Tighten your belts: factors influencing defence budgets

This report is the result of an extensive survey drawn from Strategic Defence Intelligence (SDI)’s exclusive panel of industry executives. These respondents are drawn from the SDI Industry Insight Panel, an exclusive industry panel covering business professionals worldwide. These business communities are made up of highly engaged, qualified professionals who rely on our flagship media brands in their respective markets, enabling SDI to access knowledgeable and informed industry opinion.

The research source in this report is based on the surveyed opinions and expectations of 103 global defence industry executives surveyed in February 2017.

Comprehensive desk research was also conducted across the defence industry sources with a focus on examining the change in global defence expenditure during 2017–21 and the areas likely to witness a decrease. The report highlights the factors that will influence defence budget cuts in this period and the key challenges that the manufacturer/supplier will face as a result. Additionally, the report provides information about the countries projected to exhibit highest defence budget cuts and how they will impact the revenue generated by defence suppliers. It also covers cost-saving targets owing to clean technology initiatives during 2017–21 and how the demand for new technology equipment is going to change.

Overall, 32% of respondents stated that they expect the global defence expenditure to increase significantly in 2017–21 compared with 2012–16 (see Figure 1, page 10).

Overall, 66% of respondents expect the change in global defence expenditure during 2017–21 to either increase significantly or slightly compared with the past four years. Survey results show that 38% of respondents operating in Asia-Pacific forecast a significant increase in defence expenditure over the next four years. India expects to significantly increase its defence expenditure in response to strategic threats triggered by ISIS and China. Likewise, China announced plans to boost its defence budget over the next four years due to rising territorial disputes in the East and South China seas.

Evidencing the trend, in February 2017, Hindustan Aeronautics Limited (HAL) signed a $8.5-million contract with Saab, the aerospace and defence company based in Sweden, for the maintenance and modernisation of the Dhruv advanced light helicopter’s electronic warfare self-protection system.

In total, 48 and 44% of respondents from medium and large-sized companies respectively anticipate a significant increase in defence expenditure over the next four years. Results also show 18% of defence industry executives from small companies project a slight decrease in defence expenditure during this period compared with 2012–16.

Survey results reveal that 36% of respondents expect a significant decrease in defence expenditure on ground forces over the next four years. Additionally, 35% of respondents predict a decrease in defence expenditure on naval forces, and special operations and marines.

Rising commercial debt and interest payments are influencing the Russian Government to decrease its defence expenditure on key areas. Similarly, the slowdown in China’s economy is likely to impact the government’s military spending, although it plans to strengthen its air and maritime defence. In 2017, China’s defence spending is therefore likely to increase only slightly compared with previous years.

According to survey results, 52, 50 and 40% of executives indicated that rising national debt, the aim of reducing the deficit and the emphasis on indigenous manufacturing respectively are major factors influencing defence budget cuts during 2017–21 (see Figure 2, right). For instance, the Russian Government is planning to reduce military expenditure due to budget deficits, as the country has suffered significantly from low oil prices and recession, which is likely to affect its economic growth. According to the Russian Federal Treasury, the nation’s defence budget has been reduced by 25.5% for 2017, declining from $65.4 billion to $49.6 billion.

In addition, 36 and 35% of survey respondents state that wastage and corruption, and project delays respectively are other prominent factors contributing to the reduction of defence budgets over the next four years. Most of the defence projects have been delayed due to technological embargoes, flight test programme restrictions, modifications in design, lack of availability of associated software, the incompletion of the aeronautical test range (ATR) facility, changes required in system configurations, and restrictions in the time-slots of sea, land and air trials.

Survey results reveal that the majority of respondents from small companies cited rising national debt as one of the essential factors that will influence defence budget cuts during 2017–21. Additionally, 56 and 52% of executives from large and medium-sized companies respectively noted that the emphasis on indigenous manufacturing and reducing the deficit are prominent factors that will reduce defence budgets over the next four years.

Only 30% of survey respondents from small companies highlighted compliance with legislation as a significant factor that will influence defence budget cuts during 2017–21.

Feel the pinch

Overall, 49% of survey respondents expect the impact on the procurement of advanced technologies to be one of the key challenges that the defence industry will face in the aftermath of budget cuts (see Table 1, page 12). The difficulty of developing new technologies, and inability to purchase or manufacture better fighter planes, drones, guns and other military equipment are a few critical issues that are expected to hamper the procurement plans of the defence industry.

In the survey, 47% of respondents cite the failure to acquire talent and technical skills supporting military R&D as a significant difficulty faced by manufacturers/suppliers of defence organisations. The availability and recruitment of skilled persons is one of the vital challenges in the defence industry as it requires the involvement of core skills in mechanical and technical areas, which is hard to find when recruiting. Furthermore, the defence industry is expected to lose jobs, particularly defence contractors, due to a decrease in purchases for equipment, supplies and services after budget cuts.Additionally, 48% of executives predict that budget cuts will influence the business of small government contractors.

Survey results reveal that the majority of respondents from North America highlight failing to acquire talent and technical skills supporting military R&D as one of the major issues defence organisations will face during 2017–21. In Europe, 65% of executives expect the impact of budget cuts on procurement of advanced technologies to be the biggest challenge, while for 62% of respondents in the Asia-Pacific, this will be the effect on the business of small government contractors.

According to survey results, 52, 47 and 46% of respondents expect the defence industry budget allocation to increase in Asia, the Middle East and North America respectively during 2017–21 compared with 2012–16. Of the survey respondents, 28 and 20% believe the increase will be significant in Asia and the Middle East respectively. Furthermore, 42% of industry executives project no change in the defence industry budget allocation in South America over the next four years compared with 2012–16.

Overall, 35% of executives each anticipate Brazil and France to exhibit the highest defence budget cuts over the next four years (see Figure 3, top right). Factors such as severe economic crisis, political uncertainty, and low business and consumer confidence are contributing to significant decreases in the Brazilian defence sector. Moreover, due to a shortage of financial resources, the Brazilian Government has been unable to increase its funds for military equipment and other strategic projects such as FX-2 – the development of submarines with nuclear propulsion.

In the survey, 34 and 26% of respondents expect the UK and Germany respectively to exhibit the highest defence budget cuts over the next four years. Of the survey respondents, 26% project South Africa to exhibit the highest defence budget cuts in this period due to a sharp fall in oil prices, which is expected to affect the country’s economic condition severely.

According to survey results, 40% of respondents predict that the implementation of clean technology will have either a very high or high impact on the defence industry in 2017–21 (see Figure 4, below). 25% of executives foresee no change in defence budget cuts over the next four years due to the adoption of clean technology initiatives.

However, 25% of industry executives stated that as a result of the introduction of clean technology, defence budget cuts are expected to have less of an impact during this period.

For instance, in September 2016, US-based defence company Lockheed Martin opened a new bioenergy facility in Owego, New York. The main objective is to convert waste into electricity through a process called advanced gasification. The process includes steps such as waste management, gas creation and power generation. The process produces harmless byproducts, which also protect the environment from harmful gases.