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August 23, 2014

U.S. Budget Got You Down, Defense Contractors? Don’t Worry, the World Is Getting Crazier

At home, the U.S. defense industry is contending with a future of diminishing sales thanks to a smaller national security budget after more than a decade of flush spending. But because the world is growing more chaotic, and because a number of countries are turning into “emerging markets,” the outlook for U.S. defense companies is, in a financial sense, becoming brighter elsewhere, according to research firm IBISWorld.

“Fortunately for defense contractors, demand for US arms exports remains strong, as economic growth in emerging economies and wider geopolitical tensions fuel military spending outside the western world,” writes Maksim Soshkin.

For instance, China is scaring a bunch of its neighbors with its bellicose behavior, and North Korea is fond of provocation itself, so South Korea has made a deal to buy Lockheed Martin F-35s and Japan is looking to upgrade its airborne warning and control system.

“Meanwhile, in the Middle East, oil-rich Arab states have gone on a buying spree, procuring US weapon systems as they pursue an increasingly independent foreign policy,” Soshkin writes.

It’s not just that foreign countries are seeking U.S.-manufactured defense products. The strategy by U.S. defense contractors to shift attention overseas is very deliberate. The result: Raytheon has seen international sales grow from 20 to 30 percent of its revenue from 2008 to 2013, and Lockheed has seen international sales grow from 12.8 percent to 17.1 percent over that period. So while IBISWorld is forecasting that U.S. spending on defense will decline an annualized 2 percent over the next five years, the U.S. defense industry’s exports will grow an annualized 2.4 percent over the same period.

It won’t be enough to make up for lost U.S. sales, though; overall revenues will fall 0.9 percent, IBISWorld predicts. Manufacturing jobs in the industry, however, will likely grow over the same period.

The move overseas might create other problems, however.

“Today’s export deals have the potential to create future rivals because foreign countries may use these deals to develop their own military equipment,” Soshkin writes.

“Lastly, while some countries will buy US weapons to bolster their relationships with Washington, others will view recent US hesitation to get militarily involved in foreign conflicts as a lack of commitment on the part of the US government,” he concludes. “This may erode one of the defense sector’s most competitive advantages: the idea that purchasing American products forges an alliance with one of the world’s most powerful countries.”

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