- America’s largest defense companies, Lockheed Martin and Raytheon, clinched record orders last year.
- European militaries are rushing to avoid depleting their own stockpiles of weapons while sending supplies to Ukraine.
- Global defense spending reached its highest level on record in 2022.
The 16th edition of the International Defense Exhibition and Conference and the 7th edition of the Naval Defense and Maritime Security Exhibition on February 21, 2023 in Abu Dhabi, United Arab Emirates.
Mohammed Zarandah | Anadolu Agency | Getty Images
Few things illustrate the health of the defense industry better than a giant arms fair.
Last week, Abu Dhabi’s biannual international defense exhibition, known as IDEX, featured a busy sector. Decorated military, government officials and arms company executives mingled against a backdrop of giant missile and drone displays, while young men in Terminator-like “smart armor” performed combat simulations while fake explosions lit up giant LED screens.
Covering enough land for a small town, this year’s IDEX attracted around 130,000 visitors from 65 countries. It was the largest and best attended in years.
It’s no secret why. Russia’s full-scale invasion of Ukraine a year ago uprooted much of the industrialized world from its comfortable status quo, in which a Western-led security order prevented major military invasions that Western powers did not want. Since that violent turning point in late February 2022, governments inside and outside NATO have committed to spending more than ever on defense.
“In our view, Putin is the best arms salesman there is,” an American defense contractor at IDEX told CNBC anonymously because he was not authorized to speak to the press.
“If Putin hadn’t started a fight, no one would be buying all this stuff.”
In fact, many countries are increasing their defense spending to unprecedented levels.
“With Russia’s invasion of Ukraine, many European nations have now committed to meet or exceed the NATO target — in some cases years before they originally planned to do so,” says a McKinsey Aerospace and Defense report & Co. from December. The crisis prompted “a reconsideration of longstanding assumptions that a large-scale conflict on the continent was unlikely in the 21st century”.
Just look at Germany: it announced just days after the Russian invasion that it would spend another 100 billion euros ($106 billion) on defense, a huge shift for a country that has struggled since the end of World War II saved military investment.
Poland is now aiming to increase its defense budget to 3% of its gross domestic product by 2023. And French President Emmanuel Macron announced in early January his government’s plan to increase military spending by more than 30% in the coming years and prepare its armed forces for high-intensity conflicts. Additionally, US military spending on Ukraine alone totaled nearly $50 billion last year.
The big issues are not limited to the West. Russia announced in November a defense budget of around $84 billion for 2023 — over 40% more than the figure originally planned for this year, which was announced in 2021.
And NATO ally Japan aims to double its defense spending to 2% of GDP by 2027 as regional threats from North Korea and China mount. China and Saudi Arabia also set corresponding records for their own governments’ defense spending in 2022, despite inflation, with no signs of slowing down.
“Unfortunately, business is going very well,” said an employee of a French drone manufacturer exhibiting at IDEX.
The US defense industry is enjoying a stroke of luck. U.S. overseas military equipment sales rose 49% to $205.6 billion last fiscal year, the State Department said in January.
America’s largest defense companies, Lockheed Martin and Raytheon, received record orders. Lockheed’s net sales were $19 billion in the fourth quarter, about 3% ahead of internal planning and ahead of $17.7 billion in 2021.
Ukraine stocked up on US-made spears even before Russia invaded. Pictured here is a group of Ukrainian soldiers carrying a load of javelins as Russia deploys troops on the Ukrainian border.
Sergei Supinsky | AFP | Getty Images
Raytheon’s backlog topped $150 billion last year, and fourth-quarter revenue from its missile and defense unit rose 6.2% to $4.1 billion. But the companies say they are being hampered by supply chain problems and labor shortages, and if it weren’t for them they would see far higher sales figures.
For Europe, however, there is a real sense of urgency – after years of underinvestment in the sector, trust in the US, and now many months of sending their arms and ammunition to Ukraine, European nations must stop their own weapon stockpiles from doing so be completely exhausted.
“The military stocks of most [European NATO] Member States are … highly exhausted because we have given Ukrainians a lot of capacity,” said Josep Borrell, the EU’s High Representative for Foreign Affairs and Security Policy, in September.
“It’s becoming more and more urgent. There’s a lot more discussion, a lot more enquiries,” said a manager at a UK drone company, asking not to be identified due to work restrictions. When asked if demand for his company’s UAVs was growing, he replied, “Astronomical.”
French multinational defense company Thales is one of the private sector companies working to meet the needs of the French and allied militaries, who are running low on supplies.
“The conflict in Ukraine certainly forced us to increase our capacity,” Christophe Salomon, Thales executive vice president of land and air systems, told CNBC. His division focuses on radars, missiles, rockets, vehicles and other land systems.
“You need to increase your industrial footprint. You must purchase your holdings. And we’re talking about products where the lead time is about two years,” he said, describing the challenge of ramping up production when the supply chain for a single weapon system includes hundreds of different suppliers.
Ukrainian soldiers fire a French 155 mm/52 caliber Caesar self-propelled gun at Russian positions on a front line in eastern Ukraine’s Donbass region on June 15, 2022.
Aris Messinis | AFP | Getty Images
Businesses need government help to speed up the production process, Salomon said. The French government has outlined measures in this direction, including simplifying military contracts and administrative procedures, pursuing import substitution for more French-made products, improving public-private partnerships and providing billions of euros in funding to replenish ammunition stocks.
The French Caesar SPGs, which have proven extremely effective in combat for the Ukrainian military, typically take two years to manufacture. The government wants to halve this time.
Thales will deliver its advanced GM200 radar system to Ukraine in May, which normally takes two years to manufacture. Due to increased investment in its supply chain over the past year and upfront purchases of complex radar subsystems, Thales is able to assemble the Ukrainian GM200 in four months.
“We accelerate because our team works 24 hours a day,” said Salomon. “We have taken the responsibility to invest, we invest and we buy each subsystem before we know who will buy it.”
A Leopard 2 A6 heavy battle tank.
Sean Gallup | News from Getty Images | Getty Images
Many in the Western defense industry lament that Europe’s largest economy, Germany, is still lagging behind. Expanding its military presence remains controversial and divisive in German politics, and Berlin has made it clear that it wants to help Ukraine but avoid provoking Russia.
A German private sector attendee at IDEX described his frustration with his government’s pace, but admitted “it’s a bit problematic because of history”. He asked for anonymity so that he could speak freely.
Germany’s major policy changes over the past year — particularly allowing its weapons to be used in foreign combat zones for the first time since World War II — make a big difference, the attendee said. “But,” he emphasized, “we need to change our processes and move faster now.”