Has the world become a more dangerous place to live in? With the rise of IS, the ongoing civil war in Syria, the deteriorating situation in Libya and the airstrikes in Yemen, you might be inclined to think this is certainly the case, at least in the Middle East.
Inevitably, more regional conflicts result in greater spending on arms, fighter jets and all kinds of defense apparatus. That is good news for the revenue streams of companies whose job is to provide the military hardware to fight these wars and protect a nation’s borders, Shane McGinley wrote for Arabian Business.
“There is tremendous activity from a threat perspective and all that has done is keep the pressure on evolving capabilities in the region,” Chris Chadwick, president and CEO of Boeing Defense, Space & Security, says during a chat in the company’s US headquarters.
Last year, global military spending amounted to nearly $1.8 trillion, according to an annual report from the Stockholm International Peace Research Institute. While it was down 0.4% globally, the Middle East bucked the trend and saw expenditure increase 5.2%.
Top Spenders
Saudi Arabia was among the top three spenders on arms, along with China and Russia, and it witnessed one of the largest increases in 2014, recording a 17% surge in defense spending to $80.7bn.
The extent of the (Persian) Gulf states’ defense spending can be clearly understood by looking at it as a%age of gross domestic product and per capita. Global military expenditure represented 2.3% of overall GDP or $245 per person in 2014. By comparison, Saudi Arabia spent 10.4% of its GDP on military capabilities, or $2,747 per citizen, while the UAE spent 5.1%, or $2,421 per person.
When Chadwick looks at the numbers in his office in the US, he could be forgiven for worrying that the drop in oil revenues, the (Persian) Gulf’s main primary source of income, will put a dent in sales, regardless of the conflicts in the region. SIPRI made such a warning in its most recent report on the region.
But Chadwick says he is not worried. “At this point in time, the downturn in oil and gas prices have not affected the appetite of our customers in the Middle East,” he says, pointing out that the region is actually set to account for a bigger slice of its revenues going forward, especially with the domestic US market reducing its expenditure by 6.5% last year.
“The data we see is the Middle East spend for defense, space and surveillance products is growing … If you look at the international arena as a whole, the compound annual growth rate right now is around 4.8% and in the Middle East it is about 4.5%, so there remains a lot of opportunity as we look across that region. There is still strong demand for fighters [fighter jets] and we are having those discussions.”
International revenue traditionally accounted for around 12% of Boeing’s defense, space and surveillance revenues, Chadwick says. This has risen to 25% at present and he believes it will rise to about 30-35% going forward, with “a significant amount of that” growth coming from the Middle East.
A 2014 market study by the US-based Teal Group estimated that global spending on UAVs–mainly for military purposes–would double in value to $11.5 billion by 2024, with the (Persian) Gulf set to be a big target market.
Demand Is Strong
John McGraw, Boeing Defense’s sales and marketing executive for the Middle East, says there is room for more sales.
“I believe demand is strong,” McGraw says. “We know that Egypt’s fleet needs attention. There are a couple of other countries in the region that have expressed interest ... I do believe it will be focused in the (P)GCC countries. It has a reasonable GDP to fund programs while many others outside the (P)GCC do not.”
While Boeing may be confident it can attract sales and partnerships, one challenge it is facing in securing these deals is the winding up of the US Export-Import Bank (Ex-Im Bank) in June this year. Set up in 1934, Ex-Im Bank was a credit agency set up by the US government to offer financing and credit terms on American goods sold to foreign customers.
Boeing Defense has recently lost two overseas deals because of the ending of the Ex-Im facility this summer. As a result, Boeing announced several hundred job cuts at its Southern California-based satellite division, and General Electric Co. last month confirmed plans to shift up to 500 US manufacturing jobs to Europe and China because it can no longer access Ex-Im financing.
“It is a concern,” says Chadwick. “We believe the Ex-Im Bank puts us on an even playing field with the resources that many countries have; it has definitely caused some issues in our California operations and some layoffs. We continue to work very closely with those customers to see if we can find ways around that but it is very challenging. We continue to have hope that Ex-Im Bank will be re-authorized.”
While some question whether more arms leads to greater or lesser peace, companies such as Boeing Defense exist only because of demand. Just what that demand is going forward remains to be seen.
“In 18 months from now, after we get to some sort of resolution in Yemen, then it might be easier [to estimate sales levels]. It is a simple fact that if you have a problem or incident, you find out pretty quick if you have a need for an aircraft of this capability,” McGraw says with a refreshing air of directness.
As the aircraft make their way to Dubai to display their full capabilities, it will be up to the region’s governments to determine whether or not they are required.
