Industry

Spending spree: IHS' Second Balance of Trade Report 2014

20 March 2014
Global defence trade is continuing to enjoy rapid growth. Source: IHS

The second annual IHS Balance of Trade report has revealed that 2013 was another strong growth year for defence trade. Traditional markets expanded by USD2 billion to USD67 billion, while some emerging markets are starting to impact on the structure of the global market, according to the 2014 report, which examined more than 30,000 export programmes extracted from IHS Jane's DS Forecast data.

In the upper tier of exporting countries and companies, significant changes are playing out. Having already overtaken the UK, Italy, and Israel in East Asia, South Korea is forecast by 2016 to generate higher exports revenue in the region than China.

Among purchaser states, India's imports surged in 2013 with deliveries of major US exports, including initial Boeing P-8 Poseidon maritime surveillance aircraft. Led by its demand for aviation equipment, China has overtaken South Korea as East Asia's largest defence importer. IHS Balance of Trade 2014 data show that Australia, Indonesia, Mexico, and Vietnam will be increasingly desirable export markets over the decade, while European markets and Japan are expected to weaken.

Trade in aerospace continued to grow in 2013, while other platform markets are projected to enter a relatively lean period; military ships remained a relatively small export market at USD5 billion, and military vehicles will decline in 2014.

At a company level, Boeing continues to dominate and Raytheon has temporarily pulled ahead of Lockheed Martin, which should regain its ranking through a strong order backlog.

Overall, 2014 is already forecast to be another growth year. With a number of major programmes yet to be decided, there is also potential for further significant change to exporters and importers as new opportunities and trading partnerships continue to emerge.

North America

The United States stayed on top of the export table in 2013 with USD25.2 billion worth of exports, up from USD24.9 billion in 2012. Trade with India has jumped from USD200 million in 2009 to USD2 billion in 2013, with USD3.4 billion deliveries booked for 2015. The United States also saw significant growth in exports to Egypt, Israel, Saudi Arabia, and Taiwan. The United States' primary export strength is in its aerospace product offering, such as Boeing C-17 Globemaster IIIs, Lockheed Martin F-16 upgrades, and Boeing AH-64 Apache attack helicopters.

Imports to the United States fell again, from USD1.8 billion to USD1.4 billion, continuing their slide from USD2.7 billion in 2009. Much of this decline can be attributed to the winding down of the wars in Iraq and Afghanistan and the associated drop in urgent operational requirements.

Western Europe

Western Europe's military imports slipped from USD9.14 billion in 2012 to USD8.74 billion in 2013. This predictable slowdown reflects the cancellation of programmes earlier in the decade as well as elongated production cycles to address the inability of some countries - particularly in the south of the region - to fund large-scale programmes in the short term.

An important aspect of the West European market is the correlation between trans-European and extra-European trade flows. The United States remains the largest supplier of defence equipment and its exports to Western Europe are poised to surge, underpinned by the Lockheed Martin F-35 Joint Strike Fighter programme, which faces no technological competitors in the region and could top USD29 billion here over the coming decade.

Eastern Europe (including Russia and Turkey)

Given restricted defence budgets, Western European defence suppliers invariably take a smaller share of overall regional markets. However, they have maintained their command of the Eastern European market, where they secured USD3.9 billion in sales last year, almost unchanged from USD3.94 billion in 2012. West Europe's domination of this market is expected to continue at least until 2018.

With USD983 million worth of sales, France saw the most dramatic growth, up 54% from 2012 largely from the sale of DCNS Mistral-class amphibious assault ships to the Russian Navy and the ongoing NHIndustries NH90 transport helicopter programme.

Turkey remains the principal Eastern European purchaser of foreign equipment, with USD1.9 billion spent in 2013. This figure slipped from USD2.9 billion in 2012 in line with Turkey's focus on importing large-scale programmes, especially for aircraft and armoured vehicles, while reducing its foreign contracts for lighter equipment as production is gradually funnelled to indigenous industries.

Sub-Saharan Africa

While Sub-Saharan imports decreased from USD1.2 billion in 2012 to USD0.87 billion in 2013, this is a timing contraction, triggered largely by the conclusion of Uganda's landmark Sukhoi Su-30 'Flanker' fighter aircraft procurement in 2012.

The Sub-Saharan market has a uniquely diverse array of suppliers, with European, US, and Asian companies all competing for contracts. In 2012 suppliers from Russia (with USD254 million sales for helicopters) and China (USD166 million, ships) together made up almost 38% of the import market. However, in 2013 their share was down to less than 25%. Meanwhile, Brazil's Embraer generated USD125 million in sales for trainer aircraft to Angola, Burkina Faso, Mauritania, and Senegal.

Angola and Nigeria's lack of indigenous industrial capacity ensures that they will remain the region's largest spenders and the net recipients of foreign defence equipment throughout the decade. Altogether, the top three importers - South Africa, Angola, and Nigeria - are expected to absorb between 30% and 40% of all exports to Sub-Saharan Africa from 2015 onwards.

Middle East

Saudi Arabia had an active 2013, increasing its imports by USD1.6 billion through its procurement of the Eurofighter Typhoon and Airbus A330-200 MultiRole Tanker Transport (MRTT) aircraft. The Saudi government's several ongoing programmes will help drive a rise in imports until at least 2015.The Middle East's top importers remain among the world's largest. Saudi Arabia and the United Arab Emirates (UAE) together imported USD8.5 billion in defence systems, matching the imports of all Western Europe.

The UAE's imports climbed USD122 million in 2013 to USD3.12 billion, mostly for purchasing A330 MRTTs, Sikorsky UH-60 Black Hawk helicopters, and the Lockheed Martin Terminal High-Altitude Area Defense (THAAD) system.

The biggest beneficiary of the strong Middle Eastern market remains the United States, with USD8.7 billion worth of imports to the region in 2013, up from USD7.2 billion in 2012. This US trade flow is mainly driven by sales of military aircraft and associated mission systems.

East Asia

Major regional importers Indonesia, Taiwan, and Thailand registered an additional USD2.3 billion in imports in 2013. Indonesian budgets have nearly tripled in the past four years and DS Budgets expects them to double in the coming decade. Indonesian imports shot up from USD0.6 billion in 2012 to USD1.8 billion in 2013, driven by deliveries of aerospace and ground platforms.East Asian imports surged between by nearly 25% - from USD9.8 billion up to USD12.2 billion - although this followed a fall from 2011 to 2012. South Korea was supplanted as the region's largest importer by China in 2013.

The United States remained the primary exporter to East Asia with USD4.1 billion worth of exports, very slightly down on 2012. Meanwhile, Russia's increased trade with China lifted its sales in the region from USD2.5 billion up to USD3.4 billion.

South Korea not only expanded its regional shipments but exported globally to states such as Azerbaijan, Indonesia, Iraq, the Philippines, the United Kingdom, and Turkey. South Korean exports totalled USD0.6 billion in 2013 and are forecast to hit USD1.5 billion by 2015, partly at the expense of some major Western companies.

China's exports relied almost entirely on a few economically challenged clients, primarily Bangladesh, Pakistan, and Venezuela.

Vietnam's defence budget has soared since 2009, propelling a surge in imports from USD0.3 billion up to USD0.9 billion last year. Based on signed contracts, this total should reach USD1.4 billion in 2014.

South, West, and Central Asia

Deliveries to Pakistan edged down from USD1.5 billion to USD1.3 billion, despite rising CAC JF-17 fighter imports from China. These made up about a quarter of all Pakistani imports over 2013 and will provide an even larger share in 2014 and 2015 as Pakistan struggles to fund additional programmes.Exports to South, West, and Central Asia rose from USD7.8 billion in 2012 up to USD8.8 billion in 2013, driven by a USD1.8 billion increase in India's imports, primarily from the United States. The regional market is forecast to reach at least USD11.5 billion by 2015, based on orders booked to date.

Afghanistan's imports plunged from USD1.5 billion down to USD0.5 billion as deliveries ended for BAE Systems M1152 AM General High-Mobility MultiPurpose Wheeled Vehicles (HMMWV), Textron Cadillac Gage M1117 (Guardian) armoured security vehicles (ASV), and Mil Mi-17 helicopters.

Oceania

Imports into Oceania shrank from USD2.3 billion in 2012 to USD1.8 billion last year. The region is dominated by Australian imports, which ebbed from USD2.0 billion to USD1.6 billion but are set to gain more than 30% as deliveries get under way for large aircraft programmes such as the Alenia Aermacchi C-27J tactical transport, Sikorsky-Lockheed Martin MH-60R Seahawk Romeo maritime helicopter, and P-8 maritime patrol aircraft.

Latin America

Russia continues to dominate the region, with USD1.4 billion worth of trade in 2013, up from USD0.6 billion in 2012. Meanwhile, the United States' market share nudged up to USD0.8 billion from USD0.6 billion.The Latin American defence trade export market was worth USD4.3 billion in 2013, down USD0.2 billion from 2012 but still considerably up from 2009, when it totalled USD2.7 billion.

Venezuela remains the largest recipient of imported defence equipment, with nearly a third of all Latin American imports at USD1.3 billion. Brazil trailed with USD1.0 billion but has a series of large defence programmes looming.

Latin America is still a fragmented market, to which at least 10 countries export more than USD100 million a year. Both Spain and Israel perform exceptionally well in the region, while Chinese exports to Venezuela have seen it move from almost zero market share in 2009 to USD222 million in 2013.

Industry Analysis

When examining the breadth and depth of industrial participation in the global defence trade, Israel and Sweden stand out by continuing to perform above expectations. Saab of Sweden has also secured its future with deliveries of JAS-39C Gripen fighter aircraft for Brazil and Switzerland.

Elbit, Rafael, and IAI of Israel share a combined backlog of USD11.5 billion and have all captured a significant market share in India. In unmanned aerial vehicles (UAVs), Israeli companies overtook the United States in 2013 to become the world's leading exporter, with exports of USD183 million.

Russian Helicopters has leapt from 16th up to 10th largest global exporter, as deliveries for its cheap but proven Mi-8/17 tactical transport helicopters have grown from USD0.3 billion in 2009 to USD1.7 billion in 2014.

Finmeccanica's exports slid from USD2.2 billion in 2012 to USD1.5 billion in 2013 as C-27J deliveries to the United States and Mexico and AgustaWestland AW101 multirole medium helicopter deliveries to India were curtailed. However, the company has a USD12 billion backlog and strong export order book out to 2018.

Amid a relatively weak export market for ships, United Shipbuilding of Russia captured about a quarter of the global market and moved from 17th to 14th in the global ranking of exporters.

ThyssenKrupp AG and BAE Systems led Western Europe's ship exports in 2013, although the year also saw China Shipbuilding overtake BAE Systems in exports. DCNS, Damen Schelde, and ThyssenKrupp AG all have significant order backlogs.

In aerospace, both Lockheed Martin and UTC (via its Pratt & Whitney subsidiary) hold a large backlog of orders related to the F-35 Joint Strike Fighter aircraft. Lockheed Martin lost overall market share and was leapfrogged by Raytheon, now the world's second-largest exporter after Boeing, as well as the largest single exporter to East Asia in 2013.

Boeing secured its place as the world's leading military equipment supplier by replacing United Aircraft Corporation (UAC) as the largest single supplier to India in 2013. Boeing's sales totalled USD5 billion over the year, up from USD4.5 billion in 2012.

Analysis by market type

Military aircraft account for about a third of the market, and grew 10% in dollar terms in 2013. Propelling this trade is emerging states' inability to upgrade, develop, and build local aircraft, while China continues to struggle as it develops effective aerospace engines.

Sales of ground vehicles, which account for a sixth of the world defence market, lost 7% in 2013 and are set to fall further as emerging countries seek vehicle assembly capability, while demand has fallen with the end of operations in Iraq and Afghanistan.

Trade in military ships increased by 9% to USD5 billion from 2012 to 2013, but still only accounted for about 8% of the global defence market. Littoral states in East and Southeast Asia are driving the sector as tensions escalate over maritime claims. Nearly half of all naval systems traded globally are now imported into Asia, a ratio that will continue until 2018, according to orders booked.

Mission systems have fallen this year after six years of growth, although growth has continued for electronic warfare systems.

A full version of the featured report is available online to IHS Jane's intelligence centre subscribers at:
www.ihs.com/balanceoftrade



(2157 words)
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