The US military spending as a percentage of GDP is expected to decline to an average of 4.0% over the next five years (2012-2016), down from 4.6% during the past five years (2007-2011), due to government efforts reduce its fiscal deficit from the 2010 value (reference see graph below).
The US has the largest defense market in the world. Due to its high levels of military spending, a large number of opportunities are available to companies keen to supply the nation with defense equipment. However, the US defense budget, which grew at a CAGR of 4.19% during the years 2007-2011, is expected to grow only by 0.63% CAGR over the forecast period, largely due to the financial constraints caused by the global financial crisis.
By 2016, the US is expected to invest in the modernization of its existing weapons systems and acquire advanced defense systems capable of enhancing interoperability among the armed forces. Furthermore, although homeland security expenditure is expected to decline at a CAGR of 0.36% over the forecast period, the country is expected to invest in homeland security products such as biosensors, explosive detection machines and surveillance equipment.
Challenges to Foreign Investments
The US encourages foreign direct investment (FDI) in its defense sector. However, investments thought to pose a risk to national security are barred using the Exon-Florio provision, which consists of three steps for reviewing proposed, or pending, foreign mergers, acquisitions or takeovers. According to this provision, the Committee on Foreign Investment in the United States (CFIUS) conducts and submits a review on the foreign investment to the president. The president is then authorized to approve or ban the investment depending on whether it is determined to be a risk to national security.
The ongoing global economic slowdown has had a significant impact on many US defense companies. As a result, defense firms such as Lockheed Martin and Northrop Grumman are keen to sell off certain non-profitable units or have them acquired by foreign companies.
The US is keen to modernize its existing weapon systems, but the rising unit cost of defense systems conflict with the country’s plans to decrease its procurement budget. Indeed, the cost of military hardware is increasing due to the rising cost of R&D and skilled labor shortages, particularly in the design, engineering and manufacturing sectors.
Although the US’s total defense spending is likely to decrease, factors such as the potential nuclear threats posed by North Korea and Iran, modernization initiatives, ongoing military operations and strategies to maintain military supremacy and protect its allies will continue to drive the US defense budget.
During 2005–2010, the US emerged as the largest exporter of defense equipment in the world. Moreover, the nation is expected to dominate the global arms export market over the forecast period, due to the increasing defense budgets of a number of its allies, such as South Korea, Israel and Australia. The country possesses a diverse consumer base and, during the review period, South Korea emerged as the largest consumer of US-manufactured defense goods.
Many countries, such as Spain, Israel, Poland, France and Italy, possess well-developed domestic defense industries, however, these countries continue to rely on US defense equipment for advanced military hardware such as missiles and fighter aircraft, as the US has the most advanced defense industry in the world.
The Country Report: “”The U.S. Defense Industry – Market Opportunities and Entry Strategies, Analyses and Forecasts to 2016″ was released in February 2012 by ICD.
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