Center for Strategic Decision Research


Some Defense Market Realities

Vice Admiral Norman Ray
President, Raytheon International, Europe


In spite of the reorganization and rationalization of businesses, I believe extraordinary excess capacity still exists in many of today's defense market segments. This, of course, distorts decisions and investments in all sorts of unhealthy ways, increasing risk and uncertainty. Another important overarching market reality, which amplifies the excess-capacity problem, is that defense markets continue to shrink, albeit more slowly than a while ago. Cooperation is always strained when the pie gets smaller, and that is true for defense companies nearly everywhere. But let me mention a few defense market specifics.

  • First, for the foreseeable future, C4I and air defense will continue to dominate. This will be especially true for markets in Central, Eastern, and Southern Europe.
  • Second, interoperability will continue to grow in importance, but will remain much misunderstood and elusive. This situation most likely will not impact the market except for a few companies that seize an advantage through teaming, joint ventures, or mergers, enabling them to drive interoperability to their advantage.
  • Third, the market will reward anything that better supports the "ilities," including deployability, sustainability, and survivability. Logistics will enjoy something of a renaissance. Precision weaponry will increase in importance and will become a technology transfer lightning rod.
  • Fourth, owing to stringent budgets, modernization and adaptation of older systems will result in increased market share and will create a rich area for transatlantic teaming. Turkey's postponement of its Main Battle Tank acquisition program in favor of near-term T60 modernization is a recent example of this prediction that comes to mind.
  • Fifth, and especially vexing, is that governments have not yet settled on a comfortable model for transatlantic cooperative programs. The Medium Extended Air Defense (MEADS) program was supposed to herald that model, but so far it has not delivered on its promise. Technology transfer is the main villain here. Without a doubt, the single biggest problem for U.S. companies in the transatlantic market is U.S. technology transfer restrictions and all the baggage that goes with them. As far as European customers are concerned, Black Boxes are very much out of style, which contributes to widening the transatlantic technology gap and furthering U.S. market dominance.


As the defense industry moves ever closer to commercial practices through the increased use of commercial off-the-shelf content, the globalization of the defense industry, and the demands of the equity markets, the industry is finding itself in a situation in which technology transfer restrictions severely limit its ability to compete and to cooperate. Let me hasten to emphasize that I am not suggesting that the defense industry should be able to market and sell whatever and wherever it wishes. What I am saying is that our lawmakers and regulators should implement policies that will allow the defense companies of the NATO Alliance to compete and cooperate in the Alliance's security interests to benefit their respective armed services, taxpayers, and shareholders.

To improve conditions, we need a transatlantic security policy umbrella under which we can generate more common requirements and demand interoperability for key coalition capabilities. We need to create an Alliance marketplace that allows our companies to team, cooperate, and compete more efficiently so that they can produce the products and services our armed forces need and thereby generate shareholder value. We should also strive to establish what I might call an "Alliance Common Defense Market." The purpose of such a market would be to allow companies to act more rapidly and with fewer restrictions within their area but still abide by strict guidelines for the exploitation or transfer of their products and technologies outside their market.

Unfortunately, reciprocal access across the Atlantic simply does not exist today. But if it ever did, it would, in my view, become the catalyst to solve many, if not all, of the transatlantic market ills we face today. Reciprocal access should therefore be a prime objective for governments and industries to achieve. We should consider it a strategic objective. It seems to me that transatlantic defense businesses could benefit our environment immensely if we formed an association modeled on national defense associations. Such an association would be able to provide common advice and counsel to customers, i.e., governments, with a view to improving the jointly shared business environment. This would, I believe, help communications at all levels, help governments develop better policies, bring down barriers, and assist cooperation and competition.


Defense budgets are not likely to grow or sustain current Alliance defense industrial capacity. If we fragment the Alliance market to protect overcapacity or to preserve jobs, we will be asking our taxpayers to pay more for products that do less for our armed forces. It would be a lose-lose proposition. By creating an "Alliance Common Defense Market" we would create a win-win situation for our taxpayers and our defense capabilities.




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