It's A Great Year For Weapons Companies

Massive defense fairs are one of the best ways to gauge the health of the global arms industry.

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The biennial international defense exhibition IDEX, held last week in Abu Dhabi, showcased a thriving industry. There was a gathering of decorated military personnel, government officials, and high-ranking executives from weapons manufacturers in front of giant missile and drone displays, while young men in terminator-like "smart armor" performed battle simulations while fake explosions lit up giant LED screens behind them.  

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It was the largest and most well-attended IDEX in years, spanning enough land for a small town and attracting 130,000 visitors from 65 countries.

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We all know why. The Russian invasion of Ukraine one year ago jolted much of the industrialized world out of its comfortable status quo, in which a Western-led security order prevented major military invasions. NATO and countries outside NATO have pledged to spend more on defense since that violent turning point in late February 2022.

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“Putin is our best weapons salesman,” an American defense contractor at IDEX told Trade Algo, speaking anonymously because he was not authorized to speak publicly.

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“If Putin hadn’t picked a fight, then no one would be buying all this stuff.”

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There is no doubt that many countries are increasing their defense spending to unprecedented levels. 

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A McKinsey & Co. aerospace and defense report from December said that many European nations now intend to meet or exceed NATO targets, sometimes years ahead of schedule. In the wake of the crisis, long-held assumptions that large-scale conflicts on the continent were unlikely in the 21st century were reexamined. 

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Military spending has changed historically

The German government announced just days after the invasion by Russia that it would be spending an additional 100 billion euros ($106 billion) on defense next year, a huge step for a country that has skimped on military investments ever since the end of World War II.

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By 2023, Poland intends to increase its defense budget to 3% of its gross domestic product, which would be a significant increase. In addition, French President Emmanuel Macron announced in early January that his government plans to increase military spending by more than 30% over the next few years and prepare its armed forces to take part in high-intensity conflicts in the years to come. Also, in the past year, the U.S. spent nearly $50 billion on military operations in Ukraine.

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Western countries aren't the only ones spending big. Earlier this year, Russia announced a defense budget of $84 billion for 2023 - 40% more than it had originally planned in 2021. 

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It is being reported that NATO ally Japan plans to double its defense spending by 2027 in order to meet the increased threats posed by North Korea and China in the region. It is also noteworthy that both China and Saudi Arabia have set respective records for their own governments' defense spending in 2022, despite inflation, which is showing no sign of slowing down in the near future.  

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“Business is very good, unfortunately,” said an employee of a French drone manufacturer exhibiting at IDEX, referring to the company's performance. 

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American arms companies seeing record orders

There has been a windfall for the U.S. arms industry in recent years. According to the State Department, U.S. military equipment sales to foreign countries increased by 49% in the last fiscal year to $205.6 billion, increase of 49%.

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America’s largest defense contractors, Lockheed Martin, and Raytheon received record orders. Lockheed’s net sales for the fourth quarter hit $19 billion, roughly 3% above its internal planning and up from $17.7 billion in 2021. 

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Despite Raytheon's backlog of orders surpassing $150 billion last year, its fourth-quarter sales for its missiles and defense unit were up 6.2% to $4.1 billion, which was an increase of 6.2% over the previous quarter. Despite this, the companies say they are hindered by supply chain problems and labor shortages, and that if they weren't for these developments, they would be seeing much higher sales numbers. 

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‘Depleted’ weapons stocks in Europe

Europe, however, feels an urgent need — after years of underinvesting in the sector, relying on the U.S., and now many months of sending their weapons and ammunition to Ukraine, European nations must prevent a complete depletion of their own weapons stocks.

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“Most of the [European NATO] member states have experienced a significant depletion of their military stocks as a result of our support for the Ukrainians during the past few years,” Josep Borrell, the EU's high representative for foreign affairs and security policy, told Reuters in September. 

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The situation is becoming more and more urgent as time goes on. In the past couple of months, there have been a lot more discussions, a lot more requests," said a manager at a British drone company, who requested anonymity due to professional restrictions. In response to a question regarding the growth of the demand for his company's unmanned aerial vehicles, he replied, "Astronomically.".

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The French multinational defense firm Thales is one of those in the private sector that is working hard to meet the needs of Franco-allied militaries that are running low on supplies because of a lack of funding.

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"We definitely had to increase our capacities as a result of the Ukrainian conflict," Christophe Salomon, executive vice president for Land and Air Systems at Thales, told Trade Algo. As the head of his division, he is primarily responsible for radars, missiles, rockets, vehicles, and other land systems.

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"You need to expand your industrial footprint. Stocks need to be acquired. Several hundred different suppliers are involved in the supply chain for a single weapons system, and the lead time is typically around two years," he said. 

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“Government assistance is needed for companies to speed up their production processes,” Salomon said. Several measures have been outlined by the French government in this direction, including simplifying military contracts and administrative procedures, promoting import substitution for French-made goods, improving public-private partnerships, and replenishing ammunition stocks with several billion euros in funding. 

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The French government aims to cut the time it normally takes for the Caesar self-propelled guns to be manufactured by half; the guns, which have been highly effective in the battle for the Ukrainian military, normally take two years to produce.

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A Thales radar system, the GM200, will be delivered to Ukraine in May, a process that normally takes two years to complete. Thales says that because of the increased investments it has made in its supply chain over the last year and the advanced purchase of complex radar subsystems, it should be able to assemble Ukraine's GM200 within four months.

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Salomon said that his team works 24 hours a day, which is why they are able to speed up. "We have taken on the responsibility to invest and we have invested in every subsystem even before we know who will be buying it," he said.

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Many people in the Western defense sector are complaining about the slow pace at which Germany, the continent's largest economy, has been moving. Germany's decision to expand its military footprint remains controversial and divisive within its government, and Berlin has made it clear that it intends to assist Ukraine without provoking Russia in any way.

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An attendee from the German private sector who attended IDEX expressed frustration with the pace of his government, but also admitted that "because of history, it's a bit problematic.". He requested anonymity for the purpose of speaking freely.

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The attendee noted that Germany's major policy changes over the past year, notably the first time its weapons have been allowed to be used in foreign combat zones since World War II, have made a significant difference, according to the participant. “However,” he said, “we must change our processes and move faster now.”  

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