Tiger awakes A record arms deal aims to replace India’s DEFENCE ‘flying coffins’ Page 3 FINANCIAL TIMES SPECIAL REPORT | Tuesday September 13 2011 www.ft.com/defence­2011 | twitter.com/ftreports Industry faces a tough decade Inside this issue

The huge US military budget is shrinking but China is spending Western alliance US more than ever, expresses concern as pace writes James Blitz of European budget cuts increases Page 2 he defence industry is coming to the end of UK military After swingeing what many of its senior cuts, clarity is slowly figures regard as a returning Page 2 Tgolden decade. Sniper rifles British gun Ten years ago, in the immedi- company aims for ate aftermath of the September high stakes Page 2 11 attacks, the US government began a huge injection of cash India A long­overdue into the Pentagon budget. modernisation effort in the Over the course of the decade, armed forces of the world’s the US annual defence budget largest democracy is a has doubled in cash terms to challenge to China’s might reach nearly $700bn in 2010. The Page 3 profits of the US defence indus- try have quadrupled over that Brazil The drawn­out period. The country has come to three­way contest to win dwarf all other nations in the a fighter jet contract is amount it spends on military causing casualties Page 3 equipment. Now, however, the tap has been turned off and defence companies in the US – as well as in Europe – face more challeng- ing times. The US government is deeply in debt. Some senior executives in the industry believe Congress will take out up to $1,000bn from the core Pentagon budget over the next decade. US Defence contractors are As the west winds down its being pushed into unfamiliar involvement in Iraq and territory – working to tight Afghanistan – and after the kill- budgets Page 4 ing of Osama bin Laden, the al- Qaeda leader – it is hard to Pilotless aircraft imagine anyone making a case A deal between for increasing US defence BAE expenditure. Systems One strategic threat is very As the west winds down its involvement in Iraq and Afghanistan, defence companies in the US and Europe face more challenging times PA and much on the minds of US policy- Dassault makers: the military build-up of the first time. China’s defence defence assets are still some demanding environment. The canica UK, puts it: “Over the The jet is expected to come Aviation to China. In the past five years, budget grew 7.5 per cent in 2010 way from being at the technical pressures are even greater in next few years, managements into service over the next six co­operate Beijing has expanded its capa- – faster than that of most other level of those of the west. “The Europe, where national govern- will be called to task. People in years. But Robert Gates, the on drones is bility at a pace that has taken countries in the world. technological gap between ments, including the UK, have the defence sector will need to former defence secretary, said ruffling feathers many defence experts by sur- But while policymakers in China and the US could narrow taken an axe to military budgets be more proactive about the just before leaving office this Page 4 prise. The People’s Liberation Washington are becoming but it will not disappear for a over the past few years in way they run their businesses.” year that he thought “the size of Army has evolved from being increasingly alarmed by the long time,” says Malcolm response to the budget crunch. The shadow of cuts and delays the buy” might have to be cut. Russia Price is a vital issue an internally focused force to challenge from China, the threat Chalmers of the Royal United Defence groups are having to is already being seen over exist- In Britain, the Ministry of as tension between one that regularly deploys over- is unlikely to halt the retrench- Services Institute (RUSI). “The cut costs aggressively in order ing programmes. In the US, the Defence is also pressing ahead domestic contractors and seas. In the course of 2011, ment of US defence spending in US has an accumulated advan- to survive. They are also engag- F-35 Joint Strike Fighter multi- with substantial equipment pro- the government rises China has flexed its military the near future. In 2010, China’s tage going back decades.” ing in a frantic search for new role jet, whose lead contractor is grammes. By far the biggest is Page 4 muscles, deploying an aircraft defence budget was one-tenth As a result, defence compa- markets. As Alberto de Benedic- Lockheed Martin, is a project carrier and stealth fighter for the size of that of the US. Its nies in the US must face up to a tis, chief executive of Finmec- worth more than $380bn. Continued on Page 2 Suppliers fight for contract to camouf lage US army

centres are, so you very the Army’s civilian person- on equipment such as Uniforms quickly get taken into nel. The traditional green trucks and armour that are urban areas or areas and brown woodland pat- more expensive to change John O’Doherty around the marshes, oases tern is still used by its Spe- than clothing. finds the military or the oilfields, where it’s cial Forces units. The idea is to have differ- not just desert any more. Camouflage serves two ent colour schemes for each hiding beneath “Wearing a yellow suit principal – and essentially of the requirements, but a a ‘coffee stain’ makes you stand out. What contradictory – purposes. It similar underlying pattern you want is something that aims to disrupt the appear- that is recognisably the US will blend in against a vari- ance of the wearer in the Army “brand”. Chocolate chips and coffee ety of backgrounds and eyes of the enemy, so the The entrants have been stains may at first blush that’s the advantage multi- soldier cannot be seen, and experimenting with a sound like unpleasant dis- terrain camouflage has.” to identify the wearer to number of approaches, coveries lurking under- But while Acupat worked other armies by using a dis- incorporating ever more neath the cushions on an reasonably well for the US tinctive pattern, creating sophisticated designs. undergraduate’s sofa, but Army in Iraq, the terrain in the closest thing that mili- “Our pattern is designed for the US Army, they are Afghanistan proved more from fractals, which are the something far more serious. challenging. The landscape repeating shapes found in These culinary terms are varied from desert to lush ‘You want nature,” says Guy Cramer, also some of the colloquial forest, and from grassland something that chief executive of Hyper- names given to camouflage to mountain scrub. stealth Technology, which patterns used by militaries In theory, this was pre- blends in against has submitted a pattern to around the world. As the cisely the landscape for a variety of the competition. US Army tenders for new which Acupat was suited, “We incorporate those patterns this autumn, these but the pattern ended up backgrounds’ shapes into the patterns. So and other models will be making soldiers more visi- the actual fractal pattern is studied and retooled to ble, not less, prompting the something your brain has equip the country’s next US Army in Afghanistan to taries have to a brand. It is seen before and wants to generation of soldiers. switch to another universal this branding process that ignore. It doesn’t want to The contest has attracted style pattern, Multicam, by will be most helped by the waste any time reanalysing the attention of designers Crye Precision. current US Army competi- something that is common the world over, as the prize But Acupat and Multicam tion. While Multicam was a in that background.” for this top-secret couture are not the only patterns stop-gap replacement for One of Hyperstealth’s pat- show is to see the winning worn by the US Army. It clothing only, the new com- terns is already used by the pattern worn by more than already has two desert pat- petition will seek to create Jordanian army, and it 500,000 customers. terns: the “chocolate chip” a “family” of four camou- makes the official snow- Bringing order to the pattern worn in the Gulf flage patterns: a jungle/ terrain pattern used by the clothing of the US Army is a war and now abandoned, woodland pattern, a desert US Marine Corps. difficult task. For an organi- and a three-colour “coffee pattern, a universal pattern However, it will be sation rooted in discipline stain” pattern, still used by and a pattern that will go extremely difficult for out- and uniformity, there is a siders to make assessments surprising diversity among about submissions, as many the outfits of its members. of the companies have kept The official camouflage is them secret, locking their Acupat, a pattern consisting websites to non-military of small squares of differing personnel. This keeps com- colour, each less than 1cm petitors from stealing pat- in size. The squares create a terns, but more impor- pixelated effect, and when it tantly, designers say that a was first chosen in 2004, it previously unseen pattern was hoped that Acupat can confuse enemy forces would become a universal for a split second at close camouflage pattern (or range as they try to estab- UCP), that could be worn in lish the wearer’s affiliation. deserts, cities or woodland. “Camouflage works on This universal-pattern memory,” says Jason Simi- goal would obviate the need one, president of Bulldog for separate patterns for Equipment, and designer of each deployment. Mirage, a pattern formerly “Operations do not take used by US special forces in place exclusively in one Afghanistan. environment,” points out “If you see a guy in Colonel Matthew Tresidder Acupat or Multicam you of the British Army’s know they’re US army. defence clothing team, That’s why we don’t put out which has now initiated a pictures of it. The first time UCP for the UK military. I want somebody to see it is “If you were to look at when a guy pops up and operations in Iraq, yes, they [the enemy] go ‘what troops started off in the the?’ and it’s too late. That desert, but very quickly you second of hesitation is go to where the population The US Army’s official camouflage is Acupat AFP/Getty where you win every time.” 2 ★ FINANCIAL TIMES TUESDAY SEPTEMBER 13 2011 Defence Smoke clears after the budgetary bonfire British gun

the throes of a crisis that is would have no aircraft car- there are several reasons equipment purchases with- spending plans, the MoD UK military all about money. rier capability for the next why the government can out a clear indication that should be able to maintain company When the Cameron coali- decade and introduced cuts claim to have got its broad there is underlying funding. a wide spectrum of capabil- After swingeing tion came to power last in the number of fighter strategy on defence right. Second, the government ity, albeit on a reduced cuts, clarity is June it inherited a string of jets and surface ships. It First, Mr Fox is making a can argue that, despite the scale.” problems. The UK had not announced, too, that the serious effort to get a grip cuts, Britain will end the Finally, there is now a slowly returning, held a strategic defence number of civil service and on the MoD’s hitherto decade with a modernised, little more optimism that aims high writes James Blitz review since 1998 and it military personnel was chaotic finances. One rea- world-class military. the MoD’s vision for the faced a budgetary overhang being cut by at least 42,000 son why there has been an There have been compro- armed forces in 2020 will of at least £38bn because over the next four years. atmosphere of crisis in mises, to be sure. There is match Britain’s ability to the entire order, supplying commitments had been Yet even this was not defence is that the MoD and deep unease in the regular fund it. Sniper rifles 1,200 rifles in total through- Britain’s armed forces have made to buy equipment for enough to balance the the Treasury have stopped Army at the way in which For much of the 12 out the 1980s. Subsequent been through an immense which no cash had been set books. Last July, Liam Fox, taking a “buy now, pay land forces will rely in months, service chiefs have There is big money contracts saw Accuracy upheaval over the past aside. the defence secretary, was future on more part-time lamented the fact that the to be made in International become the year. But while there has Moreover, the era of forced to announce what ‘The MoD reserves. 2020 Future Force plan first non-German small- been much confusion and increasing defence spending was effectively a second should be But by 2020 the UK will requires an annual real- small arms, finds arms company to win a con- inter-service squabbling in real terms year on year SDSR, cutting the regular able to have a new aircraft carrier, terms increase in spending John O’Doherty tract for the German mili- throughout 2011, there is was at an end. The global Army from 102,000 to 82,000 maintain new joint strike fighters of 2 per cent after 2015. tary and in the 1990s, the now greater clarity about financial crisis meant the by 2020 – its lowest level capability’ – and a new fleet of hunter This seemed unrealistic. company developed a spe- the future shape of the UK coalition knew it would since the Boer war at the Prof Chalmers killer submarines. It will But by announcing a range When the toolmaker David cial cold-weather rifle for military than there was a have to cut the Ministry of end of the 19th century. also be one of the few Nato of decisions in July – cut- Walls went to a barbeque in the Swedish army. few months ago. Defence budget in real This has been hugely countries where spending ting the size of the Army suburban Sussex in the late But in spite of their con- A decade from now, the terms. painful for the armed serv- tomorrow” approach to the on defence will still be over and giving a commitment 1970s, he had no idea that a tinued success in winning Army, Royal Navy and As a result, the past year ices. In a year that has seen equipment programme. 2 per cent of gross domestic to increasing the equipment friendship he formed over contracts throughout the Royal Air Force will all be has been a period of drastic the UK fighting in Afghani- Now, decision-making is product. budget by 1 per cent a year charred hamburgers would 1990s, trouble was brewing. smaller. But David Cam- action. The comprehensive stan and Libya, it has also far more rigorous. Bernard As Professor Malcolm after 2015 – Mr Fox may see him supplying sniper Though still directors of the eron’s government can spending review in October been politically controver- Gray, the new head of Chalmers of the Royal have a vision for defence rifles to the British army. company, Mr Walls and Mr make the case that Britain 2010 cut the MoD budget by sial. The Labour opposition defence materiel, has built United Services Institute that looks more financially Thirty years on, the com- Caig had sold their stake in will still be a leading mili- more than 8 per cent in real says the MoD budget has in more comfortable contin- says: “It is important not to credible. pany that he and his friends the business to Mr Cooper, tary power, with close to a terms by 2014-15. The subse- been cut too far and too fast gencies for cost overruns. overstate the extent to As Professor Chalmers formed with the barbeque who in turn sold his stake full spectrum of defence quent Strategic Defence and and the government’s Ursula Brennan, the new which long-term military puts it, the July announce- contact is still going strong. to 3i, the private equity capabilities. Security Review fleshed out defence strategy is rushed MoD permanent secretary capability has been dam- ments “look as though they Accuracy International is group, before he died in For 12 months, Britain’s the detail. The SDSR and incoherent. and accounting officer, aged. Provided that the have eliminated the remain- now also making sniper 2001. armed forces have been in announced that Britain Still, defence experts say refuses to approve new government sticks to its ing funding gap”. rifles for the Swedish and “The company basically German armies, as well as had a lot of debt associated the US Special Forces and with the sale,” says Tom marksmen teams in UK Irwin, who joined the com- police forces. pany 10 years ago and is a As engineers for a preci- director now. sion toolmaking company “They brought in a new in Lancing, West Sussex, management team, which Mr Walls and his colleague subcontracted out every- European David Caig had already thing that had been built become incredibly popular in-house. It was subcon- in their local gun club, tracted primarily to aero- where the two men were space machine shops, which amateur target shooters. gave good quality, but they “We were often also gave very high prices.” cutbacks approached by fellow mem- The group racked up debt bers at the club, because if of over £3m ($4.2m) by the a gun went wrong they end of 2003 and was forced might want a small part into receivership in 2005, made, and we used to have having been pushed into a it knocked up in our dinner loss the previous year. In raise US breaks,” says Mr Walls. May of 2005, Mssrs Wall and Soon, word got out and Caig along with Mr Irwin, the pair were doing work who was then a subcontrac- for other gun clubs in the area. “We used to do work for a The wars in Iraq concerns drink in those days,” says and Afghanistan Mr Walls. “If you make a new firing pin you’d get a continue to favour early stage, the US stunned its beer for it. But it got to the the development Western alliance allies by leaning back, leaving point where we were mak- European nations to use their mil- ing so many firing pins and of rifles with an Nato states plan to itary jets and helicopters to con- mending so many people‘s ever­longer range increase their duct ground attacks. guns, that we risked being The US decision on Libya to drunk, so we had to start pooling of resources, “lead from behind” exposed charging!” tor for the group, bought reports James Blitz Europe’s lack of will and capabil- In addition to fixing guns back the company for an ity when it came to conducting a manufactured by others, undisclosed sum. It is now humanitarian intervention in its the pair began replicating run by Mr Wall and Mr an the nations of Europe own back yard. existing pistol models from Irwin who are co-directors begin to reverse their col- This prompted a tough speech scratch. of the group, with no offi- lective decline as a global in June from Robert Gates, US It was these replica cial chief executive or man- Cmilitary power? The Secretary of Defense. He lamented revolvers that the men took aging director position. Mr question has been coming to the the way Nato was running an “air to a barbeque organised by Caig works for the group as forefront of discussions between operations centre designed to han- a fellow gun-club member. a consultant. US and European politicians in dle more than 300 sorties a day The Olympic medallist “We started with 11 peo- the course of 2011. and struggling to launch about shooter Malcolm Cooper, ple including the four of us, Over the past few years, Wash- 150” against a relatively puny who happened to be attend- and we had two machine ington policymakers have enemy. ing the same event, was tools and now we’ve got 20 expressed growing concern that Mr Gates’s speech was the most impressed by the pistols, machines and 50 employ- the US does the heavy lifting in forthright statement on European and suggested the men ees,” says Mr Irwin. global security while Europe military weakness from a leading make a rifle for him, In 2009, the latest year for seems keener to do softer, human- US figure in recent years. It “Cooper got hold of one of which the group has itarian operations. But in recent prompted many to wonder our rifles and he went and released accounts, the com- months, a range of factors have whether Europe can meet the mil- shot a world record with pany had a pre-tax profit of raised US concerns to a more crit- itary challenge. Given the scale of the thing, and that more or £1.2m on revenues of £7.4m. ical level. Europe’s budgetary crisis, few less kicked it off,” says Mr There is no sign yet of a A fundamental driver of US expect cuts in national defence Walls. slowdown in revenues from worries about Europe’s military budgets to be reversed. The men soon left their defence cutbacks. capability is the extent to which Instead, the big question is day jobs to work on rifle- The demands of the wars European states are cutting back whether European states can get making, and occasionally in Iraq and Afghanistan on defence spending. The US, to more bang for their buck by pool- repaired guns in Mr continue to favour the be fair, faces its own budgetary ing and sharing resources. The Cooper’s gun shop. development of rifles with pressures and is cutting the Pen- European Union’s 27 nations But it wasn’t until the an ever-longer range to pro- tagon budget. spend half as much on defence end of the Falklands war tect snipers from retaliatory But the pace at which Europe each year as the US. But there is that their small rifle busi- fire. has moved to slash military budg- such widespread duplication ness had its first major suc- Two years ago, the ets is striking. As Anders Fogh among defence ministries across cess. In the early 1980s, the group’s AWM rifle was used Rasmussen, Nato secretary-gen- the EU – both in terms of opera- British army began a by a British soldier to eral, said in a speech in February, tions and procurement – that Shortcomings in European capabilities have been revealed during Nato’s air campaign against Libya AFP/Getty search for a new sniper rifle record the longest-ever con- Europe has in the past two years much of that effort is wasted. to replace the Lee Enfield firmed kill by a sniper, reduced defence spending by a fig- The good news is that some pean foreign policy, there will soon. Instead, as Tomas Valasek, L42A1, a converted version when a single bullet passed ure equivalent to the value of the nations seem aware of this prob- always be limits to how far states of the Centre for European of a 1950s rifle. through two Afghans from annual German defence budget. lem. The UK and France, the EU’s are willing to share their capabili- Reform, has argued, Europe will The new Conservative 2,475m, roughly a mile and Declining military expenditure two big defence powers, last year ties with other nations that might see the emergence of what he government was eager to a half, away. in Europe is not the only issue. launched an unprecedented pro- not be keen to go to war. calls “islands of co-operation”. tender beyond the existing While the company does The US has also indicated that its gramme of bilateral co-operation, There is particular concern Mr Valasek’s prediction seems system of approved defence not rejoice in grisly records own perspective on global secu- signing treaties covering their con- about the role of Germany, whose realistic, if pessimistic. The ques- contractors, and Accuracy such as this, the group’s rity is changing. Since the second ventional and nuclear pro- defence budget is the third largest tion is whether this process will International decided to directors are not morally world war, Europe has been at the grammes. The Scandinavian states in Europe after those of the UK ultimately prove to be too slow, throw their hat into the troubled by the use of their core of Washington’s security con- have for some time pushed forward and France. While Germany has given the way the US is recali- ring. product. cerns. But, increasingly, its atten- moves for coloser co-operation. pushed through a significant brating its global view. It may be “There were 17 other “We believe more lives are tion is absorbed by challenges Nato is alive to the challenge. The EU’s 27 nations reform of the Bundeswehr, it that some external shock, perhaps major competitors, such as saved as a result of these from China. Mr Rasmussen wants next sum- spend half as much on seems reluctant to push ahead the from Russia, will be needed to Parker Hale, BSA, Winches- products,” says Mr Irwin. Washington’s approach to the mer’s alliance summit in Chicago kind of co-operation undertaken prompt the Europeans to get their ter, Remington and Mr Walls agrees: “If Libya conflict this year may have to see an important set of agree- defence each year as by France and the UK. act together more seriously on Mauser,” says Mr Walls. there’s a sniper out there, been an important signal about ments that will see Nato’s 28 the US, but there is In short, those who follow the defence co-operation. “They were all in it, and we the enemy does not want to its changing priorities. The US members pooling resources. agonising tale of European At any rate, Mr Gates has never thought at that time be around. So in actual fact backed the call for intervention There are hurdles ahead, how- widespread duplication defence co-operation believe there issued a clear warning of the dan- that we’d win.” you save lives, because you by the UK and France. But at an ever. Without a common Euro- will be no big-bang agreement gers if Europe fails. However, the rifle won keep the enemy out.”

Contributors Industry faces a tough decade James Blitz Philip Parrish Defence and Diplomatic Sub­Editor Editor Continued from Page 1 them is whether they can Australia – will provide defence exporters will be local capability or produc- faced by European compa- Steven Bird win in the fierce competi- strong demand for new tough – especially if China tion line, creating jobs and nies. “The real problem for James Boxell Designer the plan to build a subma- tion to find new markets to equipment. follows Russia’s tradition of skills in the region. Europe is that governments Paris Correspondent rine platform for the UK’s sell their equipment. Two other nations, how- being an exporter of capa- “If India buys large num- are not spending enough on Andy Mears independent nuclear deter- Some nations with deep ever, are attracting particu- bility to these markets. bers of Eurofighters, it research and development,” John O’Doherty Picture Editor rent, a project that will cost pockets and significant lar attention. One is India, US and European compa- won’t want them all to be says Clara O’Donnell, a vis- Defence Industries Correspondent about £25bn. security threats on their which is seeking to enhance produced in Germany or iting fellow at the Brook- For advertising details, But the MoD is in the borders will certainly its security advantage over the UK,” says Professor ings Institution, the Wash- contact: throes of a savage budget- remain big purchasers of Pakistan and responding to ‘If India buys Chalmers of RUSI. “Some of ington think- tank. James Lamont Liam Sweeney South Asia Bureau Chief ary cut equal to 8 per cent equipment. the growing military might Eurofighters, it the more technologically “This means that in the 020 7873 4148 in real terms over the next Saudi Arabia and the Gulf of China. It is emerging as sophisticated countries will years to come, European Samantha Pearson [email protected] four years. As a result, Arab states – uncertain one of the world’s biggest won’t want them all want those contracts to defence companies will find Brazil Reporter All FT Reports are available political debate may yet about the intentions and arms buyers, especially of produced in the UK have a large indigenous it harder to compete in on FT.com: intensify in the UK over nuclear capabilities of Iran fast jets. component.” export markets. Even more Jeremy Lemer www.ft.com/reports whether the nuclear deter- – will remain big clients. Brazil also plans to In the short term, US problematically, European US Business Correspondent or Germany’ Follow us on twitter at rent is financially viable. Last year, the Saudis increase spending on mili- companies may find it companies will increasingly www.twitter.com/ Companies in the US and signed a deal with Boeing tary assets, thanks to high harder than their European struggle to supply their Charles Clover ft.reports Moscow Bureau Chief Europe are having to for the sale of $60bn worth economic growth rates. nies may have to rethink rivals to get into these mar- own governments.” All editorial content in this respond. Several, such as of jets, including F-15 fight- There is speculation it how they do business. One kets, because Washington In short, US companies go Rohit Jaggi supplement is produced by Lockheed and BAE Sys- ers. States which are con- could increase its order for big pressure they face is to heavily restricts technology into this decade facing a Commissioning Editor the FT. tems, have cut their work- cerned at China’s growing fast jets to more than 100 offer purchasing countries a transfer. But over time, the fight to compete. But Euro- force. But the big strategic military role – most notably over the next 15 years. partnering arrangement, main challenges in the pean companies may be fac- question facing many of Japan, South Korea and Competition among allowing them to develop a defence industry will be ing a fight to survive. FINANCIAL TIMES TUESDAY SEPTEMBER 13 2011 ★ 3 Defence A tiger awakes to challenge Chinese military

India James Lamont looks at long­overdue modernisation efforts in the armed forces of the world’s largest democracy

f ever there was a potent reminder of the need to modernise India’s ageing defence capability, it was Ithe regular tailspins and nose- dives of its Russian fighter jets. The MiG-21 is known among the brave ranks of the Indian Air Force as the “flying coffin”. Of the almost 800 MiG-21s inducted into the Indian Air Force since 1963, more than 350 have been lost in accidents, kill- ing about 170 pilots. Air Chief Marshal N.A.K. Browne, the head of the IAF, is counting the days until the country renews its strike force, which currently consists of Rus- sian, British and French air- craft. At the end of last month, he said India’s pilots would be “greatly relieved” when the country finally agreed a con- tract for the supply of 126 jet fighters, worth $11bn. The Medium Multi-Role Com- bat Aircraft, or MMRCA, deal is one of the biggest arms deals in the world. India, which has India’s $11bn contract for the supply of 126 jet fighters has been narrowed to a choice between the Eurofighter, pictured, and France’s Rafale Reuters relied heavily on Russian sup- plies during the past 50 years, is ment-to-government deals Pakistan, particularly JF-17 jets, own stealth frigate and a now openly voice their concerns ment is under way to give Air Marshal Browne says that one of the biggest arms buyers, between Delhi and Washington. has fuelled these suspicions. So nuclear submarine modelled on about the gap in defence capa- greater reach into the Hima- China has some of the answers. with a military budget of Delhi has bought C-17 military too has China’s assertiveness a Russian design. It has tested a bilities that has opened up layan region. The army is push- One is that India’s defence com- Rs1,420bn ($31bn) a year. transporters to improve the over territory in the Himalayas range of longer-distance mis- between big-spending China and ing for a $2.5bn Mountain Strike panies should devote far more A closely watched competition forces’ airlift capacity, as well and at sea. Delhi was alarmed siles, including a supersonic what they see as “dithering” in Corps, which would lead to the resources to research and has pitted US, Russian and as Poseidon maritime surveil- by a challenge to an Indian cruise missile called the Brah- corruption-prone Delhi. deployment of a greater number development. other European aerospace com- lance aircraft. In Washington, naval vessel by the Chinese mos, and boasts a capable space The officers complain that mil- of high-altitude troops (required The second is that India panies against each other. All multibillion-dollar defence navy in July off the coast of programme. itary spending, just over 1 per to operate up to a height of should not try to “go it alone” – have extended a hand of indus- orders for India’s 1.5m-strong Vietnam – described by Indian Closer to the ground, military cent of gross domestic product, 20,000 feet). as it has with the 30-year devel- trial partnership in order to win armed forces are viewed as a officials as the first “incident” planners carefully eye what the is hampered by fears in the civil- China holds lessons, just as it opment of the Light Combat a prize that promises a strategic vital component in cementing of its kind. US, UK and France have done to ian government of over-militari- poses a threat. Aircraft or Tejas – but rather reorientation by the world’s ties between the two countries. China has also rattled India’s equip their infantry better. sation and the need to spend Jasjit Singh, director of the “learn from” licence agreements largest democracy. Air Marshal Browne has defence establishment by parad- Some private Indian compa- more on development than Centre of Air Power Studies in with foreign partners. While deadlines are notori- another reason to be “relieved”. ing technological break- nies, including the Tata Group, arms. They identify key vulnera- New Delhi, says India’s chal- In the manuals of the inte- ously fluid in India, many now Among India’s military leader- throughs, like its own aircraft Mahindra & Mahindra and bilities in cyberwarfare and lenge is to build a defence grated staff headquarters at consider the deal to be in the ship and security hawks, China carrier and ship-busting mis- Larsen & Toubro, have a grow- China’s record of reverse engi- industry base rapidly after what India’s Ministry of Defence, dia- final lap, and down to price. Air looms larger and larger as a siles, all of which could come to ing interest in developing their neering advanced technologies, he says was 250 years of de- grams show a fighting force typ- Marshal Browne says he expects potential threat. They are partic- challenge India’s dominance of defence expertise in partnership as opposed to India’s lumbering industrialisation under British ically has 30 per cent advanced, the contest, narrowed to a ularly concerned about what the Indian Ocean and crucial with international defence public sector defence companies. colonial rule. He estimates that 40 per cent current and 30 per choice between the Eurofighter they identify as a “collusive shipping lanes between the Mid- groups. Nonetheless, India’s military the process is only 10 years old. cent obsolete equipment. and France’s Rafale, to be con- threat” posed by a nuclear- dle East and Asia. Increasingly, international establishment is looking more “India is in the process of an Getting closer to this blue- cluded by the end of the year. armed neighbour, the traditional India has been no slouch investors see opportunity to its eastern border, where the industrial technological revolu- print, and retiring the MiGs Snubbed US competitors Boe- foe Pakistan, and the growing itself. Although 70 per cent of among India’s small, technologi- Chinese invaded, albeit briefly, tion, and at the forefront is the and Lee Enfield rifles, is a top ing and Lockheed Martin have military might of China. its military hardware is cally advanced defence compa- in 1962. A programme of infra- aerospace industry. But we are priority for India’s longer-term found consolation in govern- China’s supply of weaponry to imported, it has launched its nies. Yet some senior officers structure and airfield improve- still at the beginning,” he says. security. Drawn­out contest to win contract causes casualties

previous president, had further from the promises Saab, is that the longer the Brazil strong ties with President made to Dassault under Mr contract has been delayed, Nicolas Sarkozy of France Lula. the more the government’s Samantha Pearson and after signing a multibil- “We think it’s a level priorities have changed, lion-dollar defence agree- playing field and that when explains Nelson During, a explains why the ment with France in we are judged on our mer- military expert who runs a favourite does December 2008, Mr Lula its, we will prevail,” says specialist magazine called declared Dassault as the Joe McAndrew, Boeing Defesanet. not always win preferred choice. Defense, Space & Security’s “The issue today is no Given that Mr Jobim was vice-president of interna- longer about which is tech- It was at the 80th birthday defence minister under Mr tional business develop- nically the best aircraft,” celebrations of a former Lula and continued in his ment for Europe, Israel and Mr During says. “The con- president in late June when position when Ms Rousseff the Americas. tract is changing and the it all started to go wrong for took over in January this Celso Amorim, Brazil’s focus now is much more Nelson Jobim, then Brazil’s year, accepting Dassault’s new defence minister, has about which manufacturer defence minister. bid appeared a mere formal- not yet made any public can offer more benefits to He was quoted as saying ity for the new president. statements on the contract, Brazil’s industry.” he was surrounded by The Rafale has been used but all three companies Since the finalists were “idiots” – a comment he by the French air force have recently been asked to selected in September 2008, later claimed was directed since 2006 in a string of Brazil’s currency has soared at journalists. combat missions in Afghan- more than 40 per cent After a series of other istan, but the deal with Bra- ‘Brazil has an against the dollar, damag- blunders, including admit- zil would have been the enormous interest ing exporters’ competitive- ting that he had voted for first time it had been sold ness and crippling parts of President Dilma Rousseff’s abroad. in technological the domestic industry. opponent in last year’s elec- However, Ms Rousseff innovation and “The defence sector offers tion, he was forced to resign made it clear that all bets a real alternative for the in August. were off when she took we see it as a country to avoid a scenario For US-based Boeing, office. She has since pur- of ‘deindustrialisation’,” ex- Sweden’s Saab and Dassault sued stronger political ties long­term partner’ plains Orlando José Fer- of France, Mr Jobim’s exit with the US and, after a reira Neto, a vice-president is the latest in a series of visit by President Barack present their bids again to at Embraer, the aviation setbacks to a $5bn deal to Obama in March, Boeing the Senate and confirm group and head of the Bra- build 36 fighter jets for the has become the new favour- their pricing is still valid. zilian Defence and Security air force. ite with its F-18 Super To add to the confusion, Industries Association. The three companies were Hornet. Brazil’s government said in For this reason, the bid- selected in September 2008 The Super Hornet, which July it would have to post- ders have started to stress as finalists to win the con- is powered by General Elec- pone the final decision to the “technology transfer” tract, but after political tric engines, first flew in early 2012 in order to focus aspects of their bids. upheavals and budget con- the US in 2007 and is on “the domestic agenda”. In August, Boeing said it cerns, they will now have to reported to carry a lower Concerns over the impact would provide a full trans- wait until next year for a price tag than Dassault’s of the global financial crisis fer of technology if it won decision. Rafale. and rising inflation, which the contract, enabling Bra- At a time when business Analysts say the depar- is now running above target zil to produce fully the for these companies has ture of Mr Jobim a few at 7.1 per cent a year, has Super Hornet. plunged across developed weeks ago may also boost put pressure on the govern- Saab has made similar markets, the chance to help Boeing’s chances of win- ment to cut spending. pledges if Brazil agrees to Brazil upgrade its ageing ning the contract, as it dis- However, the difficulty buy its Gripen aircraft. The fleet of fighter jets is worth tances the new government for Dassault, Boeing and Swedish company plans to fighting for. produce up to 80 per cent of While the contract itself the structure of the aircraft is likely to be worth about in Brazil and also transfer $5bn, Brazil could increase intellectual property rights the order to more than 100 to local companies. aircraft over the next 15 “Brazil has an enormous years. Maintenance con- interest in technological tracts spanning decades innovation and we see Bra- should be particularly zil as a long-term partner,” lucrative. says Bengt Janér, Saab’s However, as the example director for Brazil. of the past three years goes However, the small size of to show, doing business in Sweden’s export market emerging markets, and compared with the US may even in relatively politically ultimately favour Boeing, stable ones such as Brazil, especially as all three com- is often a challenge. panies are presenting rela- Until the beginning of tively similar aircraft and this year, France’s Dassault proposals. had looked like a clear win- As Dassault’s experience ner, with its 50-foot-long shows, being the favourite Rafale model. Luiz Inácio does not necessarily mean Lula da Silva, Brazil’s Brazil seems to favour Boeing’s F­18 Super Hornet AP emerging the winner. 4 ★ FINANCIAL TIMES TUESDAY SEPTEMBER 13 2011 Defence

Suppliers of military equipment have also been taking a closer look at their industrial footprint in search of savings they can pass on to the Department of Defense AFP/Getty Images Bye, big spender, as budget is scaled back

companies have found themselves in working on defunct programmes. ment banking arm of Royal Bank of has led to an important shift in of securing key skills can make effi- US an unfamiliar position – having to cut Lockheed has reduced its workforce by Canada. He adds: “There are consider- emphasis. Until recently, he says, ciency a secondary priority. costs aggressively in order to more than 20,000 people in the past able costs to be taken out if compa- defence companies had been more At the same time, Mr Thompson Jeremy Lemer reports on survive. two years, mostly by attrition. nies are motivated to do so, and now focused on producing the most tech- notes, “there are two sides to this unfamiliar territory for “On the defence side of our busi- Lockheed has been particularly they are.” nologically advanced equipment, equation. It is not just about how the ness, all of our customers are asking aggressive, asking hundreds of mid- Indeed, companies have also been rather than the most cost-effective. contractors perform, it is also the Pen- military contractors – us about cost reduction and afforda- level managers to take early retire- taking a closer look at their industrial “Given the fiscal environment that tagon’s behaviour which drives a lot working to a tight budget bility,” says Scott Thompson, who ment and freezing the salaries of sen- footprint in search of savings they can the world finds itself in, there is going of costs.” He points to the unwilling- leads the US aerospace and defence ior executives in order to reduce its pass on to the DoD. to be an increased focus on the cost ness of the services to collaborate on practice at PwC, the professional serv- central costs. The company expects L-3 Communications, the US side of the equation,” he told the FT in programmes, and excessive project Since the terrorist attacks of Septem- ices firm. the moves to save more than $350m an interview at the Paris Air Show this oversight, as cost drivers. ber 11, 2001, defence companies have “They want to know how to do more over the next five years. summer. “But we all have to be very And some industry executives feasted on a surge of spending by the without more. That is the number one A tougher line from the Pentagon, Faced with substantial thoughtful that you don’t sacrifice the worry that the renewed focus on cost- US military. Wars in Iraq and Afghan- area of focus right now.” demanding greater “productivity” reductions in US military technological components just to save effective products may have unin- istan drove revenues and profits ever In May, a sombre Bob Stevens, chief from contractors to help offset pres- on costs.” tended consequences, encouraging the higher as the Pentagon bought equip- executive of Lockheed Martin, the big- sures on the military’s budget, has spending, big defence He says that Raytheon saw the brightest engineering students to pass ment and services. gest defence contractor in the world served to reinforce the new-found companies have to downturn in defence spending coming over the defence industry in favour of Ten years on, the outlook is very by sales, reflected the new mood, tell- resolve among defence companies to and has been rationalising the busi- sectors that are exploring cutting-edge different. In May 2010, Robert Gates, ing reporters that “the global security keep a check on costs. Under the title cut costs aggressively ness since 2005. At the moment, it is technology. then Secretary of Defence, signalled environment . . . is only growing more “Better Buying Power”, the Depart- working to reduce the number of sup- Dan Crowley, president of Raytheon the change in clear terms. “Given volatile and more complex, while eco- ment of Defense has introduced strin- pliers it uses in order to extract lower Network Centric Systems and previ- America’s difficult economic circum- nomic resources are sure to be con- gent efficiency measures. defence electronics and services com- prices from its partners. ously the head of Lockheed’s F-35 stances, the gusher has been turned strained. That’s why we’ve been giv- Analysts note that the years of ris- pany, and ITT, the US conglomerate Still, Mr Thompson at PwC points fighter jet programme, is cautious but off, and will stay off for a good period ing cost reduction and affordability a ing budgets have created plenty of fat that includes a substantial defence out that there are limits to the sav- optimistic. “Do we have something as of time.” top priority.” to cut. “The defence budget has been unit, have both consolidated business ings the defence industry can achieve. exciting as a moon shot? No, but stu- Faced with the prospect of substan- Headcount has been an early target. going up since 1999. Inefficiencies units and factories. Unlike commercial companies, dents like the challenges of material tial reductions in US military spend- Companies such as BAE Systems, the have inevitably crept into the sys- David Wajsgras, chief financial defence contractors tend to produce science, of software technology and ing and demands from the Pentagon biggest UK defence contractor by reve- tem,” says Rob Stallard, an analyst officer of Raytheon, the US defence things in relatively small batches, communications. And that is what the for cheaper equipment, big defence nues, have begun to slash personnel with RBC Capital Markets, the invest- contractor, says the new environment which raises costs, while the necessity military is focused on.” Franco­British Flush with new business deal ruff les but fighting for the spoils The industry has benefited In July, Yuri Solomonov, the Russia from savvy marketing, with the country’s chief designer of bal- Kremlin taking the lead in listic missiles, took the fight allies’ feathers Charles Clover on weapons-selling diplomacy and public, giving an interview to tensions between low prices. Russia has stub- Kommersant newspaper. He bornly maintained its rank as said that because of the minis- tion of a new surveillance drone. domestic contractors the number two arms exporter try’s pigheadedness about price Pilotless aircraft Some believe that the partner- and the government in the world and has seen sales cutting, the 2011 plan for ballis- ship could provide the building triple in a decade, from $3.7bn tic missiles would be delayed. BAE Systems and blocks for the much more ambi- in 2000 to $10bn in 2010. “Has our Ministry of Defence Dassault Aviation will tious project of developing the Moscow’s air show, known as China used to be the main cli- turned into a tax inspectorate?” countries’ next generation of MAKS and held every second ent for Russian arms, but it has jibed Mr Solomonov. “During co­operate on drones, fighter jets, which are expected August, is the closest Russia’s now been overtaken by India. the days of the USSR, the state writes James Boxell to be unmanned. sober and secretive defence Russia’s defence industries used to help [the defence indus- In the most interesting part of industry gets to a wild party. were entirely export-oriented try], now it gets in the way.” his speech, Mr Luff drew the Military hardware fills rows of during the 1990s, but rising But Mr Serdiukov gets sup- When Peter Luff, the UK’s attention of the assembled exec- aircraft hangars on the outskirts defence budgets have meant port from analysts. “The defence equipment minister, utives to the fact that both of the city. Leggy models hand that in 2007 domestic orders defence ministry is supposed to spoke to business leaders this France and Britain were assess- out glossy pamphlets and tough- actually surpassed exports for check how taxpayers’ money is summer about the Anglo-French ing what to do when their home- eyed Russian fighter pilots mix the first time since 1991. spent, because we are not North military treaty, the most closely built fighter jets (the Dassault effortlessly with flip-flop-wearing Russia’s own military, which Korea,” says Ruslan Pukhov, followed part of his speech Rafale and Eurofighter plane-spotters and turbaned had taken a 15-year “procure- director of the Centre for Analy- concerned the future of drone- Typhoon) leave service by about emissaries of nervous foreign ment holiday” following the col- sis of Strategies and Technolo- aircraft. 2030. dictators anxious to bulk up lapse of the USSR and the ensu- gies. “So what Mr Solomonov Indeed, the most eye-catching The present combat fleets are their air defences in the wake of ing financial chaos of the 1990s, says pejoratively, I take posi- industrial development to expected to be the last piloted Nato’s Libya campaign. is now back to being the arms tively.” emerge from the treaty is an variants built. The carnival is accompanied industry’s main client. The military brass has delayed alliance between the UK’s BAE As a result, he said, the BAE/ by the thunder of fighter jets contracts this year in response Systems and Dassault Aviation Dassault collaboration – if suc- overhead, dipping and cartwheel- to what it sees as unjustified of France, the two countries’ cessful – could offer the best ing like preening birds of prey. Russia has stubbornly price increases. The defence fighter jet manufacturers. way for the two countries to Lessons from BAE’s Taranis project will be used in Telemos In one corner of the airfield, maintained its rank as industry has responded by trying The companies have signed a hold on to their jealously pro- Vladimir Kuzmin, a representa- to pass legislation prohibiting memorandum of understanding tected fighter jet building exper- you include Sweden’s Gripen). worked with the French before, tive of Almaz-Antey, an air the number two arms imports of foreign arms. to build a next-generation tise at a time when their gov- Dave Kershaw, the strategy on the old Jaguar fighter jet. defence concern that makes exporter in the world The defence ministry is using “medium-altitude, long-endur- ernments’ spending is becoming director for UAVs at BAE, says The two companies have been advanced air-defence systems, the imports as leverage to keep ance” unmanned aircraft, which ever more constrained. his company would be “open to running separate projects for showed off the export version of and has seen sales domestic prices down. This could be used eventually by the The fact that the stakes are working with more partners, if unmanned combat aircraft, the S-300 anti-aircraft missile year, for example, the Kremlin French and British armed forces potentially so high explains why the two governments wanted to Taranis at BAE and Neuron at system. “If Gaddafi had had a triple in 10 years bought the Mistral, a French to provide surveillance and so- rival companies appear so further share costs”. Dassault, but some of the tech- couple of these babies,” he says, amphibious assault ship, the called “situational awareness” miffed. EADS, Europe’s biggest However, the British Ministry nology and knowledge will be patting the launch tube, “he Overall, the Kremlin plans to largest purchase of foreign hard- on the battlefield. aircraft maker, is particularly of Defence has decided to take a shared on the joint programme. would never have had any prob- spend Rbs19,000bn ($640m) re- ware by Russia since the fall of The choice of name for the annoyed that the French and strictly “bilateral” approach Mr Kershaw says that the lems from Nato. It makes the equipping the badly ageing Rus- the Soviet Union. new programme, Telemos, after the unhappy experiences technology that will set the new Patriot [the US-made nearest sian military by 2020. The armed “Serdiukov wanted to kick reflects the task the aircraft will of broad multi-country Euro- aircraft apart from rival projects competitor] look like a child’s forces are to receive eight Borei- local industry, to show them need to perform. In Greek The partnership could pean collaborations such as in the US, Israel and elsewhere, popgun in comparison.” class nuclear missile-carrying that they are not a natural mythology Telemos was the provide the building Eurofighter, or the contract will be its ability to fly in nor- Another salesman stands next submarines, 10 divisions of monopoly,” says Mr Pukhov. prophet who warned the cyclops negotiations for the A400M mili- mal air traffic. to the chief money-spinner of Iskander cruise-missile systems, The conflict reached its cli- Polyphemus about an attack by blocks for developing tary airlifter. He says the system will also the Russian arms industry, the 600 aircraft, 1,200 helicopters, 100 max when the government Odysseus. the next generation of Defence officials on both sides be genuinely autonomous, Su-27 fighter-bomber. With a naval vessels and 28 divisions of threatened to file charges An assessment phase is of the English channel also meaning the aircraft “can look rival US F-15 fighter making an the most advanced S-400 surface- against the Severnaya Verf ship- planned to start this year, once fighter jets, expected point to the fact that Britain after itself” while the ground awful racket overhead, he cov- to-air missiles. yard for failing to deliver on its the two countries’ defence min- and France together account for operator processes the surveil- ers his ears and shouts to be The fast growth has meant contract for a new generation of istries complete the delicate dip- to be unmanned half of defence spending of lance information from the heard. “They [the Americans] fast profits. But the government light warships. lomatic task of sketching out an European members of Nato, and drone. say theirs is better, we say ours and the defence industries are The tension between the min- initial agreement. Roughly the British appear to have cho- 65 per cent of the research The UK is attempting to set is better. One thing is for sure, locked in a fight for the spoils. istry and suppliers got so bad €50m ($70m) of funding has sen to ignore its efforts in the spending. itself up as a world centre in ours is definitely quieter.” In previous years, defence that when Almaz-Antey wanted been set aside for the work, unmanned air vehicle (UAV) Nevertheless, it remains to be autonomous unmanned flight. These are good times for the budget increases have largely to show off the S-400 air defence though the eventual cost of a field, namely the Talarion seen how easily Dassault and The BAE executive says it Russian defence industry. While been frittered away as the system at the MAKS air show, full development would run into medium altitude, long-endur- BAE will be able to work will be up to the two defence budgets in western industry jacked up prices. Mr Serdiukov refused to hand the billions. The ministries need ance aircraft. together. Both companies are governments to decide whether Europe and the US shrink under Now the Ministry of Defence one over, saying it could build to make a final procurement There is also unhappiness fiercely proud of their impor- the programme morphs into a austerity cuts, Russia’s has under Minister Anatoly Serdiu- one of their own to display. They decision, but delivery would be that the Franco-British plan tance to the manufacturing full-blown combat drone. grown every year for the past kov is trying to reform the pro- had to show the S-300 instead. expected between 2015 and 2020 leaves allies such as Spain, Italy landscape of their home coun- But, he adds, perhaps omi- decade. Not only that, but the curement process, which has Mr Serdiukov looks like he if all goes to plan. and Germany out in the cold. tries, and neither are exactly nously for EADS: “From the defence budgets of its main been abused by contractors in will prevail. His main asset is However, the flurry of excite- EADS is threatening to produce known for their willingness to point of view of industrial sus- export clients, China and India, the past. But they are fighting the loyal backing of his Kremlin ment around the BAE/Dassault a rival aircraft. This could mean give ground to partners. tainability and a sensible use of also continue to grow, and it against severe cost-cutting bosses, President Dmitry tie-up – and hostility from com- Europe has two competing fight- BAE insists that it has a good the two countries’ capabilities, has successfully penetrated the measures, which have led to Medvedev and Prime Minister panies not invited to the party – ers again, as it does now with record of collaboration on the an evolution would be a logical more competitive defence mar- delays and setbacks in several Vladimir Putin. In Russia this goes beyond the potential crea- the Typhoon and Rafale (three if Typhoon project and has conclusion.” kets of the Middle East. weapons systems. counts for everything.