The Roman general Vegetius has been famously quoted as saying, “If you want peace, prepare for war.” Despite the fact that for the past 70 years there has been a downward trend in the sizes of wars, global peacefulness deteriorated in 2020. Old conflicts and crises were replaced with a new wave of tension and uncertainty due to the Covid-19 pandemic.
According to the Global Peace Index 2020 report, Europe was mired in protests, riots and strikes, totaling nearly 1,600 events from 2011 to 2018. Civil unrest in sub-Saharan Africa rose by more than 800% over the period, from 32 riots and protests in 2011 to 292 in 2018.
In numbers, the impact of violence on the global economy in 2019 represented US$14.5 trillion in purchasing power parity terms or 10.6% of the world’s economic activity (gross world product).
Nevertheless, contrary to what Vegetius said, military expenditure deteriorated in 2020 for the first time since 2016. The GPI study suggests that both the weapons-imports and weapons-exports indicators are now at their lowest levels since 2009.
The Safety and Security domain also deteriorated, whereas the trend toward more authoritarian government gained momentum. As a result, the number of violent demonstrations continued to rise around the world, reflected in outbreaks of social unrest in Chile and Hong Kong.
Additionally, the possibility of future violence remains high even despite the Covid-19 pandemic restrictions.
The five largest arms exporters in the 2016-20 period were the United States, Russia, France, Germany and China. The five largest arms importers were Saudi Arabia, India, Egypt, Australia and China. Between 2011-15 and 2016-20, there were increases in arms transfers to the Middle East (25%) and to Europe (12%), while there were decreases in the transfers to Africa (-13%), the Americas (-43%), and Asia and Oceania (-8.3%).
Defense industry evolution
Inevitably, the arms industry never stopped improving. The biggest change was a turn toward technology and digitization. In particular, there was a spike in the demand for promising technologies such as fifth-generation telecom (5G) technology. The reason is quite simple – emerging cyber, electromagnetic, and biowarfare threats are changing the nature of defense, as well noted by PricewaterhouseCoopers (PwC).
Curiously, Covid-driven supply-chain disruptions have not stopped Western countries from investing to upgrade major defense platforms, including ships, submarines, tactical aircraft, and nuclear capabilities. Besides that, growing demand for newer platforms that incorporate artificial intelligence and other tools to turn data into a tactical advantage has been registered.
In terms of “appetite,” some countries opted to invest in strategic weapons systems and national0level C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance), whereas others poured millions if not billions into the development of sixth-generation fighter jets. Germany and France, for example, are collaborating on the Future Combat Air System (FCAS) fighter with Airbus and Dassault Aviation.
In this context, we could say that defense contractors that specialized in digitization could emerge as winners. To survive, defense companies should be able to anticipate changes, rather than reacting to them. For example, future trends could be hypersonics, advanced materials, autonomous technologies, and space.
PwC researchers came to the conclusion that governments are now far more willing to look at commercial technology, work with non-traditional contractors, and acquire products and services in new ways. For example, Amazon Web Services’ ongoing dispute over the Joint Enterprise Defense Infrastructure (JEDI) contract for cloud-based services for the Pentagon, which had been awarded to Microsoft in October 2019, is another.
Despite the fact that most economies have been hit hard by the pandemic crisis, most surely cuts to military spending will not be dramatic. The biggest change brought about by the pandemic could be either increased consolidation of the European arms industry or, on the contrary, protection of domestic industries at any cost.
Does this mean that we could eventually see greater cooperation and integration in the armament sector? It is possible the July 2020 agreement for €7 billion (US$8.3 billion) for the European Defense Fund (EDF) in the European Council’s 2021-27 budget confirms this. If not consolidation, we could see some sort of cooperation among companies.
Still, as the Stockholm international peace research institute’s study suggests, governments could still decide to prioritize their domestic manufacturers, to support national industries instead of promoting cross-border cooperation.
And that is despite steps taken for joint procurement programs, such as the two rival future combat-air-system projects: Tempest (Italy, Sweden and the UK) and FCAS (Germany, France and Spain) or the Main Ground Combat System (France and Germany).
US, Chinese companies on the rise
Despite the overall decrease in military expenditure, sales of the top 25 companies increased in 2019 by 8.5%, totaling $361 billion. The US companies Lockheed Martin, Boeing, Northrop Grumman, Raytheon and General Dynamics, all together, registered $166 billion in annual arms sales.
Over the last fiscal year, on the other hand, authorized arms exports (including both commercial and government-managed) rose by 2.8% from $170.09 billion to $175.08 billion.
Chinese arms companies’ sales from Aviation Industry Corporation of China (AVIC), China Electronics Technology Group Corp (CETC) and China North Industries Group Corp (NORINCO) also grew. One of the main reasons could be that “Chinese arms companies benefited from military modernization programs for the People’s Liberation Army.”
No matter how bad the impact from Covid-19 ends up, the defense industry will continue to be in demand. The only difference will be the products “customers” will be looking for. For this reason, companies should start looking for emerging opportunities and, most important, invest in digitization and research and development.
They could even consider collaborating with commercial players to build and integrate innovative technology capabilities, just as the US government did with Microsoft and Amazon.
Overall, the defense industry will be facing serious change, but that won’t necessarily be a bad thing – for the weapons merchants and their stockholders, at least.