Defense Consolidation

April 2013

As the United States (US) and Europe continue to reduce their respective defense budgets, one can anticipate that major armed forces restructuring efforts (and corresponding adjustments in operational capabilities) that have been underway for the past several years will continue.
In order to adapt to this new climate, there is a need for better cooperation between the continents. A recent example of this is the high-level UK-US summit to discuss the preservation of capabilities by consolidating military operations and establishing joint partnerships where practical. (See: http://www.defensenews.com/article/20130330/DEFREG02/303300006/U-K-U-S-Look-Preserve-Capabilities.)

In order to support these efforts, there must also be a corresponding consolidation of defense firms; keeping in mind that “critical skills” must be maintained. With that said, the pressing question is how does this process unfold and what approaches must be taken. The answers will be vital for the future of North American and Europe defense firm’s survival.

In Europe, the EU Strategy for 2020 is guiding much of the region’s way ahead, yet defense funding and cooperation are slow in their progression while industry consolidation still seems to be ill-defined. Although European firms view the establishment of “North American” operations as critical to their survival, restructuring in the US will preclude much more of this from being realized. However, I would expect more joint partnerships and/or international agreements as part of the way forward.

In regards to the US, Congress and the Obama Administration are still too slow in establishing a long term economic plan for the country; which is now affecting defense industries here in the US and worldwide. Representing some 25% of the World’s GDP, a stable economic plan is crucial in order to spur a turnaround of today’s continuing economic recession. Defense cuts have occurred through the Budget Control Act (US$500B over 10 years) and the recent “sequestration cuts” where indiscriminate cuts of another US$487B over the next ten years (2013-2022) is now being enforced. We can be certain a number of US defense firms are now crafting their mergers or divestment plans as we read this.

It would appear that certain key ideas should be kept in mind as we head down this path:
1. European and US defense leadership (both military and industry) must ensure critical skills and capabilities are not lost and that wasteful activities/overhead functions are pared down considerably.
2. While mergers between US, UK and European firms are less likely with defense and industrial firms in “emerging economies”, executives should still pursue joint-ventures or co-production opportunities in these regions, which can serve as a path for:
a. New designs and developments in less critical and less sensitive components and elements of defense systems.
b. Finding access to markets that have been difficult to enter.
c. Establishment of “Super Multi-National Teams”, with strong definitive agreements to collaboratively pursue major opportunities.

Each month I will be offering up ideas to stimulate change in our naval market. I welcome your comments, suggestions, and critiques. You can reach me at gstitt@amiinter.com, @GuyofAMI on Twitter, or on this Naval Futures site.