2011 is set to be a difficult year for the defence industry. Companies will have to step up competitiveness and look to overseas markets to remain profitable.
Once, the defence industry was dominated by a few leading and former nationalised companies that could be guaranteed a place on the shortlist for any major defence contract in their home country or those of their allies. As the market opened up, bidding for defence contracts began to work in the same way as civilian deals, with bids assessed for their suitability and value-for-money through a carefully monitored process.
With defence ministries worldwide now having to make major cutbacks, affordability has risen up the priorities list, and suppliers from countries that would not normally have been considered are becoming as important as domestic favourites.
In spring 2011, the UK government will release a white paper detailing a five-year defence procurement policy, covering defence equipment, support and technology. It represents a shot in the arm for many suppliers, which felt the industry would suffer as a result of the severe cuts detailed in the Strategic Defence and Security Review (SDSR).
While the SDSR concentrated on programme and budget cuts, the white paper will, instead, present emerging opportunities in national security, collaboration with other countries, exports, small- and medium-sized enterprises (SMEs), and cyber security.
Launching the consultation process, the Minister for Defence, Equipment, Support and Technology, Peter Luff, said: “The UK currently enjoys a strong industrial presence in the defence and security markets, and export success abroad in those markets; last year, defence and security exports achieved around £8.5bn in revenue. We are committed to doing more to promote exports of both defence and security products from the UK to responsible nations, as well as to boost the role of SMEs, both in their direct and indirect supplies to the government and its agencies.”
The advice to target overseas markets is reflected in the procurement policies of many other countries with successful defence industries, but which are facing cuts.
New defence technology
On the flip side, new overseas markets are opening up, as countries with previously closed or heavily restricted foreign procurement policies look further afield to modernise their military and gain access to new defence technology.
India, for example, which amends its defence procurement procedures every year, announced in 2010 that it is to increase the proportion of its contracts that are allowed to go to foreign contractors. In return, it wants manufacturers to carry out a share of the work in India, creating jobs and developing skills. India, in common with other countries looking to expand their defence horizons, is also looking to share in intellectual property to inform its domestic defence industry. Recognising this, the Eurofighter consortium recently offered India the blueprint of its jet to strengthen a bid to supply it to the country’s air force.
As opportunities in domestic and other traditional allied markets become limited due to drastic budget cuts, defence suppliers need to consider exporting to new countries. However, to tempt buyers into purchasing from new sources, the deals will have to be mutually beneficial both for the duration of the contract and in the future.