9. Arms production

Summary

Arms sales by the 100 largest arms-producing companies (the ‘SIPRI Top 100’) showed a marked rise of 15 per cent during 2004. This continues a rising trend since the late 1990s.

The value of the combined arms sales of the SIPRI Top 100 was $268 billion. Companies in the USA and Western Europe accounted for most of this amount: 63.3 per cent was accounted for by 40 US companies; and 29.4 per cent by 36 West European companies.

Acquisition activity is continuing in the international arms industry, albeit at a less rapid pace than during the 1990s. Five very large acquisitions were concluded in 2005, each with a deal value close to or greater than $2 billion. Intra-US acquisitions are driven by a rush into new expanding sectors, such as information technology and military services, and are facilitated by large cash surpluses. Transatlantic acquisitions are dominated by British companies seeking to access the lucrative US market.

Considering the development of the arms industry in the post-cold war period, three main types of changes are apparent: structural, technological and compositional.

• The arms industry has become increasingly concentrated, nationally as well as internationally. The share of the top 5 companies in the total arms sales of the SIPRI Top 100 increased from 22 per cent in 1990 to 44 per cent in 2003.
• There has been a clear and significant qualitative change in the nature of technology because civil technology has become increasingly important for weapon systems. This has led to an increasing importance of IT and electronics companies, often previously civil companies, in the defence sector and an increased number of civil companies in the supply chains of the main contractors. The demands of the USA’s ‘global war on terrorism’ have reinforced this trend.
• The privatization of defence services and support is drawing new kinds of suppliers into military contracting. This has been made apparent in Iraq, with companies taking on support roles that in the past the armed forces would have undertaken. A big growth area is the provision of security—guarding people and buildings. While some of these activities can be seen as an expansion of the arms industry, other support activities are not military services but general security services and construction, creating a periphery of private companies around the core arms industry.

These developments have resulted in marked changes in the arms industry and further changes can be expected. It is, however, important to recognize that arms contractors continue to have a set of unique characteristics, due to the nature of the arms market, making them different to firms in other industrial segments. The nature of arms procurement and its elaborate rules and regulations mean that they face considerable barriers to exit, while non-specialists continue to face considerable barriers to entry for the same reasons. In spite of internationalization in terms of markets and supply chains, the home market and home government support remain vital to arms-producing companies.

J. Paul Dunne (UK) is Professor of Economics at the University of the West of England, Bristol, Chair of the British affiliate of Economists for Peace and Security, and co-editor of the new Economics of Peace and Security Journal.

Eamon Surry (Australia) is a Research Associate with the SIPRI Military Expenditure and Arms Production Programme.