Globalization and defense industry

(To Leonardo Chiti)

The world economy develops unequally and the balance between supply and demand is realized through bitter economic conflicts between companies, industrial sectors and countries. This process is an integral (and relevant) part of the defense industry, even if the war is a particular market where the spheres of influence and the role of governments make their weight felt more than in other areas.

The end of the so-called bipolarity represented a crucial junction for the greatest arms manufacturers, above all for the leading groups of the "Euro-Atlantic duopoly". The competition between companies for the conquest, expansion and consolidation of their market share has many features in common with the contest for the respective spheres of influence that contrasts the different powers. It is no coincidence that von Clausewitz and Sun-Tzu are mentioned in the courses of strategy and business management of the faculties of economics.

To get an idea of ​​the "battlefield" constituted by the "market" of defense, the SIPRI Yearbook 2015 reports a level of military spending for the 2014 equal to 1.776 MLD of dollars, with a decrease in real terms of 0,4% compared to 2013 , therefore a substantial stability even if it is the third consecutive decline (2013: -1,9%, 2012: -0,4%). Only a part of this figure is destined to the purchase of armaments (procurement), of which it is possible to draw a quantitative reference considering the turnover of the companies in the sector.

The most recent assessments in this regard, both of SIPRI and of Defense News (which concern only the producers of large weapons systems), are from the 2013. The first 100 groups total a military turnover of around 400 MLD of dollars and considering that their weight on the world total is estimated at 75-80%, it is reasonable to assume that the overall turnover is around the 500-600 MLD of dollars , standing between the 25 and the 30% of world military expenditure.

It is not the doctrine developed by the various schools of economic thought that establishes the optimal critical mass of a company and the best combination of large, small and medium-sized enterprises that make up the economic-industrial fabric of a given national market of reference but the conditions of competitive struggle and the degree of openness to the world market.

The second millennium ended with the decade of globalization, whose given symbol of beginning is conventionally fixed at the 09 November 1989 with the fall of the Berlin wall. Making the due tare with respect to the emphasis to which not a few commentators have abandoned themselves in the description of the phenomenon (certainly not new in itself but with unusual features in terms of size and intensity), it is undeniable the acceleration given in those years to certain relative trends to the world economy.

International trade recorded almost double growth rates compared to those of the total gross domestic product and with the prospect of integration into the global economic system of countries that represented more than half of the world population, an epochal dimensional shift in the competitive scenario for internationalized companies was taking shape. .

According to the German weekly Der Spiegel they were gone the times in which the competition was decided all in the triangle European Union, United States and Japan. Companies have begun to consider the whole world their market ("The only owner is the market", 23 / 09 / 1996). Despite all the specificities of the sector, this phenomenon will also have its effects on the defense industry, which is certainly no stranger to the dynamics of the international economy.

To compete in the troubled waters of the global market, the most internationalized companies have had to equip themselves with an adequate size, leading the way in a process of growth by external lines through mergers and acquisitions, which are increasingly necessary also to cope with the vertical increase. of research and investment costs.

1 table. 1996 - The first 10 acquisitions




MLD value $

Sandoz (CH)

Ciba-Geigy (CH)

pharmaceutical chemical


British Telecom (UK)




Bell Atlantic (USA)

Hynex (USA)



SBC Communications

(United States)

Pacific Telesis (USA)



Boeing (USA)

McDonnell Douglas (USA)

aeronautics, defense


Worldcom (USA)

MES Communications (USA)



US West Media Group (USA)

Continental Cablev. (USA)



Nationsbank (USA)

Boatmen's Bankshares (USA)



CSX Corporation (USA)

Conrail (USA)







Source: Securities data

Thus in 1996 the value of these operations exceeded 1.000 billion dollars for the first time and to pull the sprint to the M&A record were telecommunications that in the United States alone totaled 120 billion dollars, while the pink jersey for the most part merger of the year is awarded in Europe in the pharmaceutical sector with the Ciba-Sandoz operation for a value of 36,3 billion dollars.

In those years the scenario of the protagonists of the pharmaceutical industry was radically changed, both globally and nationally, representing one of the areas that has particularly distinguished itself as a litmus test of some aspects of a more general nature that also concern defense.

The costs of the discovery and development of the drug are very high, the times are always longer and consequently, to maintain profits and investments, both the globalization of the market and the economies of scale become necessary. ("Chemistry and Industry", Journal of Industrial and Applied Chemistry, July-August 1997).

Every program considered "top level" by the Pentagon faces nine distinct levels of evaluation by its officials, with a procedure that on average takes 10 years. A great modern weapon system, like a last generation fighter, looks like a "system of systems", involves the study of aerodynamics, propulsion, materials, armament, electronics and computer science of edge and in parallel that of the integration of these different parts. The technological sophistication of the defense industry's jewels fuels an escalation of costs that affects the entire chain, from design to accessory and maintenance costs.

The technique that dominates the product strategy in these companies is the "life cost cycle", given that buyers are interested in knowing at the time of purchase (obviously it is a reasonable estimate that it is as plausible and documented as possible), the total cost over the entire useful life of the product. In this perspective, the manufacturing company will undertake to reduce the costs of design, development, manufacturing and the number of maintenance operations. Furthermore, the conclusion of each contract includes on average a period of 3-5 years of logistical assistance to the product.

The political-strategic nature of the relationship between the military industry and the governments of the commissioning states ensures a certain degree of stability to the companies that operate in the defense but does not make them completely immune from the pressure of international competition, also due to the fact that in most cases there is a share of "civil" production and the activity of a company does not operate in watertight compartments, regardless of the legal configuration chosen for its ownership structure.

Moreover the change that has affected the international chessboard has opened a long period of caution for the public budgets that after the 2008, with the fall of the financial crisis, has taken the features of a real "war of sovereign debts".

The prospect of having to confront new competitors as an expression of the emerging or "re-emerging" powers, which can count on the background of a national market where the weight of public spending on competitiveness is very small compared to the old powers, made it necessary to have a larger size also for arms manufacturers, starting with the giants who play the role of prime contractors.

In this regard, to open the dances could only be the United States, where the rationalization of programs and industrial restructuring had to take into account the filing of the golden period of the rearmament cycle that had characterized the 80 years in the arc of the two mandates of the Reagan administration.

In the 1993 the Pentagon staff led by Secretary of Defense Leslie "Les" Aspin, organizes a meeting with the leaders of the main US defense groups (which some commentators will call "the last supper": the last supper), chaired by the Deputy Secretary William J. Perry, who will give a speech urging them to undertake a series of mergers and acquisitions by offering the opportunity to cancel restructuring costs as an incentive.

The first to accept the invitation will be the leaders of Lockheed, at the time and still, world leader in the sale of arms, in fact the rival Boeing has a double turnover compared to the Maryland group but the latter obtains the 90% of its revenues from the sale of weapons while in the case of Boeing this indicator stops at 37%. In the 1994 Lockheed launches the Martin-Marietta purchase transaction for an 10 MLD value of dollars.

In December 1996, Boeing (Seattle) and McDonnell Douglas (Chicago), at the time the 2nd and 4th world aerospace group, reached an agreement to merge their activities. This operation with a value of 13,5 billion dollars ranks 5th among the world M&A of that year, with an important expansion of the production range of the newborn giant. Among other things, the Illinois company contributed to the integrated group the production of F-15 and F / A-18 fighters and in the spring of 2001 Boeing decided to elect Chicago as the new headquarters of its headquarters, with Seattle remaining the largest production center but the capital of Illinois hosts the top management of the holding.

1997 opens with the announcement by Raytheon, sixth company in the ranking, of the purchase of Hughes Electronics (third). Throughout the second half of the nineties in the American aerospace sector about forty M&A were made for a total amount of 70 billion dollars.

With the arrival of the 2000 the list of mergers between the Pentagon's supplier groups has been extended with the acquisition of Newport News Building and TRW by Northrop Grumman in the 2002 (respectively for 2,6 and 7,8 MLD of dollars), and subsequently of Veridian by General Dynamics (1,2 MLD of dollars). In 2005, L-3 Communications absorbed Titan for 2,65 MLD of dollars, DRS (as known in the 2008 acquired by Finmeccanica) bought Engineered Support Systems (1,88 MLD).

Overall, from the 1993 to the 2006, the largest groups in the sector in the United States go from about thirty to six main players: General Dynamics, Lockheed-Martin, L-3 Communications, Northrop Grumman, Boeing and Raytheon.

The record for the largest operation ever (although not strictly military) in the aerospace sector, remains at the moment the one recorded in September 2011 with the acquisition by United Technologies of Goodrich, an important civil aviation group, for a value of 16,4 MLD of dollars. The Connecticut conglomerate has for decades been in the Top 10 of Pentagon suppliers and in 2013 according to Defense News data, it closed in sixth position (eighth in the world) with a turnover attributable to military supplies equal to 11,9 MLD of dollars, the 19% of your total turnover.

Figure 1: the main concentrations in the US military industry

Source: Chiara Bonaiuti-Debora Dameri-Achille Lodovisi, edited by, "The military industry and European defense", Jaca Book 2008

The events related to the war industry are a story that, as in all other sectors, involves absorption, concentration, ascent and decline, all phenomena that are particularly evident in a restructuring cycle as was the case in the 1990s. Every restructuring makes its victims and decrees its winners and, given the activism of old and new powers on the international scene, the verdicts issued cannot be considered definitive as evidenced by the announcement of 21 last July concerning the acquisition of Sikorsky (division United Technologies group helicopters), by Lockheed-Martin for 9 MLD dollars.

The actual cost of the operation for the giant of Bethesda should be 7,1 MLD thanks to the possibility of access to tax relief for 1,9 MLD and the top management, as well as the main operators of the financial markets, believe that there should be no problems for the green light competition supervisors. Therefore the situation of the 1998 should not be repeated when the acquisition of Northrop Grumman, by Lockheed-Martin, was blocked by the unfavorable pronouncement of the Justice Department.

Lastly, in this framework it must always be borne in mind that on average - and this is generally true for all sectors - less than half of mergers and acquisitions completed exceeds 7 years of activity: a sort of risk of "crisis of the seventh year ”In a company key.

The fact remains that the great producers of weapons with stars and stripes presented themselves strengthened at the appointment with the third millennium. As will be seen on the European side of the Atlantic, we have not remained to watch but for a plurality of reasons that can ultimately be traced back to history, European competitors find themselves chasing after dealing with a departure from backward positions and the fact that the different States of the Union are engaged in the challenge of acquiring a dimension of continental power, a process to which the defense industry is closely linked, making the result of this run-up not at all obvious.

(Photo: Online Defense)