The recent report on the job cuts to be announced by BAE is very sad news for BAE as well as for the broader British Aerospace and Defence industry. BAE is not alone in decreasing the work force, with several American and European defence primes as well resorting to job cuts as a reaction to budget pressure in their home markets. Aerospace and Defence primes in the West are confronted with the fact that their home market sales are declining.

The arms industry is preparing for leaner years by cutting internal costs, reorganizing and restructuring. For the big prime contractors this means cutting in bureaucracy, increasing production efficiency and passing on the consequences of the crisis over to the subcontractor.

The impact of the economic crisis on defence spending is definitely something to worry about. In Europe, the United Kingdom and France together account for about 40% of the European defence spending and 50% of the equipment budget. British defence forces have been facing severe cuts over the last four years, what poses serious concerns of the long term capability of the armed forces to defend the UK against possible threats in the future, without the right capability, at the right time.

The impact of the job cuts would lead to significant impact on the capability of the British aerospace and defence industry. Axing thousands of skilled jobs could lead to significant gaps in the long term in the British industry capability to develop indigenous technology, with the risk of the economy becoming dependent on imports for advanced technologies.

In the international arms market in Europe encounters strong US competition, not only outside Europe but also inside the European market. With their extensive home market, US companies have a cost-cutting scale advantage over Europeans. It is important to understand that defence primes in the West still depend on their home markets for majority of their sales. With severe cuts to defence spending in home markets, it is evident that the order books of defence primes will be hit significantly. And of course, there are exports to developing countries and emerging economies.

Western defence primes have enjoyed successes in selling equipment in the Middle East, Asia Pacific and Latin America. However, defence companies are exposed to greater risk going for non traditional markets. Most of the opportunities in emerging markets like Brazil and India pose significant uncertainty and are often plagued by program delays and cancellations.

This signifies that, although insisting on spending cuts, the governments also need to think about sustaining domestic defence capability. It can only be achieved when governments truly analyze the long term impact the spending cuts will have on their capabilities and the economy. As of now, most of these so called long term measures seem to have nothing but negative impact on long term capabilities.

The British government should also do more to politically influence emerging economies to iron out uncertainties in procurement contracts and export sales, and also work more closely with companies to ensure sustainability of British capability in defence.

The defence industry is not depending on new procurement alone. Maintenance and upgrading of existing systems can be nearly as profitable and demand will rise as older material will be used longer to fill gaps arising from procurement delay.

Especially in emerging economies new platform procurement is faster than the rate at which they can develop domestic capability to manage and operate these platforms, thereby providing significant opportunities for defence primes to gain long term contracts in these economies. Primes are also adopting innovative business models and partnerships to ensure offsets in emerging economies can be a profitable business proposition rather than just a commitment.

Related Links
BAE Systems
The Military Industrial Complex at SpaceWar.com
Learn about the Superpowers of the 21st Century at SpaceWar.com

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