Since 2022, demand on the global arms market has spiked, and the race has been on to secure contracts & market share.
Two weeks ago we looked at the collapse of Russia’s position in the market. Today, we tell the rest of the story, looking at the winners and losers so far – and emerging trends.
Patreon:
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Caveats, Comments and Corrections:
At one point I refer to CSIS estimates on defence spending – they are in fact from an IISS publication
All normal caveats and disclaimers apply.
I would like to note as always that this material has been created for entertainment purposes and is not intended to be a complete or comprehensive examination of the topic in question and should not be relied upon to inform financial or other similar decisions, judgements or evaluations.
Please review the SIPRI methodology and consider viewing my previous video on Russian arms exports:
Readings and Sources:
Arms transfer data primarily sourced from the SIPRI Arms Transfer Database https://www.sipri.org/databases/armstransfers/sources-and-methods
Cover image from:
US FY 2023 Arms Transfers – US Department of State
https://www.state.gov/fiscal-year-2023-u-s-arms-transfers-and-defense-trade/
US DSCA – Poland JASSM Purchase
https://www.dsca.mil/press-media/major-arms-sales/poland-agm-158b-2-joint-air-surface-standoff-missile-extended-range
Featured Rheinmetall statements and reports
https://www.rheinmetall.com/en/media/news-watch/news/2024/02/2024-02-12-rheinmetall-builds-new-ammunition-factory-in-unterluess-ground-breaking-ceremony-with-chancellor-scholz
https://www.rheinmetall.com/en/media/news-watch/news/2024/03/2024-03-14-rheinmetall-financial-figures-2023
Reporting on Swiss policy
https://www.rferl.org/a/swiss-parliament-blocks-arms-exports-ukraine/32440097.html
https://www.dw.com/en/ukraine-updates-swiss-envoy-defends-ban-on-ammo-exports/a-65416234
https://www.reuters.com/world/europe/swiss-government-rejects-german-request-re-export-swiss-ammunition-ukraine-2022-11-03/
Increase in NATO defence spending
https://www.nato.int/cps/en/natohq/news_222664.htmIncrease in global defence spending
https://www.theguardian.com/world/2024/feb/13/global-defence-spending-rises-9-per-cent-to-record-22tn-dollars
Reporting on Indian S-400s
https://economictimes.indiatimes.com/news/defence/russia-aims-to-deliver-two-s-400-air-defence-units-by-2024-end-as-payment-woes-ease-up/articleshow/103072429.cms?from=mdr
https://timesofindia.indiatimes.com/india/putins-war-delays-delivery-of-second-s-400-squadron/articleshow/90867785.cms
Reporting on refinery strikes
https://www.bloomberg.com/news/articles/2024-03-13/russia-s-ryazan-refinery-is-on-fire-after-drone-attack-tass-says
Stockpiling
https://www.reuters.com/world/europe/germany-only-has-20000-high-explosive-artillery-shells-left-report-2023-06-19/
Reporting on contract losses
Northrop Grumman Eats $1.56 Billion Loss On First B-21 Bomber Lots
Featured image on Red Sea operations
https://www.reuters.com/world/middle-east/yemens-houthis-say-they-targeted-bulk-carrier-number-us-war-destroyers-red-sea-2024-03-09/
US interest in RoK shipbuilders
https://breakingdefense.com/2024/02/in-south-korea-del-toro-courts-major-shipbuilders-to-set-up-shop-in-us/
RoK Arms Deliveries
https://www.japantimes.co.jp/news/2023/09/16/asia-pacific/politics/south-korea-ukraine-weapons-factory/
https://www.janes.com/defence-news/news-detail/indian-army-orders-100-additional-k9-howitzers
Philippine Navy’s first 2,600-ton frigate delivered, sets sail for the Philippines
https://www.defensenews.com/global/europe/2024/02/09/poland-south-korea-wrangle-over-big-ticket-weapons-financing/
https://breakingdefense.com/2023/03/can-germanys-big-cats-resist-south-koreas-black-panther-invasion/
https://www.defensenews.com/air/2024/02/02/south-korea-to-start-mass-production-of-kf-21-fighter-jets/
Delivery of Italian built FREMM
First Italian-Built FREMM delivered to Egypt Reaches Alexandria
JF-17
https://www.airforce-technology.com/news/nigerian-air-force-inducts-three-jf-17-thunder-multirole-aircraft/
USN supplier bottlenecks (featuring mk48)
https://www.defensenews.com/naval/2024/02/06/supplier-bottlenecks-threaten-us-navy-effort-to-grow-arms-stockpiles/
Turkish Exports
https://www.defensenews.com/industry/2024/01/08/turkeys-defense-aerospace-exports-rose-by-25-last-year/
Timestamps
00:00:00 — Opening Words
00:01:00 — What Am I Talking About
00:01:38 — The Arms Trade Leaderboard
00:06:57 — The Market Shifts
00:07:58 — The USA
00:13:42 — Europe
00:20:28 — Other Rising Providers
00:33:46 — The Biggest Losers?
00:51:10 — The Forward Trajectory
01:01:56 — Brakes On Sales Volumes
01:04:56 — Channel Update
Since February 2022 the defence sector worldwide has been going through massive changes. Worldwide defence spending hit a record in 2023 as countries rushed to rearm. Many major defence firms, often used to a more sedate level of peacetime production,
Have had to pivot as suddenly the old quantities fall short and the old timelines run too long. In this moment of disruption, some providers and countries have raced forward to try and capture new market share. While other established major players have started to fall away.
We talked about the collapse of Russia’s relevance to the market a couple of weeks ago, but they haven’t been the only one to face issues. Whether that be due to issues with the systems themselves, like capability and pricing, or because you are doing something like trying to sell the world weapon systems
That you insist should never be used in wars. In short, the global arms trade is being transformed by new demand, new technologies and new security and political realities. It’s also a change that is truly global in scale and implications.
And so if a few weeks ago we told the Russian part of that story, today I want to talk about the rest of it. So to do that I am going to break this into three broad segments. Starting with the big picture of how arms deliveries have shifted over the last decade,
Complete with a look both at the “who” and “what”. Which countries are doing the selling and what are people buying? Then we’ll zoom in to have a closer look at some of the winners, losers and movers in the market. That’ll mean not just major players like EU members or the US,
But also smaller providers like Korea, Türkiye or Switzerland who have seen their fortunes rise or fall. Finally, I’ll look at some big picture trends going forward. Looking both at some of the factors that are acting as brakes on production and purchases,
But also some reasons the recent surge in investment, production and purchases may only be the beginning. OK, so to start with I thought I’d give you a couple of leader boards to show the way the arms market has changed over the last decade.
This is something we started to cover in our episode on Russian arms exports, but today it’s time to look beyond just Russia’s market face plant. Here once again, rather than counting things in dollars, rubles, euros etc. I’m once again using SIPRI Trend Indicator Value to make things as comparable as possible
Year to year, and to avoid making it looking like arms sales are sky-rocketing every time someone gets a bit too friendly with the money printer. If you are not familiar with trend indicator value, I’ll link my video on Russian arms exports
Where I explain it a little more fully, but it’s basically a methodology the Stockholm International Peace Research Institute has come up with to account for arms sales in a way that controls for things like inflation and makes figures more comparable over time.
A brand new German Type 218 SG submarine might be 325 TIV, a Russian Sukhoi 30K fighter 47.5 and a used M113 APC maybe 0.25 TIV. But they will keep that same per unit value over every year in the database. So when you see tables from different years, the values are much more like-for-like
Than if you just use headline dollar values. So speaking of data tables, let’s have a look at a few. What you are seeing on screen here are two tables covering a period 2010 to 2013, right before Russia moved into Crimea.
You have the top 10 leader board on the left for tracked deliveries of major weapons systems during that period, and on the right the top 10 list for orders. And while arms sales are historically pretty bumpy, I think 2010 to 2013 serves as a useful baseline for us.
Most of the names in the top 10 are fairly predictable and intuitive. And for a lot of these countries there is a fairly close relationship between the new orders that are coming in and the systems that are being delivered. Even at this point however, there are some interesting notes.
Over that period Russia delivered significantly more TIV worth of systems than they took orders for. That doesn’t directly translate to monetary value 1:1, but it does suggest Russia might have been burning through its backlog of orders at this point.
Italy was in a similar position, while the United States was in the reverse situation, taking in considerably more orders than it was making deliveries. Russia’s annexation of Crimea then appears to have an impact on the arms market, but isn’t immediately transformative.
You can see here that both Russian deliveries and orders are falling off, but not fast enough to knock them out of second place yet. By contrast, deliveries from several European state surge, and France jumps up to third in the new orders column.
Partly as a result of Rafale starting to seriously threaten or displace some of its competitors in the fighter market at this point. In the four years leading up to the 2022 invasion there’s yet more movement. China, Italy, Germany and France all look to be within
Striking distance of Russia when it comes to order numbers. But some of the biggest upticks aren’t coming from the major players. Italy climbing four spots on the deliveries board, two spots on the order board. The Republic of Korea making it onto the deliveries board for the first time,
And Türkiye doing the same on the orders board. Meanwhile at the top of the table, the US just continues to extend its leads and maintains a considerably larger order intake than it does deliveries. To the point where the wait lists for some systems are starting to get almost Tesla-worthy.
Again, February 2022 comes around and suffice to say it’s a mildly disruptive moment for the global arms trade. For some countries the political and economic considerations around who is an acceptable arms supplier changes almost overnight. Meanwhile, the projection line for global arms demand
Gets revised upwards so far, it may as well be pointed at lunar orbit. The result was the seismic shift in the market that is still in the process of playing out. What you looking at here are charts just like the previous ones,
But keep in mind when you are looking at the numbers here, this is for a 2 year period not 4 years. So when you see the US taking nearly 45,000 TIV worth of orders, keep in mind that’s more in 2 years than in the 4 years from 2010 to 2013.
In terms of orders, it’s countries like Russia and China falling off the table, while French and German deliveries sail to second and third respectively. And while deliveries from Korea don’t make the top 10 table, in terms of orders they sail into second.
Taking a look at just our start point and end point in terms of deliveries, you can probably see some of the larger movements more clearly. The US is still at the top of the table, but with annual deliveries that have increased almost 50% from the 2010 to 2013 period.
Russia and China’s loss has generally been to Europe’s gain, with countries like France, Germany, Italy and Spain not just gaining places on the table, but increasing deliveries significantly on an annual basis. Even the United Kingdom, which dropped one spot on the ladder,
Increased the pace at which it was making deliveries from about 1,118 TIV per annum in that 2010 to 2013 period, up to more than 1,400 per annum in 2022 and 2023. The order board shows broadly similar patterns with Russian and Chinese orders dropping off, European orders surging,
And the main disconnect from the delivery picture being that when it comes to orders South Korea comes in off the rope with the chair and decisively beats its way into second position. Something that, trust me, we’ll unpack a little bit more in a minute.
But what I think looking at these tables does, is give us a couple of obvious stories to dig deeper on. The surge of production in some of the old guards of the arms trade like the United States and the European Union.
The drop off of some other providers, not including Russia, and the important role being played by some newer major entrants to the market space, like Türkiye and South Korea. And one reason why I think it’s important to cast a pretty wide net
Over different suppliers when you are talking about the arms market, is that while a lot of attention arguably quite rightly focuses on the war in Ukraine, a lot of the changes we are seeing in the arms market are fairly global in nature.
If you look at where the increases in defence spending came from between 2022 and 2023, the total real increase in US dollar terms, not accounting for any purchasing power parity effects, was about $128 billion. And what it shows is that Russia and Ukraine collectively
Only made up just over a quarter of the overall increase. Some high-profile cases like Poland and Germany accounted for just over and just under 4% respectively, but both actually fell short of Algeria at 5.3% and of course China at 10.2%. The shifts in defence spending aren’t isolated to Europe,
Rather they seem to reflect a broader, much more global trend. So with the observation that there’s potentially a global pool of demand in play here, what can we observe about some of the countries that have moved in to try and grab that market opportunity?
And since the leader tables in our discussion a couple of weeks back probably gave it away a bit, let’s bite the bullet and start with the United States. A good American mate of mine joked that while the US tends to be a couple of years late to every World War,
No one’s ever accused them of being slow to grab a good business opportunity. Even before the Russian annexation of Crimea and later the full-scale invasion of Ukraine really shook up the global arms market, the US was already a dominant incumbent supplier across multiple equipment categories.
In IT there used to be a saying that no one ever got fired for buying IBM. And in a sense you could argue the USA is the IBM of the arms market. Maybe not always the cheapest supplier, but certainly a long-standing one with a powerful market position.
As you can see on screen there, they basically ceded the shipbuilding market to other players, but in most categories they were highly competitive, and when it came to aircraft, US firms were the dominant players. And so as international demand grew while Russian supply started to drop away,
The US became the preferred destination for a lot of the orders that were flowing in. Between 2010 and 2013 the US shipped on average about 8,500 TIV worth of major systems per year, according to the SIPRI database.
In 2022 and 2023 the average annual figure increased to almost 13,500, a jump of almost 60%, which is a hugely significant increase when you are already the number one supplier. If a small Etsy store increases sales by 60% that’s wonderful,
If Amazon does the same, the postal service spontaneously combusts. But the really impactful point here from a market perspective is despite the immense defence industry that America has, it hasn’t stopped orders overtaking deliveries. And indeed, what you can see on screen there is a chart showing how
US deliveries didn’t just increase in quantity, their share of all deliveries was increasing at the same time. From roughly 30% between 2006 to 2009, up to well past 40% in 2022 to 2023. But the increase in tracked deliveries was being outpaced by the increase in tracked orders.
And there was already a discrepancy between orders and deliveries. Whereas countries like Russia had for years been consistently delivering more TIV worth of systems than they were taking new orders for, essentially burning through their backlog,
For the US the opposite was consistently true across all of those periods we’ve looked at. And one reflection of that is the chart you can now see on screen. What it shows is that in those years immediately before the annexation of Crimea,
The US took about 40% of the TIV value worth of orders tracked by SIPRI. In terms of other major players, those clustered bits of blue are various European players while red represents Russia. By 2018 through 2021
As Russian orders started to become rarer, US orders pushed up towards the 50% mark. And in 2022 to 2023, of all of the orders tracked by SIPRI more than half of the total value in TIV terms went to the United States.
And if you then want to include various US allies in Europe and the Asia-Pacific, the number is closer to 90%. Which probably represent not just a notable geopolitical win for the US and its allies, but also a massive shift from the Cold War patterns,
Where competition between Western and Soviet designed weapon systems was often much more equal. That enormous surge in orders however I think also serves to highlight a potential challenge for the US defence industrial base. Namely, that the demand for some systems is now so high
That the ability of prime contractors to supply those systems in a reasonable amount of time is often now in question. You can have situations where Poland rocks up and says they want 500 HIMARS for example, and after the Lockheed Martin executives presumably shake off the temporary hallucination
Of diving into a Scrooge McDuck-style money pit, then having to uncomfortably ask the client whether they want to either reduce their order, or introduce HIMARS training into the Polish school curriculum. Given that by the time the final launchers arrive, those kids
Will be the ones old enough to enlist and operate them. At this point, a lot of the US defence industrial base is either running at or even past capacity. And a lot of those really painful pinch points have nothing to do
With the sort of systems the US is sending to Ukraine, but rather those it needs for domestic consumption and the export market. US defence industry is working to increase output to meet a lot of this demand,
But it can be a slow and painful process, one we’ll talk about a lot more in the future. The US Mark 48 torpedo for example, which has gone back into production to meet future Navy demand, has had to go through more than a little bit of redesign.
Reportedly, the torpedo’s tail cone regulator required a circuit card that was being made using 1980s-era soldering techniques, and had a lead time longer than a graphics card order in the depth of Covid – at 110 weeks.
For now it’s entirely possible that the US could be securing more market share when it comes to arms exports, if it wasn’t for the dual strain being placed on some production lines by the combination of both US and foreign demand.
A lot of advanced missile systems for the Navy and the Air Force are probably good examples here. Over the next couple of years the US Navy wants to roughly triple the number of long-range anti-ship missiles it is buying per annum.
And the US Air Force has been increasing its buys of the JASM cruise missile. But Poland also got approval earlier this month to buy as many as 821 of the extended-range version of the JASM. Which is enough missiles to take up very roughly a year of US productive capacity.
And also notably, probably far, far more air-launched cruise missiles that have been supplied to Ukraine to date. At a zoomed out level, it looks like often the demand for these products is very much there, but supply still has to catch up. So yeah, basically from a statistical perspective, From a demand perspective for a range of systems, the US doesn’t have enough weapons. And frankly, that is probably one of the factors in the market right now that is giving other providers the room to manoeuvre that they have.
Which brings us to Europe, a region obviously a little more proximate to the war in Ukraine than the United States, and home to some of the world’s major defence firms and exporters. In a number of respects, it’s probably fair to say that a number of the phenomena
We saw with US providers after the end of the Cold War, consolidation, optimisation around small production runs, often very long lead times for systems, and occasionally “interesting” decisions when it came to maintenance and sustainment,
All often applied to an equal, or even greater extent to many of the European producers. Since February 2022 however, the wheels of European defence industry have slowly started to turn. In 2024 a record number of NATO alliance members are expected to hit the 2% target for defence spending.
And as a collective, thanks to some particularly heavy lifters, the European allies as a whole are also expected to hit that 2% target. A lot of that increased spend is going straight into procurement. And so after many years of mostly low-rate production,
Many European manufacturers have had to get creative about how they scale up output. One interesting observation right off the bat is that a number of European firms have already made moves to set up production in Ukraine.
German giant Rheinmetall has probably been one of the highest profile movers in this space, talking about setting up factories for 155mm ammunition and armoured vehicles in Ukraine in relatively short order. Most of the plans we’ve heard here have been of joint initiatives at relatively large scale.
Rheinmetall claims for example that their 155mm shell plant in Ukraine will be 51% Rheinmetall owned, with 49% held by a Ukrainian partner, producing an undisclosed 6 figure number of 155mm shells per year. And in terms of armoured vehicles, while there has been discussion of options
Like the next generation KF51 main battle tank, the more grounded plans seem to centre around simpler armoured vehicles like Fuchs and Lynx. And while Rheinmetall is obviously one of the more high-profile actors in this space,
They are not the only European defence firm that is talking about making a move into Ukraine. In terms of reasons companies might make that investment, there is some pretty heavy risk/reward trade-off probably happening. Producing in Ukraine would probably mean much cheaper inputs in many cases, think labour and electricity.
It’s also likely to ease the logistics of sustaining systems once they go into service. Generally speaking, it’s probably easier for the Ukrainians to get an armoured vehicle back to Lviv or Kharkiv rather than Lithuania or Germany.
It’s also probably easier to compete for Ukrainian contracts if you are producing in Ukraine. Firms looking to potentially make that investment will probably be weighing them up against various risks. Some traditional, like operating in a different legal system.
And some less traditional, like the fact the Russians might try and cruise missile your factory. But whether you choose to focus on the investments happening in Ukraine or the rest of Europe, the overall picture is that after a slow start in 2022, orders have started to really flow in.
And I want to focus on the order book here, because it’s one of our best possible windows into the future of the industry. Selling a bunch of stuff today is great, but you are going to make investment decisions for things like new factories
Based on what you expect to be selling in 10 or 15 years from now, not next week. And what we have generally seen here is European firms being capacity constrained in how quickly they can deliver stuff in the short term, but the orders really piling up.
The European missile giant MBDA booked considerably more orders than it did deliveries in 2023 by a significant margin. French giant Thales now has an order book of about 38 billion US dollars equivalent. For Dassault it’s 42 billion, equivalent to about 10 years worth of work.
Meaning that if hypothetically tomorrow the rest of the world really soured on placing new orders for Rafale or for some of the firm’s other flagship products, I’m sorry, if you are a factory worker on one of those lines you might actually have to start looking for a new job.
After that is, you finish streaming Fast and Furious 27, pick up your copy of Half-Life 3, and get the odds on the upcoming US 2032 election. Of course it probably won’t take these firms that long to work through the existing orders,
Because as your order book expands, it makes more and more economic sense to invest in expanding productive capacity. If we want to illustrate that by looking at Germany, It was recently reported in Deutsche Welle that in 2023,
“Rheinmetall took orders of 38.3 billion euros, up 44% from the previous year.” Which is an absolutely monstrous amount of orders, and probably sounds too high to be true. And if so, that’s probably because it is. Checking Rheinmetall’s financial figures,
The 38 billion figure is actually the total backlog, not the orders just for 2023. But it is a 44% increase on the previous year’s backlog of 26.6 billion euros. In US dollar terms that’s north of 41 billion. And notably, Rheinmetall identified an increase in their share of revenues
From foreign sales from 71% to 77% over the covered period. Meaning that for Germany’s most recognisable arms giant, nearly four fifths of revenue now comes from selling to people other than the German government. And with that sort of order book, it seems they have the confidence
To make acquisitions, investments and scale up sales. According to the firm, in 2023 they did about 7.2 billion euros in consolidated sales. In 2024 they expect that number to be around 10 billion. And by 2026 Rheinmetall indicate that they expect to be doing between 13 and 14 billion euros
Worth of annual revenue with a profit margin of more than 15%. That represents a rough doubling of pre-Ukraine invasion levels. And assuming that 77% foreign revenue share holds constant, that would equate to about an extra 5.2 billion euros worth of Rheinmetall sales per annum to buyers outside Germany.
Which probably means a lot of extra German steel making it onto the market. One of the questions that probably remains to be answered with regards to increased European weapons productions and sales however, is the question of priority.
To an extent this is the same issue we just talked about America facing before. You have essentially this simultaneous three-way pressure: national military and political leaders that might want to see their own national forces re-equipped as quickly as possible, the geopolitical and security perspective to prioritise
New production towards meeting Ukrainian requirements, and at the same time a desire to remain competitive and active in a lot of the major markets around the world, like India or the Middle East. For now part of the answer, as in the US, has been recapitalising and expansion.
But we’ve also seen a range of other efforts, often even within or between firms, to bring down lead times, pull supplies of strategic resources like titanium, and a range of other measures. But after a reasonably slow start in 2022,
For a lot of European firms there is still probably a lot of work to do. And that perceived shortfall in productive capacity at a time of significantly elevated demand might help explain some of the increase we’ve seen in exports from countries
That, historically, weren’t exactly at the top of the export table. And so now I want to talk about two countries that have emerged as increasingly important exporters in recent years, Türkiye and the Republic of Korea. Traditionally, Türkiye has been a major arms importer,
And it still operates a wide array of technology, mostly from the United States and Germany. Although, more than a little controversially, it does have a couple of Russian air defence systems in its inventory. In recent years however, there has been a major push
Towards increased self-reliance in just about every area. Türkiye has or is developing indigenous armoured vehicles, missile systems, tanks, artillery systems, combat drones, major warships, and they even have their own 5th generation fighter development program.
And to help secure the scale and financial return a lot of the Turkish arm sector needs to make this work effectively, export has often been a major part of the strategy. Indeed some Turkish-built systems are overwhelmingly built for export, and almost export only.
For example, the drone manufacturer Baykar, the company behind the famous TB2, reported that exports accounted for 98% of the company’s annual sales in 2022. It could be argued that’s at once both an enormous success, and also a sign of a risky strategy.
By being almost entirely export focused, these companies are essentially asking foreign buyers to foot the bill for developing Türkiye’s defence industrial base, as well as helping to bring valuable foreign exchange reserves into the country.
But it also means that, unlike a lot of the French, American, Korean or Russian arms manufacturers, there isn’t a reliable baseline of domestic demand for the company to fall back on if the foreign market ever dries up.
What you are seeing on screen here is a chart of the average annual rate of Turkish arms exports by year from 2010 to 2023. And as you can see, the direction of travel is one way only, with the rate of average annual deliveries in 2022 to 2023
Being more than five times higher than they were in 2010 to 2013. Looking at that pattern, and also taking into account a couple of things we’ve heard about orders for various Turkish systems, a few things stand out.
With perhaps the most significant being the change in what makes up Turkish exports over time. Between 2010 and 2017 APCs, infantry fighting vehicles and small maritime craft were the Turkish products attracting orders. But there were also signs something was changing.
Namely that combat drones began to appear on the chart in that 2014 to 2017 period, grow in 2018 to 2021, and by 2022 to 2023 that aircraft category of Turkish arms exports (which includes combat drones) was larger in TIV terms than exports of armoured vehicles and artillery.
At this point, Turkish arms exports have shown multiple years of pretty significant growth. And it’ll be interesting to see how their deliveries and order book evolve in 2024. But if you’re going based on the SIPRI data, there’s also another export success story
Of a country that has grown its orders so rapidly that it’s catapulted itself to near the top of the order table. So let’s talk about the Republic of Korea. I’ve talked about South Korean production twice before, once in 2022 and once in 2023.
In 2022 it was the story of an emerging producer knocking on the door of some new markets. By 2023 the door had clearly been blown off its hinges. And now in 2024 the data shows that there’s a breach and clear operation well and truly in progress.
For South Korea, increasing exports isn’t just a corporate initiative, it is part of their security strategy. And in recent years we have seen that strategy manifest in new systems, expanded scale, and a dedicated push to break into new markets with new partners.
If I was to oversimplify the core pitch of many Korean weapon systems when they go up for export opportunities, it would basically be as follows: Korea generally offers Western style systems while being very open to localisation, manufacturing alliances, knowledge transfer,
Tight delivery timelines, and often a lower price point than many European or American producers are going to be able to offer. And importantly, the lower price point doesn’t always mean you lose out on quality. In some ways for example, the Korean K9 howitzer is what would happen
If someone asked for an American M109 and then someone said “We don’t need that, because we have M109 at home.” In this case though the meme does kind of invert its meaning because K9 is a newer system than M109
And offers a lot of capability that some buyers have found it very hard to walk past. And one of the things that has helped the Koreans increasingly push a lot of their systems into the market is the sheer scale at which they are capable of manufacturing them.
The entire civilian shipbuilding capacity of the United States would be a rounding error for some of Korea’s mega-yards. And the figures for some of their ground combat systems, even though they don’t often advertise them, are similarly intense.
To give an example of the scale we are talking about here, let’s just go back to artillery for a moment. It’s recently been reported that after serious concerted efforts, France has been able to more than triple its rate of production for its CAESAR self-propelled gun.
From producing only two systems per month pre-February 2022, France now expects to manufacture 78 guns in 2024 for transfer to Ukraine. So roughly 6 guns per month after roughly 2 years of the French government pushing for a transition towards what they have described as a “war economy”.
Meanwhile in Korea, next month Hanwha is reportedly going to open another line for the K9 howitzer at their Changwon facility. That will reportedly bring the production rate for K9 at Changwon To 20 per month, 240 guns per year. And Changwon is not going to be the only facility in the K9 production chain, with localised production facilities being established in countries like India and Poland. The Indian version has been adapted for high altitude operations
After the country has previously had trouble with some imported hardware from other countries that didn’t function well at altitude. There’s also been a lot of ambitions discussed around the Polish version, mostly around making the system better able to integrate with other NATO forces and operate in Europe.
And with each client that comes into the system, often the supply chain expands as do the offerings around the vehicle. If the Australian (and best named version of the K9 for example, the AS9 Huntsman) has a lot of similarities to what was once the Norwegian configuration,
Complete with the Norwegian Odin Fire Support System. So as systems like K9 and K2 assimilate into different markets, they add their technological distinctiveness to their own. Thus the logic might go: with each sale comes new options and more scale,
Which leads to more sales, which leads to more scale and options. If you want to see the overall trend in annual delivery volumes I’ve got the numbers cut by system type there. And overall it speaks to an upward trend, but not an insane one.
What you can see there are strong shipments of artillery systems across all time periods, a steady growth, and a massive spike between 2018 and 2021 when there were some major naval deliveries. The Philippines got its frigates from HHI, Thailand got its DW-2000s,
And a number of nations received Korean LPDs. But all of this was really kind of just a precursor to what we saw after February 2022. Because at that point, the Polish government started to get very nervous about the whole Russia thing, and started going around the world
Asking providers how much equipment they could provide on a reasonable time scale. Korea’s response was basically, “Yes.” And so in 2022 and 2023 we saw this happen. Annual orders exploded by more than an order of magnitude from 2018 to 2021 levels,
As the Poles ordered everything from jets, to Chunmoo multiple rocket launchers, to K9 artillery systems and K2 main battle tanks. The reason I have that giant arrow there saying “be careful of this” is because a lot of those orders haven’t turned into deliveries yet.
And there are still debates going on in Korea about the financing terms that Korea is going to offer Poland to make all of these orders a reality. Offering to help finance someone’s military purchases from you, by the way, is a very common practice.
The US is huge on foreign military financing. Russia has often sold weapons to countries on credit, and then later forgiven those debts. And often these financing deals serve as a sort of incentive. It’s basically the opposite of buying a car from a car dealership.
For some car dealerships, getting you on the hook of a car loan can be far more profitable than the mark-up on the vehicle itself. And so from a business perspective the car basically becomes a way to sell you the loan.
For a lot of countries and companies looking to sustain and support their own industrial output, the incentives are reversed. Countries are much more prone to using a generous loan to sell you the car, the tank, the jet, or whatever the system in question happens to be.
But even if some of those Polish orders don’t turn into deliveries, some already have. And the numbers involved are just massive. Which sort of served to distract from the fact that in that same time period
Korea also signed a number of deals that in any other block of years would have been massive events. With major sales to both Egypt and India. All of those sales might have potential to change the way Korean weapons are positioned in the market.
Producing in Poland and integrating European subsystems puts the K2 tank in a pretty good position to compete directly with the likes of Germany’s Leopards. Localisation in Egypt might have implications for other local markets. And it wasn’t that long ago that we talked about the enormous value
Firms might unlock if they could access the Indian market. And right as global demand is on the rise and Korean firms are having a lot of success selling off land combat systems, there are also signs we might be seeing some major plays
In traditionally higher value areas, like aviation or naval production. In February the US Secretary of the Navy visited South Korea. There he basically publicly pitched to Korea’s military ship builders to consider investing and setting up subsidiaries in the United States to compete for the US military shipbuilding market.
General US policy is not to buy fully built warships from abroad, no matter how cost effective that might be. But if Korean firms do take up the offer, setting up in the United States might provide
An indirect way to compete for one of the two largest military shipbuilding budgets in the world. And somehow I doubt Korean firms will have a chance to compete for Beijing’s order book any time soon. For the moment though, this is still very much in the watch this space stage.
But perhaps the biggest example of Korean industry deciding to go big or go home is something that hasn’t even shown up in our data yet. If you are talking about the world of foreign military sales,
There is almost no system on the planet that burns through a budget faster than fighter aircraft. And it’s an area that has some very powerful, very entrenched, providers. The US has the 5th generation market pretty well stitched up with F-35,
And has some strong entrants into the 4th gen market with the latest model F-16s and F-15s. Russia, Europe and China all have their own strong entrants into the 4th generation market as well. But now the South Koreans are poised to enter the market
With a domestically manufactured fighter aircraft that in terms of both features and costs seems to be aiming somewhere between the F-35 and a lot of existing 4th generation offers. The KF-21 for example has a stealthy aircraft design, like the F-35,
But unlike other 5th generation fighters it doesn’t carry all of its ordnance in internal weapon bays. Instead munitions are either semi-recessed (stealthy themselves), or if the mission allows it, stealth can be discarded for a larger load.
The KF-21 in some ways represents a story we have seen many times with Korean systems before. The Korean military identifies a keen domestic need, government supports industry, and with contracts for the Korean military serving as a sort of demand backstop,
The process of then trying to sell it abroad begins in earnest. With the position of China’s 5th generation systems on the market being weakened by the fact that Beijing won’t sell them, and Russia’s position being weakened by the fact that Sukhoi 75 is still basically a development program,
The KF-21 might be an option for countries that want some 5th generation features, but either can’t buy, or don’t want to buy the American F-35. And despite the fact the aircraft is still technically in the testing phase, the Korean government has already given the green light to production contracts.
So far for the first 20 aircraft, and an eventual force goal that basically suggests that even if the Koreans do not sell a single one of these things, between 2026 and 2032 they are aiming to produce at least 20 of them per year.
To put that in perspective, the French Rafale has a back order of hundreds of aircraft and has recently been produced at a rate of about 20 per year, aiming to increase that north of 3 per month.
But that’s a 4th generation fighter with a deep order book that’s been in service for years. So Korea saying they want to start with an annual target of 20 per annum is actually an enormous commitment. And only time will tell whether production ultimately goes mostly towards
Korea’s domestic needs, slowly makes its way onto the market, or if the Poles get ideas again and just buy a couple of lots straight off the factory floor. Now there are plenty of other middle-ranking arms exporters that I could choose to focus on if we had the time.
Italy for example, has had some real success in its traditional area of naval focus. But I picked the examples of Türkiye and Korea to give a bit of an example of where the data says the market is at the moment. Essentially market demand is massively elevated
Just as traditionally the second largest supplier, Russia, is basically missing in action. That vacuum potentially provides opportunities for newer providers like Korea or Türkiye to move in and grab some market share before existing prime contractors can scale up and seize that opportunity.
But this is a business where trying is expensive, success is never guaranteed, and a few good deals one way or the other can make or break the fortunes of a major producer for years to come. So while the two for now are examples of very different success stories,
I think it’ll be really interesting to see where we are a year or two from now. But having talked about countries that have been ramping up their orders and deliveries, I now want to flip the question around and ask:
Who, in the midst of this massive upswing, is actually losing share? I’ve already done a video on the downfall in Russia’s position, so I won’t be revisiting it here. But I will use it to introduce a conceptual point
Which is relevant to the next country we are going to talk about, and that’s the importance of your reliability as a supplier. In that video I talked about Russia potentially diverting priority in production from existing export contracts to the requirements of the MoD and the war in Ukraine.
And some comments suggested that wasn’t unusual and shouldn’t be particularly concerning from a Russian perspective. But from a historical perspective I’d argue there are plenty of cases of a country being engaged in a war and yet choosing to continue exports regardless.
What you are looking at here is a chart showing US arms exports before, during and immediately after the Korean War. And I note that especially during the early stages of the Korean War US and United Nations forces on the Korean peninsula
Complained about a shortage of multiple systems and munitions. Artillery ammunition was in especially short supply, an experience unique to the Korean War and every other major conventional 20th century conflict. But there was a premium placed on a lot of resources by the US military during this time
And defence spending roughly doubled between 1950 and 1951. Which isn’t particularly out of step with the trajectory we’ve seen Russian defence spending take during the war in Ukraine. And yet, US arms exports didn’t fall off during the Korean War, they took off in a massive way.
The US transferred about 1,400 TIV worth of stuff in 1950, 4,000 in 1951, 7,000 in 1952, and nearly 10,000 in 1953 – the year of the ceasefire. In 1954 after the war was over, the figure dropped to 6,000, climbing to 7,191 in 1955.
So as the world security environment got pretty jittery in the 1950s watching the major war play out in Korea, to a significant extent the US kind of moved into that market void. And if you’re thinking, “Hey Perun, that was probably just transfers of equipment
To the South Koreans to try and fight the Korean War or something.” I’m sorry, but in statistical terms while Korea did receive a lot of assistance, they didn’t really dominate the chart. Between 1950 and 1955 the Republic of Korea received about 4% of the arms transfers in this database.
By contrast, more than a third went to France, Canada or the United Kingdom. Italy and Belgium accounted for more than 15%, again highlighting that a lot of these sales were still to European countries that were more concerned about deterring the Soviet Union than fighting in Korea.
And in trend indicator value terms, the US actually transferred more weapons to Yugoslavia during this period than South Korea. You know, at this point the Federal People’s Republic of Yugoslavia, a country whose President towards the tail end of that period was famous capitalist icon, Josip Tito.
The first combat aircraft the Republic of Korea received during the Korean War were North American P-51D Mustangs, a propeller-driven fighter and veteran of World War Two. Over the course of the war the Koreans would receive 110 aircraft in total. Meanwhile, Yugoslavia would begin operating their F-84 Thunderjets,
Which as the name suggests is a jet, in the June of 1953. Ultimately receiving almost 220 of them. This isn’t because the Korean War wasn’t important, Americans fought and died in it. But instead it’s because the arms industry in a superpower
Is expected to walk, talk and chew gum at the same time. And keeping arms transfer flowing is often an important part of geopolitical manoeuvring. Looking at the stats for the Vietnam era, again arms transfers didn’t fall off a cliff.
Transfers actually hit a peak in 1964 that they wouldn’t return to until a decade later. And while you can see an apparent dip in ’66, ’67 and ’68, the levels there are still higher than they were in the years leading up to the Gulf of Tonkin incident.
The pattern meanders a bit, but hopefully it illustrates a point. The US doesn’t usually stop shipping weapons just because there’s a war on. Most of the time Uncle Sam is not going to let minor distractions like a war get in the way of good business.
But more seriously, there are plenty of examples like Lend-Lease, British aid to the Soviet Union, or German arms sales to various Axis allies during World War Two, which while often bumpy, at least in general illustrate that even where there is pretty dire, even existential, military pressure
Countries have to be pretty desperate to turn off the tap entirely. You don’t want your major clients to be left feeling under-supplied, abandoned or constrained when they need your systems most. In the arms market your reliability as a supplier is a key selling point.
Especially when you are dealing with potentially very high-profile, and operationally or even strategically significant systems. In 2022 for example it was reported that Russia had “slightly delayed” its shipments of the next tranche of S-400s to India.
In 2023 it was reported that the next two full squadrons would arrive by the end of 2024. With some reports claiming that it was payment difficulties, not necessarily availability that was driving the delay. But with someone apparently figuring out that refinery facilities
Full of hydrocarbons can be very, very flammable, some of the reporting now is that Russia might provide India its final two S-400 squadrons by August 2026. Even if that is the correct decision from Russia, and from a military perspective it almost certainly is,
It’s almost certainly going to dent international perceptions of Russia as a reliable arm supplier. And what that means is that for any given combination of efficacy and pricing, a Russian weapon system going forward might be less attractive than a more reliably delivered competitor.
But if Russia’s issue is selling weapons that may or may not be delivered this decade, some other providers may be struggling to market systems that buyers will definitely receive, but may or may not be allowed to use. Switzerland is probably a salient, if not the only example here.
Because their situation is arguably demonstrating just how difficult it is to balance neutrality on one hand against trying to be a major arms supplier on the other. Official neutrality has been a major part of Swiss foreign policy for centuries at this point.
And like many other states (the Swedes come to mind here) Switzerland long took the view that the most enduring form of neutrality was armed neutrality. Basically this is a country that for many years rigged many of its bridges and tunnels
With explosives so they could be collapsed in time of war, and then hung a metaphorical sign on the door saying “Gold deposits welcome, invaders will be shot.” To support the policy of armed neutrality, Switzerland developed a quite robust military industrial complex.
But with demand from the Swiss military itself shrinking and shrinking, one of the ways to preserve that industrial base has been to turn to export. Despite the high salaries and cost base of the country, there are a number of Swiss systems with significant international presence.
Piranha infantry fighting vehicles and APCs have gone to operators like Denmark and Romania, and made up about 13% of Swiss arms exports between 2003 and 2023. The long lineage of Skyguard and Skyshield air defence systems made up about 21% of exports over the same period.
And some older versions can claim to be combat proven, for example being used by the Argentinians to shoot down a British Harrier during the Falklands War. Swiss industry has also been able to integrate itself into some wider European production and supply chains.
And for certain calibres it has had an enduring role as an ammunition supplier. And all of that combined put it about 14th on the list of global suppliers back in 2022. The good news about being a nominally neutral arms supplier
Is there are very few clients that are going to entirely rule you out on a political basis. The bad news for the pitch however, comes when you realise that Switzerland often expects not just itself to be neutral, but its weapons to be as well.
Over the course of the war in Ukraine, countries which have purchased, or sought to purchase, Swiss weapons (particularly Germany in many cases) have asked permission from Switzerland to take those weapons (that they have, remember, already bought) and transfer them to Ukraine.
An early example of this was when Germany sent the Gepard Flakpanzers to Ukraine and they wanted to send 35mm ammunition with them. But some of that 35 mil ammo had been produced in Switzerland before being shipped to Germany. Switzerland (like most arms exporters it has to be said)
Requires you to get permission before you re-export something you purchased. Those restrictions tend to exist for a wide array of often very legitimate reasons. For example, those rules prevent Kiwiland from ordering a single F-35 from the United States,
Adding two zeros to the sticker price and reselling it to Moscow (as hilarious as that might be). As wide as Amazon’s reach has grown, you can’t actually drop-ship major weapon systems, at least for now. The potential problem with these re-export permissions however,
Comes from the policy question of when the original seller will approve them. France for example, probably doesn’t want its weapons being put in the hands of potential enemies and so will refuse re-export permission accordingly. Switzerland however, has long taken a slightly different policy.
With Switzerland’s then President being quoted in 2023 as saying (and I’m quoting from the article here) “Swiss weapons must not be used in wars.” A statement which probably caused sudden-onset depression in all the marketing guys for the Swiss armament sector.
And all the buyers to sort of nervously look at each other and ask, “Well, what’s the bloody point then?” To grossly oversimplify: Switzerland’s position is they will refuse to grant permission for you to transfer arms you have bought to any country that is currently at war,
Because that could be interpreted as a breach of Switzerland’s neutrality. Now thankfully for everyone’s sanity, that doesn’t mean that if a country buys Swiss weapons it can’t use them itself during a war. Which can lead to some relatively confusing situations,
So I’ve provided you a handy-dandy neutrality flowchart here. If Germany sends German-built tanks and Swiss ammunition to Ukraine to help it defend itself against the Russian invasion, that is a dangerous violation of neutrality and obviously not allowed.
If Germany sends German-built tanks to fire Swiss-built ammunition at the Russians in Ukraine, but this time, they have Bundeswehr troops crewing them, that is obviously not a violation of neutrality and totally OK. And then finally, if Berlin figures the rest of Europe is kind of distracted
With the whole Ukraine thing and decides to, I don’t know, invade Belgium out of reflexive habit, you guessed it, this is also very neutral and totally OK. And so if you’re potentially going to buy Swiss platforms or Swiss munitions,
You have to be aware of the fact that while you can use them directly, you might struggle to use them indirectly. And so in terms of the reliability of those systems as a tool of your own national policy and security,
This might be just as much an issue as systems not being delivered on time. For some countries that might be a perfectly acceptable restriction. For others, buying weapons you can’t send to a war zone might be a step too far.
As you can see on screen there, the export of Swiss systems tracked in the SIPRI database has been falling for years at this point. It averaged about 323 TIV per annum between 2007 and 2011, 293 between 2012 and 2016, 182 between 2017 and 2021,
And 139 between 2022 and 2023. The drop is arguably less extreme than it looks, because deliveries are often very lumpy and there were some major deliveries in that 2007 through 2016 period. But the Swiss order book, or least the components of it tracked by SIPRI,
Haven’t exactly looked their best in the last couple of years either. In trend indicator value terms, the average annual orders in 2022 to 2023 were about half of what they’d been between 2003 and 2011, and about a quarter of what they were between 2012 and 2016.
The drop from 2017 to 2021 was more mild, only about 40%. Again, that’s the classic lumpiness of major arms order showing itself. But at a time where many other defence producers have been seeing their orders skyrocket, the orders for Swiss systems have remained a bit more grounded.
Now I obviously can’t say for certain what has driven that demand picture. But the president of the relevant Swiss industrial association put it as follows, and here he’s reportedly speaking in reference to the re-export restrictions, “Some companies have lost orders because of concerns about the Swiss regulations,
While others are considering investing less here.” That last point about investment might be a particular concern, because the Swiss arms industry includes a lot of multinational corporate presence: Lockheed Martin, Rheinmetall. And so when those companies are making investment decisions
They can generally choose to set up new productive capacity in a range of countries, Germany, the United States etc. They aren’t bound to double down on their investments in Switzerland itself. Now I want to stress here that this is by no means a mono-dimensional story,
And far from writing the Swiss arms sector off, I actually wouldn’t be surprised if orders and shipments stabilise or even lift in the short to medium term. At the moment the demand for a lot of munitions and systems in the market seems to be dramatically outstripping supply.
So even if countries might not like Switzerland’s restrictions on re-export, they might choose to buy anyway in order to, for example, refill part of their stockpiles for domestic use only. You can think of this as a form of circle trading,
For example when the United States got Patriot missiles from Japan and artillery shells from South Korea to refill its own stockpiles so that American versions of those same systems could be sent to Ukraine. In that sense, having some Swiss munitions or systems in your stockpile
May not impact your ability to send a meaningful number of systems to other countries or groups if the situation demands it. The Swiss also manufacture a range of military systems that aren’t intended for combat purposes at all, one of the big sellers is the PC-21 trainer aircraft for example.
With a training aircraft you don’t even need to send it to the country you want to help in order for it to be effective. Just bring the Ukrainian pilots to your bases, put them in the training aircraft, teach them a trade and then send them back home.
That would obviously again be very neutral and not reach any restriction on re-export. So it’s less that Switzerland’s armament sector is likely to die off, so much as miss massive opportunities. At a time when other producers in Europe are seeing stratospheric growth in orders,
You have a Swiss sector that originally fell, and is now looking at stabilisation and moderate growth. And as tens of billions of euros are dedicated to recapitalising the defence industrial base in Europe, it’s possible that a lot of those euros
Might be focused on jurisdictions that are a little more comfortable with the idea that weapons are sometimes used in wars. If you want an imperfect example of what might have been, look at another country which traditionally had a policy of armed neutrality, Sweden.
Like Switzerland, Sweden traditionally adopted a policy of armed neutrality. Like Switzerland, it developed a significant domestic arms sector. And like Switzerland it downscaled defence spending considerably after the end of the Cold War to the point where export became critical to sustaining the domestic defence industry.
Their paths did diverge eventually however. Sweden joined both the European Union and NATO, and Sweden is now a participant in many European defence programs and integrated into a wide array of supply chains. And while it’s impossible to know the future for sure, that might position Swedish firms
In a much better way to catch the wave of growing European demand. It’s worth noting that shares in SAAB, perhaps the most recognisable name in the Swedish defence industrial base, have undergone a minor increase in price since February 2022.
With a share that went for less than 230 Swedish krona before the invasion now selling for more than 900. The exact nature of Swiss neutrality is ultimately a political decision, and one that is passionately debated in Switzerland itself. But on the narrow topic of arms exports,
Swiss policy may be leaving investment and sales opportunities on the table. Logically speaking, it’s often going to be easier to sell weapons of war that are allowed to be used in them. The final country I want to give a quick mention in this section is the People’s Republic of China.
Not so much because of anything the country has done, but rather because of what it hasn’t. If you looked at the basic characteristics of many Chinese weapon systems, you’d think they were a pretty good substitute for countries that were used to using Russian systems.
Many Chinese systems would share the same Soviet lineage, be competitively priced compared to Western products, and you would think often be available to countries that couldn’t go purchase arms from for example, the United States. And over the last decade or so, the country has had
Some busy years when it comes to foreign arms shipments. As you can see on screen there, shipments did dip a little between 2018 and 2021, but in 2022 and 2023, Chinese arms exports grew considerably in SIPRI TIV terms.
But even though there’s been growth in deliveries answering orders that are a couple of years old, something strange has happened with the order book. Or at least, the part of it that the public can see and SIPRI can track. For years China’s tracked orders in the SIPRI database
Have consistently fallen short of delivery figures. But in 2022 to 2023 the ratio between those two figures has exploded as at least so far, Chinese orders have actually dropped off more than Russia’s have. In 2018 to 2021 China delivered about 2,500 TIV worth of systems per annum.
Over the same years SIPRI identified on average about 2,000 TIV worth of orders coming in. So very roughly, deliveries were about 1.25 times orders. These last 2 years around 4,500 TIV worth of deliveries
Have been matched up against less than 200 TIV worth of orders, a ratio well north of 20:1. To be honest, unpacking what might be happening here probably deserves its own segment in a different episode. It could be some combination of demand factors,
Where countries are actively deciding not to purchase Chinese weapons. Supply driven, where China is choosing to prioritise the bulk of its arms output to meet domestic requirements. Plus there could be other diplomatic or political considerations at play.
We know the various services of the People’s Liberation Army have continued to rearm at a significant pace over the course of 2022 and 2023. So it isn’t like all of China’s massive defence producers have suddenly chopped all their output.
But for the moment at least, it seems like China’s significant output of various weapon systems hasn’t been translated into SIPRI-tracked export orders. The question I want to unpack then is: what might happen to the sector going forward? Is this just a short-term bubble driven by the war in Ukraine?
Or is it the start of something more enduring and substantial? And while I can’t give you a definite answer to that question, I can take you through some factors that are putting upward and downward pressure on future demand.
Perhaps the easiest driver to point to is just global defence spending going mountain climbing. The [IISS] estimated that in 2023 global defence spending rose almost 10%. And while the correlation between increased spending and demand for major weapon systems clearly isn’t 1:1, it’s a correlation that’s very much there.
Unlike small arms and their ammunition, you can’t just sell surplus warships or cruise missiles to the US civilian population if you have surplus output. And so looking at how much nations are spending on their militaries
Is usually a decent proxy for how much they are going to spend on importing weapons. But the thing with relying on budgets to project future demand is that they can change rapidly. Programs can be cancelled or expanded, politics can shift,
And so I think some of the pressures that are worth looking at might be a little more fundamental than just current fiscal year planning. And those start with the way the war in Ukraine has changed the game on defence planning by depleting storages that need to be refilled,
Prompting nations to shift their view on what and how much military equipment they think they need, and demonstrating the value of disruptive technology and tactics. That first point around storages has just been driven by the rate of materiel consumption in the war in Ukraine.
When the Cold War ended an enormous amount of former NATO and Soviet materiel was left behind. You might be hearing me say “a lot of stuff”, but I mean a LOT of stuff. As in, there were places in the world where it was cheaper to get
An armoured vehicle than a tractor to tow stuff on your farm. Something which I’m sure would have had secondary benefits for any land disputes with neighbours, or efforts to control local invasive species. That old hardware filled the storages of nation states, private companies, even private individuals.
And it would have shaped investment and planning decisions, because what possible event could be so cataclysmic that it could burn through all that leftover Soviet crap? The war in Ukraine, and to an extent before it the war in Syria, have been just that furnace.
Depending on what system category you are looking at, in just over 2 years Russia might have burnt through more than half of the largest conventional weapon stockpile on planet earth. And its current model for producing ground combat systems at scale
Remains overwhelmingly reliant on that reactivate or repair model. To inflict that attrition though, Ukraine’s allies have also had to dig deep into their own legacies. Many European NATO states, like the Poles and the Czechs, had large stockpiles
Of leftover Warsaw Pact-era tanks and armoured vehicles. A lot of those are now gone. In terms of artillery munitions, Russia has expended a majority of its own stockpile and tapped those of North Korea and Iran. While thanks to things like the Czech Initiative, the war is vacuuming up
Not just European and American ammo supplies, but shell supplies across the world. Now make no mistake, there are still some enormous stockpiles of military equipment out there. Some NATO states like Greece and Türkiye
Still sit on massive conventional arms stockpiles that they point at each other a lot of the time. And there are stretches of American desert with enough parked equipment to give every rattlesnake their own armoured division.
But those stocks don’t exist as surplus so much as part of a security strategy. Equipment storages served as a sort of safety blanket, insulation against a sudden need to increase arms production. Now that’s more or less how most countries are using these stockpiles right now.
But if nations want to maintain the capability and security that that old equipment gave them, then going forward you’d expect them to have to buy new kit. Either to rebuild active duty numbers, or so current equipment can be retired to rebuild those storages.
And the demand might actually go further than that, particularly for things like basic munitions. Many nations and their industrial bases were caught off guard by just how many shells and munitions the war in Ukraine consumed. What that translates to is an understanding that the magazine depth
That a lot of nations were planning for may not be deep enough. And so the understanding in some places now might be that the role of production and imports going forward is not just to refill stockpiles to where they were in February 2022, but rather to a level
That is at least somewhat close to good enough. Germany alone for example, might need to procure something like 250,000 artillery rounds just to hit the requirement to be able to supply the Bundeswehr through 30 days of high-intensity combat.
But as the war in Ukraine has shown, it is possible for a war to carry on for more than 30 days. And so when you are talking about stockpiles of everything from spare parts, to shells, to cruise missiles, the definition of “enough” might be shifting.
And that re-baselining wouldn’t be happening just on the basis of experience in Ukraine. We’ve seen high consumption rates for example in patrol operations in the Red Sea. And a continuation of a longer-term shift in what a lot of militaries are expected to focus on and be able to do.
For a lot of militaries, the early 21st century was a period where they focused on very specific missions. For some that was counter-insurgency and stability operations, for others just saving as much money as possible and fully embracing the peace dividend.
But now in the 2020s a lot of forces seem to be going through something of a Back to the Future moment, with a lot of new focus on some very old missions. For Europe, the deterrence of Russia. And in the Asia-Pacific it’s hard to pretend
That the demands of great power competition and deterrence aren’t on the rise. To help meet those strategic imperatives, militaries are likely to feel that they need to be ready for large scale combat operations against peer or near-peer opponents. And that just imposes a very different set of requirements
Than when your mission is insurgency or austerity. You may need very different munitions and equipment when you are shooting at tanks rather than Toyotas. And the quantities involved, especially when it comes to munitions, may be orders of magnitude apart. So the changing security environment and force objectives
Might be one reason that militaries need to build up more and different equipment. But another driver might just be that new technologies and systems are being developed that greatly disrupt the existing balance and merit investment. And more than that: merit frequent and recurring investment.
Over the course of the war in Ukraine for example, drone technology and drone tactics have evolved very quickly. Already their level of effectiveness in Ukraine can probably be best described as terrifying. And increasingly trying to occupy any defensive position or entrenchment
That doesn’t have good overhead cover or concealment is increasingly just daring a millennial with a headset and controller to absolutely ruin your day. But as I’ll hopefully cover in another episode soon, while the pace of systems development in Ukraine has been insane,
It still probably has a long way to go. In essence, what we’re arguably seeing in some systems categories, particularly unmanned systems, is less the steady incrementing of technologies that already exist, and more one where weapons technology suddenly gallops ahead in a sort of generational change.
And you can’t really afford to be left behind. That sort of rapid generational shift in technology and tactics isn’t the norm. If I take two F-35s or two F-16s manufactured by the same company 5 years apart, the difference between them, if any, is likely to be incremental.
Both are likely to be serviceable, useful to some degree in a military campaign. If the two systems are likely to go head to head, I could likely give the older aircraft a better pilot, better mission plan, better enablers etc. and cause it to come out ahead.
But what you’re seeing on screen now is another example of two aircraft manufactured by the same company, Gloucester, about 5 years apart. The British would begin the war actively using Gloucester Gladiators in combat. By the end of the war they were using Meteors to shoot down V-1 flying bombs.
But if you took a squadron of Gladiators and put them up against a squadron of Meteors, I do not care if every single Gladiator was piloted by a reincarnation of Manfred von Richthofen or Douglas Bader,
Their best hope for trying to bring down a jet with even a moderately competent pilot is probably just to cross their fingers and hope for technical failure. It’s possible for a technological gulf to become too wide to effectively bridge. And while sometimes that shift might take centuries or decades,
Right now, looking at drone systems, changes are happening in a few short years or even months. In some ways this might make it a very exciting time for force planners and an absolutely terrifying time for anyone running the budget.
Because the more of this change that’s happening, the more pressure you have to invest early and frequently. Just like a lot of other government business (or even personal investments) one of the key things planners are often going to be looking at is return on investment versus risk.
And all else being equal, the less capable your existing systems compared to the new ones, the more likely you are to get a return on investment and for that decision to make sense. So when you have a relatively new, cheap technology like these little tactical drones come along,
It might make sense to invest a lot of money in them right away. After all, you get a massive increase to the overall combat power of your force. The problem however, is that because the technology is still moving so quickly,
That same technology you might buy now might be obsolete in a couple of years. And if you don’t get into a war in that time, that investment might be considered wasted. That’s not just a theoretical possibility by the way, we’ve got historical examples.
In the inter-war years the French embarked on a massive build-up of their air force using early 1930s designs. That did mean that for some years they had a massive advantage over the embryonic Luftwaffe. But by the time the war started, most of the designs were horribly outdated,
And a second wave of rearmament came too late. So to move back to the modern era, you can have some pretty extreme hype and development curves in play, and an incentive to invest both now and also again later once the technology and tactics have matured.
And critically, when it comes to projecting overall future demand, a lot of this stuff doesn’t really have a legacy equivalent. There are no Cold War-era warehouses full of FPV drones and loitering munitions to fall back on.
If countries now want them, they need to build them or buy them from scratch. And often when you are creating new systems with new capabilities, you have to then create counter-measures to those capabilities. And again, depending on how dangerous the threat they are meant to defend against,
Acquiring them might really not be optional if you want your force to be effective. If you are trying to fight a conventional land engagement against an opponent with great battlefield networking and communications, highly skilled drone operators, and a range of precision fire systems ranging from First Person View drones
Through to long-range precision missiles, like good luck. You might try to do that without a modern and effective anti-drone system for example, but it’s probably going to look kind of like Saddam Hussein trying to fight the US Air Force without adequate air defence.
Sure you might have saved a couple of procurement bucks, but you also just might die. So maybe new counter-measures have to be in the budget as well. Whether that be lasers for shooting down drones, defences against hypersonic missiles,
Secure communication systems so you can leverage and share information without again immediately dying. Or a range of other systems which, again, won’t always have legacy options available. That might mean planners have very little choice but to find a way to buy or build the systems in question.
And that imperative might generate at least some additional demand in the market in coming years. Now of course it’s not all upward pressure, and the future direction of the arms market is hard to chart for certain. To cover just a few factors, many nations are dealing with political polarisation
And uncertainty at home, which might raise the risks of things like orders falling through. Or measures that might otherwise make strategic sense failing due to domestic political reasons. Inflation is also a massive problem, and one of the reasons why I’ve favoured TIV based measures so far.
The combination of Covid followed by Ukraine has imposed serious stress on a lot of military supply chains. And the prices for some relatively basic products like 155mm shells have in some cases increased several times over the last 2 years.
It’s even got to the point where some big prime contractors that signed contracts with the Pentagon before all the supply shocks have now lost money on those deals. And the ever-present threat you have when prices go up is that decisions then get made
To control cost increases by reducing quantity, which drives inflation, sparking the kind of death cycle that we’ve talked about before. Some forces might also find the cost of unfunded operations eating into the funds available for procurement.
Operations like the patrol missions in the Red Sea can be very, very expensive. And if a force doesn’t receive supplemental money to do those sort of operations, often they might have to find the money somewhere else.
And the somewhere else might just be the budget for shiny new missiles or helicopters. And even if none of those factors weigh down purchases too far, there’s still going to be the need for many countries to recapitalise their forces and their industrial base.
And so even in a situation where you see major increases in global defence spending, there might still be a lot of demands on that funding. But for now, the zoomed out picture is probably something like this.
Over the last few years a lot of countries have experienced a little bit of a shock to their system when it comes to their security policy. Now they are looking out on a higher threat environment that might be defined by more and more great power competition.
At the same time old arms stockpiles have been run down, and so they have an imperative to build up their stockpiles not just to the old level of adequate, but to new (usually higher) baselines that reflect the new environment and the new realities.
And on top of all of that, there is also an imperative to invest in new and emerging technologies that are arriving and being integrated in a way that doesn’t displace existing systems, but just further expands the list of requirements. Centuries ago, Private Conscriptovic’s great-great-great-great-great-great-great-grandfather
Might have been considered fully equipped if he went into battle with a helmet, some armour and a personal weapon. Now the current generation still needs a helmet, some armour and a personal weapon, but also a huge array of other (often expensive) technologies as well.
A communications system; air, armour, drone and artillery support; the protection of electronic warfare units and coverage by air defences. As new, often critically important, systems and technologies are designed, developed and fielded, nations have a pressure
To find a way to fit them in the budget. And industry to find a way to build them. All of that speaks to potential opportunities for various suppliers in the arms market in the coming years. But as to how the arms export market ultimately shifts
And evolves over that time? Well, only time will tell. OK, and a brief channel update to close out. First of all, thank you all very much for the positive response to the video on Russian arms exports a couple of weeks ago.
After that video was done I really felt like the story wasn’t yet finished because we’d only really covered one major player and sort of glossed over everyone else. But because that video got the response it did, I had the confidence to then
Go and do this video covering the movement in the rest of the market. I personally really enjoy doing these sort of data- and market-centric videos, so I very much hope you enjoyed it. In terms of future topics, by the time this goes up,
Patrons, your long range topic poll should be up and available for voting. And I’ll be collecting the results from that one in roughly a week’s time. For all of you, thanks for your kind and ongoing support and I hope to see you all again next week.
22 Comments
The arms market has seen some dramatic shifts since 2022, and after the response to the video on Russia's collapse as a supplier, I thought it would be worth finishing the story by looking at some of the other major movers and trends in detail. Hope you enjoy.
Small correction as per the description – at one point I do misspeak. I indicate that the estimate for increased defence spending in 2023 is a CSIS figure when it is in fact from an IISS publication.
"Most of the time Uncle Sam isn't going to let minor distractions like a war, get in the way of good business" Out-of-context Perun, March 31, 2024
Also, Switzlerland: "Gold deposits welcome, invaders will be shot".
According to the Swiss model, wouldn't the ultimate form of neutrality be to host wars inside its own country? They could mandate that both sides use their weapons and just set off like half the country as an international thunderdome. You can't re-export weapons if you require that they be used inside your own borders.
Can we call it "War Spending" ?
That's really what it is. The USA used to have a "Department of War" but they changed it to the "Department of Defense" because it sounds better.
Do we have to use euphemisms for war and death?
It would still be useful information to do a video on why Decades of NATO Allies not meeting 2% is, and will have consequences for a decade, or more. All of your videos tie into this result, or lack of spending. Thanks Sir
Thanks Perun, your content is superb
I think we all know that if a country were to buy an F-35 and add two zeros to the price, turn around, and sell it to an adversary of the US it would be the Emutopians. Kiwilanders are too honorable to do such a thing, Great vid Aussie. #StandWithKiwiland #StopEmuAggression
❤❤❤ ❤❤❤❤
Algo
Great video!!
Even without invading Ukraine in 2014, Russia's weapons would have continued declining in sale numbers.
Most Russian weapons are obsolete 1970s tech with 1990s upgrades (eg T-90 or Su-34/-35). Russia's support packages for high tech weapons is notoriously terrible.
Russia's industry is in decline too – a lot of what was sold up to 2010s was old refurbished Soviet weapons.
But most critically Russia lost nearly all its clients with dissolution by 2000:
– Dissolution of Warsaw Pact – most Eastern European states have been shifting to west since 1991.
– Middle East – in decline since 1990s. Egypt replaced Russia as main supplier in 1970s, Libya, Iraq and Syria stopped buying much equipment.
Only Arab county that maintained Russia as primary supplier of high end equipment is Algeria.
– Sub-Saharan Africa – near total collapse for more high end Russian equipment since 1990. Most African militaries have devolved from MiGs, SAMs and armoured brigades to Toyotas with machine guns.
– Latin America – exports to Cuba, Nicaragua and Peru collapsed. Venezuela replaced these to some degree but this has also dried up.
– Asia – only bright spot. China became a major buyer in 1990s. Vietnam and India continued as core customers. Myanmar and Bangladesh also started buying more Russian equipment (both were primarily buyers of Chinese equipment). North Korea dropped off (hence MiG-17s and Il-28s are still apparently in service).
However Asia declined due to Chinese capabilities reaching or even surpassing Russia's technological capabilities. India always had a diversified acquisition program. Their big change was in early-mid 2000s when it started buying US equipment (this before Ukraine 2014).
The US initially provided equipment the Russians and Europeans could not eg transport aircraft (C-130, C-17) or large maritime patrol aircraft (P-8).
Vietnam, Myanmar and Bangladesh stopped buying as much not due to to politics but rather economics. Eg Vietnam was unable to replace all MiG-21s on 1 for 1 basis or even 2 for 1. They once had around 150 MiG-21 and 40-ish Su-22s. Now they're down to 87 Su-22/-27/-30 (31 Su-22, 11 Su-27, 35 Su-30). Vietnam only has 64 modern tanks (T-90). Remaining 1800 are all 1950-1960s museum pieces – T-55/-62/Type 59/PT-76 etc etc.
Basically after 2000-10 arms splurge, they no longer have cash for any major weapons be they Russian or otherwise (Thailand, Laos, Philippines, Malaysia are all in similar positions).
– China has also lost out big time too starting in 1979 with loss of Vietnam as customer (due to Sino-Vietnamese War). Other than Pakistan, no country has China as a primary supplier. And unlike in the past, China no longer gets massive orders from Egypt, Iraq, Iran and North Korea (all mainly ceased by 2000) or large-ish orders from Myanmar, Sri Lanka and Bangladesh (all of which stopped by 2010-15).
China did manage to sell quite a few drones but these are cheap and given their unreliability, sales have plummeted. Russia never really exported drones and in fact has acquired them from elsewhere (Israel initially and now China and Iran).
You reference Gladiator V Meteor. Gladiator can survive somewhat easily due to its low speed. In WW2 Po-2 biplanes were really difficult to shoot down due to their low speed. An F-89 managed to shoot down a Po-2 but crashed. Reason it crashed? To shoot down the biplane it had to lower speed by lower flaps and undercarriage. Recoil of its guns caused it stall and it crashed.
Early jets were poor at manoeuvring too with really low power to weight ratio. In a close turning battle the piston engined fighters were still at advantage until F-86 and MiG-15.
North Vietnamese did really well with "obsolete" MiG-17 and MiG-19s against state of art Century fighters and early F-4s. The issue was US reliance on unreliable AAMs, jets and tactics designed for supersonic intercepts of bombers not fighters.
Hence in the dogfights the nimble MiGs did quite well against USN and USAF despite being nominally obsolete.
One thing i'd like to have seen addressed was Ukraine's arms industry pre-crimea. As they were #7 on the leader board. We all know why they dropped off after Crimea. But how robust was their arms industry for them to be #7? Were they mostly exporting out of their stockpile? Were they producing what they were exporting? Combination of both? We all know their arms industry isn't anywhere near Russia's but how did it stack up to others?
Great post. Your abilities to research and put together a huge amount of information, then make it understandable and very interesting to the average person in a circa one hour presentation is astounding. Onya!
Sometimes the Swiss frustrate me. At least they make good cheese.
hi, i have a question about Switzerland: if Kiwiland byes Airdefence from Switzerland and Emutopia attacks it, then Kiwiland is at war and may not get any more rockets (because it is at war) ?
Diddy bought all Norinco's 2024 output.
You said a plus for making weapons in Ukraine is electricity, on top of Russia hiting dams with glide bombs and missiles i was just reading Ukraines plan to shut a bunch of power plants down in their bid to fight "climate change"
Hail ,,,the military industrial complex!
What Dutch equipment is being exported? Only radars right?
so we can conclude we need to fear the rattlesnakes with their armored divisions.. or did i miss any points?
thanks for the in depth analysis once more!
Korea is manufacturing to NATO specifications. Korea is licensing Korean-assisted manufacture in nations which are challenged or threatened by China and Russia. If their facilities in Korea are degraded under attack, they will resupply from their facilities in other nations. Excellent planning for resilience.