Transformations in Defense Markets and Industries 

Highlights

Since the end of the Cold War, the global armament system has begun to evidence a radical transformation leading to changes in national practices governing how arms are acquired and produced.  If current trends continue, which seems the most likely, this transformation may alter significantly how nations prepare for and conduct war.

There is a historical precedent. In all previous eras of significant military-technical change, there was a transformation of global defense markets and industries. A few countries became the global suppliers, but technology diffusion inevitably occurred, principally from migration of skilled personnel. Leading nations that adopted protectionist policies accelerated their decline.  Other countries rapidly filled the gap.

Two key trends are especially important for the future of warfare: the deliberate diversification of national armament strategies to include a larger fraction of cross-border imports, and the deliberate commercialization of national defense industrial bases. These two trends are occurring globally, although at different paces within individual regions and countries. Although these produce many domestic benefits, they also lead to a world characterized by the routine diffusion of weapons and technology, embedded security of supply issues, and reduced national control over indigenous defense industrial bases.

There is also an important derivative trend. One of the global government commercialization initiatives since the mid-1980’s has been the promotion of defense industry operations in civilian markets to help defray costs and promote access to commercial technology. Yet it appears that from a corporate perspective, concentration on defense is a better competitive strategy than splitting efforts with commercial markets. For those companies in the Top 100 global defense industries, the average fraction of annual revenues from defense markets has been steadily increasing, rising from 38 percent in 1995 to 56 percent in 1999. After experimenting with commercial markets in the early 1990s, the most successful companies now concentrate more on defense. As a result, arms export market dependencies are increasing.

Nations globally are adjusting to the new trends, and they are choosing different combinations of diversification and commercialization. Forty-seven countries that comprise about 95 percent of world military expenditures were compared over time. Fourteen have a more diversified armament strategy in 1997 than in 1991, and only four have a less diversified strategy. Eleven of the 47 states exhibit greater commercialization of defense industries via arms export markets; only six indicate less commercialization. Within many nations, there are also internal tensions between their historical goals of self-sufficiency in arms production and the current realities that mandate greater cross-border diversification.  These tensions have not been resolved.

As nations and corporations adjust to the new defense economic realities, a more diffused armaments world will probably evolve toward a division of labor based on relative competitive commercial advantage. This division of labor will extend to different classes of armaments, with companies assuming global sector leadership.

Currently, US companies lead in all major armament sectors. At the same time, increased concentration on export markets, new niche strategies, and growing numbers of mergers and acquisitions are increasing the competitiveness of global defense industries and may eventually erode the US lead in some areas of defense products or services.

In the short term, advanced-technology weapons will continue to reach emerging nations. Aircraft, missiles, and defense electronics lead the way in systems that are dispersing globally.  US reluctance to provide technology to Asian and Middle Eastern countries is countered by the willingness of other nations to provide systems and technologies. If they so choose, second-tier countries can also regularly modernize by relying on competitive market forces to regulate costs without investing in, and maintaining, expensive infrastructures. Systems integration, training, and maintenance services are also now available to those countries on the global market.

Defense industries globally may also suffer from competition with commercial markets for skilled personnel. The market for skills represented by the current annual global armaments budget of about $250B is competing with a global commercial high technology market in excess of $1.6T.  If the defense sector loses, the pace and character of global military force development will suffer. Nations that have learned how to effectively integrate commercial and defense development and production will emerge as winners.

Current trends suggest that the diffused armaments world will endure for at least several decades. This world will be a return to the historical global armaments process that was interrupted by WWII and the Cold War.  Military thought will then have to focus on leveraging those characteristics to a nation’s military advantage. Significant changes in the character of warfare could follow. For example, doctrinal investigations  by experienced military planners suggest that:

•   In future wars between symmetric opponent states (e.g., both advanced or both developing nations), neither country may be able to assume very far in advance that its forces will have decisive technological superiority at the outset of combat. This is because of the ease and relatively short lead time with which states will be able to acquire advanced combat systems if they so choose and can afford it.   As a result, strategy, tactics, and command and control may become a more decisive determinant of combat outcomes than the relative technological level of forces.

• Security of supply considerations will become an increasing focus of combat. Targeting the opponent’s armament supply infrastructure, and protecting one’s own, will become even more important than in the past. At the same time, since third party and commercial providers will be involved, the rules of engagement for such actions may be complex. A short war will be more desirable to the aggressor but may be more difficult to achieve. At the same time, the risks from failure to terminate a conflict quickly may be higher.

•  The increased likelihood of combat between technologically balanced forces will create a strong incentive to preemptively employ forces en masse early as opposed to precision escalation, which may expose unexpended systems to effective counterstrikes. Active defenses will also increase in value. Because of the incentives by both sides to mass early, marginal advantages in the number of deployed systems and/or survivable reserves may prove decisive.

In the diffused armaments world, asymmetric forms of warfare may flourish. The diffusion of systems and technology provides more opportunities for states to develop unique operational employment concepts that draw on capabilities not otherwise readily available. In addition to combat and support systems, systems integration, training, and maintenance services can also be purchased. The diversity of options also increases the likelihood that countries will make asymmetric choices to fit their own circumstances. Future armament and defense industrial strategies will also adapt, and the changes will create challenges for US security interests.  For example:

•   Some nations will see an advantage in deliberately foregoing significant development costs in favor of a dynamic purchase-oriented procurement strategy. They will continuously buy, pay for, adapt, use the current operational state of the art, and then repurchase again.

•   The systems integration capability will be a critical function. Integration will have to occur in five different arenas: between the subsystems of a single combat platform; between combat platforms; between armament elements developed within defense industries and those procured commercially off-the-shelf; between armament elements produced domestically and those procured externally; and between the combat systems of different military services.  This is an historical US strength with a very high entry cost. At the same time, there are currently several countries, and several defense companies, who have targeted the systems integration function as a competitive niche area and offer those services globally. Systems-integration-for-hire will be a characteristic of the diffused armaments world.

•   The ready availability of advanced combat systems, and even developmental facilities, for countries with money to pay for them will gradually shorten the lead time for US competitive strategies. The ability of the United States to stay inside an opponent’s research, development, and acquisition cycle for new weaponry will become increasingly difficult to estimate, depending on the degree of commercial diversification and cross-border acquisition in the two national armament processes.

•   New conventional nonproliferation regimes and arms control agreements are going to be difficult to obtain until the domestic issues, and the eventual form of the emerging global armament system, are resolved.  Many states see that defense globalization and arms exports offer critical domestic benefits (for example, economies of scale, access to technology, increased national revenues, and jobs).

Although there are new challenges, the United States is well positioned to meet them. The United States and its defense industries are the dominant players in the global armament system. US armament strategy and defense industrial strategy, as well as the actions of US defense companies, will have a shaping influence on the entire global armament system for the foreseeable future. The outcome of the trans-Atlantic defense industrial relationship will also have a key influence.

At the same time, for at least the next 10-20 years, the characteristics of the new global armament system should be an explicit factor in US security and defense planning and in the evaluation of future warfare capabilities.  In addition to sustained investment to stay at the cutting edge of military technology, an important element of military dominance will be the ability of the United States to exploit the characteristics of the emerging armaments world more effectively than potential adversaries.

It also seems clear that the transformations in global defense markets and industries, even though underway for over a decade, should still be viewed as in the experimental stage. Further significant changes appear likely. These will be necessary in the short term to resolve internal inconsistencies within national defense industrial strategies and to reconcile, across countries, national defense industrial strategies with the overall size of the global defense market. The results will probably concentrate even more of the world’s defense industrial capacity in a small number of very large transnational defense companies, and thus reinforce the trends toward a diffused armaments world.

One factor contributing to the current transformation is the global decline in defense budgets, down as of 1997 by about 40 percent from the Cold War high of 1987. There is current debate as to whether defense budgets will continue to decline, or will gradually rise. Increased personnel costs may also result in fewer funds for weaponry.

Further declines in defense budgets reinforce the conclusions of this research. In the extreme, it is even possible that the demand for some classes of weaponry could fall below the minimum required for private sector profitability.  If defense industrial bases remain commercialized, then the production capacity for such weaponry could vanish.

Even a gradual rise in defense budgets will not appreciably change the size of the global arms market from the perspective of private industry. It would take about a 2 percent annual increase above the inflation rate to restore global military expenditures to the 1987 level by 2020. This steady level of increase seems unlikely unless the international security situation appreciably changes. If so, then it also is likely that governments, as in the years immediately preceding WW II, will return to more autarkic armament strategies and nationalized defense industrial bases.

Consequently, even though the size of defense budgets clearly influences the levels and types of deployed armaments, the character of the global armament system will be determined principally by whether or not governments continue with diversification and commercialization strategies.  There are strong current incentives to do so.

Section 1
Global Transformations in Defense Markets and Industries

Since the end of the Cold War, the global armament system[1] has begun to evidence a radical transformation leading to changes in national practices governing how arms are acquired and produced.  If current trends continue, and that seems the most likely, this transformation may alter significantly how nations prepare for and conduct war.

The pattern of armaments funding is one indicator of change. That pattern has shifted appreciably throughout the decade of the 1990’s. Worldwide military expenditures and national armament budgets have dropped significantly.[2] Using 1991 and 1997 as benchmark years for comparison, the relative financial levels of several important categories are as shown in Table 1.[3] Actually, import/export levels dropped to a low of $46B in 1994, gradually increasing to the point that both 1997 and 1991 had equal arms import levels, even though the global armaments budget of the two years differs dramatically.  This situation arose from changes in national armament strategies and defense industrial strategies. Accompanying these changes, significant shifts are underway in traditional patterns, modes, and sources of global arms production and sales.

The phenomenon currently unfolding has a historical precedent. In all previous periods of significant change in military technology there was an accompanying transformation of global defense markets and industries. The issues and dilemmas currently being debated were also debated by the participants of the times. Today the world appears to be in the initial phase of a similar historical epoch precipitated by changes in information technologies and miniaturization.  There are historical lessons that bear on probable outcomes, and that are especially important for the United States. For example, in previous periods:

• A small number of countries (one to three) became the global suppliers of advanced military capabilities for a significant period of time.

• Diffusion of military technology inevitably occurred from the small number of initial countries to a much larger number. That process took time, perhaps many decades or longer.  The most significant source of diffusion was not the transfer of armaments themselves; it was the importation or migration of skilled personnel from the knows to the know-nots.

• Commercial industry played a significant role in developing the innovative application of new technology for military purposes, and in many if not most instances led state arsenals.

• The nations that were dominant suppliers accelerated their loss of the lead when they restricted their corporations in external markets, and curbed imports to favor domestic industry. Other countries rapidly filled the gap in demand. Additionally, the reduced market size, coupled with the restricted access to global developments, made it difficult for the country’s defense industrial base to maintain a technological lead.

During these eras, nations changed their armament strategies for a prolonged period of time, there were transformations in global defense markets and industries, and there was a redefinition of the global armament system.  Leaders emerged, followers tried to catch up, and technology eventually diffused. Commercial technology, export markets, and import strategies played a key role. Private companies (both defense and commercial) assumed new functions and responsibilities, and state arsenals were redefined.

For example, the industrial revolution of the late nineteenth century induced a transformation in the global armament system that lasted about 50 years. The transformation was due to several factors. These included: improved technology for mass production and a derivative ability to export arms in large quantities; a separate defense-industrial sector of the economy, producing arms mostly for profit; and the rapid development of a global transportation and communications infrastructure for commerce.

By the interwar period, more nations were armament providers. About 20 states were suppliers, with nine accounting for about 90 percent of global arms exports. There were many new competitors, and multiple suppliers for all major weapons classes. It was easy for any state that could afford to pay to acquire armaments, countries worked to diversify their sources of supply, and it was much more difficult to control arms sales. About 60  countries became importers.  Transnational arms companies emerged, as well as licensed production. Global restructuring of defense industries occurred as a commercial response to the character of the arms market. When WWII started, this structure abruptly changed as most countries nationalized their defense industries.

The Cold War global armament system, in retrospect, was a historical anomaly. It was not driven by commercial market forces as in previous epochs, but by political decisions in the context of a bipolar global arms market structure. Hence the current transformations that characterize defense markets and defense industries in the aftermath of the Cold War may signal a return to normalcy.

Section 2
Two Key Trends for the Future of Warfare

The most significant source of change in global defense markets and industries is the collapse of the Cold War order that had produced a bipolar global arms market structure that was stable for 40 years. That collapse created a vacuum that has been an underlying shaping factor in the transformation currently underway. In the absence of the defense-production rationale of the Cold War, there ceased to be a large well-defined opponent that served to size the defense industrial effort and create its core characteristics,  requirements, rules, and trends.

The general integration of competitive armaments blocks following the collapse of the Soviet Union and the Warsaw Pact has largely been completed.  Beyond this, there are also many other common factors influencing recent national decisions on armaments and defense industries. These include: defense budget reductions; pending block obsolescence of weaponry; the pace of military technology development; the promotion of alliance interoperability; the social need to deal with legacy defense industries from the Cold War; rising advanced armaments costs; the rate of commercial technology development; the realities of economic globalization; and, for some states, increased threat perceptions.  Nations globally are faced with the same fundamental dilemma: how to provide for their own armament requirements in a controllable way[4] while maintaining a national defense industrial base that they can afford with public funds.

The decade of the 1990’s has started to demonstrate how nations are resolving this dilemma. While Western non-proliferation policies continue to promote limits on the exports of some categories of arms, often with modest success, for the most part global arms markets respond more to economic incentives than to political incentives.

There are two key trends that are especially important for the future of warfare. These trends characterize the new approaches being taken globally to acquire weaponry and to maintain defense industrial bases. They also portend a significant shift from the Cold War armaments paradigm in which countries produced arms for their own needs, augmented with production for foreign military sales to meet political ends.

Trend #1: Diversification of National Armament Strategies

The first important trend is the deliberate diversification of national armament strategies. Armament diversification consists of broadening the sources from which states acquire arms. This may include a mix of: indigenous development and production; co-development or co-production; licensed production; purchase of completed systems, or renting needed capabilities. Over the decade of the 1990’s, countries globally have been diversifying that mix.

There are several indicators of this trend. These include: government declaratory policies to use diversified strategies; increased attempts to form collaborative co-development alliances between nations; government decisions to import systems even when it meant reducing funds to directly competing domestic industries; and a gradual rise in spending on arms imports. Perhaps the most important signal pointing to this trend is the increasing share of imports as a proportion of national arms acquisitions.

The implications of diversification

Armament diversification strategies are driven by a state’s desire to acquire the most effective defense capabilities for a given armaments budget. The shift to a more diversified armament strategy provides nations with lower-cost military capabilities, and at more advanced technology levels, than would be obtainable from a less-diversified strategy. To obtain those capabilities, risks are accepted. The trend signifies an apparent growing willingness by states to accept the greater risk that comes from external armaments dependencies, and the free-flowing global arms market created by diversification strategies, when compared with the disadvantages of the alternatives.

Trend # 2: Commercialization of Defense Industrial Bases

The second important trend is the deliberate increase in the degree of commercialization of national defense industrial bases. A non-commercialized defense industrial base is a combination of state and privately owned enterprises that are fully funded by the host government to do defense work. As a result, they are captive to domestic defense requirements and procedures.  By contrast, the underlying structure of a commercialized defense industrial base dictates that it operate within the practices of the competitive commercial sector and emphasize shareholder value in selecting products, markets, and investment priorities. The domestic defense ministry is one of several customers. Most national defense industrial bases are neither fully commercialized nor fully non-commercialized.

Globally, governmental decisions over the last decade have increased the degree of commercialization. As defense expenditures have fallen, particularly in the West and in the former Soviet Union, all major arms producers have aggressively sought means of protecting the health and competitiveness of their domestic defense industries, while at the same time increasing their access to rapidly developing commercial technologies with military relevance. 

Strategies have followed several tracks: increased privatization of government arsenals; acquisition policies emphasizing dual-use technology development and the spin-on of commercially developed technologies to provided needed defense capabilities; and increased emphasis on arms exports to provide supplemental markets.  Other indicators include: the streamlining of national arms export infrastructures to improve international competitiveness (including the creation of special government structures to help private companies market externally); the absence of bail-out mechanisms for defense companies that lose key defense procurements; and the reduction in many countries in government-sponsored defense research and development funding.

But the most important indicator of increased commercialization is the deliberate funding of national defense industrial bases to less than the level needed for survival and growth. The accompanying explicit assumption is that individual defense companies will be able to make up the deficit by a combination of funds obtainable from international arms markets and from diversification to the commercial sector.

The implications of commercialization

A commercialized defense industrial strategy reduces the cost to governments of maintaining national defense industrial bases. It also provides greater access to rapidly developing commercial technology. However, this trend also introduces commercial relationships into what until recently have been largely security-driven decisions.  As arms export revenues have increased as a percentage of a state’s defense industrial expenditures, and as defense companies diversify to commercial markets, the factors driving research, development, and procurement decisions are increasingly market-oriented. Shareholder value becomes a dominant consideration in corporate decisions. Information sharing between armament partners, some of whom are potential adversaries, becomes routine, as does the sharing of technology. And international weapons requirements and specifications may intrude on the preferences of national militaries.

Most importantly, this trend indicates the increased willingness of governments to accept the consequences of commercialized behavior when compared with the costs of the alternatives. For example, with fewer suppliers due to rationalization of the industry, governments now deliberately depend more heavily on shareholder value considerations to result in needed domestic defense capabilities.

Section 3
Composite Characteristics of the Global Armaments Transformation

Nations globally have chosen different combinations of diversification and commercialization. Using 1991 and 1997 as benchmark years for comparison, Table 2 depicts how the countries comprising about ninety five percent of world military expenditures have chosen to simultaneously diversify their armament strategies and commercialize their defense industrial bases.[5]

The diversification index used to categorize countries is the percent of a nation’s armament budget that is spent on arms imports. Since the global arms market of the 1990’s has significant commercial behavior, the commercialization index is the share of defense funding of a nation’s indigenous defense industrial base that comes from arms exports.[6] Countries are categorized by the simultaneous degree of diversification and commercialization reflected by these indices.

Table 2b reflects key characteristics of the emerging global armament system:

• Fourteen of the 47 countries studied have a more diversified armament strategy in 1997 than in 1991, and only four have a less diversified strategy. Furthermore, by 1997 thirty of the countries spent over 25 percent of their armament budget on imports. These suggest a trend toward a diffused armaments world in which systems and technology freely migrate as needed, and other factors become dominant in the achievement and maintenance of relative military strength.

• Eleven of the 47 states illustrate greater commercialization of defense industries via arms export markets; only six indicate less commercialization. Since arms exports are only one element of commercialization, the actual commercialization trends are probably much higher.

• Four states (three European plus Australia) reflect both high diversification and high commercialization. These countries import what they need, and supply what they can in accordance with the principle of comparative advantage.  As diffusion continues, more and more nations should naturally migrate toward that condition.

• The United States, France, Russia and North Korea stand out as leading arms exporters that have chosen—or been forced to accept—at least partial arms autarky. These are important supplier countries that, during the 1990’s, appeared to be working against the global trend towards diversification. All curbed imports for major end items, while continuing to emphasize arms exports in their defense industrial strategies.  However, since 1997, France has chosen to abandon her  traditional self-reliance, Russia has started to seek imports in advanced technology areas, and the United States has formulated new import initiatives.

• The Asian countries, with the exception of China, exhibit low arms export dependencies, even though they have chosen to aggressively diversify armament strategies. These countries are either: (a) generally unsuccessful in developing exportable defense products (e.g., Taiwan); (b) importing mainly to upgrade their defense industries for eventual internal funding (e.g., India); (c) permanently depending on imports to augment a smaller defense industrial base that also produces some arms exports (e.g., Singapore); or (d) depending on the commercial sector instead of arms exports to partially fund their defense industrial base (e.g., Japan).

• China, Syria, and Chile exhibit classic symptoms of autarky—both selling and importing less proportionately than the other states surveyed. Even though China deliberately imports technology and arms to help modernize current forces and defense industries, the indices suggest a long-term strategy of self-sufficiency.

It is also instructive to view the dynamics of change in national composite characteristics. Table 2c shows change in the combined diversification/arms export dependencies of countries between 1991 and 1997.[7] The eighteen countries in the center box were all in the same category of both diversification and arms export dependencies in 1997 as they were in 1991. Twenty nine countries changed their posture in one or both categories.[8]

The fact that over 60 percent of the countries shifted postures between 1991 and 1997 also indicates that the global armament system is in a high state of flux.

Transformations in the Global Top 100 Defense Companies

The distribution of the most important defense companies between the regions has also changed over time. One important subset of the global defense industrial base is the set of companies that comprise the top global 100 defense industries as measured by annual defense revenues. Global trends in the composition of the Top 100 list reflect the state of the transformation underway in global defense industries and defense markets. This is because the individual companies and their positions on the list constitute the results of industrial restructuring, mergers and acquisitions, marketing strategies, commercial diversification, competitive successes or failures, and the combined effects of both domestic and cross-border revenues. 

The characteristics of Top 100 companies in terms of such parameters as total annual revenues, total defense revenues, and diversification fractions give valuable insights about diversification strategies and the impact of the competitive environment (only the winners make and stay on the list). Regional aggregations also give comparative insights on the relative status and progress of regional transformations and the comparative strengths of regional defense industrial bases in a global competitive context.

Some important comparative characteristics of the Top 100 defense companies over the decade of the 1990’s are contained in Table 3.[9] Table 3a compares aggregate characteristics.[10] Table 3b compares the regional distribution of companies. Table 3c compares the regional distribution of annual defense revenues. Table 3d compares the regional distribution of average company defense percentages.  

  The comparisons suggest several important consequences of change:

• From a corporate perspective, concentration on defense works better than splitting efforts with commercial markets. Although one of the global government initiatives since the mid-1980’s has been the promotion of defense industry operations in civilian markets, corporate decisions seem to be moving in the opposite direction. For those companies that have made it to the Top 100, the average fraction of annual revenues in the defense business has been steadily increasing in the late 1990s, starting with 38% in 1995 to 56% in 1999 (Table 3a). Similarly, the number of companies that have at least half of their revenue coming from the defense business has also grown from 32 in 1995 to 55 in 1999.  After experimenting with commercial operations in the early 1990s, the most successful companies are now concentrating more on defense.

• Arms export markets are growing in significance. The global trend for national governments is to fund domestic defense industries to less than the amount needed for survival and growth, assuming that the deficit will be obtained from a combination of commercial markets and arms exports. But since the winning companies are deciding to concentrate more on defense, global arms markets are of growing importance to those companies, and hence to national defense industrial strategies. Diffusion of weaponry and military technology is becoming the norm.

• US and Asian companies are the relative winners. The total annual defense revenue of US and Asian companies in the Top 100 is growing. The revenue of companies on the list from the Western European countries is not (Table 3c). This trend highlights the difficulties experienced by the European defense industries.

• Trans-Atlantic defense integration seems key to Western Europe’s success. The data does not yet reflect the full impact of the recent European consolidations that created two large defense giants (BAE Systems and the European Aeronautics, Defence, and Space Company (EADS)). But the revenue trend suggests that European defense industry, if left to operate semi-autonomously, may experience a continued decline in the number of companies represented in the Top 100 globally. The ramifications of this remain to be seen.

• Additional commercial-military integration approaches are needed. National defense industrial strategies globally have encouraged diversification to commercial markets to obtain better and faster access to rapidly developing commercial technologies.   But if the leading companies are concentrating more on defense, other adjunct mechanisms for merging commercial technology developments with national armament requirements will be needed. Countries that develop the most effective overall processes may emerge as global winners in domestic armaments development.

Regional Comparisons

Table 4 compares the major regions with respect to important aspects of the diversification and commercialization strategies of countries within the region.

Using the region-wide aggregations to characterize the general trends of the countries within each region, the comparisons suggest that:

• All regions are generally moving toward diversified armament strategies, although those strategies are at different stages of implementation. Western Europe, the Middle East, and Latin America are solidly committed. The Asia-Pacific region is using imports to help upgrade defense industrial bases, but self-sufficiency is not likely for the foreseeable future. Russia and the United States, for different reasons, are being pressured to increase import levels.

• The regions with developed commercial sectors are also heavily committed to commercialized defense industrial bases. These include North America, Western Europe, and the Asia-Pacific region. Some countries in the other regions are also pursuing commercialization, but with mixed success to date.   

• Key countries with historical strong indigenous strategies (France, the United States, Russia) are moving toward more diversified strategies. The rate and scope of diversification of these three countries will affect the entire global arms market.

Towards Global Comparative Advantage

As nations and corporations adjust to the new defense economic realities, a more diffused armaments world will probably evolve naturally toward a division of labor based on relative competitive commercial advantage. In the extreme, diffusion and competition could ultimately lead to developer nations, producer nations, integration nations, servicing nations, and financial/deal making nations (or transnational companies hosted in nations which give them their basic identity).  There could also be hardware and software nations. 

Some nations may even become the repository of key global armaments capabilities to such an extent that they have implicit semi-sanctuary protection from conflict. For example, during WW II, both Spain and Switzerland were bases of operation for intelligence activities for all warring parties.

The global division of labor will also extend to different classes of armaments, with companies assuming global sector leadership. One important indicator of the current state of global comparative advantage is the distribution of the leading defense companies across defense sectors. Table 7 gives the current distribution and ranking within key defense market segments.[11]

Note that:

• US companies hold the lead in all sectors, and are also second in all but helicopters.

• US and Western European companies hold 80 percent of the 48 positions in Table 2. Two Japanese companies hold six positions, Israeli Aircraft Industries holds three, and Rosvooruzheniye, representing the Russian defense industrial base, holds one.

• The large defense giants (Lockheed-Martin, Boeing, BAE Systems, Raytheon, and EADS) hold the top five positions in Missiles/Munitions and Aircraft, and four of the top five positions in Satellites/Space Systems.

The current state of comparative advantage is the platform from which the future will unfold. Today, the profile of probable future winners and losers is murky. Globally nations as a matter of defense industrial policy, and corporations as a matter of business strategy, are jockeying for position. They are searching for niche advantage. They are investigating: (a) both high technology and lower technology markets; (b) product lines at the platform, system, subsystem, and component levels; and (c) the full range of services—systems integration, training, maintenance, testing, upgrades, and retrofits.   They are looking for global markets and market niches sized to their own capacities and objectives.

Nations and companies are also increasingly willing to team, merge, and acquire to secure comparative advantage.  They are also trying to create export control regimes that will facilitate comparative advantage, while at the same time many are sensitive to the potential security implications of the consequences. 

Some nations may be capable of competitively encompassing all of the developmental and production requirements for the most advanced technology weapons. At the same time, individual defense companies in those nations may also choose to concentrate on specific functions, products, or services that are materially less advanced than the global state of the art because they will provide greater shareholder value. Other nations as a matter of policy will create more specialized indigenous defense industrial bases.  And as in other economic sectors characterized by rapidly developing high technology, countries whose governments and defense industries are fleet of foot in orchestrating deals and creating and manipulating opportunities to meet their own armament needs will possess a competitive advantage.

In some countries, foreign suppliers will also become significant competitors to domestic industry in subsequent national arms procurements. This process will eventually erode the commercial viability of less competitive indigenous defense industries and further strengthen the global positions of the winners.

Although uncertain at this time, it seems likely that within a decade or less, financial imperatives will force a clearer picture. The global profile of national and corporate comparative advantages in the defense sector will then become the basic menu for future defense acquisitions from that point forward.

Section 4
First Order Security Consequences of a Diffused Armaments World

Considering the overall situation of individual nations, and the tradeoffs each country must make between political, economic, domestic, and purely military considerations, the results of diversification and commercialization produce many positive benefits. These include greater economies of scale, access to technology, and jobs for national defense industrial bases. There is a lesser need to maintain a modern high-technology defense industrial infrastructure. There is cheaper and faster access to weaponry for military force postures. Countries are more able to bear the cost of their own defense.  The diffused purchasing system also promotes greater interoperability among forces by providing access to technologically equal systems.

At the same time, the trends identified above will likely alter significantly the security calculations and military practices of states. Increased dependencies for many arms importing states on foreign arms suppliers and for arms exporters on arms buyers in the new global armaments system will increase actual or perceived insecurities.  The diffused armaments world will have several semi-permanent macro characteristics.

• Technology diffusion will accelerate.  Weapons and military-relevant technologies will migrate rapidly and routinely across national borders. Arms export regimes and sanctions increasingly will be difficult to manage.

• Security of arms supplies will be less assured.  Increased diversification of armament strategies inevitably confers political and economic risks and targetable wartime vulnerabilities. States accepting continued dependence on external arms supplies will seek assured access to military support in crises by diversifying sources of suppliers in peace, stockpiling critical components and exploiting “gray” arms markets during a crisis.

• National control over domestic arms industry outputs will diminish. Loss of control over the decisions of domestic arms producers will reflect the demands of competing markets and also, selectively, the views of national owners.

These characteristics, now steady state features of the global security landscape, will induce change. Nations will have to adapt to the new defense economic realities. They will also have to reconsider their approaches to warfare. And in turn, the United States will be confronted with several new classes of security issues.

Section 5
Adapting to New Defense Economic Realities

How well any state accommodates the on-going transformation depends in part on how well it recognizes the strategic security implications of the changes. The most important derivative characteristics that create major security considerations for nations globally include:

• In the short term, advanced-technology weapons will continue to reach emerging nations. Aircraft, missiles, and defense electronics lead the way in systems that are dispersing globally.  US reluctance to provide technology to Asian and Middle Eastern countries is countered by the willingness of other nations to provide systems and technologies. If they so choose, second-tier countries can also regularly modernize by relying on competitive market forces to regulate costs without investing in, and maintaining, expensive infrastructures. Systems integration, training, and maintenance services are also now available to those countries on the global market.

• There will be a strong military rationale to promote stable and long-term coalitions. The logic will not be that of burden-sharing or of a common enemy. The goal will be a pragmatic way to achieve robustness in a defense industrial base that the nation can reliably access, whether or not it fights in a coalition, or as an independent actor.  To work, these coalitions may need to take the form of business alliances, rather than political consortia.

• Second-tier arms producers globally are facing problems adapting to the new armaments world.  They have significant over-capacity, inefficient production, high unit costs, technological gaps, and general inability to keep up with the technological frontier. There is not consensus on which way the defense industries of these countries will turn, ranging from strong alliances with large Western defense companies and the pragmatic abandonment of national goals of self-sufficiency to concentration on niche production with an export emphasis. Either model would give second-tier countries the ability to produce significant and dangerous weaponry. Since the second-tier countries create major markets for first-tier suppliers, how these countries resolve this situation will have a shaping impact on the global armaments system.

• The microeconomic structure of the global defense industrial sector has changed significantly. The previous structure of an oligopoly industry supporting monopsony buyers has been replaced by the model of a few buyers and a few sellers for large procurements. This market structure has not been studied in depth in the past, and there is not a good basis for understanding behavioral outcomes. There appears to be a clear divergence between the incentive structures dictating the behaviors of government and industry that will have to be reconciled. There are strong opportunities and rationale for evasion in the transmission of information between companies and governments.  Over the last decade, defense industries have also gained increased leverage globally.  There could be short and mid-term surprises.

• Defense industries globally may suffer from competition with commercial markets for skilled personnel. The market for skills represented by the current annual global armaments budget of about $250B is competing with a global commercial high technology market in excess of $1.6T.  If the defense sector loses, the pace and character of global military force development will suffer. Nations that have learned how to effectively integrate commercial and defense development and production will emerge as winners.

Finally, defense industries have gained increased leverage in the global armament system. Even though a buyer’s market exists, the products and services available to satisfy market demand are increasingly being determined by choices made by defense companies in light of shareholder value considerations.  For example:

• Mergers, acquisitions, creation of offshore workforces, and partnering arrangements for international competitions are focused more heavily on securing competitive advantage than on satisfying host government security objectives.

• Investment of corporate R/D funds is focused on procurements, or future products, determined by corporate objectives.

• Corporations left to fend in international markets for survival, and employing significant numbers of domestic workers, have increasingly stronger leverage over host governments to provide more lenient export control regimes to allow them to remain competitive. 

• Decisions to stay in the defense business reside with corporate leadership, not government intent.

Finally, as programs become increasingly collaborative, and are focused on interleaved and interdependent stage-wise execution, it is becoming more difficult for governments to know and understand the consequences of choices made by individual companies. Collectively, these actions give defense companies increased influence when compared with what they had in a more command, less-commercialized relationship with their host governments.

Section 6
Warfare in a Diffused Armaments World

If the trends continue, which appears likely, the first order security characteristics of the diffused armaments world no longer are troublesome aberrations, but a permanent part of the strategic landscape. Warfare must now contend with the strategic facts of armaments diffusion and defense industrial commercialization as the normal situation. Military scientists, defense planners, and combat commanders must then turn to the preparation and conduct of war in a world whose global armament system is structurally very different than that of the recent past. They will have to resolve how the fundamental approaches to warfare must change in order to take into account the new realities. They will have to rethink approaches to strategy, military doctrine, intelligence capabilities and expectations, and logistics writ large (acquisition, mobilization, sustainment).

Nations that develop effective ways to leverage the characteristics of a diffused armaments world to meet their own national security objectives will have superior strategies that may ultimately prove decisive. Table 8 illustrates the positive as well as the negative military aspects of a globally diffused armaments world.

 

Characteristics of  the Diffused  Armaments World Advantages For Warfare Disadvantages for Warfare Routine proliferation of systems and technology Cheaper / faster access to latest capabilities External markets for DIB Interoperability of allies Competition  promotes innovation  Easier for opponents to arm Rapid change in regional balances Static defense capabilities become progressively obsolete Enhances competitor capabilities Greater problems with security-of-supply issues Allows access to global capabilities Promotes flexible  armament  strategies Creates incentives for suppliers to remain friendly Creates political and economic vulnerabilities  Creates targetable wartime vulnerabilities Complicates rules of engagement Loss of control over Defense Industrial Base (DIB) priorities Allows DIB to receive funding and capabilities from other sources Promotes cost-efficiencies from shared resources Transnational ownership promotes de-facto coalitions, and creates reverse economic leverage against other owners. May not be able to meet national armament schedules, surges Shareholder value arguments  may shift investment priorities Transnational ownership creates political and economic vulnerabilities Table 8.  Strategy Considerations: The Pluses and Minuses of Diffusion

Each characteristic offers both warfare advantages and  disadvantages. For example:

• The combat risks from a better-armed opponent are offset by the ability of a country to more economically and rapidly access the latest weaponry.
• Security-of-supply disadvantages are offset by the ability to maintain advanced force postures at more affordable costs.
• Partial loss of control over the defense industrial base is offset by the cost-sharing of infrastructure, as well the promotion of coalitions that in themselves create reverse economic leverage over those actors that could divert priorities.

The most effective military strategy in a diffused armaments world will be one that exploits the advantages associated with these characteristics, while at the same time targeting the vulnerabilities created for potential opponents. 

Warfare Changes

Astute military exploitation of both the positive and negative attributes in Table 8 will probably lead to war fighting changes.  To explore these changes, doctrinal investigations were conducted for selected aspects of warfare. Experienced military planners were presented with the characteristics of the diffused armaments world and asked to evaluate how those characteristics would affect war preparation, combat, and strategic competition management. The areas investigated are listed in Table 9.

The results of the doctrinal investigations suggest several changes when compared with a more autarkic armaments world that has been the traditional reference frame for recent military thought. For example, the analysis suggests that:

• In future wars between symmetric opponent states (e.g., both advanced or both developing nations), neither country may be able to assume very far in advance that its forces will have decisive technological superiority at the outset of combat. This is because of the ease and relatively short lead time with which states will be able to acquire advanced combat systems if they so choose and can afford it.   As a result, strategy, tactics, command and control, and training may become a more decisive determinant of combat outcomes than the relative technological level of forces.
• Security of supply considerations will become an increasing focus of combat. Targeting the opponent’s armament supply infrastructure, and protecting one’s own, will become even more important than in the past. At the same time, since third party and commercial providers will be involved, the rules of engagement for such actions may be complex. A short war will be more desirable to the aggressor but may be more difficult to achieve. At the same time, the risks from failure to terminate a conflict quickly may be higher.
• The increased likelihood of combat between technologically balanced forces will create a strong incentive to preemptively employ forces en masse early as opposed to precision escalation, which may expose unexpended systems to effective counterstrikes. Active defenses will also increase in value. Because of the incentives by both sides to mass early, marginal advantages in the number of deployed systems and/or survivable reserves may prove decisive.
• There will be incentives to time military actions to the schedule of arms deliveries. For example, the logic of the naval embargo to prevent the arrival of nuclear weapons during the Cuban missile crisis will become more commonplace.
• Concepts of strategic industrial mobilization will change, since nations can rapidly appeal to the global armaments system for whatever they can afford to procure. There will also be incentives to create new strategic reserve concepts to help mitigate risk.

Finally, it may not be possible to forecast opponent’s weaponry with the same lead times as in the past, and defense planners will have to adapt accordingly. Forecasting methods that depend on the structure of national research, development, and acquisition processes to help identify the characteristics and timing of future weaponry for a specific country may not be as effective. Paradoxically, it may also be easy to know much about an opponent’s weaponry once he acquires it.  In this respect warfare will become more open book.

Asymmetric warfare

In the diffused armaments world, asymmetric forms of warfare may flourish.[12] The diffusion of systems and technology will provide more opportunities for states to develop unique operational employment concepts that draw on capabilities that would otherwise not be as readily available. In addition to diverse combat and support systems, systems integration, training, and maintenance services can also be purchased. Additionally, the diversity of possible options increases the likelihood that countries will make asymmetric choices to fit their own circumstances.

Clever states will also have the option of choosing a combination of symmetric and asymmetric employment concepts. If the balance of forces between combatants is roughly equal in both the quantitative and qualitative aspects of weaponry, then the nation that is able to best employ asymmetric concepts may have an advantage.

Futuristic warfare concepts

In the diffused armaments world, the technologies enabling revolutionary military change will be generally available to all. States that want to explore new uses will be able to do so. Not all will be successful. Some will not be able to innovate. Others will have difficulty assimilating new technologies into their force postures. But some may also be able to fully develop new warfare concepts. Yet the ease of access to existing weapons may also have a reverse inhibiting effect. Since it will be easier and cheaper for states to purchase “machine-age” weaponry, there may be less incentive to advance the state of military art for “information-age” weaponry. It will be easier to assume a follower strategy that purchases systems, supporting doctrines, and training from others. If most countries adopt this strategy, then those few countries that concentrate on revolutionary military change will set the global standard for futuristic warfare concepts.

The United States is the acknowledged global leader in the pursuit of advanced warfare concepts. The program that has been termed the “American RMA” revolves around three fundamental capabilities: advanced intelligence, surveillance, and reconnaissance; advanced command and control; and the precision use of force. Network-centered warfare employing functionally related but physically distributed combat systems employed against target sets with similar characteristics is a focal point for development.

A few countries (e.g., Russia, China) are pursuing independent lines of investigation about the nature of future war, drawing on US directions as input data. But more countries are interested in the programs articulated by the United States. Within the American RMA, individual platforms are less important in many ways than their on-board capabilities and how those capabilities are linked to off-board assets and to each other. Nations pursuing equivalent net-centric concepts will have access to similar on-board and off-board systems through the resources of the diffused global armament system, and may be able to employ those systems via lesser capable (and less expensive) platforms. As a result, the basic concepts of future war implied by the current American RMA will be more widely available to nations that choose to pursue those concepts.

It will also be easier for countries to pursue niche countermeasures to future warfare concepts being pursued by their opponents. For example, anti-access capabilities to thwart US force projection capabilities, and counters to US precision strike assets, are already being offered on the open market. Better defensive systems will be available, as will improved capabilities to execute counter-strikes against an opponent’s precision weaponry. It may be harder to achieve air or information superiority. As a result, warfare may have increased casualty levels when compared with those of the Gulf War or of Kosovo operations.

Countries also will have the opportunity to develop futuristic warfare concepts based on cheaper and lower technology systems that can be purchased on the global market.  Examples include low-observable cruise missiles, UAVs, mines, ballistic missiles, and space imagery and commercial communications services. Future warfare concepts based on fewer most-advanced-technology systems may clash on the battlefield with other future warfare concepts based on large numbers of less-capable systems. Both may involve the innovative use of combat power, but perhaps in very different ways.

Changes in National Armament and Defense Industrial Strategies

Future armament and defense industrial strategies will also adapt. For example:

• Some nations will see an advantage in deliberately foregoing significant development costs in favor of a dynamic purchase-oriented procurement strategy. They will continuously buy, pay for, adapt, use the current operational state of the art, and then repurchase again.

• The systems integration capability will be a critical function. Integration will have to occur in five different arenas: between the subsystems of a single combat platform; between combat platforms; between armament elements developed within defense industries and those procured commercially off-the-shelf; between armament elements produced domestically and those procured externally; and between the combat systems of different military services.  This is an historical US strength with a very high entry cost. The United States may be able to retain a global competitive advantage. At the same time, there are currently several countries, and several defense companies, who have targeted the systems integration function as a competitive niche area and offer those services globally. Systems-integration-for-hire will be a characteristic of the diffused armaments world.

• The quality and timing of effective training on new combat systems obtained from abroad will be critical, as will the maintenance of these systems once obtained. However training and maintenance services will be increasingly available commercially. As a consequence, even second- and third-tier states that can afford it may be able to acquire and employ weapons in types, numbers, and at rates that otherwise exceed their expected ability to use them effectively.

• There also will be a need for some states to redefine the structure and operational procedures governing their national defense industrial bases. There are three major alternatives: (a) a smaller and probably less efficient version of the past, which could include re-subordination of some functions to government ownership; (b) a fully integrated national industrial base, which would include the reconciliation of government vs. industrial incentive structures, plus funding commitments that put more predictability into defense markets; and (c) a defense industrial base focused on core or niche capabilities, which would result in a scaling down of the targeted market size, and also perhaps new ways for companies to operate effectively in both commercial and defense markets.

Future Defense Innovation

Defense innovation will also reflect the characteristics of diffusion. For example, 

• For supplier nations, there will be a continuous requirement to develop new military capabilities. The rationale goes far beyond that of countering increasing threats. International competitive advantage will require sustained developmental effort.  Additionally, national defense industrial bases must be in continuous demand by host governments lest they shift assets to non-defense markets.

• For defense firms, the principal objective of continuous R/D will be to maintain, or gain, a competitive advantage.  Some of that effort, but by no means all, will also advance the global state of the art in armaments. Some effort will advance abilities to produce and distribute mid-technology weaponry faster and cheaper. Some will advance abilities to provide better, faster, and cheaper services such as systems integration, upgrades, retrofits, training, and maintenance. And some will advance the competitive edge of individual defense companies. The aggregate R/D effort will also advance the ability of any state to buy better weapons and support services for its defense dollar at whatever level of technology a state chooses to adopt.

• Governments will also be more dependent for R/D outcomes based on decisions made by private corporations with diverse markets. Consequently, it may be more difficult to achieve consistent and programmed research and development to meet the specific objectives of a given nation without direct government funding. At the same time, in some technical fields, i.e., those with significant commercial potential, the probability of sustained and even serendipitous innovation will increase.

• New military innovations may also emerge rapidly because of the incorporation of modern commercial business processes in government operations coupled with commercial dependencies in defense industries. The new commercial business processes heavily emphasize networking, information sharing, feedback, and decentralization, which collectively increase the likelihood and rapidity of concept and product development and implementation.

Changes in Competitive Strategies

Countries trying to maintain a competitive advantage over potential opponents will also have to adapt to new considerations.  For example:

• The diffused armaments world blurs the concept of an indigenous weapons system. Hence competitive strategies based on relative armaments capabilities need to be focused on the entire diversified armaments process of a target nation, and not only on indigenous national defense capabilities. A complicating factor is the fact that the global defense industrial base, including possibly even the defense industries of potential opponents, becomes a common denominator that all nations can at least theoretically access if they have the funds.

• The rate at which advanced technology weaponry can be provided to states that can pay for it may decrease the relative value of high technology weaponry (since all may have it), and thus change the focal point of competitive strategies targeted against those states.

• No one nation have confidence of its ability to effectively determine the kinds of armaments technology or systems that flow to any particular country. This makes the process of technological competition itself a more difficult task.

• In some respects, nations will be routinely competing with themselves. Since market dynamics play a major role in the transfer of systems and technologies, states may have to fight against their own combat systems in the hands of opponents, and perhaps upgraded by third party suppliers.  This is the normal situation faced by private corporations competing in high-technology commercial markets, but now it also may become the norm in the security arena.

• The behavior of important defense companies will become an explicit factor in the strategic competition between states. Corporations heavily engaged in the  international arms market may behave in very different ways. They could be highly competitive, or collaborative, to promote shareholder value. Their actions could also either promote, or perhaps inhibit, the competitive advantage of their host nation.

Other Implications

The propositions advanced in this section are representative. They do not cover all areas in which change may be warranted. They do suggest, however, that future military thought will probably take a different approach to warfare in a diffused armaments world than that of the recent past.  The new access to arms made possible by that world will not necessarily be a cause of conflict; however, it will probably shape how nations prepare for and prosecute conflict.

Section 7
Specific National Security Issues for the United States

In addition to the general issues raised by the character of the global future security environment, there are also several specific issues or opportunities for the United States:

• The United States and its defense industries are the dominant players in the global armament system. The United States has the largest homogenous internal defense market in the world. It owns over half of the global arms export market, with total sales larger than the aggregate sum of the next five countries. It has the strongest commercial information technology sector, the strongest university science base, and the most commercial experience in the global economy. US national armament strategy and defense industrial strategy will have a shaping influence on the entire global armament system for the foreseeable future.

• The trans-Atlantic issue is key. There are dim prospects for significant trans-Atlantic defense industrial cooperation unless the United States substantially opens its domestic market and is willing to export advanced technology.  At the same time, defense industries on both sides of the Atlantic are undertaking cooperative initiatives, but feel constrained by governmental policies. An increasingly conflictual environment will affect domestic industry in both countries.  The form of the eventual outcome will shape the entire global armament system.

• The ready availability of advanced combat systems, and even developmental facilities, for countries with money to pay for them will gradually shorten the lead time for US competitive strategies. The ability of the United States to stay inside an opponent’s research, development, and acquisition cycle for new weaponry will become increasingly difficult to estimate, depending on the degree of commercial diversification and cross-border acquisition in the two national armament processes.

• New conventional nonproliferation regimes and arms control agreements are going to be difficult to obtain until the domestic issues, and the eventual form of the emerging global armament system, are resolved.  Many states see that defense globalization and arms exports offer critical domestic benefits (for example, economies of scale, access to technology, increased national revenues, and jobs).

• The United States has time to shape the global armament system to help further US security objectives. Analogous historical periods of change produced a stable armament system only after all military, economic, political, and social factors were in balance. The issue is more encompassing than US export control policy or defense i