With the DSEi under way at the ExCel, Howard Wheeldon shares his thoughts on defence spending in the not too far off future
No less that forty countries will be represented at the 2009 Defence Systems & Equipment International [DSEi] exhibition which opened its doors at the splendid ExCel venue this yesterday. For those that take the trouble to visit this most excellent of all defence industry shows around the world there is much new equipment to see. In the wake of the global recession and of big government deficits there will also be seen on the faces of a great many UK exhibitors concern as to the future outlook of the defence industrial base. So be it but
Though there will also be visible concern regarding an uncertain future through the global recession and big government deficits, this is a shop window for product just as it is a shop window to network and for discussing ideas with potential customers that might one day make future new defence and security products. And despite the anxieties defence equipment buyers from around the world along with many military delegations can be expected to attend in bigger numbers than ever before.
If there is any bad news it is that DSEi this time round comes at a very difficult time for the global defence industry and particularly for what remains of the UK defence industrial base. At the heart of such concern is the prospect of more defence cuts – not only in the UK but also in the US. Indeed, the US has already wielded the knife on some defence programs and while core defence spend (including supplemental expenditure) will remain above $600bn in each of the next two years, projects such as the F-22 have already been chopped. Worse is that procurement research and development budgets on both sides of the pond have already been sharply cut. Meanwhile both the UK and US governments are in the preparation stages of major defence reviews that will eventually produce blueprints for the future financial and strategic policies on defence. Clearly in a much changing world in which security is the watchword the need for such reviews can hardly be challenged. In the US for instance the recent change of President plus the inevitable pressure to slash government expenditure in light of the massive budget deficit may well mean that the cuts that will likely emanate from the 2010 Quadrennial Defence Review will be the most radical that the US will likely have seen in the past forty years. The same may well be true for the UK as the proposed Strategic Defence Review planned to take place through 2010, the first since 1998 and thus long overdue, may well even attempt to narrow the existing boundaries of the UK NATO commitment. That said, given existing commitments, there is little doubt that UK public attention has been drawn to the failure to supply our troops with enough decent equipment. The body bags coming back from Afghanistan and the angst of public opinion is surely enough to tell politicians that in 2010 when the next General Election comes that this time there really are votes in defence.
As stock prices in defence sector players on both sides of the pond show markets have already decided that whatever comes from the respective QDR in the US and SDR in the UK, it will boil down to equipment cuts and thus a reduction in income. One can hardly argue with such assumptions although it is as well to take on board the typically long lead time of defence related business. But for all the woes we need to remember that the defence industrial base is of huge importance to the UK economy – a £35bn a year industry that directly employs 160,000 with another 145,000 supported through the supply chain. Add security to defence and the directly employed numbers rise to over 300,000. This is no small-fry industry then. Indeed, defence alone accounts for 10% of Britain’s remaining manufacturing industry. It is an important exporter too, cutting at least £5bn a year off the trade deficit. Moreover of all industries left in Britain defence is probably the one that contains the most innovation. With literally thousands of small and medium sized enterprises producing innovative news ideas, components and often complete products, I am reliably told that the UK defence industry submits an average of 1,000 patent applications a year – twice as many as the pharmaceutical industry!
So, DSEi comes at a time of huge structural change in how mature western governments propose to conduct future defence policy and commitment. It will be a difficult one to balance and it will be charged with emotion on all sides. Somehow it also has to be affordable and unlike too many of the current government promises, whatever is done must be properly funded. That latter commitment is at least one that voters can be assured is already part of Conservative Party policy. As to other commitments the Tories are, if elected next year, sticking firmly behind there own mandated Strategic Defence Review to come up with the answers. The result of that review when it comes – I imagine within a year of being elected – will be radical though I suspect will take the view of correctly matching the need to provide adequate protection to an attack and meeting a revised NATO commitment with the correct levels of equipment, force numbers, bases and fighting equipment. One thing is certain – the primary strategic relationship will remain with the US and, NATO commitment on Europe aside, one may rule out any prospect of UK defence moving closer with that of the EC. I suspect too that following the appalling findings of the current governments Gray Report on procurement a huge and radical shake up of how the government buys its equipment can be expected to lead to the creation of a replacement for the brilliant Defence Industrial Strategy that the current government proposed but then refused to fund. I certainly hope it does. Certainly the question of what are you hoping to achieve buying this or that piece of equipment. I suspect the Tories will also ask whether the equipment required might also be better bought from the US as opposed to through the UK defence industrial base. There are big challenges ahead for industry then as they are forced to face up to the prospect of even more change. For all that, the military will also need to have its say. The Army, Navy and Royal Air Force have done a fantastic job this past ten years against the odds. They have received all too few thanks and troops and their families have been treated appallingly by the current government. They will continue to give the nation the full commitment it requires but whatever government is charged with leading the country over the next five years must ensure that they have sufficient tools and equipment to do the job. My own view is at the very least the Tories will do that!
Howard Wheeldon is the senior strategist at BGC Partners brokerage firm