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China, Russia and ... Saudi Arabia : very fast growing markets for Defence Groups

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écrit par Kathryn McFARLAND,Analyst,XERFI Global Business (18 septembre 15)
Xerfi Global has recently published a report on Defence Groups. Uncertainty is the word that currently describes the outlook for the defence industry, which accounted for 2.4% of the world’s GDP in 2014, with large contractors particularly facing reduced government revenue streams in Western nations.
Indeed, after seeing considerable growth of 3.5% per year on average from 2005 to 2011 due to major military operations in Afghanistan and Iraq, global military expenditure contracted from 2011 to 2014, giving -0.8% growth per year, pulled down by lower defence budgets in large markets in North America and Europe.
The US remains, by far, the world’s biggest market, accounting for 37.0% of global military spending in 2014. However, this share was even bigger in 2010, when it accounted for 43.0% of the market. This change is brought about by three consecutive years of spending cuts in the US as well as increased spending by other countries, meaning that they have gained a greater market share. China is particularly impressive in this regard. Its military spending has increased its share in world military expenditure from 6.6% in 2010 to 11.0% in 2014. Russia has also gone from holding a 3.5% market share in 2010 to 5.0% in 2014 and Saudi Arabia has gone from  2.7% to 3.8% in the same timeframe. France on the other hand, has slipped from 4.2% to 3.5% and the UK from 3.8% to 3.3%.
This shift in demand growth is having an effect on major defence contractors, who are primarily based in mature markets and are thus highly exposed to spending patterns in these markets.
Sales of the world’s major defence players slipped by an average of 3.9% per annum between 2010 and 2014.

Nevertheless, behind these sales figures lies recovering growth in companies’ bottom lines.2014 resulted in a five-year profit high. This was the fruit of moves to make business operations more efficient and diversification into higher added-value areas such as cybersecurity, healthcare, financial systems and communications as well as lower commodity prices particularly for those specialised in military hardware.

In terms of strategies, companies will continue to streamline operations and reduce operating costs. Technological innovation remains a focus, but average capex ratios are fairly low, amounting to less than 3% of revenue for the analysed companies from 2009 to 2014, as groups try to keep costs low and turn to mergers and acquisitions as well as partnerships to access new technologies. A considerable part of this innovation concerns civil or dual-use technology (that is to say technology with both military and civil applications) which allows reduced exposure to the ailing defence market and synergies in terms of research and development, supply-chain management and manufacturing. Given the shift in demand centres, international expansion to tap into to growing spends on new markets is also a priority of many major defence contractors.


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(Mis en ligne le 18 Septembre 2015)