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Globally, defence expenditure is estimated to have continued to grow by more than 2% in 2006, to approximately USD 1,200 billion5). US defence spending continued to grow at the fastest rate, and there were pockets of expansion in Asia and the Middle East. Spending in Europe was flat.
The US President’s request for a 2008 total defence budget of USD 647 billion, the largest in history, demonstrates the huge size of the United States military commitment. While the majority of this increase pays for troops on the ground in Iraq and Afghanistan, there is a sizeable commitment for modernising military equipment.
R&D
By contrast, Europe’s total defence budget remains less than €200 billion6), and the continent spends far less than the United States on equipment procurement and on research and development. Asian countries such as India are modernising ageing defence forces, and high oil prices are supporting high levels of spending in the Middle East.
Homeland security is a growing market, although it remains smaller than defence. In the five years since 9/11 this sector has expanded rapidly, with both technology and services in demand from government and private sectors alike. EADS estimates that global homeland security procurement reached USD 55 billion7) in 2006, a sizeable increase on our 2005 estimate.
Growth for solutions to modern threats
The main driver of new procurement in defence and security remains the necessary replacement of ageing platforms – especially with the types of equipment suited to countering threats from rogue states and terrorists. This is spurring long-term growth for support aircraft (tankers and transport), mission aircraft including Unmanned Aerial Vehicles (UAVs), helicopters, combat ships and light armoured vehicles (incorporating complex electronic mission equipment).
Military and civil customers want complete integrated and interoperable systems. This is because multinational forces work together abroad, while homeland security is increasingly undertaken by both military and civil organisations. Interoperable and networked systems enable close to real-time decisions and actions, based on a common operational picture. Only large defence and security companies have the range of capabilities to act as prime contractors for these complex systems.
Procurement methods are becoming increasingly innovative. Governments are beginning to demand more complex service solutions from defence and security contractors in areas ranging from airborne refuelling to secure satellite communications. To be competitive, contractors have to provide high-performance equipment and services, as well as innovative contract schemes and life cycle solutions.
Expect more consolidation
Both the move towards integrated systems and new procurement methods are encouraging consolidation. For several years, scale has been becoming more important, and defence companies have sought opportunities to build and fill their portfolios. They have also looked at buying into new regional markets in order to gain market access. In particular, acquisition activity is expected in the United Kingdom, Europe’s largest defence market, following a shift towards stronger focus on development and retention of national capabilities.
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5) |
Teal Group |
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6) |
European Defence Agency, December 2006 |
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7) |
Civitas, November 2006 |
