Opportunities emerge: global trends in defence spending

With a combined spend of more than USD1 trillion in 2007, the 76 countries that account for the vast majority of global defence expenditure comprise a market that, on first glance, appears to be in rude health. However, look below the headline and it quickly becomes apparent that while some new markets are growing rapidly, other more traditional sources of high budgets are stagnating or even shrinking.

The United States remains the largest market by far, yet the defence budget (including supplemental spending) is expected to reach its peak in 2008 and 2009 as growth is driven by the demands and consequences of the war in Iraq. Traditionally, the relatively high spending countries in Western Europe are also seeing defence-budget increases slow as political and demographic changes lead to other areas of government spending being prioritised. In general, the growth levels among emerging economies are high, but with a varied spread of starting budgets they offer mixed levels of actual spending.

The key for defence companies looking for new markets is to identify those countries that are able to combine high growth, significant existing budgets and a strong commitment to defence.

In 2007, official outlay by the top 76 biggest national spenders reached USD1.3 trillion dollars with the US alone providing nearly half the global total. Outside the US, around 80 per cent comes from just 20 countries: seven in Europe (UK; France; Germany; Italy; Spain; Netherlands; and Greece); six in the Asia Pacific (Japan; China; South Korea; India; Taiwan; and Australia); three in the Middle East (Saudi Arabia; Israel; and Turkey); two in South America (Brazil and Colombia); and Russia in the Commonwealth of Independent States (CIS).

Expenditure in each region is dominated by one or two countries: the UK and France in Europe; Japan and China in Asia Pacific; Saudi Arabia in the Middle East and Russia in the former Soviet Union/CIS. The large budgets of these countries means that the bulk of global expenditure comes from Western Europe and Asia. However, whereas the traditionally high-spending countries in Europe are slowing the growth of their budgets, those in Asia - with the significant exception of Japan - are growing more quickly.

Spending growth is an important measure as it indicates that new money is being introduced to the budget, implying that new programmes are in prospect and that funding is not just incremental increases to pay for existing programmes. This is particularly important in the larger countries where small proportional increases can translate into budget increases that are used for current operations, rising personnel costs or continuing programmes; i.e: they do not necessarily mean a new procurement or service opportunity exists.

Spending growth alone is not sufficient to identify the largest potential markets: in the last five years the largest spending growth has predominantly been in countries with lower budgets such as Azerbaijan (more than 500 per cent growth between 2002 and 2007 to reach a budget of USD750 million in 2007) or Kazakhstan (more than 400 per cent growth during the same period to reach a budget of USD1.2 billion in 2007).

A review of the top 20 countries by defence budget and expected growth to 2010 shows that a combination of large defence budgets and large growth is most clearly evident in five countries: Russia; China; South Korea; India; and Saudi Arabia. These countries are all expected to grow by at least 30 per cent during the next three years - with Russia topping the list with growth of an enormous 67.5 per cent through the period. Together these countries are forecast to grow their budgets by a combined total of USD55 billion between now and 2010.

Image: An Indian Air Force (IAF) Sukhoi Su-30 Mk1 during the IAF's 75th Anniversary celebrations in February 2007. (Jane's/Patrick Allen) 613 of 2,395 words