European Defense Trends 2012:
European Defense Trends 2012: Budgets, Regulatory Frameworks and the Industrial Base David Berteau, Guy Ben-Ari, Joachim Hofbauer December 18, 2012
Outline • • • • • • • •
Methodology Demand side Regulatory frameworks European defense and security industrial base Trend analysis Future spending trajectories Options for reversing the course Areas for further research 2
Methodology • • • • •
Scope Data sources Data analysis Defense spending categories CSIS ESDS Index
3
270
120,000
260
100,000
250
80,000
240
60,000
230
40,000
220
20,000
210
0 2001
2002
2003
2004
2005
Defense Spending
2006
2007
2008
2009
2010
Per soldier spending (constant 2011, in € thousands)
Spending (constant 2011, in € billions)
Total European Defense Spending and Defense Spending per Soldier
2011
Defense Spending per Soldier
Source: NATO Defense Expenditures; SIPRI Military Expenditure Database; IISS Military Balance; analysis by CSIS DefenseIndustrial Initiatives Group.
4
Total European Spending by Defense Spending Categories 280 12.9
Spending (constant 2011, in € billions)
240 200
7.4 54.5
13.4 7.0 52.1
10.6
9.7
10.3
10.4
6.3
6.6
5.7
6.5
6.9
49.7
49.1
51.5
51.6
54.2
12.7
8.6 6.4 53.5
8.0
6.2
5.6
5.7
51.8
51.6
160 120
132.0
128.9
124.0
124.0
127.4
126.9
5.2 51.4
119.4
117.2
107.1
106.3
103.4
80 40 44.9
43.9
42.3
41.4
41.5
42.3
42.1
42.6
41.2
42.8
38.5
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
Equipment
Personnel
O&M/Other
Infrastructure
R&D
Note: NATO budget sources do not provide a separate breakdown for R&D spending. They instead subsume the research portion of R&D in the O&M/Other category and the development portion of R&D in the Equipment category. To provide a separate breakdown for R&D spending, CSIS added OECD data on defense R&D. R&D spending is therefore accounted for twice in this chart, once directly in the R&D category and once combined in the Equipment and the O&M/Other categories. In addition, the combined category aggregates do not match the aggregate values displayed in Chart 1 as complete functional spending breakdowns are not available for all 37 countries. Only countries with complete time series data are included in the aggregates of the respective categories. Source: NATO Defense Expenditures; OECD Main Science and Technology Indicators; analysis by CSIS Defense-Industrial Initiatives Group.
5
Defense Equipment Spending for EDA Member States 100% 90%
2.0% 16.0%
2.0%
2.3%
3.0%
3.4%
1.4%
20.9%
18.9%
21.2%
22.0%
22.0%
77.1%
78.8%
75.8%
74.7%
76.6%
2006
2007
2008
2009
2010
80% 70% 60% 50% 40%
82.0%
30% 20% 10% 0% 2005
National
European Collaborative
Other Collaborative
Sources: EDA Defense Data; analysis by CSIS Defense-Industrial Group.
6
Defense R&T Spending for EDA Member States 100% 90%
4.9%
1.8%
1.6%
9.5%
13.1%
16.6%
87.6%
85.5%
85.2%
81.8%
2005
2006
2007
2008
3.0% 9.4%
1.4%
0.9%
12.8%
11.8%
85.8%
87.3%
2009
2010
80% 70% 60% 50% 40% 30% 20% 10% 0% National
European Collaborative
Other Collaborative
Sources: EDA Defense Data; analysis by CSIS Defense-Industrial Group.
7
Key European Commission Regulatory Reform Efforts Intra-EU Transfer Directive 2009/43/EC
EU Defence Procurement Directive 2009/81/EC
Interpretative Communication on Article 296 COM(2006) 779 final
Open the EU market for defense and security related procurement
Source: Analysis by CSIS Defense-Industrial Initiatives Group.
8
CSIS ESDS Index Revenue, Total and Equipment Defense Spending Spending and revenue (constant 2011, in € billions)
300
250
200
150
100
50
0 2001
2002
2003
2004
Total Defense Spending*
2005
2006
2007
CSIS ESDS Index Revenue
2008
2009
2010
2011
Equipment Spending*
* Note: Only countries with a complete time series for total defense spending and Equipment spending are included. Source: Bloomberg; NATO Defense Expenditures; analysis by CSIS Defense-Industrial Initiatives Group.
9
CSIS ESDS Index: Revenue by Geographic Origin 100 Percentage change in revenue share
Revenue (constant 2011, in € billions)
90 80
16
+3 %
20
25
-1 %
25
45
-2 %
45
70
-2 % 60 50
12
40
10
30 20
+11 %
-9 % 35
10 0 2003 Europe
2008 North America
2011 Rest of World
Note: Excludes the following companies due to lack of data in 2003: Comrod Communication, ZKT Lubawa, Simrad Optronics, Cohort, and Aselsan. Source: Bloomberg, company financial reports; analysis by CSIS Defense-Industrial Initiatives Group.
10
Operating Profit Margin, Revenue Weighted 12%
10%
8%
6%
4%
2%
0% 2001
2002
2003
2004
2005
2006
CSIS ESDS Index Source: Bloomberg; analysis by CSIS Defense-Industrial Initiatives Group.
2007
2008
2009
2010
2011
MSCI Industrials
11
Return on Invested Capital (ROIC), Revenue Weighted 12%
10%
8%
6%
4%
2%
0% 2001
2002
2003
2004
2005
2006
CSIS ESDS Index Source: Bloomberg; analysis by CSIS Defense-Industrial Initiatives Group.
2007
2008
2009
2010
2011
MSCI Industrials
12
Capital Expenditure, Revenue Weighted 7%
6%
5%
4%
3%
2%
1%
0% 2001
2002
2003
2004
2005
2006
CSIS ESDS Index
2007
2008
2009
2010
2011
MSCI Industrials
Source: Bloomberg; analysis by CSIS Defense-Industrial Initiatives Group.
13
Research and Development Investment, Revenue Weighted 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2001
2002
2003
2004
2005
2006
CSIS ESDS Index
2007 MSCI Industrials
2008
2009
2010
2011
14
Key Trends • Force Structure Reductions Will No Longer Offset Budget Declines • The Regulatory Environment Leads Drive for Market Defragmentation • Future European Industrial Capabilities Depend on the Global Defense Market
15
CSIS Total and Per-Soldier Spending Trajectories Total spending declines slowly (continues 20012011 CAGR of -1.8 percent)
CSIS Spending Scenarios Total spending declines quickly (continues 20082011 CAGR of -3.2 percent)
Total troop numbers continue at the 20082011 CAGR of -3.3 percent Aggregate 2011 European troop numbers hold steady through 2020 Total troop numbers continue at the 20082011 CAGR of-3.3 percent Aggregate 2011 European troop numbers hold steady through 2020 16
Total European Defense Spending Projections 275 Total defense spending (constant 2011, in € billions)
250 225 200 175 Projected Values
150 125 100
75 50 25 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Scenario "Slow Decline" (-1.8% CAGR from 2001-2011) Scenario "Accelerated Decline" (-3.2 %CAGR from 2008-2011)
Overlap between Topline Projections of Both Scenarios
Source: NATO Defense Expenditures; SIPRI Military Expenditure Database; analysis by CSIS Defense-Industrial Initiatives Group.
17
Per-Soldier European Defense Spending Projections with Troop Reductions Defense spending per soldier (constant 2011, in €
140,000
120,000
100,000
Projected Values 80,000
60,000
40,000
20,000
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 "Slow Decline" in Aggregate Defense Spending (-1.8% CAGR from 2001-2011) and Continued Troop Reductions Overlap between Both Projections "Accelerated Decline" in Aggregate Defense Spending (-3.2% CAGR from 2008-2011) and Continue Troop Reductions
Source: NATO Defense Expenditures; SIPRI Military Expenditure Database; analysis by CSIS Defense-Industrial Initiatives Group.
18
Per-Soldier European Defense Spending Projections without Troop Reductions Defense spending per soldier (constant 2011, in € thousands)
120,000
100,000
80,000 Projected Values 60,000
40,000
20,000
0 '01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
'18
'19
'20
"Slow Decline" in Aggregate Defense Spending (-1.8% CAGR from 2001-2011) and no Troop Reductions Overlap Between Both Projections "Accelerated Decline" in Aggregate Defense Spending (-3.2% CAGR from 2008-2011) and no Troop Reductions Source: NATO Defense Expenditures; SIPRI Military Expenditure Database; analysis by CSIS Defense-Industrial Initiatives Group.
19
Problem Statement Decline in available resources • Unlikely to change
Inefficient resource utilization due to: • Market barriers along country borders • Ineffective collaboration • Inefficient acquisition processes • Public sector over-involvement on the supply side • Lack of strategic direction
20
Demand Side • Further troop reductions • More coordinated capability trade-off decisions • More effective and systematic forms of collaboration and cooperation • Utilize more innovative business models • Become a more business savvy customer • Better leveraging of competition
21
Regulatory Environment • Finalize implementation of regulatory reforms • Monitor and enforce their application
22
Supply Side • Limit public sector involvement on the supply side • Support exports more systematically and create more efficient and predictable frameworks
23
Areas for Further Research • Import and export patterns • Industrial analysis beyond publicly traded companies • Metrics for European defense spending efficiency and effectiveness
24
Questions or Comments? [email protected]
25
About CSIS At a time of new global opportunities and challenges, the Center for Strategic and International Studies (CSIS) provides strategic insights and policy solutions to decisionmakers in government, international institutions, the private sector, and civil society. A bipartisan, nonprofit organization headquartered in Washington, DC, CSIS conducts research and analysis and develops policy initiatives that look into the future and anticipate change. Founded by David M. Abshire and Admiral Arleigh Burke at the height of the Cold War, CSIS was dedicated to finding ways for America to sustain its prominence and prosperity as a force for good in the world. Since 1962, CSIS has grown to become one of the world’s preeminent international policy institutions, with more than 220 full-time staff and a large network of affiliated scholars focused on defense and security, regional stability, and transnational challenges ranging from energy and climate to global development and economic integration. Former U.S. senator Sam Nunn became chairman of the CSIS Board of Trustees in 1999, and John J. Hamre has led CSIS as its president and chief executive officer since April 2000 CSIS does not take specific policy positions; accordingly, all views expressed in this presentation should be understood to be solely those of the author(s).
26
Outline • • • • • • • •
Methodology Demand side Regulatory frameworks European defense and security industrial base Trend analysis Future spending trajectories Options for reversing the course Areas for further research 2
Methodology • • • • •
Scope Data sources Data analysis Defense spending categories CSIS ESDS Index
3
270
120,000
260
100,000
250
80,000
240
60,000
230
40,000
220
20,000
210
0 2001
2002
2003
2004
2005
Defense Spending
2006
2007
2008
2009
2010
Per soldier spending (constant 2011, in € thousands)
Spending (constant 2011, in € billions)
Total European Defense Spending and Defense Spending per Soldier
2011
Defense Spending per Soldier
Source: NATO Defense Expenditures; SIPRI Military Expenditure Database; IISS Military Balance; analysis by CSIS DefenseIndustrial Initiatives Group.
4
Total European Spending by Defense Spending Categories 280 12.9
Spending (constant 2011, in € billions)
240 200
7.4 54.5
13.4 7.0 52.1
10.6
9.7
10.3
10.4
6.3
6.6
5.7
6.5
6.9
49.7
49.1
51.5
51.6
54.2
12.7
8.6 6.4 53.5
8.0
6.2
5.6
5.7
51.8
51.6
160 120
132.0
128.9
124.0
124.0
127.4
126.9
5.2 51.4
119.4
117.2
107.1
106.3
103.4
80 40 44.9
43.9
42.3
41.4
41.5
42.3
42.1
42.6
41.2
42.8
38.5
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
Equipment
Personnel
O&M/Other
Infrastructure
R&D
Note: NATO budget sources do not provide a separate breakdown for R&D spending. They instead subsume the research portion of R&D in the O&M/Other category and the development portion of R&D in the Equipment category. To provide a separate breakdown for R&D spending, CSIS added OECD data on defense R&D. R&D spending is therefore accounted for twice in this chart, once directly in the R&D category and once combined in the Equipment and the O&M/Other categories. In addition, the combined category aggregates do not match the aggregate values displayed in Chart 1 as complete functional spending breakdowns are not available for all 37 countries. Only countries with complete time series data are included in the aggregates of the respective categories. Source: NATO Defense Expenditures; OECD Main Science and Technology Indicators; analysis by CSIS Defense-Industrial Initiatives Group.
5
Defense Equipment Spending for EDA Member States 100% 90%
2.0% 16.0%
2.0%
2.3%
3.0%
3.4%
1.4%
20.9%
18.9%
21.2%
22.0%
22.0%
77.1%
78.8%
75.8%
74.7%
76.6%
2006
2007
2008
2009
2010
80% 70% 60% 50% 40%
82.0%
30% 20% 10% 0% 2005
National
European Collaborative
Other Collaborative
Sources: EDA Defense Data; analysis by CSIS Defense-Industrial Group.
6
Defense R&T Spending for EDA Member States 100% 90%
4.9%
1.8%
1.6%
9.5%
13.1%
16.6%
87.6%
85.5%
85.2%
81.8%
2005
2006
2007
2008
3.0% 9.4%
1.4%
0.9%
12.8%
11.8%
85.8%
87.3%
2009
2010
80% 70% 60% 50% 40% 30% 20% 10% 0% National
European Collaborative
Other Collaborative
Sources: EDA Defense Data; analysis by CSIS Defense-Industrial Group.
7
Key European Commission Regulatory Reform Efforts Intra-EU Transfer Directive 2009/43/EC
EU Defence Procurement Directive 2009/81/EC
Interpretative Communication on Article 296 COM(2006) 779 final
Open the EU market for defense and security related procurement
Source: Analysis by CSIS Defense-Industrial Initiatives Group.
8
CSIS ESDS Index Revenue, Total and Equipment Defense Spending Spending and revenue (constant 2011, in € billions)
300
250
200
150
100
50
0 2001
2002
2003
2004
Total Defense Spending*
2005
2006
2007
CSIS ESDS Index Revenue
2008
2009
2010
2011
Equipment Spending*
* Note: Only countries with a complete time series for total defense spending and Equipment spending are included. Source: Bloomberg; NATO Defense Expenditures; analysis by CSIS Defense-Industrial Initiatives Group.
9
CSIS ESDS Index: Revenue by Geographic Origin 100 Percentage change in revenue share
Revenue (constant 2011, in € billions)
90 80
16
+3 %
20
25
-1 %
25
45
-2 %
45
70
-2 % 60 50
12
40
10
30 20
+11 %
-9 % 35
10 0 2003 Europe
2008 North America
2011 Rest of World
Note: Excludes the following companies due to lack of data in 2003: Comrod Communication, ZKT Lubawa, Simrad Optronics, Cohort, and Aselsan. Source: Bloomberg, company financial reports; analysis by CSIS Defense-Industrial Initiatives Group.
10
Operating Profit Margin, Revenue Weighted 12%
10%
8%
6%
4%
2%
0% 2001
2002
2003
2004
2005
2006
CSIS ESDS Index Source: Bloomberg; analysis by CSIS Defense-Industrial Initiatives Group.
2007
2008
2009
2010
2011
MSCI Industrials
11
Return on Invested Capital (ROIC), Revenue Weighted 12%
10%
8%
6%
4%
2%
0% 2001
2002
2003
2004
2005
2006
CSIS ESDS Index Source: Bloomberg; analysis by CSIS Defense-Industrial Initiatives Group.
2007
2008
2009
2010
2011
MSCI Industrials
12
Capital Expenditure, Revenue Weighted 7%
6%
5%
4%
3%
2%
1%
0% 2001
2002
2003
2004
2005
2006
CSIS ESDS Index
2007
2008
2009
2010
2011
MSCI Industrials
Source: Bloomberg; analysis by CSIS Defense-Industrial Initiatives Group.
13
Research and Development Investment, Revenue Weighted 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2001
2002
2003
2004
2005
2006
CSIS ESDS Index
2007 MSCI Industrials
2008
2009
2010
2011
14
Key Trends • Force Structure Reductions Will No Longer Offset Budget Declines • The Regulatory Environment Leads Drive for Market Defragmentation • Future European Industrial Capabilities Depend on the Global Defense Market
15
CSIS Total and Per-Soldier Spending Trajectories Total spending declines slowly (continues 20012011 CAGR of -1.8 percent)
CSIS Spending Scenarios Total spending declines quickly (continues 20082011 CAGR of -3.2 percent)
Total troop numbers continue at the 20082011 CAGR of -3.3 percent Aggregate 2011 European troop numbers hold steady through 2020 Total troop numbers continue at the 20082011 CAGR of-3.3 percent Aggregate 2011 European troop numbers hold steady through 2020 16
Total European Defense Spending Projections 275 Total defense spending (constant 2011, in € billions)
250 225 200 175 Projected Values
150 125 100
75 50 25 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Scenario "Slow Decline" (-1.8% CAGR from 2001-2011) Scenario "Accelerated Decline" (-3.2 %CAGR from 2008-2011)
Overlap between Topline Projections of Both Scenarios
Source: NATO Defense Expenditures; SIPRI Military Expenditure Database; analysis by CSIS Defense-Industrial Initiatives Group.
17
Per-Soldier European Defense Spending Projections with Troop Reductions Defense spending per soldier (constant 2011, in €
140,000
120,000
100,000
Projected Values 80,000
60,000
40,000
20,000
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 "Slow Decline" in Aggregate Defense Spending (-1.8% CAGR from 2001-2011) and Continued Troop Reductions Overlap between Both Projections "Accelerated Decline" in Aggregate Defense Spending (-3.2% CAGR from 2008-2011) and Continue Troop Reductions
Source: NATO Defense Expenditures; SIPRI Military Expenditure Database; analysis by CSIS Defense-Industrial Initiatives Group.
18
Per-Soldier European Defense Spending Projections without Troop Reductions Defense spending per soldier (constant 2011, in € thousands)
120,000
100,000
80,000 Projected Values 60,000
40,000
20,000
0 '01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
'18
'19
'20
"Slow Decline" in Aggregate Defense Spending (-1.8% CAGR from 2001-2011) and no Troop Reductions Overlap Between Both Projections "Accelerated Decline" in Aggregate Defense Spending (-3.2% CAGR from 2008-2011) and no Troop Reductions Source: NATO Defense Expenditures; SIPRI Military Expenditure Database; analysis by CSIS Defense-Industrial Initiatives Group.
19
Problem Statement Decline in available resources • Unlikely to change
Inefficient resource utilization due to: • Market barriers along country borders • Ineffective collaboration • Inefficient acquisition processes • Public sector over-involvement on the supply side • Lack of strategic direction
20
Demand Side • Further troop reductions • More coordinated capability trade-off decisions • More effective and systematic forms of collaboration and cooperation • Utilize more innovative business models • Become a more business savvy customer • Better leveraging of competition
21
Regulatory Environment • Finalize implementation of regulatory reforms • Monitor and enforce their application
22
Supply Side • Limit public sector involvement on the supply side • Support exports more systematically and create more efficient and predictable frameworks
23
Areas for Further Research • Import and export patterns • Industrial analysis beyond publicly traded companies • Metrics for European defense spending efficiency and effectiveness
24
Questions or Comments? [email protected]
25
About CSIS At a time of new global opportunities and challenges, the Center for Strategic and International Studies (CSIS) provides strategic insights and policy solutions to decisionmakers in government, international institutions, the private sector, and civil society. A bipartisan, nonprofit organization headquartered in Washington, DC, CSIS conducts research and analysis and develops policy initiatives that look into the future and anticipate change. Founded by David M. Abshire and Admiral Arleigh Burke at the height of the Cold War, CSIS was dedicated to finding ways for America to sustain its prominence and prosperity as a force for good in the world. Since 1962, CSIS has grown to become one of the world’s preeminent international policy institutions, with more than 220 full-time staff and a large network of affiliated scholars focused on defense and security, regional stability, and transnational challenges ranging from energy and climate to global development and economic integration. Former U.S. senator Sam Nunn became chairman of the CSIS Board of Trustees in 1999, and John J. Hamre has led CSIS as its president and chief executive officer since April 2000 CSIS does not take specific policy positions; accordingly, all views expressed in this presentation should be understood to be solely those of the author(s).
26
