9. Arms production J. PAUL DUNNE and EAMON SURRY* I. Introduction Arms sales by the 100 largest arms-producing companies (the ‘SIPRI Top 100’) increased again during 2004, although the increase was less dra- matic than in the previous year. Sales by US companies continued to account for the bulk of this increase. While there was significant merger and acqui- sition activity in 2005, this was at a slower pace than in 2004. Another round of consolidation may follow which will see moves into other sectors to gain increasingly valuable skills and services and the continuing move by non-US firms into the lucrative, growing and now more accommodating US market. While the post-cold war restructuring of the international arms industry has shown some signs of subsiding, important changes are still taking place. Con- solidation among European companies continues and is likely to be reinforced by the increased political commitment in the European Union (EU) to harmon- ize rules for arms procurement and by the adoption of the 2005 Code of Con- duct on Defence Procurement, which accepts competition in arms procure- ment among member states.1 At the same time, the consequences of the ‘global war on terrorism’, including added emphasis on homeland security, and the experiences in Iraq are creating demands for new, private industrial services and products, and in turn are drawing new kinds of suppliers into the international arms market. This chapter describes developments in the major arms-producing com- panies in 2004 and 2005. In addition, it looks at the development of the arms industry since the end of the cold war. Section II considers the data on the 100 largest arms-producing companies in the world (excluding China) in 2004.2 In section III the long-term trends in arms production are described 1 European Defence Agency, The Code of Conduct on Defence Procurement of the EU Member States Participating in the European Defence Agency, 21 Nov. 2005, URL <http://www.eda.eu.int/ reference/eda/EDA - Code of Conduct - European Defence Equipment Market.htm>. Denmark does not participate in the Code of Conduct. See also ‘EU agrees to open defence market’, BBC News Online, 21 Nov. 2005, URL <http://news.bbc.co.uk/1/4458014.stm>; and chapter 16 in this volume. 2 SIPRI has focused on the top 100 arms-producing companies annually in an effort to capture the trends in the overall arms industry. The choice of the top 100 companies was motivated by the fact that this is the highest number for which it was deemed realistically possible to gather data. This group of companies is fairly representative of the arms industry, accounting for roughly three-quarters of the value of global arms production in 1996. Chinese companies are excluded because of lack of data. See Sköns, E. and Weidacher, R., ‘Arms production’, SIPRI Yearbook 1999: Armaments, Disarmament and International Security (Oxford University Press: Oxford, 1999), pp. 389, 409; and Sköns, E. and * The authors are grateful to Elisabeth Sköns for comments and guidance and to Jurgen Brauer, Ron Smith and Herbert Wulf for comments on earlier drafts. SIPRI Yearbook 2006: Armaments, Disarmament and International Security 388 MILITARY SPENDING AND ARMAMENTS, 2005 Table 9.1. Regional and national shares of arms sales for the SIPRI Top 100 arms-producing companies in the world excluding China, 2004 compared to 2003 Arms sales figures are in US$ b., at current prices and exchange rates. Figures do not always add up because of the conventions of rounding. Arms sales Change in arms sales, Share of (US$ b.)a 2003–2004 (%) total arms Number of Region/ sales, 2004 companies country 2003 2004 Nominalb Realc (%) 41 North America 147.7 170.3 15 12 63.5 40 USA 147.3 169.8 15 12 63.3 1 Canada 0.5 0.5 2 –7 0.2 40 Europe 71.0 82.1 16 2 30.6 11 UK 26.3 32.4 23 7 12.1 8 France 17.6 19.8 12 0 7.4 1 Trans-Europeand 8.0 9.5 18 6 3.5 3 Italy 5.6 6.6 19 6 2.5 6 Germany 5.7 5.2 –8 –18 1.9 4 Russiae 3.1 3.1 2 –14 1.2 2 Sweden 2.3 2.3 11 1 0.9 2 Spain 1.7 1.7 27 12 0.6 1 Switzerland 0.7 0.7 6 –3 0.2 1 Norway 0.4 0.4 –7 –12 0.1 1 Finland 0.4 0.4 64 49 0.1 9 Other OECD 8.2 8.2 11 3 3.1 6 Japan 6.5 6.5 12 5 2.4 2 Korea, Southe 1.3 1.3 3 –4 0.5 1 Australia 0.4 0.4 19 2 0.2 10 Other non-OECD 7.8 7.8 6 1 2.9 4 Israel 3.5 3.5 0 –1 1.3 3 India 2.3 2.7 15 8 1.0 1 Singapore 0.9 0.9 –3 –8 0.3 1 South Africa 0.5 0.5 0 –16 0.2 1 Brazil 0.3 0.4 38 23 0.1 100 Total 233.4 268.3 15 8 100.0 OECD = Organisation for Economic Co-operation and Development. a Arms sales include both sales for domestic procurement and export sales. b This column gives the percentage change in arms sales in 2003–2004 calculated in current dollars. c This column gives the percentage change in arms sales in 2003–2004 calculated in constant dollars. d The company classified as trans-European is EADS, which is based in three countries— France, Germany and Spain—and registered in the Netherlands. e Data for Russian and South Korean companies are uncertain. Source: Appendix 9A, table 9A.1. ARMS PRODUCTION 389 along with the SIPRI Arms Production Project’s analysis of these trends. Section IV provides some conclusions. Appendices 9A and 9B include tables of the Top 100 arms-producing companies in 2004 and acquisitions in the North American and West European arms industry in 2005. Appendix 9C pro- vides an analysis of developments in the Russian arms industry. II. Recent trends The SIPRI Top 100 arms-producing companies, 2004 The value of the combined arms sales of the SIPRI Top 100 arms-producing companies in the world (excluding China) in 2004 was $268 billion (see table 9.1).3 Companies in the United States and Western Europe accounted for most of this amount. The dominance of US companies is particularly striking. Of the total arms sales of the Top 100 companies, 63.3 per cent was accounted for by 40 US companies; and 29.4 per cent by 36 West European companies. Four Russian companies accounted for 1.2 per cent of the total value. There was a marked expansion in total arms sales of the Top 100 in 2004 compared to 2003. However, this increase of 15 per cent (in nominal terms) was not as dramatic as in the previous year: the increase in 2003 over 2002 was 25 per cent.4 Indeed, owing to the continued deterioration of the value of the US dollar during 2004, the increase in 2004 over 2003 was even smaller in real terms: just over 8 per cent. This is still a significant increase, especially since it followed a year of great increase, and suggests that the decline in arms sales by the largest arms-producing companies that occurred during the 1990s has ended. The composition of firms on the Top 100 for 2004 did not change a great deal (see table 9.2), but the companies that entered and exited the list are inter- esting for several reasons. Four companies left the Top 100 in 2004. Two of these were Russian: Uralvagonzavod, which dropped from a ranking of 98 to 136, and MMPP Salyut, which fell less dramatically from 96 to 109. While Uralvagonzavod’s arms sales decreased in 2004, its total sales increased by more than 60 per cent between 2001 and 2004 as a result of a strong increase in civil sales. Most of this increase is from building rolling stock for Russian Railways,5 but the company also produces, for example, road-building equip- ment and consumer commodities that are increasingly exported.6 The third company to exit the SIPRI Top 100 list for 2004 was the Japanese company Weidacher, R., ‘The economics of arms production’, ed. L. Kurtz, Encyclopedia of Violence, Peace and Conflict (Academic Press: San Diego, Calif., 1999), p. 137. 3 There may also be other companies that are large enough to appear in the Top 100 list but for which insufficient data are available. 4 Sköns, E. and Surry, E., ‘Arms production’, SIPRI Yearbook 2005: Armaments, Disarmament and International Security (Oxford University Press: Oxford, 2005), pp. 383–416. 5 Lantratov, K., ‘Airplanes give way to submarines’, Kommersant, 9 June 2005, URL <http://www. kommersant.com/doc.asp?id=584099>. 6 ‘The “steel flow” of Urals tanks’, Diplomat, no. 5 (133), 2005, URL <http://www.diplomatrus.ru/ 200505/uk/02-06.php>. 390 MILITARY SPENDING AND ARMAMENTS, 2005 Table 9.2. Companies that entered and exited the SIPRI Top 100 list of arms-producing companies in 2004 Rank Rank 2004 2003 Company Country 2004 2003 Company Country Entering companies Exiting companies 99 106 Embraer Brazil 106 97 Komatsu Japan 68 S MTU Aero Engines Germany 109 96 MMPP Salyut Russia 100 116 Patria Finland 136 98 Uralvagonzavod Russia 71 142 Armor Holdings USA S 65 Alvis UK S = Subsidiary company. Source: SIPRI Arms Industry Database.