Eurosatory 2016

REGIONAL FOCUS - Europe [ES2016D3]

15 June 2016

The Ukraine crisis and Russia continue to cast a long shadow, with the rest of Europe still reeling from the outbreak of war on its eastern borders. Threats to the east were not confined to Russia, however. With the Islamic State exporting terror into Europe and countless refugees seeking a safe haven on its shores, the continent was eventually forced to think long and hard about its security, with almost all European states pledging increases to their defence spending.

Of all European countries, France has faced the most challenges of late. With the French capital stung twice by Islamist terror attacks, 2015 saw French military deployed en masse on the country’s streets and launch military strikes against the Islamic State in Syria (Operation ‘Chammal’).

The attacks saw the French military tasked with a new internal security mission: Operation ‘Sentinelle’. The thousands of military personnel deployed as part of this operation stretched a military that was already struggling with the twin burdens of declining real-term spending and sustaining 7,000 personnel engaged in operations abroad.

Accordingly, France’s military planning law (LPM) was updated in May 2015 to provide an additional EUR3.8 billion (USD4 billion) of spending until 2019, EUR2.8 billion being to support the then-7,000 strong Operation ‘Sentinelle’. It was, however, questionable as to whether the French military would be able to sustain all its commitments without additional resources into the future.

The November 2015 terror attacks in Paris saw security placed firmly at the top of French concerns and the LPM and budgetary rigour essentially cast aside. Operation ‘Sentinelle’ was strengthened to 10,000, while the operational tempo of France’s Operation ‘Chammal’ was ramped up considerably.

Quite how all of this will affect the French armed forces is unclear, although what is clear is that they are more in demand than ever.

The Baltic states are also worthy of mention. Between them, Estonia, Latvia and Lithuania – previously part of the Soviet Union – enacted a series of measures in 2015 aimed at improving their defence readiness.

Estonia has for several years been one of only a handful of NATO members to spend the alliance’s required 2% of GDP on defence. Even so, the country took the step of planning further increases in its military spending in 2015. A significant proportion of this increase went on the January 2016 purchase of 35 more CV90 AFVs from Norway. The country also marked the completion of its GM400 radar-based military air surveillance network at the beginning of 2015.

Latvia is also increasing its defence spending, albeit far more dramatically given its much lower spending level of less than 1% of GDP prior to the Ukraine crisis. Having pledged in 2014 to reach the 2% NATO guideline amount by 2020, the country stated in 2015 that it would bring the date forward to 2018. This amounts to a 120% real-term increase over just three years: a rate of increase that may not be realistic.

Lithuania reintroduced conscription in April 2016, which may eventually see its armed forces increase in size by over 45%. As a consequence of this, the country announced plans to increase its 2016 defence spending by 35%, with further rises expected in future years.

The country has also made several major defence purchases, including 21 Panzerhaubitze 2000 (PzH 2000s) 155mm SPG systems from Germany and FN Herstal SCAR-H Precision Rifles, while by the end of the year the country was expected to select a new 8x8 IFV to arm its ‘Iron Wolf’ mechanised brigade.

End user countries

The UK’s 7.7% compound annual growth rate (CAGR) and market value of USD27.5 billion are led by procurement of the Ajax (formerly the FRES SV) valued at USD7.1 billion for 589 vehicles to form the core of the UK’s new Strike Brigades. The mechanised infantry vehicle’s (MIV) USD1 billion forecast is driven by a MOTS 8×8 AFV requirement.

Valued at USD1.2 billion, the MRV-P seeks a new protected utility platform in a very similar manner to the US JLTV. The in-service Ocelot (in service as the Foxhound) is looking good for the MRV-P requirement and an upgrade to the Challenger 2 is also a potential programme. The UK’s Future Force 2025 appears to lack capability, particularly anti-armour assets and has yet to find a convincing solution to the pressing issue of its ageing Challenger 2.

Russia, with a 3.55% CAGR and USD236.5 billion forecast, is focused on three new armoured fighting vehicle families – the Armata, the Kurganets-25 and the Bumerang. The Armata (USD3.6 billion) is the heavy tracked combat system, including the T-14 MBT and T-15 heavy IFV. The Kurganets-25 (USD3.9 billion) is the mediumweight tracked combat system, including an APC and IFV. The Bumerang (USD2.5 billion) is the 8×8 wheeled AFV system. Despite the lack of clarity, what is clear is that Russia is very committed to the wholesale replacement of the entire spectrum of AFV platforms with high capability systems that have given a number of Western users’ serious concern over their own capabilities.

Germany has a negative -0.5% CAGR and a forecast of USD223.2 billion, with significant programmes including the Puma IFV at (USD4.2 billion) and Boxer MRAV with approximately USD1.2 billion forecast. The continued production of Leopard 2’s forecast at USD1 billion focuses on upgrades to the A7/8 variants. The country has also bought back 100 used Leopard 2s from industry, which will be modernised. Germany has a very mature industrial base and a wide range of products, from logistic and utility vehicles through to high-end AFVs, with high demand worldwide.

A recent example is Germany’s effort to accelerate development of a Leopard 2 replacement with France.

France has a negative -6.3% CAGR and a market forecast of USD287 billion led by the EBRC Jaguar (USD1.2 billion).

This programme is a new 6×6 armoured reconnaissance platform, replacing existing AMX-10RC and ERC-90 Sagaie platforms in service. The Véhicule Blindé Multirole (VBMR) Griffon, USD1.4 billion, will come in two versions, heavy and light, replacing existing VAB systems. The Leclerc (USD2.5 billion) is being modernised along with the Leclerc-based DCL (Dépanneur de Char Leclerc) ARV. France also enjoys a mature domestic industrial base and is capable of supplying all anticipated requirements.

The recent merger of Nexter and KMW will strengthen France’s vehicle capabilities significantly.

MAJOR DEFENCE MARKETS

France

France is a political and economic heavyweight within the European Union, and the bloc’s second-largest defence market.

It has also been an engine of European integration in general and a strong proponent of greater intra-community defence and security co-operation.

The country has frequently looked to defend national defence industries in order to safeguard jobs and capabilities.

To this end, procurement decisions have in the past frequently favoured national champions.

France has been willing to participate in multinational European procurement programmes (and has been a vocal advocate of intracommunity industrial consolidation), but only so far as activities have benefited local interests.

It should also be noted that while the French procurement budget is one of the largest in Europe (second only to the UK’s), the majority of funds over the current spending review period (2014-19) are allocated to either legacy large-scale procurement programmes such as the ongoing acquisition of Rafale multirole combat aircraft or the sustainment of the national nuclear deterrent. The latter was to account for a fifth of the equipment budget over the five years to 2019.

France possesses a highly developed and technically sophisticated defence industry capable of independently producing the most advanced and complex systems. It is one of the few countries in the world that can boast a full spectrum of capabilities in all military and security domains, including the design and development of nuclear systems.

The defence sector in France is vast. In its broadest sense, the sector employs more than 165,000 people in 5,000 companies across the country.

The French state claims that French defence industrial activity accounts for 25% of the EU total. France has developed and maintained the industrial capability and scale to be virtually autonomous for the provision of defence materiel.

France has a strong position too in the global defence market (it achieved orders of EUR8.06 billion and EUR16 billion in 2014 and 2015 respectively, and consistently ranks around the top of European countries).

In contrast to most other first-tier defence manufacturers such as the UK and US, the French state holds major shareholdings in the prime contractors.

Examples are land systems group Nexter (100%); Safran (18%); DCNS (63%); Thales (26%); and Airbus Group (formerly EADS – 12%). It should be noted that the stake in Nexter will in effect change as a result of the merger between Nexter and Krauss- Maffei Wegmann of Germany that completed in December 2015. The French state has a half share in the combined venture.

Defence spending

Military investment returned to a positive trajectory in 2015 as a result of improved economic conditions, and the terrorist attacks against Paris during the year added an additional impetus.

French Defence Minister Jean-Yves Le Drian presented France’s six-year defence funding programme, the Projet de Loi de Programmation Militaire (LPM) 2014-2019, on 2 August 2013.

The LPM was to see core defence spending remain static in nominal terms from 2013-16 at EUR31.38 billion (USD42 billion) a year, rising slightly to EUR31.56 billion in 2017, EUR31.78 billion in 2018 and finally EUR32.51 billion in 2019.

Static expenditure during the early years of the LPM was confirmed by the Projet de Loi de Finances 2015, which was released in October 2014. Expenditure for 2015 was static in nominal terms.

A change of direction was apparent from April 2015, however, with the announcement by President François Hollande that French defence spending would increase by EUR3.9 billion over the 2016-19 period, reversing the slide of the previously announced budget plans and bringing the core French defence budget up to EUR35 billion.

It was notable too that the 2015 budget was ring-fenced from broader government austerity cuts.

The 2016 draft budget, released in September 2015, was in line with this new funding plan and allocated EUR32 billion to core defence with an extra EUR8 billion spent on pensions.

The budget also pledged to create 2,300 more jobs at the MoD rather than enact personnel reductions of 7,500 as planned.

Land sector indigenous industry

France has a broad and deep industrial capability when it comes to ground forces. It is capable of designing and manufacturing systems from the smallest 4×4 all-terrain vehicles to 155 mm artillery systems to main battle tanks, sourcing most of the construction materials and subsystems from France itself. There has been an element of consolidation in the land sector in recent years, placing most ‘armoured’ vehicle and artillery manufacture in the hands of Nexter. Renault Trucks Defense (owned by Volvo) is heavily involved in the tactical mobility market, developing a suite of light, medium and heavy wheeled vehicles following its acquisition of Panhard. Nexter in effect merged with Krauss-Maffei Wegmann of Germany from December 2015.

UK

The UK is Europe’s largest defence market (despite austerity-driven spending cuts in recent years), and arguably one of the most open to foreign entrants. The country’s defence industrial base, meanwhile, boasts worldclass capabilities across most domains and is a major force in global export markets.

UK defence procurement policies and procedures have been subject to a prolonged period of reform and refinement in order to simplify processes, improve accountability and to increase efficiency.

The reform process was set in motion by the Review of Acquisition for the Secretary of State for Defence report of 2009, developed by the Defence Reform: An Independent Report into the Structure and Management of the Ministry of Defence of 2011, and solidified by the UK Defence Reform Act of 2014.

UK defence procurement practices are currently shaped by the Acquisition System Operating Model (ASOP), which has been in place since April 2015.

Defence procurement is transparent and subject to civilian oversight from the government, Parliament and independent bodies such as the National Audit Office. However, almost half of the Ministry of Defence’s contracts are awarded on a non-competitive (solesource) basis and in 2014 the government introduced a new body (the sole-source regulations office, SSRO) to ensure it was getting value for money.

The UK’s Defence Equipment and Support (DE&S – the national military procurement body) has also been undergoing a period of major change, having been converted into a commercially supported ‘bespoke central government trading entity’ in 2014 in an attempt to improve the efficacy of the equipment procurement process.

The UK defence and security industries directly employ 215,000 people (and support a further 150,000 jobs) and have a combined turnover of around GBP30 billion (2014: UK government figures).

Exports typically account for just over a third of output by turnover.

The UK has a wide and deep range of defence industrial capabilities, which encompass indigenous world-leaders such as BAE Systems and Rolls-Royce and the extensive capabilities of foreign-owned organisations such as Thales and Finmeccanica, which have a significant presence in the UK.

Defence spending

The UK has the largest defence budget in the EU at GBP41.4 billion (USD61.7 billion) as of 2016; a figure equivalent to 2% of GDP. Military investment had been on a steep downward trajectory from 2010 as a result of the economic challenges facing the country, although expenditure has now stabilised and steady real growth is forecast for the remainder of the decade.

The UK outlined in the Strategic Defence and Security Review (SDSR) of 2015 investment of GBP178 billion on equipment procurement and support for the decade to 2025.

It should be noted that the UK is only one of three EU countries within NATO to meet the NATO spending threshold of 2% of GDP as of 2016 (the others are Estonia and Poland). The UK government committed in July 2015 to maintaining its defence budget at 2% of GDP until at least 2019-20 and to increase spending each year in real terms.

Land sector indigenous industry

The UK does not currently have a significant, UK-owned and based armour capability. BAE Systems can produce wheeled and tracked armour systems; however, manufacturing facilities are located in Sweden and the US as the company’s construction and development capabilities in the UK atrophied over the past decade.

BAE Systems retains the ability to upgrade its Challenger 2 MBT in the UK. US-owned General Dynamics and Lockheed Martin are delivering the UK’s Scout SV (now Ajax – formerly part of the Future Rapid Effects System (FRES) programme) and Warrior Capability Sustainment Programme from UK facilities.

Beyond these companies, Supacat is a UK-based manufacturer of small armoured and high-mobility vehicles.

WFEL, meanwhile, is a UK headquartered company known for its tactical bridging solutions. It supplies 39 armed forces around the world. It has been owned by Krauss-Maffei Wegmann of Germany since 2012.

Information from IHS Jane’s Markets Forecast, Defence Budgets and Navigating the Emerging Markets



(2472 words)
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