The%20Restructuring%20of%20the%20International%20Arms%20Industry

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The Restructuring of the International Arms
Industry

• J Paul Dunne, Maria Garcia Alonso, Paul Levine,
  and Ron Smith
• UWE, Kent, Surrey and Birkbeck
• http//carecon.org.uk/Armsproduction

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Context

• Declining military spending and procurement
• Peaked in mid 1980s fell gradually and then
  rapidly
• Arms trade halved mid 1980s-90s

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Context

• Production for military not homogeneous
• Large and small etc
• Features
• Concentration of production
• high fixed RD costs
• steep learning curves
• mes large relative to size of market
• problems when demand declines

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Context

• Particular characteristics of major weapons
  system production have led to rather particular
  corporate structures
• Role of government whether private or public
• Difference from civil
• Performance rather than cost
• Risk borne by govt
• Elaborate rules and regulations
• National ownership
• Incumbents favoured
• Considerable barriers to entry and exit
• Need to get funds out of government rather than
  produce for market

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End of Cold War

• End of Cold War
• quantitative change in demand bottomed out
• qualitative change in demand
• hangover from previous designs
• technology spin off to spin in
• national DIB infeasible structural disarmament
• changes in government policy to DIB
• Revolution in Military Affairs

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Government dilemma

• Introduce Competition
• reduce prices
• problem maintain competition
• problem maintain innovation
• Tension between benefits of scale and competition
• Problem of security of supply?

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Corporate Options

• Firm responses
• convert
• diversify
• cooperate
• concentrate
• internationalise

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Company Changes

• Systems integrators
• Subcontracting
• International supply chains
• Cross ownership, joint ventures
• Hollowing out role of finance capital
• Spin in rather than spin off COTS
• Intra network trade
• Marketing and lobbying

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Restructuring

• US Defence Mergers
• Concentration evident
• European restructuring different
• Ownership differences
• Still consolidation
• Requires cross country mergers
• BAE systems
• EADS
• Thales Racal

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Restructuring

• Continuing concentration but not so much to
  reduce capacity as to gain new capabilities
• Ended for majors
• Still going on for smaller companies
• New companies joining club
• IT, electronics
• Govt attitude changes
• US concerns home production
• EU concern for industryrestructuring

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Explanations of Concentration

• Structural models SCP Paradigm
• Managerial/institutional
• Statistical/dynamic Gibrat explaining?
• Strategic interaction game theoretic models
  sensitive to assumptions
• Particular nature of arms industry

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Understanding concentration

• To investigate the concentration we have used
  three approaches
• Abstract structural model of global arms market
  See other papers
• Bounds approach to market structure
• Statistical approach
• Consider the last two here

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Observations

• Decline in market means expect increase in
  concentration
• Proportionate decline in milex less than decline
  in number of equivalent firms.
• So decline in demand not full explanation for
  reduced no. firms
• Fall in RD less than decline in milex so fixed
  costs have risen

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Bounds Approach

• Sutton Bounds Approach
• game theory
• statistical assumptions
• sub markets
• lower bound on concentration

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Explanations of Concentration

• Sutton approach
• degree of linkage with submarkets defence low
  because government controlled
• elasticity of fixed and sunk costs to quality
  defence low because high RD

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Evolution of Concentration

• SIPRI company database
• Sample top 100 1990 on
• Expect increase in concentration but what we get
  is very large
• Herfindahl index doubled for arms sales, bit less
  for total
• Lorenz curves concur

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Evolution of Concentration

• Concentration
• top5 22-42 arms production 1990-2000
• Sutton lower bound 20
• Others close to lower bound
• Total sales more concentrated and increase less
  33-40

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Evolution of Concentration

• Expect increase in concentration following fall
  in demand but this rather large
• Suggests nature of market concentrated
• like pharmaceuticals civil aerospace
• National governments policies have prevented
  inevitable concentration

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Evolution of Concentration

• Expect to find that growth of firms
• showed no clear pattern that suggested strategic
  success of companies
• rather a general change across the whole size
  distribution
• adjustments to declining demand not leading to
  unhealthy industrial profile

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Evolution of Concentration

• Analysis of growth rates
• fall in arms sales not reflected in total sales
• suggests not leading to unhealthy market
• Transition matrices
• most exit medium to small size groups
• Corporate strategy and success
• most converters (declining arms sales and
  increasing civil) with decreasing arms share

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Growth and Size

• Law of proportionate effects
• Basic model log Sit ? ? log S it-1
• Econometric problems
• Country effects

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Results

• In both arms and total sales ? not significantly
  different to 1
• Total equation fits better
• Some significant country effects
• No specific US effect but further work

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Conclusions

• End of Cold war industry restructured
• Arms industry relatively unconcentrated
• close to lower bound
• Reason government national procurement
• Decline market and rise RD intensity led to
  increase in concentration
• Still a way to go

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Conclusions

• Preliminary econometric analysis did not reject
  hypothesis that rate of arms sales independent of
  initial level for companies
• Important difference between US and Europe need
  further investigation
• US restructuring continues
• EU restructuring some way to go

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Conclusions

• Interesting new developments in the industry
• RMA implications increased COTS
• New companies and corporate structures
• Implications for the control of international
  arms and technology transfer
• Further research needed