European Procurement Trends in the Nineties

A Case for dual-use Industry*

Rainer Rupp
German Senior Advisor in NATO's Economic Directorate
Brussels, Belgium

Edited version of a speech on the same subject at an international business seminar on the Future of the European Defence Industry, in Brussels on 5 June 1992, provided by the NATO correspondent of European Security, Colonel Rolf Hallerbach

Published in South African Defence Review Issue No 7, 1992

INTRODUCTION

Important developments in the globalization of research and development, manufacturing technologies and markets have shown that the spin-offs from the thriving and open, civilian high-tech sectors into the military sector are much more significant than vice versa. In Western economies, civilian technologies are developed under highly competitive conditions and civilian products therefore tend to be more advanced and less expensive than their military counter parts. This is in total contrast to a firmly held belief in military circles.

DEFENCE CUTS STIMULATE DEBATE ON DUAL-USE INDUSTRIES

Industrial and high-tech developments during the 1980's, especially in Japan, have proven that a strong civilian Research and Development (R&D) effort combined with a sophisticated manufacturing technology can produce a wide range of state-of-the-art, dual-use technologies and goods for military use. If these technologies had been developed specifically for the military, they would most likely have turned out to be much more expensive and possibly less advanced. The actual development is therefore in stark contrast to the Independent European Programming Group's (IEPG's) earlier calls for massive investments in European military R&D, arguing that this was the only way to help Europe's civilian technology catch up with the US and Japan.

A DUAL-USE DEFENCE-INDUSTRIAL BASE?

With less money for defence and smaller production runs, the role of dual-use industries becomes crucial for any sustained defence-industrial preparedness. Large scale development of military technologies involves costs which can not be carried in the future. An attempt must therefore be made to treat military technology essentially as a derivative of civilian technology, even though the application of civilian technologies has its limits.

Greater use of advanced, but off-the-shelf civilian technology would undoubtedly result in considerable savings of time and money in weapons procurement. On the negative side, participation in the globalization of civilian technology and manufacturing implies increasing dependence on foreign suppliers for critical technologies or parts.

WHAT KIND OF MILITARY PROCUREMENT IN EUROPE OF THE NINETIES?

There are a number of key factors influencing developments in this field:

Defence budgets

Developments in Eastern Europe have intensified pressures on the defence budgets to a point where only a few NATO countries are left that are planning for a real increase in defence expenditure.

Ill-defined risks resulting from ethnic strife in Eastern Europe and the former Soviet Union, are unlikely to protect NATO-European defence budgets from further cuts. NATO Force planners are therefore actively adapting force structures to match lower budgets with the defence requirements of the post Cold War period.

Co-operation:

European and trans-atlantic

In the past, NATO or European arms co-operation projects developed a life of their own. Once launched, a project was almost impossible to kill, if only for political reasons. Over the last two to three years, the field of collaborative arms projects has been marked, however, by an increasing number of cancellations, with the European Fighter Aircraft (EFA) being the most famous and recent case in point. There may be three main reasons for this development:

the high hopes in terms of cost savings, technology transfers, standardization, etc have not been realized;



fundamental reassessment of military requirements, tighter budgets of individual services, different deployment schedules, etc; and



growing competition over shrinking markets. It is ironic that in this context US defence equipment manufacturers hope to gain market shares in Europe while Europeans are putting their hopes on a piece of the American procurement market, which will remain by far the largest in the world.

Export markets

Here we can distinguish between two opposing trends:

Cash poor Third World countries have lost their easy access to Warsaw Pact or Western weaponry and arms credits by exploiting the East-West ideological conflict. Tribal wars do not turn into East-West representative wars any more. Moreover, donor countries and international institutions providing economic assistance increasingly make financial aid to Third World countries dependent on a low level of defence spending.



Simultaneously we see a massive surge in military equipment imports in the cash rich areas of the developing world, the Gulf states, countries of ASEAN and South East Asia. In the Gulf, American exporters have clearly won the race, leaving all other parties far behind. In Iran, China and a growing number of South East Asian countries, cheap and only recently available Russian state-of-the-art high-tech weapons are enjoying considerable interest.

The hard currency-hungry Third World exporters, such as Brazil, China, North Korea, etc are meanwhile carving out niches for their cheap, though reliable equipment in other markets. European exporters have largely been left behind in this global redistribution of shares in the armaments market.

Changes in force structure

The outlook for European manufacturers is nevertheless not as gloomy as it would appear on first sight. New demand, in addition to routine replacement of equipment at lower levels, will in all probability result from changes in European force structures in response to the new strategic environment and the emerging new roles.

In the emerging new strategy the United States for instance is placing greater emphasis on air power and light mobile forces. Potentially this has far reaching consequences for procurement.

Last but not least, the treaty on Conventional Forces in Europe (CFE) imposes strict limits on major weapon systems. In other words, military R&D and procurement policies will have to distinguish between areas and systems that are subject to limitations and those that are not.

Against this background future policy may develop mainly along two axis:

giving high priority to 'force multipliers' outside CFE areas; and

high-tech upgrading of CFE limited systems.

Applying economic principles, procurement along both axis would only be in balance (maximum force posture) if incremental spending increases along one axis yield the same marginal increase in fire power as the same spending increase along the other axis. But such a theoretical analysis can almost never be implemented in practice, although it can serve its purpose in general policy formulation.

IMPLICATIONS FOR PROCUREMENT

Major systems

Systems limited by CFE generally incorporate mature technology. This is making quantum leaps, by the introduction of new technology, not only less probable but also increasingly expensive. The task will therefore be to keep a shrinking number of major systems technologically up-to-date. And we all know the implication regarding unit costs. A major impact on the defence industries, which were already suffering from over capacity before the demise of the Warsaw Pact and the Soviet Union, is implicit.

A further problem will arise in the replacement market. Over the next years it will be difficult to explain to our public why for instance we need new tanks when, at the same time, we are destroying or giving away perfectly adequate ones.

Force multipliers

The main elements affecting 'force multipliers' such as mobility, real time intelligence, command, control and communications are still in full development.

New technologies in this field can offset quantitative imbalances on the battlefield by rapidly concentrating dispersed units at the right place, by giving them a clear picture of the combat situation and by maintaining communications free of disruptions, etc. This area of force multipliers is far from fully explored. Quantum leaps are still possible, even without major investment into military R&D.

The reasons for this are as follows:

the technologies required for the further development of force multipliers are essentially 'dual-use' technologies;



civilian R&D expenditure in this broad sector has become much larger than the comparable military expenditure could ever be;



generational change of civilian-developed technology is faster and cheaper; and



large production runs rapidly amortize R&D investment and large quantities and applications for varied purposes provide a manufacturing experience that the defence sector, especially if working in isolation and secrecy, can never achieve.

This focuses the debate on the dual-use question which came to life only a few years ago. Stimulated by the end of the Cold War and the prospects of prolonged defence spending cuts, the question is asked to what extent dual-use industries can contribute to a sustainable defence-industrial preparedness.

MILITARY R&D - AN ADD-ON TO CIVILIAN TECHNOLOGY?

Given the likely development of resources for defence, large scale development of military technologies involves costs which can not be carried in the future. An attempt must therefore be made to treat military technology essentially as a derivative of civilian technology. In essence it would be ideal if as many components and parts as possible that end up in the final military product were bought off-the-shelf from corporations that do their essential business in the civilian market.

But the application of civilian technologies has its limits! It cannot be expected, for example, for the civilian micro-electronics industry to independently produce acceleration-stable guidance elements that can be fired from tank guns, if there is no market for them. For this reason it is necessary that the specifically military applications, for which there are no civilian counter parts, continue to be funded and developed by the military sector in a kind of follow-on or add-on development of civilian technologies and products.

Generational change in civilian technology and systems takes place at breathtaking speed due to fierce commercial competition. By comparison, military developments - especially if they take place in the cumbersome environment of bureaucratically regulated, multilateral, co-operative projects - appear to advance at a snails pace. As a result, military industries need to overcome high obstacles in order to penetrate new civilian markets.

HARD TIMES FOR CONVERSION

Also linked to the dual-industry complex, is the question to what extent defence-industrial conversion is possible, e.g. to 'turn swords into plough shares'. In the West, global access and competition assure that demand is satisfied almost instantaneously. Market niches are difficult to find at any time. Civilian manufacturers do not wait for a defence manufacturer to fill the gap. Defence manufacturers are also facing the task of building from scratch an extensive, and therefore expensive marketing and support network for their 'new' products converted to civilian use. Defence manufacturers 'turning civilian' will therefore face fierce competition in almost every market from well established and globally sourced civilian suppliers.

OUTLOOK

As the add-on approach is finding more and more followers - converted by the hard reality of shrinking defence budgets throughout NATO - the concept of dual-use industries and dual-use products will increasingly become the focus of the discussion on future defence-industrial preparedness. In this discussion it will also become clear that relying on civilian technology implies participation in the globalization of civilian technology and manufacturing, e.g. an increasing dependence on foreign suppliers of critical technologies or parts.

The concept of relying on dual-use industries with add-on military developments will undoubtedly effect considerable savings as it will increase the efficiency of resources allocated. But in return it will also increase supply dependency on the global market. The United States had a painful, though limited experience of this during the Gulf War.

A NATO Code of Conduct for an Alliance-wide agreement on defence trade, as currently under discussion, could increase supply security at least within the Alliance. It would not solve, however, the problem resulting from an increased reliance on civilian, globalized high-tech R&D and manufacturing. Alternatives aimed at avoiding such global dependencies imply an increasingly costly, parallel domestic industrial and scientific development, which even the richest nations are unlikely to be able to afford in the future.