A report released last week claims that the world’s top defense corporations saw their profits decline in 2022, famed analyst Richard Aboulafia.
Aboulafia is the CEO of the consulting firm AeroDynamic Advisory and a widely followed analyst and commentator in the aerospace and defense communities. He responded to the annual report of the Stockholm International Peace Research Institute (SIPRI) on global arms sales.
I wrote about its conclusions last Friday, the chief of which was that the top 100 global defense industry firms actually saw their revenues decrease last year as conflicts and weapons demand soared.
“I knew the scenario was bad,” Aboulafia told me in an emailed reaction to questions about the report, “but I imagine it would be a solid year or slightly higher, rather than a down year. “
Revenue generated through the 42 U. S. defense corporations among the 100 most sensible accounted for 51% of the group’s total arms revenue. But its total gun revenue fell 7. 9% to $302 billion in 2022. The decline in corporate turnover has been widespread. Out of 42 U. S. corporations, 32 experienced a year-over-year decline in gun revenue.
The majority of companies surveyed through SIPRI cited persistent supply chain problems and labour shortages as a result of the Covid-19 pandemic. As I pointed out in my article on Friday, attributing the chain of origin and other problems to the pandemic now turns out to be a cliché, 3 years after it began.
I wondered how much of the bottlenecks U.S. defense firms claim they have faced stemmed from factors beyond their control versus poor internal management-planning and focus on non-essential imperatives?
In response, Aboulafia said: “Western countries have created the ultimate free-market defence trade base ever created. Possibly we would have gone too far. Unfortunately, in fact, the component of this policy has the epitome of complex capitalism. It will take many years to repair it to the mandatory point of capacity. “
One of the standout findings of the report is SIPRI’s assertion that Asian and Middle Eastern producers saw revenues grow as opposed to Western firms thanks to what the Insitute described as an ability to respond to increased demand within a shorter time frame driven in part by “ever warm” production lines in places like South Korea.
Aboulafia downplayed the importance of the expansion of profits in Asia and the Middle East, saying, “I don’t think it means much. The output of these corporations is minimal. And, of course, they have the same number of civil aviation production sectors, so there’s less festival for professional work.
SIPRI attributed the outperformance of corporations in Asia and the Middle East to reliance on local suppliers and more consistent government investment. As for the willingness of Asian governments to invest massively in defense, Richard Aboulafia shares this view, but qualifies their ability to rely on local companies. production.
“Defense sovereignty is back in fashion,” he said. “But I’m not entirely sure about relying on local suppliers. Most of those premiums still rely on imports from Western systems and subsystems, which face many of the same bottlenecks. “faced through older Western premiums.
Korea Aerospace Industries’ FA-50 line in South Korea.
SIPRI’s findings that European companies in the top 100 have seen a modest expansion in their earnings (0. 9%) and its conclusion that they are expected to grow at a faster pace in 2023 were met with scepticism by the analyst.
“It isn’t looking great,” he said of the European sector’s 2023. “Some programs, particularly Rafale, A400M, NH90, Eurofighter, and others are stumbling, either for production reasons or demand reasons. France is particularly vulnerable because a national vertically integrated industrial base is very hard to scale up.”
Among the few other notable observations in the report was its finding that Turkish defense firms had driven Middle Eastern arms revenue growth, outperforming their peers in the region as well as Europe and the U.S.
SIPRI credited their performance ($5.5 billion in revenue—22 per cent more than in 2021) to simpler, easier to ramp-up systems which were snapped up for use in the Russia-Ukraine War. But it could be argued their performance was the result of a pivot to domestic production driven by US/NATO reluctance to sell systems to Turkey for strategic/political reasons.
“Here are both in the paintings,” says Aboulafia. Obviously, reasonable drones are easy to handle, but the country is also more inward-focused when it comes to arms supplies, partly for political reasons, but also because of runaway inflation and Erdogan’s desperate desire to give the impression that he has dealt with everything competently. “
With demand for weapons widely perceived to increase in 2023, it will be desirable to see what story the Stockholm Institute’s 2023 report will tell. But as is the case with most think tank studies, the Aboulafia individual makes it clear that this is the only component of the story of global arms sales.