Can America’s weapons-makers adapt to 21st-century warfare?
ARMING UNCLE SAM is a great business. America’s latest defence budget earmarks 0bn for procurement and $145bn for research and development (R&D), most of which ends up with the handful of “prime” contractors, which deal directly with the Department of Defence (DoD). So will some of the $44bn in American military aid to Ukraine and some of the extra defence spending by America’s European allies, which account for 5-10% of the primes’ sales. Although those sums do not increase at the same rate as, say, corporate IT spending, leaving less room for spectacular gains, arms manufacturers are also shielded from eye-watering losses by huge, decades-long contracts.
Thanks to a big shake-up at the end of the cold war, the industry is also highly concentrated. At a meeting in 1993, dubbed the “last supper”, William Perry, then President Bill Clinton’s deputy defence secretary, told industry bosses that excess capacity was no longer appropriate and that consolidation was in order. As a result, the ranks of the primes have thinned from more than 50 in 1950s America to six. The number of suppliers of satellites has declined from eight to four, of fixed-wing aircraft from eight to three and of tactical missiles from 13 to three.
Guaranteed custom and weak competition have helped American armsmakers’ shares comfortably outperform the broader stockmarket over the past 50 years. A paper published by the DoD in April found that between 2000 and 2019 defence contractors did better than civilian ones in terms of shareholder returns, return on assets and return on equity, among other financial measures. An increasingly unstable world means more money going to the armed forces—and to their suppliers. Total shareholder returns, including dividends, at primes such as General Dynamics, Lockheed Martin and Northrop Grumman rose when Russia invaded Ukraine in February 2022 and when Hamas attacked Israel on…
2023-11-01 13:59:12
Article from www.economist.com
rnrn