 5,000 pounds into orbit. The Air Force has never given up on that idea, as evidenced by the new DARPA initiative, Lewis said.  Space planes have been talked about for decades, Lewis said. There have been many starts and stops in developing the concept, he added.

NASA’s space shuttle was originally conceived as a vehicle that could rapidly lift payloads into space at low cost, and be flexible and responsive. It never lived up to that promise.

The DARPA experimental spaceplane (XS-1) program envisions a reusable aircraft that could be launched from a mobile platform, and return 10 times within 10 days. It would employ a reusable first stage that would fly to Mach 10 at a suborbital altitude. At that point, one or more expendable upper stages would separate and deploy a satellite into low-Earth orbit.  While a space plane in low-Earth orbit could potentially be used as a weapon, it would more likely be employed as a means to rapidly replace satellites that have been damaged in a space war, or to place sensors over regions where there are currently no assets, Lewis said….

Meanwhile, more akin to the space shuttle than the DARPA concept for the space plane, the Air Force continues to use the X-37B, a top-secret orbiter that also glides to Earth. One has been in orbit since October 2012. The Air Force has repeatedly denied that it has, or is intended to be, weaponized. What its exact mission is remains classified

Excerpts from Stew Magnuson . Hypersonic Weapons Can Defeat the of Time, Distance , National Defense Magazine. November 2014

see also Falcons

Technology Firms Invade Defense Industry

Satellite Collision

[N]imbler Silicon Valley outfits are beginning to invade the defence industry’s territory. “Warfare is going digital,” observes Tom Captain of Deloitte, a consulting firm. Tech firms have shown that they can supply robots, drones and intelligence software. SpaceX, founded by Elon Musk, a tech entrepreneur, is taking America’s air force to court to reopen bidding for a satellite-launch contract awarded to Boeing and Lockheed.

Excerpt, Weapons-makers: The case for defence, Economist, July 19, 2014, at 55

The Militarization of Japan: the Fourth Force

China Japan

Japan will add a new division to its military or Self-Defense Forces in 2019, to protect equipment in orbit from space debris as well as other attacks, a source familiar with Japan-U.S. relations said, according to a report by the South China Morning Post.

Japan revised a law regarding its non-military activities in space in 2008, allowing the creation of a “space force,” which will initially be responsible for monitoring dangerous debris floating within close vicinity of the Earth, as well as protect satellites from collisions or attacks, according to the report, which added that the U.S. has been informed of the development by the Japanese Defense Ministry. There are around 3,000 fragments of space debris currently at risk of smashing into reconnaissance or communication satellites around the Earth.  Japan will assist the U.S. military with the information it obtains through this program, and looks to strengthen bilateral cooperation in space, or the “fourth battlefield,” the report said.  The “fourth force” will initially use radar and telescope facilities in the Okayama prefecture that the defense ministry acquired from the Japan Space Forum, which also owns the Spaceguard Center radar facility in Kagamino and a telescope facility in Ihara.

Units from Japan’s Air Self-Defense Force are currently being considered by the defense ministry to make up parts of the new space force. And, the Japanese ministries of defense, education, culture, sports, science and technology, along with the Japan Aerospace Exploration Agency, or JAXA, will jointly acquire the radar and telescope facilities from the Japan Space Forum, a Tokyo-based think tank that coordinates aerospace-related activities among government, industry and academia.

Japan and the U.S. have reportedly been working on a space force since 2007, when China tested its satellite destruction capabilities by launching a missile against one of its own satellites and destroyed it.  In May, at a space development cooperation meeting held in Washington, the Japanese and U.S. governments agreed to increase cooperation in using satellites for monitoring space debris, marine surveillance, and to protect one another’s space operations. Japan also pledged to share information acquired by JAXA with the U.S. Strategic Command.

Excerpts from Alroy Menezes, Japan’s ‘Space Force’ To Protect Satellites In Orbit, International Business Times, Aug. 4, 2014

The Art of Selling Weapons: defense industry

image from wikipedia

[When governments buy weapons] it is standard to supplement the main deal with a side contract, usually undisclosed, that outlines additional investments that the winning bidder must make in local projects or else pay a penalty. Welcome to the murky world of “offsets”.

The practice came of age in the 1950s, when Dwight Eisenhower forced West Germany to buy American-made defence gear to compensate for the costs of stationing troops in Europe. Since then it has grown steadily and is now accepted practice in 120 countries. It has its own industry newsletter and feeds a lively conference circuit. The latest jamboree, hosted by the Global Offset and Countertrade Association, was held in Florida…. Yet its very structure serves to mask a build-up in the unrecognised financial liabilities of companies. It also, critics argue, fosters corruption, especially in poorer parts of the world.

Avascent, a consultancy, reckons that defence and aerospace contractors’ accrued offset “obligations”—investments they have promised but not yet made—are about $250 billion today and could be almost $450 billion by 2016. The industry’s own estimates are lower, but all agree the trajectory is upward.

Offsets come in two types. Direct offsets require investment in or partnerships with local defence firms. The idea is to develop self-sufficiency. Turkey, for instance, now meets half its own defence needs thanks to such arrangements. Indirect (non-defence) offsets include everything from backing new technologies or business parks to building hotels, donating to universities and even supporting condom-makers. Here the stated intention is to achieve more general economic or social goals.

Both types of offset are controversial. Economists view offsets as market-distorting. The World Trade Organisation bans their use as a criterion for contract evaluation in all industries except defence. Anti-corruption groups see them as a clever way to channel bribes. Even if many offset deals are clean, they are widely seen as a “dark art”, admits an industry executive. “Offset” has become a dirty word; the industry now prefers the euphemistic “industrial participation”.

The practice is frowned upon in some advanced economies. The European Commission is trying to impose a ban on all offsets in EU-to-EU contracts, and on indirect offsets when the supplier is from outside the union…

America has long been officially against offsets, though it practises something similar at home under the Buy American Act of 1933, which requires foreign arms-makers to source much of the work locally… And as embassy cables published by WikiLeaks make clear, America’s diplomats are sometimes closely involved in its firms’ discussions with foreign governments, including even squeaky-clean Norway’s, over proposed offsets.

In less developed countries, where defence spending is generally rising, offsets are booming. One appeal is that they can be recorded as foreign direct investment, boosting the government’s economic-management credentials. The two biggest arms-buyers in the Gulf, Saudi Arabia and the United Arab Emirates, have long-standing, sophisticated offset programs…Brazil and India are catching up…

This growth is fuelling a thriving offsets industry. At one end are dozens of small brokers who hawk ideas for offset projects to arms-makers and their clients. With the right contacts in government and the armed forces, even small outfits can service the largest defence firms. Take Dolin International Trade & Capital, a one-man operation run by Dov Hyman from his home in suburban New York. Mr Hyman cut his teeth as a textile trader in Nigeria. Today he advises African governments looking to use offsets while helping multinationals craft offset packages.

Further up the chain are a few sophisticated outfits that structure complex deals and arrange financing. The best known is London-based Blenheim Capital. These are assembling ever more creative packages, including, for instance, helping procuring countries to use contractors’ offset obligations as collateral for loans, backed by the “performance bonds” that firms set aside to cover unfulfilled obligations.

These middlemen are offsets’ most vocal defenders. Mr Hyman cites reams of examples of deals that he believes brought great benefits for purchasing countries’ economies. The best of them are “beautiful solutions”: for instance when arms-sellers satisfy offset obligations by guaranteeing credit lines for local manufacturers, thus reducing their financing costs. Using a multinational’s good standing in this way is “an efficient means of making possible transactions that otherwise wouldn’t be viable,” he argues.

However, some projects take contractors disconcertingly far away from their core competence. Take the shrimp farm set up in Saudi Arabia in 2006 with backing from Raytheon, a maker of radar systems and missiles. Praised at first as a model offset, it reportedly struggled to keep its pools properly maintained in searing temperatures and eventually went bust.

Moreover, the academic literature on offsets suggests that the promised benefits are elusive. There are some technology-transfer success stories: for instance, China has boosted its defence-manufacturing capability by requiring offsets when buying kit from Russia. However, research by Paul Dunne of Bristol Business School and Jurgen Brauer of Augusta State University has found that such deals are generally pricier than “off-the-shelf” arms purchases and create little new or sustainable employment. The offsets associated with the giant South African arms purchases of the late 1990s have created 28,000 direct jobs, claims the country’s government. Even if true, it is well below the 65,000 first envisaged. India’s auditor-general recently concluded that some offsets have produced no value for the country.

Judging performance is hard because of a lack of openness. Asked for confirmation of the fate of the shrimp farm, the Saudi offset authority said it kept “minimum information” on projects after their founding and suggested contacting its commercial backers. Raytheon declined to comment and suggested contacting the Saudis. DevCorp, another backer, did not respond. A study published in February by Transparency International, an anti-graft group, found that a third of governments that use offsets neither audit them nor impose due-diligence requirements on contractors.

Worse, accounting rulemakers have failed to impose any requirement to disclose offset liabilities. Companies can thus choose how, or whether, to put them on the balance-sheet. Defence firms have lobbied successfully for offsets to remain classified as “proprietary”, so they do not have to disclose their obligations. In some ways things have got worse: the Commerce Department’s annual report on American contractors’ offsets no longer even breaks out the numbers country-by-country.

This murkiness makes it hard to determine who really pays for offsets. On the face of it, the defence companies do. But Shana Marshall, an offsets-watcher at George Washington University, believes that they build the cost into their bids (pdf). Politicians and officials in procuring countries know that they are paying the bill through padded prices, but they accept this because offsets give them some grand projects to trumpet and sometimes provide palm-greasing opportunities.

A study in Belgium found that the country ended up paying 20-30% more for military gear when offsets were factored in. If the costs are largely borne by taxpayers, the benefits accrue to individuals and institutions chosen by the procuring government. This make offsets a good way to conceal delivery of public subsidies to interest groups, according to Ms Marshall.

A number of deals have been exposed as, or are suspected of being, corrupt. A commission has been set up to look into South African contracts dating back to 1999; the government has already conceded that offset credits changed hands at inflated prices. Since 2006 prosecutors in Portugal have been investigating offsets connected with a €1 billion ($1.3 billion) submarine contract with Germany’s Ferrostaal, HDW and ThyssenKrupp. Three Ferrostaal board members and seven Portuguese businessmen are on trial, charged with fraud and falsifying documents.  EADS, a large European contractor, is facing multiple inquiries over its sale of 15 Eurofighter planes to Austria. Prosecutors in Vienna and Munich are looking into allegations that millions of euros in kickbacks flowed through a web of offshore firms and side-deals, linked to offset agreements worth €3.5 billion, twice the value of the main contract. (In other words, EADS was supposed to generate €2 of business for Austrian firms for every euro it received for the planes—an unusually high ratio even in fiercely bid contracts.) Tom Enders, EADS’s chief executive, told Der Spiegel, a German magazine, that he “knew nothing about the shadowy world of dubious firms allegedly behind this.” The company says it is co-operating fully with prosecutors and that an internal investigation has so far found no evidence of punishable activity.

Prosecutors are also looking into whether AgustaWestland, part of Finmeccanica, an Italian defence firm, paid bribes to secure the sale of 12 helicopters to India in 2010. Finmeccanica’s former chief executive and the former head of AgustaWestland are due to go on trial next month. According to Italian court filings, suspicious payments allegedly flowed through a sham offset contract for software with help from a Swiss-based consultant. The helicopter-maker and the charged individuals deny wrongdoing.

Industry figures point out that all but the Indian case are at least five years old. They argue that corruption is harder to get away with today because of stricter anti-bribery laws and enforcement in America and Europe. Companies’ general counsels pay much more attention to offsets than they did a decade ago, says Grant Rogan, the head of Blenheim Capital.

Even if graft really is on the wane, offsets’ complexities make it hard to measure the true cost of defence deals. Procuring governments may apply generous “multipliers” to give extra credit to projects they deem exceptionally beneficial, especially if they are keen to buy the kit in question. As a result, defence contractors often find their liabilities turn out to be a lot less than their nominal obligations. A $5 billion sale of military kit might come with, say, $4 billion of gross offset requirements, but after multipliers it might only cost $500m to fulfil. A book on the arms trade, “The Shadow World”, by Andrew Feinstein, describes a contract Saab won in South Africa: to receive more than $200m in credits all the planemaker was required to do, the book says, was to spend $3m upgrading pools in Port Elizabeth and marketing the town to Swedish tourists. Saab says the tourism project cost much more, and suggested that it was up to the authorities to decide what value they put on what it achieved.

This sleight-of-hand helps to explain why industry executives are better disposed towards offsets in private than in public, says Ms Marshall. They say they could happily live without them, but they do not lobby to have them banned. Indeed, some big contractors see their ability to craft a package of attractive offsets as a “source of competitive advantage”, as Boeing’s boss, Jim McNerney, puts it.

The largest such firms will employ dozens of offset specialists to give them an edge in bidding. Lockheed, another American contractor, has about 40. As long ago as 2005 the firm was touting its leadership in offsets to win Thai contracts, according to a leaked diplomatic cable.  A downside for the companies is that dealing with national offset agencies can be frustrating. And though the companies’ offset liabilities are smaller in reality than on paper, they can still be daunting: one American contractor, for instance, has $10 billion of nominal obligations in a single Gulf state that will cost $1 billion-2 billion to fulfil, according to a consultant (who will not say which firm or country)….

How long can the offsets boom last?  But in the shorter term, their growth will be fuelled by American and European contractors’ intensifying efforts to sell outside their shrinking home markets, to big developing countries whose defence budgets are growing…. Remarkably, offsets are now said to be the main criterion in contract evaluation in Turkey and some Asian countries—more important than the price or the technical capability of the defence equipment itself.

The defence industry: Guns and sugar, Economist,May 25, 2013, at 63

The Military-Industrial Complex: aerospace and defense industry

The U.S. is the world’s largest aerospace and defense market, and also home to the world’s largest military budget. The growth of the Aerospace and Defense industry depends largely on the spending outlook of government departments, with the U.S. defense budget being the primary driver. The industry largely depends on U.S. government contracts….

Defense spending is the major source of revenue for the top nine global aerospace and defense companies, with the US accounting for more than 40% of total global defense spending. However, with the U.S. government expected to institute greater austerity in its defense budget going forward, defense companies will need to source more orders from global clients. The geostrategic significance of the industry and the related heavy export restrictions will come in the way, to some extent, of those marketing efforts by U.S.-based operators.

The U.S. defense budget for 2012 was $645.7 billion, with the base budget at $530.6 billion and $115.1 billion approved for Overseas Contingency Operations (“OCO”) as supplementary defense spending, mainly to fund ongoing wars.  In February this year (2012), the Department of Defense (DoD) requested a Pentagon base budget of $525.4 billion for 2013, which is approximately $5.1 billion or 1% less than what is approved for fiscal 2012, with $88.5 billion earmarked for OCO spending. The significant reduction in OCO funding is mainly due to the decline of U.S. military operations in Iraq in 2011. Going forward, OCO funding is expected to continue to decline as troops redeploy out of Afghanistan.  Since the September 2001 attacks, the U.S. government has spent significant amounts on military campaigns overseas. The country has already decided to gradually move out of Afghanistan, and the war in Iraq has finally ended, which is expected to lower its expenditure on foreign campaigns. However, its clandestine military operations in other nations as part of anti-terrorism operations will continue to add to foreign war expenses. However, the overall trend in overseas military spending is unmistakably on the downtrend.

The big defense operators armed with a strong balance sheets are expanding their operations inorganically through acquisitions. The U.S. Defense department also endorses mergers among U.S. defense companies, provided they don’t involve the top five or six suppliers acquiring each other.

Lockheed Martin Corporation bolstered its product portfolio by acquiring Procerus Technologies, a company specializing in autopilot and other avionics for micro unmanned aerial systems. In November 2011, it had acquired Sim-Industries B.V., a commercial aviation simulation company located in the Netherlands. This acquisition would expand both companies’ closely related markets and expand the customer base.

Another defense major, L-3 Communications Holdings Inc., acquired the Kollmorgen Electro-Optical (“KEO”) unit of of Danaher Corporation This unit will improve L-3’s product suite with products like submarine photonics systems and periscopes, ship fire control systems, visual landing aids, ground electro-optical and sensor-cueing systems.

In December 2011, General Dynamics Corporation completed the acquisition of Force Protection, Inc. The latter provides blast- and ballistic-protected platforms that support the armed forces of the U.S. and its allies.

In December 2011, Raytheon Company announced that it has acquired Pikewerks Corporation, a privately held company, to further extend Raytheon’s capabilities to defend against sophisticated cyber-security threats facing customers in the intelligence community, the DoD and commercial organizations.=

Excerpts, Zacks Industry Outlook Highlights: Lockheed Martin, L-3 Communications, Danaher, General Dynamics and Raytheon, PRNewswire, May 15, 2012