External Environment Assessment 03/05 Defense Economics Frank Killelea National Security Analysis Department Johns Hopkins University Applied Physics Laboratory.

External Environment Assessment

03/05

DefenseEconomics

Frank KilleleaNational Security Analysis Department

Johns Hopkins University Applied Physics Laboratory

March 2005

Note: Additional explanatory material can be found in the Notes view

Distribution Statement A – Approved for Public Release;

Distribution is Unlimited


03/05 2

Abstract

This analysis identifies economics factors and conditions that are important to a nation-state’s ability to develop, acquire and sustain significant military forces and capabilities. It examines readily available economic data which influence the size and direction of a country’s defense spending. It is less applicable to subnational and transnational threats whose financial and arms requirements tend to get lost in the background noise.

This report is an occasional paper of the APL National Security Analysis DepartmentIts ideas are intended to stimulate and provoke serious thinking.

Not everyone will agree with them. Therefore it should be noted that thisreport reflects the views of the author alone and does not necessarily implyconcurrence by APL or any other organization or agency, public or private.


03/05 3

Executive Summary (1of 4)

This analysis identifies economics factors and conditions that are important to a nation-state’s ability to develop, acquire and sustain significant military forces and capabilities. It examines readily available economic data which influence the size and direction of a country’s defense spending. It is less applicable to subnational and transnational threats whose financial and arms requirements tend to get lost in the background noise.

The base year for this update is 2002, the latest year for which data were available. Where available, pertinent data on subsequent years have been included.

This analysis addresses: Economic factors that support or inhibit defense spending Defense and military R&D spending and trends Weapon costs and trends Arms transfers and trends Defense industries and trends Defense economics impact on military capabilities Defense economics impact on US military spending An economically influenced view of global threats. (Asymmetric threats are included to

remain consistent with data contained in the previous external environment assessment.)


03/05 4

Executive Summary Continued (2 of 4)

Since last updated: Global defense and R&D spending has trended upward led by the US, China, and Russia to a

lesser degree. Other countries spending more include India, Iran, Brazil and South Korea. Most countries spending, however, has either remained flat or increased/decreased slightly.

The value of global arms transfers, which decreased over 70% from the mid-80s through 2002, has shown no signs of leveling off.

Escalating weapons costs have continued to outpace defense budget growth making it difficult (actually impossible) for nations, including the US, to replace aging systems with new models on a one-for-one basis. Few countries can afford to purchase large numbers of modern combat systems.

Global defense industries have continued to contract and consolidate via mergers and acquisitions, with current trends favoring national and cross-border collaborations (teaming) in an effort to share development and production costs, and gain market access.

Some insights: Defense economics analysis remains useful as a means of identifying countries capable of

acquiring significant military capabilities that could challenge US forces. It can alert decision-makers to countries with changing military aspirations, and in effect

provide years of early warning to developing threats. Defense economics can also help decision-makers prioritize weapons spending based upon

global weapons development and acquisition efforts.


03/05 5


Findings: Developing military capabilities in nation states is largely a function of defense spending. In 2002,

73% of the countries worldwide spent under $2B on defense. Eleven countries besides the US spent in excess of $10B, including four over $30B (China ~ $62B). Among the countries spending over $4B, Syria, Iran, Russia and China are probably the only ones that could be considered potential adversaries. (By way of comparison, the US defense budget in FY2002 was $344.8B.)

Escalating costs of all things military including weapons development and acquisition, personnel, operations and maintenance, and infrastructure have led many countries to smaller forces with mixed inventories, retaining older systems longer.

The high cost of military R&D has significantly limited the number of countries capable of developing and producing modern, sophisticated combat systems. Few new state-of-the-art systems, in all major weapon categories are being developed worldwide.

Many countries rely on others to develop the new systems and hope they can afford a few. Unfortunately, the cost of the latest models has escalated beyond the reach of most countries, resulting in a growing market for less costly used and/or upgraded combat systems.

The ratio of defense spending and escalating weapons costs is the most significant influence affecting acquisitions, force size and mix, arms sales, and the global defense industry.


03/05 6


Findings Continued: Without the amortization of weapon costs across large unit buys, there is little hope to

reduce the cost of new sophisticated combat systems to affordable levels. It will become increasingly difficult to prevent sensitive technology transfers because of

industrial offsets related to arms sales, and cross-border industrial collaborations to develop, produce modern weapon systems.

In the US, large federal budget and trade deficits, growing national debt and related servicing costs, and increasing social, welfare, health, infrastructure and domestic security costs will likely pressure non-war related defense spending downward as early as FY2006.

Defense modernization (R&D, Acquisition) will like absorb most cuts as military personnel, medical, and O&M accounts continue to grow as a share of the defense budget. Expensive programs will likely be reduced, stretched or cancelled to accommodate the reduced funding. Likely candidates include the F/A-22, Joint Strike Fighter, National Missile Defense, DD(X), Littoral Combat Ship, Airborne Laser, Army Future Combat System (FCS), and space systems.

Transnational threats are not dependent on large budgets to further their aims. Their employment of asymmetric tactics and inexpensive and readily available weapons and explosives make them a continuing and dangerous threat.


03/05 7

Current and Near-Term GEO-POL OverviewUnsettled and Challenging

• Post Cold War Period Unsettled and Dangerous

• Regional Conflicts Could Involve US

• Transnational Threats More Prominent

• Russia’s National Interests Still Uncertain

• China Perceives Greater Regional Role

• NATO’s Future Role Unclear – Europe More Introspective

• US Engaged– Countering Transnational Threats– Supporting Developing Democracies– Will Preempt to Defend Interests

• Emphasis on Coalition OPS

• Conflicting National Interests Challenge Coalition Solidarity, Effectiveness


03/05 8

International Defense EconomicsOverview

• Economics Analysis Applicable to Nation-States; Much Less To Transnational Threats

• Defense Economics Analysis– Identifies Countries Able to Acquire Significant Capabilities, Develop

Sophisticated Systems– Provides Early I&W of Countries’ Changing Military Aspirations

• Understanding the Economically Feasible Threat – That Which is Available, Affordable and Sustainable – Can Help Defense Planners

– Focus on Potential Adversaries with Significant Capabilities– Prioritize Weapons Spending Based on Global Weapons Development

and Acquisition Efforts Few State-of-Art Systems in All Major Categories Being Developed

• Not As Useful Assessing Transnational/Terrorist Threats– Other Than WMD, Most Arms Are Low Tech, Inexpensive and Available– Data Not Readily Available


03/05 9

International Defense Economics (Cont'd)Overview

• Global Defense Spending– Affected by Strategic and Economic Considerations– Driven by Big Spenders, i.e., US, Western Europe, Japan, Russia, China– Unlikely to Return to Cold War Levels in Foreseeable Future

• Defense Forces– Smaller Personnel- and Equipment-wise– Mixed Inventories, with Fewer Modern Systems– Growing Personnel and Operating Costs Pressure Procurement

• Military R&D– Investment Driven by US; Western Europe to Lesser Degree– Few Can Afford– Few New Sophisticated Combat Systems Being Developed Worldwide– Europe Needs to Consolidate R&D Efforts to Reduce Duplication and Achieve

Greater Investment Mass

• Arm Sales– Fewer Domestic Sales for National Forces– Stiff Competition Among Defense Industries for Shrinking Foreign Sales– Prohibitive New Weapons Costs Increasing Market for Cheaper, Used, and

Upgraded Systems Upgrades and Maintenance are Not Cheap; Pool of Used Systems Growing Smaller

– An Area in Distress and In Need of Realistic Market Analysis


03/05 10

• Ratio of Defense Spending and Escalating Weapons Costs the Single Most Significant Influence on Acquisitions, Force Size and Mix, Arms Sales, and the Global Defense Industry

• Previous Efforts to Reduce Costs Largely Unsuccessful– Major Defense Industrial Restructuring Has Not Slowed Price

Escalation– Streamlined Acquisition Procedures, Including Less Oversight, Use of

Commercial Products, Capabilities-Based Process Not The Answer– Still Waiting for Significant Hi-Tech Solutions

• Without Significantly Lower Weapon Costs, Foreign Sales Will Continue to Decrease

• Without Foreign Sales and Significant National Demand, Production Runs Will Be Short, Fewer Units Produced, and Unit Costs Will Continue To Outpace Defense Budgets

• Amortization of Weapons Costs Critical To Lower Prices– Easy Answer is to Reduce Costs and Sell More – But – The Devil is in

the Details

International Defense Economics (Cont'd)Overview


03/05 11

• Defense Spending Decline Bottomed in ’98 – Slow Climb Since

• Military R&D Spending Also Bottomed in ’98

• Arms Transfers Trend Still Down Since Mid-80s

• Higher Priority Economic Considerations Gaining Greater Share of National Budgets

• Sophisticated Weapons Cost More Than Systems Being Replaced

• Fewer Costly New Hi-Tech Systems Being Acquired, Developed

• Greater Competition For Fewer Arms Sales

• Leaner Defense Industries

• Sophisticated Systems Available, but Few Can Afford Many

• Transnational/Terrorist Threats Don’t Need Large Budgets, Expensive Weapons

Defense EconomicsSummary

Global Defense Spending


03/05 12

Notional Worldwide Defense Spending Trends

DEFENSE BUDGETS

R&DWEAPONSTRANSFERS

1998 2010MID-80s

CONSTANT 2000 $ TIME

$

WEAPON COSTS

2002

VG#7


03/05 13

Defense Spending Economic Factors

• Economic Factors Impact World-Wide Defense Aspirations

– Increasing Social, Welfare, Infrastructure Competition for Limited Revenues

• Varying Combinations of Stagnant Economies, Budget Deficits, Large External Debt, Currency Devaluation, High Inflation, Trade Deficits, Limited Foreign Reserves, and Growing Population Drive Defense Budgets Down. Autocratic Regimes Can Delay This For Awhile.


03/05 14

Defense SpendingKey Economic Data

• Economic Factors That Affect Defense Spending– Gross Domestic Product (GDP)*– Population/Growth Rate/Literacy Rate– Per Capita Income– Natural Resources– Industrial/Agricultural/Output– Exports/Imports – Balance of Payments– Revenues*– Budget Surplus or Deficit*– External Debt*– Inflation*– Currency Devaluation*– Defense Budget/Allocation*

*Major Influences


03/05 15

Macro-Economic Factors InhibitDefense Budgets

• Sustained annual Gross Domestic Product (GDP) growth below 3%, ornegative growth

• Sustained annual inflation rate over 15%• External debt equal to or greater than annual gov’t revenues• External debt equal to or greater than 50% of GDP

Note: Presence of more than one factor increases negative pressure on defense budget.

Current year +1 +2 +3 +4

Economic Factors

Current defensebudget level

Less $

More $


03/05 16

Worldwide GDP & Defense Spending Trends

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

140

120

100

80

60

40

20

0

Index: 1986 = 100

Note: Over this period, worldwide GDP, excluding the U.S. increased by around 36 percent while defense spending decreased by over 30 percent.

Source: DIA DI-1912-15-00, Defense Intelligence Reference Document, “Worldwide Defense Expenditures, 1999(U),” Jun 2000 The World Bank: “2004 World Development Indicators”

SIPRI Yearbook-2003World Bank Development Indicators Data Bank, 4 Jun 2004 query

1998 1999

DEFENSE SPENDING

GDP

2000 2001 2002

VG#11


03/05 17

2002 Economic Data (1of 4)

Source: The World Bank “World Development Indicators – 04” SIPRI Yearbook – 2003 CIA “The World Factbook 2003” IISS “The Military Balance 2003/2004”Note: *Range of values reflect differing defense budget estimates in source documents.

Country GDP$B U.S.

Revenues$B U.S.

Defense Budget$B U.S. – 2000 $

Nat’l Budget±$B U.S.

External Debt$B U.S.

Current AccountTrade Balance

$B U.S.

Foreign Exchange

$B U.S.

Argentina

Brazil

Chile

South Africa

Egypt

Iran

Israel

Saudi Arabia

Syria

Greece

Turkey

France

Germany

Italy

$102.0

452.4

64.2

104.2

89.8

108.2

103.7

188.5

20.8

132.8

183.7

1,431.3

1,984.1

1,184.3

44.0

100.6

17.0

22.6

21.5

29.5

38.5

46.0

6.0

45.0

42.4

286.0

802.0

504.0

2.9

9.96

2.3

2.2

2.7

8.7

9.8

21.6

1-5.4*

5.3

10.1

33.6

27.7

21.1

-4.0

9.0

−

-2.1

-0.4

-2.1

-6.6

-10.5

-1.0

-2.6

-26.7

-44.0

-23.0

-13.0

132.3

227.9

19.2

25.0

30.8

9.2

43.0 (01$) est.

25.9

21.5

63.4

131.6

−

−

−

9.6

-7.7

-0.6

0.3

0.7

12.6

-1.2

11.7

1.1

-10.4

3.4

25.7

46.6

-6.7

10.5

37.8

15.3

7.8

14.1

−

24.1

22.2

−

9.4

28.3

61.7

89.1

55.6


03/05 18

2002 Economic Data (2 of 4)

Country GDP$B U.S.

Revenues$B U.S.

Defense Budget$B U.S. – 2000 $

NATL Budget±$B U.S.

External Debt$B U.S.

Current AccountTrade Balance

$B U.S.

Foreign Exchange

$B U.S.

Spain

U.K.

India

Pakistan

Indonesia

Malaysia

Singapore

China

South Korea

North Korea

Taiwan

Japan

Russia

U.S.

653.1

1,566.3

510.2

59.1

172.9

94.9

87.0

1,266.0

467.7

−

406.0

3,993.4

346.5

10,383.1

105.0

565.0

48.3

12.6

26.0

20.3

27.9

224.8

118.1

−

36.0

441.0

70.0

1946.0

7.1

36.0

12.9

3.2

1.8

1.9

4.7

61.5

13.5

1.5

7.3

46.7

15.7

336.0

-4.0

25.0

-27.9

-2.2

-4.0

-6.9

8.4

-42.3

22.4

−

-0.1

-277.0

8.0

-106.0

−

−

104.5

33.7

132.2

48.6

8.2

168.2

132.5 (01$)

−

24.7

−

147.5

−

-15.9

-14.4

4.6

3.9

7.8

7.2

18.7

35.4

6.1

−

17.0

112.4

29.9

-480.9

40.3

42.8

71.6

8.8

32.0

34.6

82.0

297.7

121.5

−

−

469.6

48.3

157.8



03/05 19

2002 Economic Data (Cont’d) (3 of 4)

NegativeInfluences

GDP Growth – Population Growth <3% >20% >10% >15% ≥50% ≥100%

Def. SpendingProjectionCountry

% Population

Growth

% GDP Growth

Def. Share of

Revenues

Debt Service Share of

Revenues

Inflation%

Debt as % of GDP

Debt as % of Revenues

Argentina

Brazil

Chile

South Africa

Egypt

Iran

Israel

Saudi Arabia

Syria

Greece

Turkey

France

Germany

Italy

1.2%

1.6

1.5

2.3

2.2

2.3

2.4

3.9

3.0

0.4

2.0

0.4

0.2

0.1

-10.9%

1.5

2.1

3.0

3.0

6.7

0.8

1.0

2.7

4.0

7.8

1.2

0.2

0.4

6.6%

9.9

13.5

9.7

12.6

29.5

25.4

47.0

17-90.0*

11.8

23.8

11.7

3.4

4.2

27.5%

11.3

2.1

17.5

12.0 est.

0.7

12.9

2.3 est.

17.9 est.

7.0 est.

27.6 est.

−

−

2.4

41%

8.3

2.5

9.9

4.3

15.3

5.7

1.0

0.9

3.6

45.2

1.8

1.3

2.4

130%

50.4

30.3

24.4

34.0

8.5

41.0

14.0

103.0

48.0

72.0

−

−

−

300%

228.0

113.0

111.0

143.0

31.0

112.0

56.0

358.0

141.0

310.0

−

−

−

↓

↓

-

-↓

-↓

↑

-↓

-↑

↓

-

↓

?

?

?Source: The World Bank “World Development Indicators – 04” SIPRI Yearbook – 2003 CIA “The World Factbook 2003” IISS “The Military Balance 2003/2004”Note: *Range of values reflect differing defense budget estimates in source documents.


03/05 20

2002 Economic Data (Cont’d) (4 of 4)


NegativeInfluences

GDP Growth – Population Growth <3% >20% >10% >15% ≥50% ≥100%

Def. SpendingProjectionCountry

% Population

Growth

% GDP Growth

Def. Share of

Revenues

Debt Service Share of

Revenues

Inflation%

Debt as % of GDP

Debt as % of

Revenues

Spain

U.K.

India

Pakistan

Indonesia

Malaysia

Singapore

China

South Korea

North Korea

Taiwan

Japan

Russia

U.S.

0.4

0.2

1.9

2.5

1.6

2.6

2.5

1.2

1.0

1.2

0.65

0.4

0.2

0.92

2.0

1.8

4.6

2.8

3.7

4.1

2.2

8.0

6.3

1.0

3.5

0.3

4.3

2.4

6.8

6.4

26.7

25.4

6.9

9.4

16.8

27.4

11.4

−

20.3

10.6

22.4

17.3

−

7.7

37.1

58.4

21.6

11.9 est.

1.3

3.7 est.

5.6 est.

−

3.4 est.

−

9.5

10.8

3.0

2.1

5.4

3.9

11.9

1.9

-0.4

-0.8

2.8

−

-0.2

-0.9

15.0

1.6

−

−

20.0

57.0

76.0

51.0

19.0

13.0

28.0

−

6.1

−

43.0

4.0

−

−

216.0

267.0

508.0

239.0

29.0

75.0

112.0

−

69.0

−

210.0

−

?

?

−↓

↓

↓

-↓

↑

↑

↑

-↑

↑

?

-↓

−


03/05

DefenseSpending


03/05 22

Defense Spending Overview

• Worldwide Defense Spending Bottomed in 1998– Fewer Producers of High End systems– More Emphasis on Affordability and International Collaboration

and Consolidation in Production and R&D– US, Western Europe, Japan, Russia Produce High Technology

Systems; ROW Countries Don’t– R&D Down 60% from 1986 to 1998; Up 12% from ’98– System Upgrades, Software Modifications, Dual Use

Technology, Asymmetric and Terrorist Threats Emphasized

• Arms Transfers Down over 70% Since Mid 1980s– Greater Competition for Fewer Sales as Industries Fight for

Survival– Major Suppliers: US, Russia, France, UK, Germany


03/05 23

Defense SpendingSmaller Inventories and Upgrades

• New Weapon Systems 2-5 Times More Costly Than Older Systems. Few One-for-One Replacements

• Most Weapon Sales Require Hard Cash, Pay-Back Loans, or Barter at Market Prices. Few Discounts or Grant-Aid. Many Countries Lack Foreign Reserves to Buy New Systems.

• Sophisticated Weapon Systems Available But Few Can Afford Them

• Seventy-Three Percent of Countries 2002 Defense Budgets Under $2B in US 2000$

– Under $800 Million For Procurement– Emphasis On System Upgrades, and More Capable Used

Systems

• Sustained Defense Spending Over $2 Billion Buys Some Sophisticated Systems


03/05 24

Worldwide Defense Budgets – 2002

Ref: 9800648B_UK.PPT-4

0

10

20

30

40

50

60

70

80

90

100

Defense Budgets in Billions Constant U.S. 2000 Dollars

Nu

mb

er o

f C

ou

ntr

ies

0 $0.5 1.0 2.0 3.0 4.0 5.0 7.0 10.0 15.0 30.0 >30.0

N. KOREAINDONESIA EGYPT

KUWAITCOLOMBIABELGIUMPOLANDNORWAYPAKISTAN SWEDEN

SINGAPORE

NETHERLANDS

SYRIA

AUSTRALIA

GREECE

IRANBRAZILTAIWANCANADASPAINISRAEL

TURKEYS. KOREAINDIA

S. ARABIAGERMANYRUSSIAITALY

CHINA 61.5JAPAN 46.7U.K. 36FRANCE 33.6

Notes: Includes all countries less the U.S.,Sources: “SIPRI Yearbook 2003” and “The Military Balance 2003/2004”

90

14

4

13

62 6 3 4 4

9

VG#19


03/05 25

10-Year Defense Budget Growth (%)1993 → 2002

0

5

10

15

20

25N

um

ber

of

Co

un

trie

s

LIBYA

BELARUS

CROATIA

ZAMBIA

TAIWAN

ARGENTINA

VENEZUELA

N. KOREA

THAILAND

ANGOLA

CHAD

SIERRA LEONE

GUATEMALA

URUGUAY

PARAGUAY

AZERBAIJAN

U.K.

GERMANY

CANADA

SWITZERLAND

PERU

MOZAMBIQUE

RWANDA

SEYCHELLES

ZIMBABWE

BRUNEI

MONGOLIA

ALBANIA

KAZAKHSTAN

USA

RUSSIA

SPAIN

NETHERLANDS

AUSTRALIA

BELGIUM

AUSTRIA

FINLAND

SENEGAL

EL SALVADOR

BULGARIA

YEMEN

JAPAN

PAKISTAN

DENMARK

NORWAY

POLAND

SWEDEN

EGYPT

MOROCCO

HUNGARY

ROMANIA

LEBANON

GHANA

NICARAGUA

MALTA

ITALY

KUWAIT

MALAYSIA

CZECH REP.

PHILIPPINES

BURKINA FASO

CAMEROON

MADAGASCAR

BOLIVIA

INDIA

BRAZIL

COLOMBIA

SINGAPORE

LETHOSO

MALI

NAMIBIA

NIGERIA

TANZANIA

ECUADOR

ARMENIA

LUXEMBOURGE

CHINA

ALGERIA

SUDAN

UGANDA

NEPAL

UKRAINE

ETHIOPIA

ESTONIA

LATVIA

LITHUANIA

10 Year Growth -100% -50% -25% -10% 0% +10% +20% +50% +100% +150% +250%

Avg. Ann. Growth -10% -5% -2.5% -1% 0% +1% +2% +5% +10% +15% +25%

Source: SIPRI 2003; Military Balance 2003-2004

>$10B

$5-10B

$2-5B

$1-2B

$0.5-1B

<$0.5B

CONSTANT U.S. 2000 $

VG#20

S. KOREA

SAUDI ARABIA

TURKEY

GREECE

IRAN

ISRAEL

SYRIA

MEXICO

CHILE

PORTUGAL

OMAN

BANGLADESH

SRI LANKA

IRELAND

JORDAN

TUNISIA

BOTSWANA

BURUNDI

KENYA

PANAMA

CAMBODIA

CYPRUS

SLOVAKIA

BAHRAIN


03/05 26

Estimated Worldwide Defense ModernizationFunding – 2002

Ref: 9800648B_UK.PPT-4

Notes: Modernization includes all forces (Ground, Air, Naval Platforms, Weapons, Sensors)$ in billions of constant U.S. 2000 dollarsIncludes most countries less the U.S.

Primary Sources: “SIPRI Yearbook 2003” and “The Military Balance 2003/2004”

Defense Budgets>30.0

0

10

20

30

40

50

60

70

80

90

100

Nu

mb

er o

f C

ou

ntr

ies

0 $0.5 1.0 2.0 3.0 4.0 5.0 7.0 10.0 15.0 30.0

N. KOREAINDONESIA

EGYPT

KUWAITCOLOMBIABELGIUMPOLANDNORWAYPAKISTAN

SWEDENSINGAPORE

NETHERLANDS

SYRIAI

AUSTRALIA

GREECE

IRANBRAZILTAIWANCANADASPAINISRAEL

TURKEYS. KOREAINDIA

S. ARABIAGERMANYRUSSIAITALY

CHINA 61.5JAPAN 46.7U.K. 36FRANCE 33.6

90

14 136 2 6 3 4 4

94

Defense Funds for Force Modernization @20 and 40%

$ @ 20% $0.1 0.2 0.4 0.6 0.8 1.0 1.4 2.0 3.0 6.0 >6.0$ @ 40% $0.2 0.4 0.8 1.2 1.6 2.0 2.8 4.0 6.0 12.0 >12.0

VG#21


03/05 27

Defense Spending Trends

• Trending Upward Since 1998, Led By US (+46B), China (+13.3B), Iran (+8.1B), Russia (+4.3B), India (+3.5B), Brazil (+2.1B)

• Likely to Continue Upward Near-Term, Influenced By US, China, Russia, South Korea, and India. Economic Developments Could Slow or Reverse Trend

Worldwide Defense Spending in Billions US 2000$

1988 1993 1998 2002 909 762 690 784

Sources: SIPR1 2001, 2002, 2003IUSS Military Balance 2003-2004


03/05 28

• Fewer New High-Technology Weapon Systems Likely to be Developed and Fielded Over Next 10-20 Years Because of Costs

• Most Countries’ Defense Spending Flat or Negative Over Time Unless Involved in or Preparing for Conflict, Insurgencies, or the War on Terrorism

Sources: SIPRI Yearbooks – 2001, 2002, 2003The Military Balance – 2003-2004

Defense Spending (Cont'd) Trends


03/05

Defense R&D/S&T


03/05 30

• R&D Down 60% from 86 to 98: Up 12% from 98 to 2002

• 2002 Estimated Spending at $66 Billion in 2000$– $50.6 B by US; $57.4 B by NATO– Most for Aircraft Related Programs

• Nine Besides US Spending Over $500 Million on R&D

• US, Russia, China* Spending More in 2002

• R&D Budgets Compete with Procurement, Personnel, Maintenance and Operational Readiness Accounts

• Aggregate Worldwide Defense R&D Spending Likely to Increase Near-Term as US, Russia, China* Spend More

• European R&D Likely to Decrease Somewhat as Major Aircraft Programs (RAFAEL, EUROFIGHTER, A400 Transport) Transition to Production

Worldwide Military R&D Spending Overview

Note: *China Has Made R&D a Priority; Chinese R&D Funding Figures Are Best EstimatesSources: SIPRI Yearbooks – 2001, 2002, 2003

IISS “The Military Balance 2003-2004”


03/05 31

Estimated Worldwide Military R&D Spending - 2002

0

1

2

3

4

5

6

7

8

9

10

R&D Spending in Constant 2000 U.S. Dollars

Nu

mb

er o

f C

ou

ntr

ies

$50M 100M 200M 500M 1.0B 2.0B 5.0B

PAKISTAN

SWITZERLAND

NORWAY

NETHERLANDS

POLAND

UKRAINE

ISRAEL

ARGENTINA

GREECE

SPAIN

AUSTRALIA

S. AFRICA

CANADA

SINGAPORE

BRAZIL

TAIWAN

SWEDEN

ITALY

INDIA

IRAN

FRANCE

S. KOREA

GERMANY

CHINA

JAPAN

RUSSIA U.K.

Notes: Includes only countries spending >$50 millionSources: SIPRI Yearbooks – 2001, 2002, 2003 Defense News, 2 Feb 04

Ref: 9800648_UK.PPT-7

U.S. @ $50.6B66.3B in 2004


03/05 32

Worldwide Military R&D Spending

1989*

($)

1997

($)

1999

($)

2001

($)

2002

($)

US 51.0 42.5 42.6 44.5 50.6

UK 4.1 3.9 3.7 3.9 --

Japan 1.1 1.8* 1.2**** -- --

Russia -- 0.970* -- -- 1.04

China -- 1.0** -- -- --

Germany 3.1 1.7 1.4 1.2 0.749

France 7.1 3.4 3.1 3.5 0.707

India 0.410 0.630* 0.632**** 0.695 0.625

S. Korea 0.170 0.510* -- -- --

Sweden 0.680 0.570*** 0.100 0.300 0.400

Italy 0.750 0.400 0.100 0.400 --

Spain 0.460 0.700 1.2 1.7 0.167

S. Africa 0.480 0.150*** -- -- --

Canada 0.230 0.120*** 0.114**** -- --

Norway -- 0.100 0.100 0.100 0.100

Netherlands -- 0.100 0.100 0.100 --

Billions of US Constant 2000$

*1995$

**1994$

***1996$

****1997$

Source: SIPRI “Yearbook 2001, 2003”

IISS “The Military Balance” 2003-2004

Various Defense News Editions


03/05 33

Worldwide R&D Sophisticated Systems Costly

• High Technology Weapons Development Programs Costly

– Most in US, Western Europe, Japan, and Russia

• Situation Not Expected to Change Because of High R&D and Manufacturing Infrastructure Costs Associated with High Technology Development Programs

• Most ROW Countries Rely on Foreign Acquisition of Complex Weapon Systems

– State-of-the-Art Combat Aircraft, Naval Combatants, Main Battle Tanks, IADs, etc.


03/05 34

Worldwide R&D (Cont'd)Sophisticated Systems Costly

• Most ROW Countries Can’t Develop High Tech Systems

• Main Impediments to High Technology Development:– Funding– Technical Education and Pool of Scientists and Engineers– Well-Equipped Research, Laboratory, and Test Facilities– Natural Resources– Manufacturing Facilities and Capabilities– Skilled Work Force– Quality Control– Technology Base and Infrastructure


03/05 35

Worldwide R&D (Cont'd)Sophisticated Systems Costly

• Some ROW Countries Produce Low to Medium Technology Systems Based on Co-Production and Reverse Engineering of Acquired Systems

– Ground Force Weapons, Vehicles, MLRS, Small Patrol Craft, Training Aircraft

• Some Produce Niche High Technology Systems with Foreign Assistance

– TBMs, WMD, Helicopters, UAVs, Anti-Ship Cruise Missiles, Diesel Subs

• Industrial Offsets, Collaborations and Consolidations Future Wild Cards?

Source: SCCS


03/05 36

Worldwide High Technology Weapon Design andDevelopment Capabilities

None

Very limited. Dependent on foreign weapons acq. and related co-production, reverse eng, and tech transfer to produce a few low to medium technology systems.

Some low to medium tech. design, development, production capability. Needs foreign assistance in some areas.

Few niche high tech. capabilities. Relies on foreign weapons acquisition and related co-production, reverse engineering and tech. transfer. Broad low to med. tech. capabilities.

Broad med-tech. capabilities; capable of designing, developing, producing many high-tech systems; external assistance required for high performance aircraft and other complex systems.

Broad high-tech. design, development and production capabilities. Indigenous capability to develop, produce high performance combat aircraft, missiles and other highly complex systems.

Ref: 0400346_UK.ai


03/05 37

Worldwide Military R&D Trends

• Without a Clear Technologically Advanced Threat, or a Market for Costly High Tech Systems, R&D Investment Will Decrease, and the Pace of Technology Development Will Slow

– More for Counter-Terrorism, Homeland Defense, Asymmetric Threats

• Fewer High Tech Weapon Systems Will be Developed in all Major Categories

• Development and Availability of New Generation Systems Delayed

• Fewer Producers of High-End Systems

• More Cross-Border/International Cooperation, Pooling of R&D Resources


03/05 38

Worldwide Military R&D Trends (Cont'd)

• Emphasis on Affordability, Technologies that Reduce Development, Manufacturing Costs

• Emphasis on Dual-Use Technologies, COTS, System Upgrades

• Future Threats Include Fewer High-Tech, Many Low-Medium Tech Systems

• Adversaries Can Leverage Small Defense Budgets with Less Costly Asymmetrical Threats, i.e., IW, TBMs, C/B Weapons, Mines, CCMs, Small Boats, Terrorism, etc., to Complicate, Impede US Military Ops

• Caution: A Resurgent Near-Peer Type Threat Would Negate Some of These Trends


03/05 39

Foreign Science & Technology Overview

• Technology “Haves” and “Have Nots” Persist

• Technology Increasingly Dual Use

• Technology’s Economic Impact More Important Than Military’s

• Nations and Industries Will Sell Technology for Political and Economic Reasons

• Credible Asymmetric Threats Can Offset Some Technological Advantage


03/05 40

Foreign S&TAreas of Interest

• Areas of Foreign Technological Interest:– Anti-Navigation/GPS Systems– Remote Sensors and Weapons– Standoff Weapons and Penetration Aids

Ballistic Missiles Cruise Missiles

– Information Systems and CM Data Transfer and Interoperability Data Blocking/Corruption False Target Generation High-Power Microwave (HPM) Encryption

– Antiterrorism Systems Aircraft Protection Harbor Protection Helicopter Protection Improvised Explosive Device Detection, Neutralization Precision Airdrop Systems CBR and Nuclear Weapons Detection, Protection and Defeat

Systems ISR and Target Acquisition Systems to Counter Terrorists Explosive Ordnance Disposal


03/05 41

Foreign S&T (Cont'd) Areas of Interest

• Areas of Foreign Technological Interest:– Nanotechnology– Robotics– Low Observable and Masking Technologies

and CM– Diesel Submarine Endurance– Biotechnology– Increased Lethality

Conventional Explosives Weapons of Mass Destruction


03/05 42

Foreign S&T TrendsCommercial Technologies Available to All

• Technology Available to Buyers

• Commercial Sector Drives Technology Development

• Emphasis on Technologies That Make Things Happen

• Micro-Miniaturization More Important

• Biotechnology A Breakthrough Area

• Ubiquitous Access to Communications

• Greater Access to Space Based Sensors, and Related CM

• Broader, More Timely Access to Information

• Sophisticated/Interdependent Systems Increasingly Vulnerable To Single Point Failures


03/05

Weapons Costs


03/05 44

Weapon System CostsFew Can Afford to Develop or Buy

• Sophisticated System Costs Escalate Faster Than Annual Inflation Rates

– Techinflation Affects Development Costs of Aerospace, Ship, Submarine, Armor Systems

• Major Program Initial Costs Underestimated

• Cost Overruns Lead to Stretched Schedules, Smaller buys, increased unit costs

• Sophisticated Programs Expensive – Not Many Countries Can Develop Them

• Representative Program Costs• F-35 JSF ~200B• *F/A-22 Raptor ~72B• *V-22 Osprey ~46B• *RAH-66 Commanche ~39B• *Evolved Expendable Launch Vehicle ~31.8B• Eurofighter Up $20B since ’96; ½ fewer a/c

• *Space Based Radar ~30B• Multi-Mission Maritime Aircraft ~26B• European A-400M Transport ~23.7B• *SBIR ~8B• Kinetic Energy Interceptor ~4.5B• *Airborne Laser Program more than

doubledNote: *Significant cost overruns

Multiple Sources


03/05 45










Multiple Sources


03/05 46










Multiple Sources


03/05 47

Ball Park Weapons Cost Data

Non-Stealth Bomber

Stealth Bomber

$50 – 150M

1.5 – 2B

Aircraft Carriers

CVN

CV

$4.9 – 11B

2.4 - 3.5B

Non-Stealth Fighter

Stealth Fighter

30 – 80M

80 – 120M

Amphib/VSTOL 1.5 – 3B

Non-Stealth Attack a/c

Stealth Attack a/c

20 – 50M

75 – 150M

Aegis DDG

DD(X)

LCS

~1.2B

1.2 -1.4B

Target<250M

Non-Stealth Fighter/Attack a/c

Stealth Fighter/Attack a/c

75 – 100M

150 – 300M

Frigate

Corvette

300 – 480M

150 – 300M

AEW a/c (AWACS)

Maritime Surveillance a/c*

100 – 500M

20 – 40M

SSNs

SS

1.5 – 3.0B

225 – 475M

Military Transport – Med. Range

Military Transport – Long Range

40 – 75M

50 – 280M

UAVs

Global Hawk w/full sensors

Predator unit cost

28 – 50M

2.5 – 3M

ASW Helicopter

Attack Helicopter

Tactical Ballistic Missile

25 – 46M

25 – 60M

3 – 6M

Land-Based Surv. Radars

Low Tech

Medium Tech

Aerostat

2 – 4M

7.5 – 15M

30 – 50M

Long-Range Land Attack Cruise Missile

*Old data circa 1996

1 – 2M Army Heavy Tank

Stryker Combat Vehicle

Armored Humvee

2 – 6M

>1.5M

180K


03/05 48

F/A-22 Program

1980 85 90 95 2000 2005

80

70

60

50

40

30

20

10

0

800

700

600

500

400

300

200

100

Nu

mb

er o

f A

ircr

aft

Pro

gra

m C

ost

s $B

260

240

200

180

140

80

50

30

220

160

120

100

60

40

20

750

#a/c

Number a/c a/c cost Program Cost

Program $

$38B

$72B

277

218$100M

a/c Cost

$179M

$257M

(GAO)

Un

it C

ost

$M

Note: Program chg to F/A-22 in 2002 DoD Estimate #a/c

Sources: Multiple


03/05 49

F/A-22 Program Acquisition Numbers

0

100

200

300

400

500

600

700

800

1981 85 90 95 2000 2005

750

277 2218 3

381

762

1

180

226

Notes: 1 USAF requirement for 381-762 aircraft

2 USAF Plan

3 Affordable within Funding ceilingBlack figures/lines are DODBlue figures/lines are USAF

Nu

mb

er A

ircr

aft

YEARSources: Defense News, “Beyond F-22 Decision” 2 Aug 99

Defense News, “Meet the F/A-22”, 16-22 Sep 2002Inside Defense, “Rumsfeld Staff Moves Closer to AF Size of F/A-22 Fleet”, 31 Oct 02Inside Defense, “GAO Doubts DOD’s Readiness to Make F-22 Production Decision”, 15 Mar 04


03/05 50

Weapon Systems Cost TrendsNew Systems Cost More

• Trends Upward

• Most Prominent Microeconomic Force Affecting Defense Industries is The Rapidly Rising Cost of Weapons R&D and Production

• New Systems Cost Far More In Real Terms Than Units Being Replaced

• Smaller Production Runs Resulting From Smaller National Requirements and Fewer Export Sales Increase Unit Costs

• Inflation and Currency Devaluation in Buyer Countries Raise System Costs Accordingly

• Typically, Weapon Costs Increase About 10% Per Year, Doubling Every 7.25 Years

• Ratio of Increasing New Unit Costs To Defense Budgets Affects Numbers Acquired

Sources:

•“Hand Book of Defense Economics, Vol. I”; K.J. Arrow and M.D. Intriligator, 1995

•“Global Arms Trade – Commerce in Advanced Military Technology and Weapons”, Congress of the US – Defense News, LGEN M. Davison, USA, US Defense Security Assistance Agency, 9-15 Feb 1998

•SIPRI Yearbook – 2003


03/05

WorldwideArms Transfers


03/05 52

Worldwide Arms TransfersOverview

• Arms Transfers Down 72% Since Mid-80sTime Frame

1981 – 881989 – 911992 – 931992 – 961994 – 981995 – 991998 - 02

Average Annual Transfers$66B in 91$$40B in 91$$21B in 91$

$23.8B in 90$$22.5B in 90$$22.3B in 90$$18.5B in 90$

CommentCold War

Post Cold War

• US (41%), Russia, France, Germany, UK, Ukraine Account for 86% of Worldwide Transfers During 98-02

• Major Recipients, China, Taiwan, India, Turkey, Saudi Arabia, Greece, South Korea, Egypt, UK, Israel, Pakistan, Japan, UAE, Australia, Account for 83% of Total Deliveries During 98-02

• Greater Competition for Fewer Arms Sales

• Many National Arms Industries Need Arms Exports to Survive– Leads to Creative Financing to Close Sales

Sources: SIPRI Yearbooks 2001, 2002, 2003Military Balance 2003-2004Multiple Issues of Defense News, Armed Forces Journal 2001→2004


03/05 53

Worldwide Arms TransfersMore Flexible Financing

• Major Market for Used and Modernized Systems

• Most Post Cold War Period Sales for Cash

• High Weapons Costs and Intensive Competition for Sales Lead to More Flexible Arms Transfer Arrangements

– Grant Aid – Primarily by US – Egypt ($1.3B in 03), Israel ($2.1B in 03), and Jordan for Mid-East Peace Agreements; South, Latin American Countries for Counter-narcotics Ops; Pakistan, Philippines and Others for Counter- terrorism Support

– Loans – US Loaned Poland $3.8B to Purchase 48 F-16s; Poland Paying Only Interest First 8 Yrs of 15-Yr Loan

– US FMS Reached ~$14B in 2003; at a Flat Fee of 2.5%– Barter – Russian a/c Sales to Malaysia, Indonesia for Commodities and

Cash– French Tanks to Saudi Arabia for Oil

– Debt – Russian Exchange of Arms for Debt with China, South Korea, Czech Republic, Other Former East European Countries

– Lease – Czech Republic, Hungary Leasing Gripen Fighters from Sweden; Italy F-16s from US; Denmark APCs from Finland; India an AKULA SSN from Russia for 3 Yrs at ~$100M/Yr

Sources: SIPRI Yearbook – 2003

Defense News – Multiple Issues


03/05 54

Worldwide Arms TransfersOffsets

• More Countries Purchasing Major Weapon Systems Demand Industrial Offsets or Compensation to Defray Purchase Cost, Increase Domestic Employment, Acquire Technologies and Develop Local Industries

– Direct offsets Require Production of Some Weapon Components in the Buyer Country

– Indirect Offsets Include Tech Transfer, Local Investment and Counter-trade

• Offsets Becoming Increasingly Expensive – Some at 100% - 200% of Weapons’ Purchase Price

• Offsets Controversial– House Armed Services Committee Would Ban Industrial Offsets– Without Offsets, US Defense Industries Would Lose Arms Sales to

Foreign Competitors– Europe Views Offset Ban As Protectionist, Challenge to Free Trade

• Despite Availability of More Flexible Arms Transfer Arrangements, Global Arms Transfers Remain Depressed

Sources: Defense News, 24 May 04, 14 June 04, 28 June 04


03/05 55

Worldwide Arms TransfersOffsets

• More Countries Purchasing Major Weapon Systems Demand Industrial Offsets or Compensation to Defray Purchase Cost, Increase Domestic Employment, Acquire Technologies and Develop Local Industries

– Direct offsets Require Production of Some Weapon Components in the Buyer Country

– Indirect Offsets Include Tech Transfer, Local Investment and Counter-trade

• Offsets Becoming Increasingly Expensive – Some at 100% - 200% of Weapons’ Purchase Price

• Offsets Controversial– House Armed Services Committee Would Ban Industrial Offsets– Without Offsets, US Defense Industries Would Lose Arms Sales to

Foreign Competitors– Europe Views Offset Ban As Protectionist, Challenge to Free Trade

• Despite Availability of More Flexible Arms Transfer Arrangements, Global Arms Transfers Remain Depressed

Sources: Defense News, 24 May 04, 14 June 04, 28 June 04


03/05 56

Worldwide Arms Transfer TrendsNearing Bottom ??

• Near Term: Likely to Increase Slightly if Asian Economic Problems Continue to Ease, European Economies Strengthen, Oil Prices Support Increased Spending

• Mid Term: Probably Will Stabilize Around $20-25B in 1990$

• Defense Industries’ Survival More and More Dependent on Foreign Sales

• Continued Strong Competition for Fewer Sales

Sources: SIPRI Yearbooks 2001, 2002, 2003

The World Bank “World Development Indicators – 2004”


03/05 57

Notional Arms Export Market

140

130

110

100

70

60

40

20

10

120

90

80

50

30

05% 10 20 40 60 100

Market Access

1400

1300

1100

1000

700

600

400

200

100

1200

900

800

500

300

0

5.0

4.0

2.5

2.0

1.4

1.2

.8

.4

.2

3.0

1.8

1.6

1.0

.6

0

Co

mb

at A

ircr

aft

$M

Tan

ks $

M

Nav

al C

om

bat

ants

$M

Combat Aircraft

Tanks

Naval Combatants


03/05

WorldwideDefense

Industries


03/05 59

Defense IndustriesOverview

• Post Cold War Search for Peace Dividends Led to Reduced Defense Spending

– Diminishing National Requirements and Foreign Arms Sales

– Industries Faced with Overcapacity, Obsolescence, Large and Underutilized Work Force

• Worldwide Defense Industry Comprised of Public, Private, and Gov’t Owned/Controlled Companies

– Most State Owned When Cold War Ended– More Public or Private Today


03/05 60

Selected Worldwide Defense Industries – 2004Nationalized vs. Privatized

5

10

15

GOVT. PUBLIC/PRIVATE

OWNERSHIP/CONROL

CO

UN

TR

IES

State Owned/Controlled

State/Public Mix

Transitioning from State to Public/Private

Public/Private

CHILE

CHINA*

FINLAND

INDONESIA

IRAN

ITALY*

MALALYSIA*

N. KOREA

PAKISTAN

SPAIN*

SYRIA

TURKEY

UKRAINE*

EGYPTFRANCE*INDIAPORTUGALRUSSIASINGAPORE

AUSTRALIABRAZILGREECEISRAELPOLANDS. AFRICATAIWAN

AUSTRIACANADADENMARKGERMANYJAPANNETHERLANDSNORWAYSWEDENU.K.

Note: *Considering Privatization Multiple Unclassified Sources


03/05 61

• Supply, Demand and Profitability Issues Led to Major Restructuring

– Rationalization Leading to Plant Closures and Downsizing of Work Force

– Consolidation Via Mergers and Acquisitions with Competitors and Suppliers to Reduce Overcapacity and Redundant Production Lines – In All Major Weapons Categories – Especially Aerospace and Electronics

Cross-Border Consolidations More Difficult as Nations Protect Defense Industries from Foreign Control (UK an Exception)

– Collaboration Among National and Cross-Border Companies Based Upon Workshares and Units Purchased

• Future Will See More Collaboration and Consolidation, Especially in Naval Shipbuilding and Land Combat Systems

• Issues Remain– Problem with Gov’t Owned/Controlled Companies– Protectionism vs. Free Trade– Tech Transfer– Does Less Competition Mean Less Innovation– Reducing Unit Costs

Defense IndustriesIn Transition


03/05 62










03/05 63










03/05 64

Worldwide Defense Industry Trends

• Privatization – Slow Process

• Consolidation – More National and Cross-Border Mergers and Acquisitions

• Collaboration – Sharing The Load (and Cost)

• Cessation – Survival of Fittest

• Fewer Developers, Manufactures of Air, Space, Land, Naval and Electronics Systems


03/05

Defense Economics Summary


03/05 66

Defense Economics SummaryImpact on Military Capabilities

• Sustained (2+ yrs) Combinations of Following Economic Conditions Will Pressure Defense Spending Downward

– GDP Growth Less Population Growth <3%– Budget Deficit >3% of GDP– Defense Budget >20% of Revenues– Debt Interest Payment >10% of Revenues– Inflation >20%– Debt >50% of GDP– Debt ≥ Revenues

• Many Countries, Especially in Europe, South America More Likely to Cut Defense Budgets Before Public Health, Schools, Welfare, Security and Infrastructure to Accommodate National Budget Deficits, Debt, Inflation and Other Impediments to Spending

• Sustained Lower Defense Spending Leads to:– Reduced Force Levels – Russia, Spain, Greece, Netherlands, Switzerland, Belgium, Sweden,

Germany, etc.– Retiring Older Systems Early to Reduce Maintenance Costs – UK, Canada, Belgium, etc.– Retiring Systems Because Can’t Afford to Upgrade Them– Canceling, Reducing, Delaying Planned Acquisitions – Argentina, Brazil, Singapore, UK,

Sweden, Norway, Greece, Egypt, Turkey, etc.– Upgrading Rather Than Buying New Systems – Italy, Israel, India, Denmark, Finland, Greece,

Germany, India, Turkey, Saudi Arabia, China, Germany, Algeria, Australia– Buying Used Systems – India, Pakistan, Algeria, Australia, Austria, Brazil, Canada, Chile,

China, Czech Republic, Egypt, Greece, Indonesia, Israel, Saudi Arabia, Malaysia, etc.

Sources: The World Bank “World Development Indicators – 2004”IMF “International Financial Statistics Yearbook – 2002”IMF “Government Finance Statistics Yearbook – 2002” Various Editions of Defense News and The Washington Post


03/05 67

Defense Economics SummaryImpact on US Military Spending

• Increasing Competition for Defense Share of US Revenues– Balancing the Budget (FY 04 Deficit est. $413B)– Servicing and Paying Down Debt (FY04 Debt ~$7.4T; Interest

Payment ~$159B)– Paying for Tax Cuts– Increasing Cost of Retiring Baby-Boomers Medical and Social

Security Expenses– Homeland Defense– Infrastructure– HEW

• Increasing Competition for Modernization Share of Defense Budget

– Rising Personnel Pay, Benefits, Health Care Costs– Cost Estimates for 10-20 Thousand Troop Increase Range from

$1.2 > $2B Per Yr– Afghanistan, Iraq, Other Peacekeeping Ops– Increasing O&M

Source: Washington Post OPED “A Bad Way to Cut the Debt”, Michael Kinsley, 2 Jul 04


03/05 68

Defense Economics SummaryImpact on US Military Spending

• Increasing Competition for Defense Share of US Revenues– Balancing the Budget (FY 04 Deficit est. $413B)– Servicing and Paying Down Debt (FY04 Debt ~$7.4T; Interest

Payment ~$159B)– Paying for Tax Cuts– Increasing Cost of Retiring Baby-Boomers Medical and Social

Security Expenses– Homeland Defense– Infrastructure– HEW

• Increasing Competition for Modernization Share of Defense Budget

– Rising Personnel Pay, Benefits, Health Care Costs– Cost Estimates for 10-20 Thousand Troop Increase Range from

$1.2 > $2B Per Yr– Afghanistan, Iraq, Other Peacekeeping Ops– Increasing O&M

Source: Washington Post OPED “A Bad Way to Cut the Debt”, Michael Kinsley, 2 Jul 04


03/05 69

Trends ImplicationsSpending Trends Have Wide Impact

• Fewer Producers of High-End Systems and Fewer New Systems Produced

• More Cross-Border/International Cooperation, Sharing of R&D, Production and Acquisitions

• Wider Access to Technologies

• Increased Emphasis on Affordability Strategies, Technologies that Reduce Development, Manufacturing Costs

• Small Market for Costly New Systems

• Big Market for Less Capable, More Affordable Combat Systems

• Increasing Competition for Foreign Sales

• Emphasis on Dual-Use Technologies, COTS, System Upgrades

• Escalating Weapons Costs Affect Military Forces, Capabilities

• Future Conventional Threats Include Fewer High-Tech, Many Low-Medium Tech Systems

• Adversaries Can Leverage Small Defense Budgets with Less Costly Asymmetric Threats, i.e., IW, TBMs, C/B Weapons, Mines, CCMs, Small Boats, Terrorism, Insurgencies and Urban Warfare, etc., to Complicate, Impede US Military Ops


03/05

Threats


03/05 71

Worldwide Threat OverviewSmaller Forces with Mixed Inventories

• 75% of Today’s Threats Are Older Systems

• Potential Adversaries Will Replace Some With More Capable Systems

• Technology Inserts During System Upgrades Complicate Threats, Extend Life 10-15 Years

• Wide Variety of Modern Weapon Systems Available for Those that Can Afford Them

• Economic Factors Preclude One-for-One Replacements, Lead to Smaller Forces


03/05 72

Worldwide Threat Overview (Cont'd)Smaller Forces with Mixed Inventories

• Year 2010 Threat Composition– 85% with Pre-1995 IOCs; 1960-1980 Technologies– 15% with Post-1995 IOCs; 1980-1995 Technologies

• Coastal Countries that Consider the US a Threat Will Acquire Capabilities to Attack Forces in Littoral Waters

• Asymmetric Threats are In Play – More Affordable – Can Complicate, Slow US Mission Accomplishment


03/05 73

Year 2010 Military Systems

AIRCRAFTMIG-21/23

F-4/F-5A-4/A-7

MIRAGE F-1

SHIPSFFG-7

KASHIN FFKONI FFLFF-1056

OSA PTGKRESTA I/II CG

SUBSFOXTROTROMEO

209 TYPES

MSLSSTYX

HARPOONEXOCET BL 1 30%*

AIRCRAFTMIG-25/29

Su-24/25/27F-14/15F-16/18

MIRAGE 2000HAWK 100/200

SHIPSKHUKRI FFLKRIVAK FF

LEANDER FFB’DSWORD FF

SOV*MNYY

SUBSUPHOLDER

KILO SSMSLS

SS-N-22 B1

35%

AIRCRAFTMIRAGE 2000-5

Su-30/35GRIPPEN

SHIPSNEUST*MYY FFJIANGHU III FF

LUHU DDHALIFAX FF

FLYVEFISHLEN FFLDELHI DDGSAAR V FFL

LAFAYETTE FFLOREAL FFL

SUBS209 SS TYPECOLLINS SS

AGOSTA B SSKILO FO SS

MSLSEXOCET BI-II

C801/C802SS-N-22 BL 2

HARPOONUPGRADES

SS-NX-25

1950 1960 1970 1980 1990 2000 2005 2010 2015 20201995

1950 1960 1970 1980 1990 2000 2005 2010 2015 20201995

20%

AIRCRAFTF/A-18 E/FRAFAEL

EFAFSX (JA)

SHIPSMALAY FF

KONGU DDG(JA)

KDX DD (SK)YS 2000

MSLSSS-N-26SS-N-27 10%

AIRCRAFTF-22MFI

XF-10SU-37

SHIPSHORIZON FFNEW GEN FFCOMMON FF

5%

*(U) NOTE: PERCENTAGE (%) IS ESTIMATED YEAR 2010 COMPOSITION.

TECHNOLOGY

DEVELOPMENT

PRODUCTION

OPERATIONAL

UPGRADE

EXTENDED OPERATIONAL LIFE

LEGEND

Ref: 9800648_UK.PPT-4


03/05 74

A/CF/A-18 E/FGRIPPENRAFAEL

EFAFSX (JA)

SHIPSMALAY FF

KONGU DDG(JA)

KDX DD (SX)YS-2000

MISSILESSS-N-26SS-N-27

A/CF-22MFI

XF-10

SHIPSHORIZON NEW GEN FF

COMMON FFDD(X)LCS

Year 2025 – 2030 Military Systems

1950 1960 1970 1980 1995 2000 2005 2010 2015 2020 2025 2030 2040

TECH-NOLOGY DEVELOP PRODUCE OPERATIONAL

1990

UPGRADE EXTENDED OPERATIONAL LIFE

A/CMIG-21/23

F-4/-5A-4/-7

MIRAGE F-1

SHIPSMIG 21/23

F-4/-5A-4/-7

MIRAGE F-1

SUBSFOXTROTROMEO

209 TYPES

MISSILESSTYX

HARPOONEXOCET BL 1

5%

20%A/C

MIG-25/23Su-24/25/27

F-14/15F-16/18

MIRAGE 2000

SHIPSKHUKRI FFLKRIVAK FF

LEANDER FFBDSWORD FFSOV’MNYY DDG

SUBSUPHOLDER

KILO SS

MISSILESSS-N-22 BL 1

40%A/C

MIRAGE 2000Su-30/35

HAWK 100/20

SHIPSNEUST’MYY FF DELHI DDG

JIANGHU III FF SAAR V FFL

LHU DD LAFAYETTE FF

HALIFAX FF LOREAL FF

FLYVEFISHLEN FFL

SUBS209 SS TYPECOLLINS SSAGOSTA SSKILO FO SS

MISSILESEXOCET BL-II

C801/C802SS-N-22 BL-II

SS-N-25HARPOON UPGRADES

20%

10%

5%

NOTE: % REFLECTS EST. YEAR 2025-2030 COMPOSITION

SUBS

?? ???? ??


03/05 75

Threat Summary

• Mixed Technology Forces in 2010

• Wide Variety of Modern Weapon Systems Including WMD Available

• Smaller Conventional Forces

• Asymmetric Threats In Play


03/05 76

Asymmetric WarfareTarget Vulnerabilities

• Exploits an Adversary’s Strategic, Tactical, Technical Vulnerabilities by Innovative, Unexpected, and/or Less Costly Means in Order to Deter Action, Deny Access and/or Delay Mission Accomplishment

• An Attractive Option for National, Sub-National and Transnational Groups to Employ Against Stronger Adversaries

Source: Institute for National Strategic Studies, National Defense University; 1998 Strategic Assessment “Engaging Power for Peace”


03/05 77

Asymmetric WarfareApplications

• Exploits National Will, Public Aversion to Casualties

• Targets Coalition Cohesiveness

• Employs IW for Perception Management

• Threatens US Homeland, Nationals, Allies

• Attacks National Infrastructure, Civil Facilities, Population

• Employs Low Cost, Low Technology Solutions to Counter High Cost, High Technology Threats


03/05 78

Asymmetric Warfare (Cont'd)Applications

• Selectively Acquires, Uses, Threatens to Use Niche High Tech Sensors, Weapon Systems, i.e.,

– WMD and Delivery Systems– Cyberweapons to Disrupt C4ISR Systems– IW Countermeasures

• Fights in Environment Less Favorable to US Capabilities


03/05 79

Asymmetric ThreatsExamples

• Naval, Land and Anti-Helo Mines

• Cheap Aircraft with Explosives or Precision Guided Munitions

• UAVs Equipped with Explosives

• Terrorists with Small Arms, Rockets, Explosives, Chemical/Biological Agents

• Remotely Controlled Explosive Devices

• Swimmers with Limpet Mines, Explosive Charges

• Pier-Side Attacks


03/05 80

Asymmetric Threats (Cont'd)Examples

• Chemical, Biological Warheads for Coastal Cruise Missiles, Anti-Ship Cruise Missiles (ASCMs), Theater Ballistic Missiles (TBMs), Artillery, Mines, Bombs

• Urban Warfare

• Information Warfare

• Cyberwarfare

• Satellite Interference, Denial

• Etc.


03/05 81

2002 Defense Budgets(US 2000 Dollars)

<$500M

$500M − <$1B

$1B − $2B

$2B − <$5B

$5B − <$10B

$10B − <$20B

>$20B

VG#70

External Environment Assessment 03/05 Defense Economics Frank Killelea National Security Analysis Department Johns Hopkins University Applied Physics Laboratory.

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