Covid-19 Subdues Growth in Global Arms Industry

Covid-19 Subdues Growth in Global Arms Industry

The diplomatic breakthrough that brought last summer’s normalization of relations between Israel and both the United Arab Emirates and Bahrain was also seen as a potential boon for the international defense industry.

But prospects for direct transfers of Israeli defense technology to the Arab countries instead have lagged amid the coronavirus pandemic—one of many factors contributing to reduced defense sales across the board.

Overall, defense analyst Janes expects the industry to grow this year, although at its lowest rate—just 0.7%—since 2013, with total global spending on defense at nearly $1.8 trillion. Janes expects significant drops in Africa, the Middle East and Russia, with no growth in Asia Pacific, Europe and Latin America.

These are tangible signs of how the coronavirus, and efforts to combat it, have affected the defense industry—usually resilient given its financial and geopolitical importance—as governments have deemed the public-health crisis a national-security issue.

Logistical and economic hurdles have disrupted sales, development and manufacturing. Many defense companies have been rocked by rising costs and production irregularities. And governments have poured trillions of dollars into combating the economic and public-health effects of Covid-19.

The impact of the virus on the defense industry has varied. The aerospace sector, with its heavy reliance on civilian aviation, has been hit especially hard as a result of pandemic lockdowns on travel. The General Aviation Manufacturers Association said global business jet deliveries declined 20.4% last year.

Military exercises, traditionally an opportunity for seller nations to showcase weapons systems to prospective clients, have been limited. The Pentagon suspended travel and troop deployments.

Last year in February, Washington and Seoul postponed planned joint military exercises due to the coronavirus and President

Donald Trump’s

objection to their cost. Military exercises on their own account for millions of dollars in economic activity.

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The pandemic has limited human intelligence gathering, increasing reliance on cyber intelligence and cybersecurity and continuing development of unmanned systems such as ariel drones. Analysts also have seen an increase in sales of thermal-imaging equipment, which can be used to take body temperatures remotely.

Despite setbacks, some analysts see the defense industry as broadly protected from major volatility, thanks to the multiyear nature of its contracting cycle.

“Demand over the next two years is unlikely to be affected, since budgets for these projects had been allocated prior to the pandemic, and the projects are critical to national defense,” a report released by accounting firm Deloitte LLP said.

But an acute reduction of in-person meetings—a necessity given the political aspects of most arms agreements—has impeded the progress of new deals. One Gulf official at last month’s International Defence Exhibition and Conference, held in Abu Dhabi, said some international counterparts were also reluctant to engage in videoconferences.

For this and other reasons, the biennial Abu Dhabi exhibition—the region’s largest defense conference, known as IDEX—held particular value for the industry. The fact that the Emiratis, who have employed strict public-health controls since the pandemic began, mounted the exhibition at all came as a surprise. More than 900 exhibitors from 59 countries attended.

By contrast, this year’s Paris Air Show, a traditional industry palm-presser scheduled for June, was canceled, one of many defense conferences and exhibitions called off, postponed or held remotely in the past year.

This year’s IDEX conference demonstrated the U.A.E.’s priority on becoming a major arms player against the backdrop of continued rivalry with Iran and the Biden administration’s review of U.S. arms sales to the U.A.E. and Saudi Arabia.

Coming after completion of the accords between Israel, the U.A.E. and Bahrain, this year’s gathering held promise in the arms industry as the first IDEX attended by Israeli defense companies, marking a major shift in the region’s defense complexion.

However, a coronavirus-related shutdown of international flights to and from Israel left the exhibition stands of those Israeli companies all but vacant.

Many companies that succeeded in attending the conference brought with them lessons of the difficulties of the pandemic. One of the few Israeli companies represented at IDEX, small-arms manufacturer Emtan Karmiel Ltd., halted production at its factory for several weeks and faced shipping costs that ballooned from $5 to $20 per kilogram.

The Biden administration approved a $60 million sale of Lockheed Martin’s F-16s to Jordan in the past month.



Photo:

Luka Dakskobler/Zuma Press

“It’s because there were fewer flights,” said

Ron Pollak,

Emtan’s vice president of sales and marketing. “Our profit was damaged.”

An executive at the Edge, an Emirati defense conglomerate, said that some subsidiaries adopted what amounted to a staggered shift schedule in order to continue production while accommodating strict governmental health regulations.

Janes said that defense purchases in the Gulf region increased by 5.4% in 2020, to $100 billion, but were expected to decline by 9.4% in 2021, and fall further in 2022 to $89.4 billion. Janes predicts that Gulf military spending will return to its pre-pandemic level only in 2024.

China was among countries demonstrating resilience in the pandemic, with its 2021 defense budget marking an increase of 6.8%, to $209.4 billion, in the first year of a new five-year plan.

Israel wasn’t the only marquee country with a limited presence at IDEX. Pandemic concerns dissuaded the U.S., customarily the largest governmental mission at the exhibition, from sponsoring a delegation.

State-owned Israel Aerospace Industries saw record sales of $4.2 billion last year. An assembly line near Or Yehuda, Israel.



Photo:

baz ratner/Reuters

The Pentagon has taken steps to shore up U.S. contractors during the past year, more than doubling the amount—$135 million in 2020, up from $64 million in 2019—annually distributed through the Defense Production Act. The act was known during the past year for its use in coronavirus-related procurements, but it has been regularly used by the Defense Department for national security.

The majority of that money, $80 million, went to

Spirit AeroSystems Holdings Inc.,

a Kansas aircraft manufacturer that furloughed hundreds of workers due to aerospace-sector slowdowns.

For some U.S. companies, new defense deals continue despite the general slowdown. The Biden administration approved several large contracts in the past month, including a $60 million sale of

Lockheed Martin Corp.

F-16s to Jordan and an $85 million

Raytheon Technologies Corp.

missile sale to Chile.

Prosperity in hard times wasn’t limited to the U.S. Turkey’s largest defense manufacturer,

Aselsan Elektronik Sanayi ve Ticaret AS

., increased its revenue last year by 24%, hitting $2.23 billion.

Owing to a new focus on profit ahead of a planned listing on the Tel Aviv Stock Exchange, the state-owned Israel Aerospace Industries, one of the country’s largest exporters, recorded record sales of $4.2 billion last year. Despite that, an IAI spokeswoman said, it was still a tough year.

“We had to do a lot of creative solutions to bring our products to our clients,” she said.

Write to Brett Forrest at brett.forrest@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Source: WSJ – US News

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