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KEY NOTE DEFENCE EQUIPMENT : July 2002

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This report covers: defence equipment, sea systems, hulls & machinery, dockyard services, weapons, support, maintenance, land systems, communications, fighting vehicles, ammunition, load carrying vehicles, guided weapons, engineer equipment, surveillance equipment, guns small arms and chemical defence, maintenance, air systems, aircraft engines and equipment, guided weapons and electronic equipment, smart acquisition, defence agencies, major procurement projects, Eurofighter, equipment programmes,

Companies covered include: BAE SYSTEMS, EADS, Thales, Rolls-Royce, Saab, GKN, VT Group, Vosper Thornycroft, Cobham, Uktra Electronics Holdings, Alvis,

EXECUTIVE SUMMARY

The world defence market has now stabilised, following a steep decline in the early 1990s. The most recent data available indicates that the UK has maintained its position as the second-largest global supplier of defence equipment, after the US.

In 2001/2002, the UK Government spent an estimated £24.5bn on defence. It is estimated that 44.6 percent of this figure was allocated to the purchase of defence equipment. Despite pressures on the overall defence budget, the MoD (Ministry of Defence) remains the department with the fourth-largest share of government expenditure, after Social Security, Health and Education.

The relationship between defence suppliers and their major customer (the MoD) has undergone considerable upheaval in recent years. The number of UK contractors has reduced, and the Government's pursuit of `value for money' has opened up the domestic market to overseas suppliers. The MoD has also introduced a new procurement system, aimed at enhancing its `range of modern procurement techniques'. The advance of civil technologies, particularly in the area of IT, electronics and communications, has particular relevance to the design of military systems. These are challenging developments for the UK defence industry.

Air systems account for the largest share of the UK defence-equipment budget. This can be explained by the dominance of one major project: Eurofighter. There are, however, a number of other significant programmes that reflect the reconfiguration of the UK's forces in line with the conclusions of the 1998 Strategic Defence Review (SDR). Prospective projects include new aircraft carriers (and their associated aircraft), digitisation of the battlefield, and an enhanced strategic airlift capability. Public-Private Partnerships (PPPs) and the Private Finance Initiative (PFI) are increasingly popular financing tools for major investments within the MoD.

Despite the end of the Cold War, the UK's Armed Forces have seen increased activity as part of an international effort to intervene in the world's `trouble spots'. This has placed an enormous strain on resources. There is also increasing pressure from the US, via NATO (North Atlantic Treaty Organisation), for European members to increase their defence capabilities. This implies a need to boost defence expenditure, although such a move seems unlikely in the near future. Following the terrorist attacks on the US on 11th September 2001, the MoD is currently finalising a New Chapter of the SDR. This New Chapter, which is due to be published in summer 2002, should provide some insight into how the Government intends to rebalance the roles and requirements of the UK's Armed Forces.

TABLE OF CONTENTS

Executive Summary	1
1. Market Definition	2
REPORT COVERAGE	2
MARKET SECTORS	2
MARKET TRENDS	3
Restructuring	3
Industrial Co-operation	3
The Transatlantic Market	5
MARKET POSITION	6
The UK	6
Table 1: MoD Contractors That Featured in the Financial Times Top UK 500, 2001	7
Overseas	8
2. Market Size	9
THE DEFENCE BUDGET	9
Table 2: Proportions of Total Managed Expenditure Allocated to Social Security, Health, Education and Defence ( percent), 2000/2001-2003/2004	9
Share of Gross Domestic Product	10
Table 3: Defence Expenditure as a percentage of Gross Domestic Product, 1987-2001	10
Table 4: Defence Expenditure as a percentage of Gross Domestic Product, 1987/1988-2002/2003	11
Breakdown by Sector	11
Table 5: The Defence Budget by Sector ( percent), 1998/1999-2000/2001	12
Research and Development	12
Table 6: percentage of the Defence Budget Committed to Research and Development, 1995/1996-1999/2000	12
EXPENDITURE ON DEFENCE EQUIPMENT	13
Table 7: Expenditure on Defence Equipment (£m and percent), 1985/1986-2000/2001	13
By Sector	14
Table 8: Expenditure on Defence Equipment by Sector (£m and percent), 1997/1998-2000/2001	14
Sea Systems	15
Table 9: Expenditure on Sea Systems (£m and percent), 1985/1986-2000/2001	15
Table 10: Expenditure on the Production and Repair of Sea Systems by Sector by Value (£m), 1996/1997-1999/2000	16
Land Systems	16
Table 11: Expenditure on Land Systems (£m and percent), 1985/1986-2000/2001	17
Table 12: Expenditure on the Production and Repair of Land Systems by Sector by Value (£m), 1996/1997-1999/2000	18
Air Systems	18
Table 13: Expenditure on Air Systems (£m and percent), 1985/1986-2000/2001	19
Table 14: Expenditure on the Production and Repair of Air Systems by Sector by Value (£m), 1996/1997-1999/2000	20
OVERSEAS TRADE	20
Imports	20
Table 15: UK Imports of Defence Equipment by Sector by Value (£m), 1997-2000	21
Exports	21
Table 16: UK Exports of Defence Equipment by Value (£m and percent of world market), 1992-2000	22
3. Industry Background	23
RECENT HISTORY	23
‘Smart Acquisition’	23
Acquisition Cycle	23
Supplier and Customers	24
Procurement Responsibilities	24
Financial Approval	25
Table 17: Equipment Approval Categories, 2002	25
The Political Dimension	26
NUMBER OF COMPANIES	27
Table 18: Number of MoD Contractors Paid Over £5m by Size of Payment (£m), 1988/1989-2000/2001	27
Major Suppliers to the MoD	28
Table 19: Quoted Companies Paid £25m or More by the MoD, 2000/2001	28
EMPLOYMENT	29
Table 20: Number of People Employed Directly and Indirectly by the UK Defence Industry, 1996/1997-1998/1999	30
Table 21: Estimated UK Employment Directly Dependent on Defence-Equipment Expenditure by Region, 1998/1999	30
SUPPORT AGENCIES	31
MoD Agencies	31
Table 22: The 36 Defence Agencies, 1st May 2002	32
Procurement and Logistics	35
Defence Export Services Organisation	36
TRADE ASSOCIATIONS	38
Defence Manufacturers Association	38
Society of British Aerospace Companies	38
4. Competitor Analysis	39
THE MARKETPLACE	39
Table 23: FT Global 500 Aerospace and Defence Companies by Market Value ($m), 2002	39
The European Defence Industry	39
UK MARKET LEADERS	40
Table 24: UK Defence-Market Leaders by Defence-Related Turnover (£m and percent), 2001	40
BAE SYSTEMS PLC	41
Thales PLC	44
Rolls-Royce PLC	45
GKN PLC	46
VT Group PLC	47
Cobham PLC	48
Ultra Electronics Holdings PLC	49
Alvis PLC	50
5. Strengths, Weaknesses, Opportunities and Threats	51
STRENGTHS	51
WEAKNESSES	52
OPPORTUNITIES	53
THREATS	54
6. Buying Behaviour	56
INTRODUCTION	56
MAJOR PROCUREMENT PROJECTS	56
Major Projects 2001	56
Table 25: Major Equipment Projects by Cost (£m), 31st March 2001	57
Eurofighter	60
Table 26: Eurofighter — UK Cost Estimates (£m), 31st March 1989-2001	60
CURRENT AND FUTURE EQUIPMENT PROGRAMMES	61
Table 27: Current Equipment Programmes by Sector, 12th May 2002	62
7. Current Issues	68
UK DEFENCE POLICY	68
Background	68
Policy Papers	68
Strategic Context	69
Policy Priorities	69
A New Chapter	70
EUROPEAN SECURITY	71
Common European Security and Defence Policy	71
EU and NATO Relations	71
Enlargement	72
Table 28: European Members of, and Applicants to, the European Union and NATO, 2002	72
DEFENCE CAPABILITIES	74
Declining Budgets	74
Table 29: NATO Military Expenditure at 1995 Price Levels and Exchange Rates ($m), 1990-2001	74
Defence Capabilities Initiative	75
European Capabilities Conference	75
Table 30: Capability Targets — Shortfalls for Which the Situation Had Improved, November 2001	76
Table 31: Capability Targets — Shortfalls Remaining, November 2001	76
8. The Global Market	78
MARKET GROWTH	78
EQUIPMENT DELIVERIES	78
Table 32: Imports of Defence Equipment by the Top Five Importing Regions by Value at 1999 Prices ($m), 1989-1999	79
TOP IMPORTERS AND EXPORTERS	79
Table 33: The World’s Top 15 Exporters and Importers of Defence Equipment by Value at 2001 Prices ($m), 1999	79
Table 34: Countries That Featured as Both Top Importers and Top Exporters of Defence Equipment, 1997/1999	81
9. Forecasts	82
INTRODUCTION	82
Budgetary Cycle	82
Resource Accounting and Budgeting	82
FORECASTS 2001/2002 TO 2006/2007	83
Defence Budget	83
Table 35: The Forecast UK Defence Budget (£m), 2001/2002-2006/2007	83
Expenditure on Defence Equipment	83
Table 36: Forecast Expenditure on Defence Equipment by Sector (£m and percent), 2001/2002-2003/2004	84
PROCUREMENT TRENDS	84
Acquisition Strategy	84
Near-Term Priorities	85
Key Technologies	86
Table 37: Possible Military Implications of Future Technologies, 2001	87
10. Company Profiles	88
Alvis PLC	89
BAE SYSTEMS PLC	91
Cobham PLC	93
GKN PLC	95
Rolls-Royce PLC	97
Ultra Electronics Holdings PLC	99
VT Group PLC	101
11. Glossary	103
12. Further Sources	106
Associations	106
Periodicals	107
Directories	108
General Sources	109
Bonnier Information Sources	110
Government Publications	111
Defence Agencies	112
Western European Armaments Group (WEAG) Addresses	114
Other Sources	116
Key Note Research	117
The Key Note Range of Reports	118

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Last updated by Amanda Porteous February 2004