European Defense Trends: Budgets, Regulatory Frameworks, and
European Defense Trends: Budgets, Regulatory Frameworks, and the Industrial Base November 5, 2010 Defense-Industrial Initiatives Group Center for Strategic & International Studies 202-775-3183 www.csis.org/isp/diig
Outline • Individual Trends • Defense Spending • Regulatory Framework • Financial Health
• Integrated Trends • Future Outlook and Recommendations
2
260
120,000
250
100,000
240
80,000
230
60,000
220
40,000
210
20,000
200 2001
0 2002
2003
2004
Defense Spending
2005
2006
2007
2008
Per soldier spending (constant 2009, in €)
Spending (constant 2009, in € billions)
Total European Defense Spending and Defense Spending Per Soldier (2001-2009)
2009
Defense Spending per Soldier
3
Growth Rate for Total European Defense Spending by Budget Categories (2001-2009) Equipment
Personnel
Infrastructure
O&M/Other
R&D (2001-2008)
2001-2009 CAGR (in percent)
0.0
-1.0
-0.6 -0.9
-2.0
-3.0
-2.6
-2.6
-4.0
-5.0
-5.1 -6.0
4
Growth Rate for Per-Solider European Defense Spending by Budget Categories (2001-2009) 4.0
3.7
2001-2009 CAGR (in percent)
3.4 3.0
2.0
1.7 0.9
1.0
0.0
-1.0 -1.0 -2.0 Equipment
Personnel
Infrastructure
O&M/Other
R&D (2001-2008)
5
Distribution of Total European Defense Spending by NATO Budget Categories (2001-2009) 100%
90%
20.2
80%
20.5
20.6
2.5
2.4
2.3
20.7
21.2 2.7
21.4 2.3
22.8 2.7
22.8
2.8
70%
23.6 2.1
2.6
60% 50%
55.6
56.0
56.1
56.3
56.5
55.9
53.7
53.4
52.5
15.7
16.6
17.1
17.3
17.1
17.2
17.2
17.5
19.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
40% 30% 20% 10% 0%
Equipment
Personnel
Infrastructure
O&M/Other
6
European Defense Spending by Country
7
The European Defense Market • No integrated European defense market, but instead fragmented national defense markets • Leads to inefficiencies and duplication of efforts in acquisition and R&D
• Article 346 of Lisbon Treaty key regulatory challenge
8
Key EU Regulatory Reforms for Defense Procurement EU Procurement
Intra-EU Exports
EU Defence Procurement Directive 2009/81/EC Provides regulations specifically designed for defense and security related procurement
Interpretative Communication on Article 296 COM(2006) 779 final Clarifies Article 346's (formerly 296) role as an exception rather than a standard
Intra-EU Transfer Directive 2009/43/EC Facilitating intra-EU transfer of defenserelated products
Open the EU market for defense and security related procurement
9
CSIS ESDS Index Company Name
Country
Company Name
Country
Babcock Intl Group
United Kingdom
Qinetiq Group
United Kingdom
BAE Systems
United Kingdom
Rheinmetall
Germany
Chemring Group
United Kingdom
Rolls-Royce Group
United Kingdom
Cobham
United Kingdom
SAAB
Sweden
Comrod Communication
Norway
Safran
France
Dassault Aviation
France
Serco Group
United Kingdom
Finmeccanica
Italy
Simrad Optronics
Norway
Indra Sistemas
Spain
Thales
France
Lubawa
Poland
Ultra Electronics Hldgs
United Kingdom
Meggitt
United Kingdom
VT Group
United Kingdom
OHB Technology
Germany
Zodiac Aerospace
France
10
Profitability of ESDS companies CSIS ESDS and MSCI Europe Industrials: EBIT Margin Comparison (1995-2009; Revenue Weighted; Current Euros) 12%
CSIS ESDS and MSCI Europe Industrials: Cash Flow Return on Investment (2001-2009; Revenue Weighted) 25%
10% 20% 8% 15% 6% 10%
4%
2%
5%
0% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 CSIS ESDS Index
MSCI Europe Industrials
CSIS ESDS Index
MSCI Europe Industrials
11
Investment trends of ESDS companies CSIS ESDS and MSCI Europe Industrials: R&D as Percentage of Revenue (1995-2009; Average of Index Companies)
CSIS ESDS, MSCI Europe Industrials: CAPEX as Share of Revenue (2001-2009; Average of Index Companies)
6%
6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
CSIS ESDS Index
MSCI Europe Industrials
CSIS ESDS Index
MSCI Europe Industrials
12
CSIS ESDS Index: Revenue Mix by Geographic Origin (2003, 2009) Revenue (constant 2009, in € billions)
100 90 Rest of World
80 70 60 50
Rest of World
N. America
N. America
40 30 20
Europe
Europe
2003
2009
10 0
13
Integrated Trends • Budget declines offset by troop reductions • Demand changes alter the defense market • Defense industry needs sufficient financial incentives • Government and industry responses determine regulatory reform impact • Defense market supports greater international involvement
14
Future Outlook and Recommendations • • • •
Maintain per-soldier spending trend Enforce regulatory reforms Develop European DIB strategy Use economic recession as opportunity
15
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).
Outline • Individual Trends • Defense Spending • Regulatory Framework • Financial Health
• Integrated Trends • Future Outlook and Recommendations
2
260
120,000
250
100,000
240
80,000
230
60,000
220
40,000
210
20,000
200 2001
0 2002
2003
2004
Defense Spending
2005
2006
2007
2008
Per soldier spending (constant 2009, in €)
Spending (constant 2009, in € billions)
Total European Defense Spending and Defense Spending Per Soldier (2001-2009)
2009
Defense Spending per Soldier
3
Growth Rate for Total European Defense Spending by Budget Categories (2001-2009) Equipment
Personnel
Infrastructure
O&M/Other
R&D (2001-2008)
2001-2009 CAGR (in percent)
0.0
-1.0
-0.6 -0.9
-2.0
-3.0
-2.6
-2.6
-4.0
-5.0
-5.1 -6.0
4
Growth Rate for Per-Solider European Defense Spending by Budget Categories (2001-2009) 4.0
3.7
2001-2009 CAGR (in percent)
3.4 3.0
2.0
1.7 0.9
1.0
0.0
-1.0 -1.0 -2.0 Equipment
Personnel
Infrastructure
O&M/Other
R&D (2001-2008)
5
Distribution of Total European Defense Spending by NATO Budget Categories (2001-2009) 100%
90%
20.2
80%
20.5
20.6
2.5
2.4
2.3
20.7
21.2 2.7
21.4 2.3
22.8 2.7
22.8
2.8
70%
23.6 2.1
2.6
60% 50%
55.6
56.0
56.1
56.3
56.5
55.9
53.7
53.4
52.5
15.7
16.6
17.1
17.3
17.1
17.2
17.2
17.5
19.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
40% 30% 20% 10% 0%
Equipment
Personnel
Infrastructure
O&M/Other
6
European Defense Spending by Country
7
The European Defense Market • No integrated European defense market, but instead fragmented national defense markets • Leads to inefficiencies and duplication of efforts in acquisition and R&D
• Article 346 of Lisbon Treaty key regulatory challenge
8
Key EU Regulatory Reforms for Defense Procurement EU Procurement
Intra-EU Exports
EU Defence Procurement Directive 2009/81/EC Provides regulations specifically designed for defense and security related procurement
Interpretative Communication on Article 296 COM(2006) 779 final Clarifies Article 346's (formerly 296) role as an exception rather than a standard
Intra-EU Transfer Directive 2009/43/EC Facilitating intra-EU transfer of defenserelated products
Open the EU market for defense and security related procurement
9
CSIS ESDS Index Company Name
Country
Company Name
Country
Babcock Intl Group
United Kingdom
Qinetiq Group
United Kingdom
BAE Systems
United Kingdom
Rheinmetall
Germany
Chemring Group
United Kingdom
Rolls-Royce Group
United Kingdom
Cobham
United Kingdom
SAAB
Sweden
Comrod Communication
Norway
Safran
France
Dassault Aviation
France
Serco Group
United Kingdom
Finmeccanica
Italy
Simrad Optronics
Norway
Indra Sistemas
Spain
Thales
France
Lubawa
Poland
Ultra Electronics Hldgs
United Kingdom
Meggitt
United Kingdom
VT Group
United Kingdom
OHB Technology
Germany
Zodiac Aerospace
France
10
Profitability of ESDS companies CSIS ESDS and MSCI Europe Industrials: EBIT Margin Comparison (1995-2009; Revenue Weighted; Current Euros) 12%
CSIS ESDS and MSCI Europe Industrials: Cash Flow Return on Investment (2001-2009; Revenue Weighted) 25%
10% 20% 8% 15% 6% 10%
4%
2%
5%
0% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 CSIS ESDS Index
MSCI Europe Industrials
CSIS ESDS Index
MSCI Europe Industrials
11
Investment trends of ESDS companies CSIS ESDS and MSCI Europe Industrials: R&D as Percentage of Revenue (1995-2009; Average of Index Companies)
CSIS ESDS, MSCI Europe Industrials: CAPEX as Share of Revenue (2001-2009; Average of Index Companies)
6%
6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
CSIS ESDS Index
MSCI Europe Industrials
CSIS ESDS Index
MSCI Europe Industrials
12
CSIS ESDS Index: Revenue Mix by Geographic Origin (2003, 2009) Revenue (constant 2009, in € billions)
100 90 Rest of World
80 70 60 50
Rest of World
N. America
N. America
40 30 20
Europe
Europe
2003
2009
10 0
13
Integrated Trends • Budget declines offset by troop reductions • Demand changes alter the defense market • Defense industry needs sufficient financial incentives • Government and industry responses determine regulatory reform impact • Defense market supports greater international involvement
14
Future Outlook and Recommendations • • • •
Maintain per-soldier spending trend Enforce regulatory reforms Develop European DIB strategy Use economic recession as opportunity
15
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).
