TCS Requirements IPT Operational Situations/Target Sets

External Environment Assessment

Defense

Economics

Frank Killelea

National Security Analysis Department

Johns Hopkins University Applied Physics Laboratory

March 2005

Note: Additional explanatory material can be found in the Notes view

Distribution Statement A –

Approved for Public Release;

Distribution is Unlimited

03/05


Abstract

This analysis identifies economics factors and conditions that are important to a nationstate’s ability to develop, acquire and sustain significant military forces and capabilities. It examines readily available economic data which influence the size and direction of a country’s defense spending. It is less applicable to subnational and transnational threats whose financial and arms requirements tend to get lost in the background noise.

This report is an occasional paper of the APL National Security Analysis Department

Its ideas are intended to stimulate and provoke serious thinking.

Not everyone will agree with them. Therefore it should be noted that this report reflects the views of the author alone and does not necessarily imply concurrence by APL or any other organization or agency, public or private.

03/05 2

Executive Summary

(1of 4)


This analysis identifies economics factors and conditions that are important to a nationstate’s ability to develop, acquire and sustain significant military forces and capabilities. It examines readily available economic data which influence the size and direction of a country’s defense spending. It is less applicable to subnational and transnational threats whose financial and arms requirements tend to get lost in the background noise.

The base year for this update is 2002, the latest year for which data were available. Where available, pertinent data on subsequent years have been included.

This analysis addresses:



Economic factors that support or inhibit defense spending



Defense and military R&D spending and trends



Weapon costs and trends



Arms transfers and trends



Defense industries and trends



Defense economics impact on military capabilities



Defense economics impact on US military spending



An economically influenced view of global threats. (Asymmetric threats are included to remain consistent with data contained in the previous external environment assessment.)

03/05 3

Executive Summary Continued

(2 of 4)


Since last updated:

 Global defense and R&D spending has trended upward led by the US, China, and Russia to a lesser degree. Other countries spending more include India, Iran, Brazil and South Korea.

Most countries spending, however, has either remained flat or increased/decreased slightly.

 The value of global arms transfers, which decreased over 70% from the mid-80s through 2002, has shown no signs of leveling off.

 Escalating weapons costs have continued to outpace defense budget growth making it difficult

(actually impossible) for nations, including the US, to replace aging systems with new models on a one-for-one basis. Few countries can afford to purchase large numbers of modern combat systems.

 Global defense industries have continued to contract and consolidate via mergers and acquisitions, with current trends favoring national and cross-border collaborations (teaming) in an effort to share development and production costs, and gain market access.

Some insights:

 Defense economics analysis remains useful as a means of identifying countries capable of acquiring significant military capabilities that could challenge US forces.

 It can alert decision-makers to countries with changing military aspirations, and in effect provide years of early warning to developing threats.

 Defense economics can also help decision-makers prioritize weapons spending based upon global weapons development and acquisition efforts.

03/05 4


(3 of 4)


Findings:

 Developing military capabilities in nation states is largely a function of defense spending. In 2002,

73% of the countries worldwide spent under $2B on defense. Eleven countries besides the US spent in excess of $10B, including four over $30B (China ~ $62B). Among the countries spending over $4B, Syria, Iran, Russia and China are probably the only ones that could be considered potential adversaries. (By way of comparison, the US defense budget in FY2002 was $344.8B.)

 Escalating costs of all things military including weapons development and acquisition, personnel, operations and maintenance, and infrastructure have led many countries to smaller forces with mixed inventories, retaining older systems longer.

 The high cost of military R&D has significantly limited the number of countries capable of developing and producing modern, sophisticated combat systems. Few new state-of-the-art systems, in all major weapon categories are being developed worldwide.

 Many countries rely on others to develop the new systems and hope they can afford a few.

Unfortunately, the cost of the latest models has escalated beyond the reach of most countries, resulting in a growing market for less costly used and/or upgraded combat systems.

 The ratio of defense spending and escalating weapons costs is the most significant influence affecting acquisitions, force size and mix, arms sales, and the global defense industry.

03/05 5


(4 of 4)


Findings Continued:

 Without the amortization of weapon costs across large unit buys, there is little hope to reduce the cost of new sophisticated combat systems to affordable levels.

 It will become increasingly difficult to prevent sensitive technology transfers because of industrial offsets related to arms sales, and cross-border industrial collaborations to develop, produce modern weapon systems.

 In the US, large federal budget and trade deficits, growing national debt and related servicing costs, and increasing social, welfare, health, infrastructure and domestic security costs will likely pressure non-war related defense spending downward as early as FY2006.

 Defense modernization (R&D, Acquisition) will like absorb most cuts as military personnel, medical, and O&M accounts continue to grow as a share of the defense budget. Expensive programs will likely be reduced, stretched or cancelled to accommodate the reduced funding. Likely candidates include the F/A-22, Joint Strike Fighter, National Missile Defense,

DD(X), Littoral Combat Ship, Airborne Laser, Army Future Combat System (FCS), and space systems.

 Transnational threats are not dependent on large budgets to further their aims. Their employment of asymmetric tactics and inexpensive and readily available weapons and explosives make them a continuing and dangerous threat.

03/05 6

Current and Near-Term GEO-POL Overview

• Post Cold War Period Unsettled and Dangerous

• Regional Conflicts Could Involve US

• Transnational Threats More Prominent

• Russia’s National Interests Still Uncertain

• China Perceives Greater Regional Role

• NATO’s Future Role Unclear – Europe More Introspective

• US Engaged

–

Countering Transnational Threats

– Supporting Developing Democracies

– Will Preempt to Defend Interests

•

Emphasis on Coalition OPS

• Conflicting National Interests Challenge Coalition Solidarity,

Effectiveness

03/05 7

International Defense Economics


Overview

• Economics Analysis Applicable to Nation-States ; Much Less To

Transnational Threats

• Defense Economics Analysis

– Identifies Countries Able to Acquire Significant Capabilities, Develop

Sophisticated Systems

– Provides Early I&W of Countries’ Changing Military Aspirations

•

Understanding the Economically Feasible Threat

– That Which is

Available, Affordable and Sustainable – Can Help Defense

Planners

– Focus on Potential Adversaries with Significant Capabilities

– Prioritize Weapons Spending Based on Global Weapons Development and Acquisition Efforts

 Few State-of-Art Systems in All Major Categories Being Developed

• Not As Useful Assessing Transnational/Terrorist Threats

–

Other Than WMD, Most Arms Are Low Tech, Inexpensive and Available

–

Data Not Readily Available

03/05 8

International Defense Economics (Cont'd)


Overview

• Global Defense Spending

– Affected by Strategic and Economic Considerations

– Driven by Big Spenders , i.e., US, Western Europe, Japan, Russia, China

– Unlikely to Return to Cold War Levels in Foreseeable Future

•

Defense Forces

– Smaller Personnel- and Equipment-wise

– Mixed Inventories , with Fewer Modern Systems

– Growing Personnel and Operating Costs Pressure Procurement

• Military R&D

– Investment Driven by US; Western Europe to Lesser Degree

– Few Can Afford

– Few New Sophisticated Combat Systems Being Developed Worldwide

– Europe Needs to Consolidate R&D Efforts to Reduce Duplication and Achieve

Greater Investment Mass

• Arm Sales

– Fewer Domestic Sales for National Forces

– Stiff Competition Among Defense Industries for Shrinking Foreign Sales

– Prohibitive New Weapons Costs Increasing Market for Cheaper, Used, and

Upgraded Systems

 Upgrades and Maintenance are Not Cheap; Pool of Used Systems Growing Smaller

– An Area in Distress and In Need of Realistic Market Analysis

03/05 9

International Defense Economics (Cont'd)


Overview

•

Ratio of Defense Spending and Escalating Weapons Costs the

Single Most Significant Influence on Acquisitions, Force Size and

Mix, Arms Sales, and the Global Defense Industry

• Previous Efforts to Reduce Costs Largely Unsuccessful

–

Major Defense Industrial Restructuring Has Not Slowed Price

Escalation

– Streamlined Acquisition Procedures, Including Less Oversight, Use of

Commercial Products, Capabilities-Based Process Not The Answer

–

Still Waiting for Significant Hi-Tech Solutions

• Without Significantly Lower Weapon Costs, Foreign Sales Will

Continue to Decrease

• Without Foreign Sales and Significant National Demand,

Production Runs Will Be Short, Fewer Units Produced, and Unit

Costs Will Continue To Outpace Defense Budgets

•

Amortization of Weapons Costs Critical To Lower Prices

– Easy Answer is to Reduce Costs and Sell More – But – The Devil is in the Details

03/05 10

Defense Economics

Summary

Global Defense Spending


• Defense Spending Decline Bottomed in ’98 – Slow Climb Since

•

Military R&D Spending Also

Bottomed in ’98

•

Arms Transfers Trend Still Down Since Mid-80s

•

Higher Priority Economic Considerations Gaining Greater Share of

National Budgets

• Sophisticated Weapons Cost More Than Systems Being Replaced

• Fewer Costly New Hi-Tech Systems Being Acquired, Developed

• Greater Competition For Fewer Arms Sales

•

Leaner Defense Industries

•

Sophisticated Systems Available , but Few Can Afford Many

•

Transnational/ Terrorist

Threats Don’t Need Large Budgets

, Expensive

Weapons

03/05 11

Notional Worldwide Defense Spending Trends


$

DEFENSE BUDGETS

WEAPONS

TRANSFERS

R&D

WEAPON COSTS

VG#7

MID-80s

CONSTANT 2000 $

1998

TIME

2002 2010

03/05 12

Defense Spending


Economic Factors

• Economic Factors Impact World-Wide Defense

Aspirations

– Increasing Social, Welfare, Infrastructure Competition for

Limited Revenues

• Varying Combinations of Stagnant Economies, Budget

Deficits, Large External Debt, Currency Devaluation,

High Inflation, Trade Deficits, Limited Foreign Reserves, and Growing Population Drive Defense Budgets Down .

Autocratic Regimes Can Delay This For Awhile.

03/05 13


• Economic Factors That Affect Defense Spending

– Gross Domestic Product (GDP)*

– Population/Growth Rate/Literacy Rate

– Per Capita Income

– Natural Resources

– Industrial/Agricultural/Output

– Exports/Imports – Balance of Payments

– Revenues*

– Budget Surplus or Deficit*

– External Debt*

– Inflation*

– Currency Devaluation*

– Defense Budget/Allocation*

*Major Influences

03/05 14

Macro-Economic Factors Inhibit


Defense Budgets

More $

Current defense budget level

Less $

Current year +1 +2 +3 +4

Economic Factors

• Sustained annual Gross Domestic Product (GDP) growth below 3%, or negative growth

• Sustained annual inflation rate over 15%

• External debt equal to or greater than annual gov’t revenues

•

External debt equal to or greater than 50% of GDP

Note: Presence of more than one factor increases negative pressure on defense budget.

03/05 15

Worldwide GDP & Defense Spending Trends


VG#11

40

20

80

60

Index: 1986 = 100

140

120

100

GDP

DEFENSE SPENDING

0

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Note: Over this period, worldwide GDP, excluding the U.S. increased by around

36 percent while defense spending decreased by over 30 percent.

Source: DIA DI-1912-1500, Defense Intelligence Reference Document, “Worldwide

Defense Expenditures, 1999(U ),” Jun 2000

The World Bank: “2004 World Development Indicators”

SIPRI Yearbook-2003

World Bank Development Indicators Data Bank, 4 Jun 2004 query

2000 2001 2002

03/05 16

2002 Economic Data

(1of 4)


Country

Argentina

Brazil

Chile

South Africa

Egypt

Iran

Israel

Saudi Arabia

GDP

$B U.S.

$102.0

452.4

64.2

104.2

89.8

108.2

103.7

188.5

Revenues

$B U.S.

44.0

100.6

17.0

22.6

21.5

29.5

38.5

46.0

Defense Budget

$B U.S. – 2000 $

2.9

9.96

2.3

2.2

2.7

8.7

9.8

21.6

Nat’l Budget

±$B U.S.

-4.0

9.0

−

-2.1

-0.4

-2.1

-6.6

-10.5

External Debt

132.3

227.9

19.2

25.0

30.8

9.2

$B U.S.

43.0 (01$) est.

25.9

Current Account

Trade Balance

$B U.S.

9.6

-7.7

-0.6

0.3

0.7

12.6

-1.2

11.7

Foreign

Exchange

$B U.S.

10.5

37.8

15.3

7.8

14.1

−

24.1

22.2

Syria

Greece

Turkey

France

Germany

20.8

132.8

183.7

1,431.3

1,984.1

6.0

45.0

42.4

286.0

802.0

1-5.4*

5.3

10.1

33.6

27.7

-1.0

-2.6

-26.7

-44.0

-23.0

21.5

63.4

131.6

−

−

1.1

-10.4

3.4

25.7

46.6

−

9.4

28.3

61.7

89.1

Italy 1,184.3

504.0

21.1

-13.0

− -6.7

55.6

Source: The World Bank “World Development Indicators – 04” SIPRI Yearbook – 2003 CIA “The World Factbook 2003” IISS “The Military Balance

2003/2004”

Note: *Range of values reflect differing defense budget estimates in source documents.

03/05 17

2002 Economic Data

(2 of 4)


Country

Spain

U.K.

India

Pakistan

Indonesia

Malaysia

Singapore

China

South Korea

North Korea

Taiwan

Japan

Russia

GDP

$B U.S.

653.1

1,566.3

510.2

59.1

172.9

94.9

87.0

1,266.0

467.7

−

406.0

3,993.4

346.5

Revenues

$B U.S.

105.0

565.0

48.3

12.6

26.0

20.3

27.9

224.8

118.1

−

36.0

441.0

70.0

Defense Budget

$B U.S. – 2000 $

7.1

36.0

12.9

3.2

1.8

1.9

4.7

61.5

13.5

1.5

7.3

46.7

15.7

NATL Budget

±$B U.S.

-4.0

25.0

-27.9

-2.2

-4.0

-6.9

8.4

-42.3

22.4

−

-0.1

-277.0

8.0

External Debt

$B U.S.

−

−

104.5

33.7

132.2

48.6

8.2

168.2

132.5 (01$)

−

24.7

−

147.5

Current Account

Trade Balance

$B U.S.

-15.9

-14.4

4.6

3.9

7.8

7.2

18.7

35.4

6.1

−

17.0

112.4

29.9

Foreign

Exchange

$B U.S.

40.3

42.8

71.6

8.8

32.0

34.6

82.0

297.7

121.5

−

−

469.6

48.3

U.S.

10,383.1

1946.0

336.0

-106.0

− -480.9

157.8


2003/2004”


03/05 18

2002 Economic Data (Cont’d)

(3 of 4)


Negative

Influences

Country

Argentina

Brazil

Chile

South Africa

Egypt

Iran

Israel

Saudi Arabia

Syria

Greece

Turkey

France

Germany

GDP Growth – Population

Growth <3%

%

Population

Growth

1.2%

% GDP

Growth

-10.9%

1.6

1.5

2.3

2.2

2.3

2.4

3.9

3.0

0.4

2.0

0.4

0.2

1.5

2.1

3.0

3.0

6.7

0.8

1.0

2.7

4.0

7.8

1.2

0.2

>20%

Def. Share of

Revenues

6.6%

9.9

13.5

9.7

12.6

29.5

25.4

47.0

17-90.0*

11.8

23.8

11.7

3.4

>10%

Debt Service

Share of

Revenues

27.5%

11.3

2.1

17.5

12.0

0.7

12.9

17.9

27.6

−

− est.

2.3 est. est.

7.0 est. est.

>15%

Inflation

%

41%

8.3

2.5

9.9

4.3

15.3

5.7

1.0

0.9

3.6

45.2

1.8

1.3

≥50%

Debt as % of

GDP

130%

50.4

30.3

24.4

34.0

8.5

41.0

14.0

103.0

48.0

72.0

−

−

≥100%

Debt as % of

Revenues

300%

228.0

113.0

111.0

143.0

31.0

112.0

56.0

358.0

141.0

310.0

−

−

Italy 0.1

0.4

4.2

2.4

2.4

− −


2003/2004”


Def.

Spending

Projection

03/05 19

↓

?

↓

-

?

?

↓

-↑

↓

↑

-

↓

↓

↓

2002 Economic Data (Cont’d)

(4 of 4)


Negative

Influences

Country

Spain

U.K.

India

Pakistan

Indonesia

Malaysia

Singapore

China

South Korea

North Korea

Taiwan

Japan

Russia

U.S.

GDP Growth – Population

Growth <3%

%

Population

Growth

0.4

% GDP

Growth

2.0

0.2

1.9

2.5

1.6

2.6

2.5

1.2

1.0

1.2

0.65

0.4

0.2

0.92

1.8

4.6

2.8

3.7

4.1

2.2

8.0

6.3

1.0

3.5

0.3

4.3

2.4

>20%

Def. Share of

Revenues

6.8

6.4

26.7

25.4

6.9

9.4

16.8

27.4

11.4

−

20.3

10.6

22.4

17.3

>10%

Debt Service

Share of

Revenues

−

7.7

37.1

58.4

21.6

11.9 est.

1.3

3.7 est.

5.6 est.

−

3.4 est.

−

9.5

10.8

>15%

Inflation

%

3.0

2.1

5.4

3.9

11.9

1.9

-0.4

-0.8

2.8

−

-0.2

-0.9

15.0

1.6

≥50%

Debt as % of GDP

20.0

57.0

76.0

51.0

19.0

13.0

−

−

28.0

−

6.1

−

43.0

4.0

≥100%


2003/2004”


Debt as % of

Revenues

−

−

216.0

267.0

508.0

239.0

29.0

75.0

112.0

−

69.0

−

210.0

−

Def.

Spending

Projection

↑

↑

↓

↓

− ↓

↓

?

?

↑

?

↑

-↑

↓

−

03/05 20


Defense

Spending

03/05



Overview

• Worldwide Defense Spending Bottomed in 1998

– Fewer Producers of High End systems

– More Emphasis on Affordability and International Collaboration and Consolidation in Production and R&D

– US, Western Europe, Japan, Russia Produce High Technology

Systems; ROW Countries Don’t

– R&D Down 60% from 1986 to 1998; Up 12% from ’98

– System Upgrades, Software Modifications, Dual Use

Technology, Asymmetric and Terrorist Threats Emphasized

• Arms Transfers Down over 70% Since Mid 1980s

– Greater Competition for Fewer Sales as Industries Fight for

Survival

– Major Suppliers: US, Russia, France, UK, Germany

03/05 22


Smaller Inventories and Upgrades


• New Weapon Systems 2-5 Times More Costly Than Older

Systems. Few One-for-One Replacements

• Most Weapon Sales Require Hard Cash, Pay-Back Loans, or

Barter at Market Prices. Few Discounts or Grant-Aid. Many

Countries Lack Foreign Reserves to Buy New Systems.

• Sophisticated Weapon Systems Available But Few Can

Afford Them

• Seventy-Three Percent of Countries 2002 Defense Budgets

Under $2B in US 2000$

– Under $800 Million For Procurement

– Emphasis On System Upgrades , and More Capable Used

Systems

• Sustained Defense Spending Over $2 Billion Buys Some

Sophisticated Systems

03/05 23

VG#19

Worldwide Defense Budgets – 2002


100

90

80

70

60

50

90

40

30

20

10

0

0 $0.5

14

N. KOREA

INDONESIA

1.0

9

2.0

EGYPT

13

3.0

KUWAIT

COLOMBIA

BELGIUM

POLAND

NETHERLANDS

NORWAY

PAKISTAN SWEDEN

6 SINGAPORE

2

SYRIA

AUSTRALIA

GREECE

4

4.0

5.0

7.0

IRAN

BRAZIL

TAIWAN

CANADA

SPAIN

ISRAEL

6

TURKEY

S. KOREA

INDIA

3

S. ARABIA

GERMANY

RUSSIA

ITALY

4

CHINA 61.5

JAPAN 46.7

U.K.

36

FRANCE 33.6

4

10.0

15.0

30.0

>30.0

Defense Budgets in Billions Constant U.S. 2000 Dollars

Notes: Includes all countries less the U.S.,

Sources: “SIPRI Yearbook 2003” and “The Military Balance 2003/2004”

Ref: 9800648B_UK.PPT-4

03/05 24

10-Year Defense Budget Growth (%)


1993

→

2002

10 Year Growth

Avg. Ann. Growth

25

CONSTANT U.S. 2000 $

S. KOREA

SAUDI ARABIA

>$10B

20

TURKEY

GREECE

$5-10B

$2-5B

IRAN

ISRAEL

$1-2B

15

10

5

ZAMBIA

0

-100%

LIBYA

BELARUS

CROATIA

SYRIA

$0.5-1B

MEXICO

CHILE <$0.5B

JAPAN

PORTUGAL

TAIWAN

ARGENTINA

VENEZUELA

N. KOREA

THAILAND

ANGOLA

CHAD

U.K.

GERMANY

CANADA

SWITZERLAND

PERU

MOZAMBIQUE

RWANDA

SEYCHELLES

USA

RUSSIA

SPAIN

NETHERLANDS

AUSTRALIA

BELGIUM

AUSTRIA

SIERRA LEONE

ZIMBABWE FINLAND

GUATEMALA

BRUNEI SENEGAL

URUGUAY

MONGOLIA EL SALVADOR

PARAGUAY

-50%

ALBANIA

AZERBAIJAN

KAZAKHSTAN

-25% -10%

BULGARIA

YEMEN

0%

PAKISTAN

OMAN

DENMARK

BANGLADESH

INDIA

NORWAY

SRI LANKA

BRAZIL

POLAND

IRELAND

COLOMBIA

SWEDEN

ITALY

JORDAN

BURUNDI

CYPRUS

SINGAPORE

EGYPT

MOROCCO

HUNGARY

ROMANIA

LEBANON

GHANA

NICARAGUA

MALTA

+10%

KUWAIT

MALAYSIA

CZECH REP.

PHILIPPINES

BURKINA FASO

CAMEROON

TUNISIA

BOTSWANA

KENYA

PANAMA

CAMBODIA

SLOVAKIA

LETHOSO

MALI

NAMIBIA

NIGERIA

TANZANIA

ECUADOR

ARMENIA

MADAGASCAR

BOLIVIA

LUXEMBOURGE

+20%

BAHRAIN

+50% +100%

CHINA

ALGERIA

SUDAN

UGANDA

NEPAL

+150%

UKRAINE

ETHIOPIA

ESTONIA

LATVIA

LITHUANIA

+250%

-10% -5% -2.5% -1% 0% +1% +2% +5% +10% +15% +25%

Source: SIPRI 2003; Military Balance 2003-2004

VG#20

03/05 25

Estimated Worldwide Defense Modernization


Funding – 2002

100

90

80

90

70

60

50

VG#21

40

30

20

10

$ @ 20%

$ @ 40%

0

0 $0.5

$0.1

$0.2

14

0.2

0.4

N. KOREA

INDONESIA

9

1.0

2.0

0.4

0.8

EGYPT

13

3.0

0.6

1.2

KUWAIT

COLOMBIA

BELGIUM

POLAND

NORWAY

PAKISTAN

6

NETHERLANDS

SYRIAI

SWEDEN

SINGAPORE

AUSTRALIA

2

GREECE

4

7.0

IRAN

BRAZIL

TAIWAN

CANADA

SPAIN

ISRAEL

6

TURKEY

S. KOREA

INDIA

3

S. ARABIA

GERMANY

RUSSIA

ITALY

4

10.0

15.0

30.0

CHINA 61.5

JAPAN 46.7

U.K.

36

FRANCE 33.6

4

>30.0

4.0

5.0

Defense Budgets

0.8

1.6

1.0

2.0

1.4

2.8

2.0

4.0

3.0

6.0

6.0

>6.0

12.0

>12.0

Defense Funds for Force Modernization @20 and 40%

Notes: Modernization includes all forces (Ground, Air, Naval Platforms, Weapons, Sensors)

$ in billions of constant U.S. 2000 dollars

Includes most countries less the U.S.

Primary Sources: “SIPRI Yearbook 2003” and “The Military Balance 2003/2004”

03/05 26


Trends


• Trending Upward Since 1998 , Led By US (+46B),

China (+13.3B), Iran (+8.1B), Russia (+4.3B), India

(+3.5B), Brazil (+2.1B)

• Likely to Continue Upward Near-Term , Influenced

By US, China, Russia, South Korea, and India.

Economic Developments Could Slow or Reverse

Trend

Worldwide Defense Spending in Billions US 2000$

1988

909

Sources: SIPR1 2001, 2002, 2003

IUSS Military Balance 2003-2004

1993

762

1998

690

2002

784

03/05 27

Defense Spending (Cont'd)


Trends

• Fewer New High-Technology Weapon Systems

Likely to be Developed and Fielded Over Next 10-

20 Years Because of Costs

• Most Countries’ Defense Spending Flat or

Negative Over Time Unless Involved in or

Preparing for Conflict, Insurgencies, or the War on Terrorism

Sources: SIPRI Yearbooks

– 2001, 2002, 2003

The Military Balance

– 2003-2004

03/05 28


Defense

R&D/S&T

03/05

Worldwide Military R&D Spending

Overview


• R&D Down 60% from 86 to 98: Up 12% from 98 to 2002

• 2002 Estimated Spending at $66 Billion in 2000$

– $50.6 B by US; $57.4 B by NATO

– Most for Aircraft Related Programs

• Nine Besides US Spending Over $500 Million on R&D

• US, Russia, China* Spending More in 2002

• R&D Budgets Compete with Procurement, Personnel, Maintenance and

Operational Readiness Accounts

• Aggregate Worldwide Defense R&D Spending Likely to Increase Near-Term as US, Russia, China* Spend More

• European R&D Likely to Decrease Somewhat as Major Aircraft Programs

(RAFAEL, EUROFIGHTER, A400 Transport) Transition to Production

Note: *China Has Made R&D a Priority; Chinese R&D Funding Figures Are Best Estimates

Sources: SIPRI Yearbooks

– 2001, 2002, 2003

IISS “The Military Balance 2003-2004”

03/05 30

Estimated Worldwide Military R&D Spending - 2002


10

9

PAKISTAN

8

SWITZERLAND

7

NORWAY

6

NETHERLANDS

5

4

POLAND

UKRAINE SPAIN

3

ISRAEL AUSTRALIA

2

ARGENTINA

1

0

$50M

GREECE

100M

S. AFRICA

CANADA

200M

ITALY

SINGAPORE

BRAZIL

TAIWAN

SWEDEN

500M

GERMANY

INDIA

IRAN

FRANCE

S. KOREA

1.0B

CHINA

JAPAN

RUSSIA

U.S. @ $50.6B

66.3B in 2004

2.0B

U.K.

5.0B

R&D Spending in Constant 2000 U.S. Dollars

Notes: Includes only countries spending >$50 million

Sources: SIPRI Yearbooks – 2001, 2002, 2003 Defense News, 2 Feb 04

Ref: 9800648_UK.PPT-7

03/05 31

Worldwide Military R&D Spending


US

UK

Japan

Russia

China

Germany

France

India

S. Korea

Sweden

Italy

Spain

S. Africa

Canada

Norway

Netherlands

0.680

0.750

0.460

0.480

0.230

--

1989*

($)

51.0

4.1

1.1

--

--

3.1

7.1

0.410

0.170

--

1997

($)

42.5

3.9

1.8*

0.970*

1.0**

1.7

3.4

0.630*

0.510*

0.570***

0.400

0.700

0.150***

0.120***

0.100

0.100

1999

($)

42.6

3.7

1.2****

--

--

1.4

3.1

0.632****

--

0.100

0.100

1.2

--

0.114****

0.100

0.100

0.400

--

0.167

--

--

0.100

2002

($)

50.6

--

--

1.04

--

0.749

0.707

0.625

--

--

0.300

0.400

1.7

--

--

0.100

2001

($)

44.5

3.9

--

--

--

1.2

3.5

0.695

--

0.100

Billions of US

Constant 2000$

*1995$

**1994$

***1996$

****1997$

Source: SIPRI

“Yearbook 2001,

2003”

IISS “The Military

Balance” 2003-2004

Various Defense

News Editions

03/05 32

Worldwide R&D

Sophisticated Systems Costly


• High Technology Weapons Development Programs

Costly

– Most in US, Western Europe, Japan, and Russia

• Situation Not Expected to Change Because of High R&D and Manufacturing Infrastructure Costs Associated with

High Technology Development Programs

• Most ROW Countries Rely on Foreign Acquisition of

Complex Weapon Systems

– State-of-the-Art Combat Aircraft, Naval Combatants, Main Battle

Tanks, IADs, etc.

03/05 33

Worldwide R&D (Cont'd)

• Most ROW Countries Can’t Develop High Tech Systems

• Main Impediments to High Technology Development :

– Funding

– Technical Education and Pool of Scientists and Engineers

– Well-Equipped Research, Laboratory, and Test Facilities

– Natural Resources

– Manufacturing Facilities and Capabilities

– Skilled Work Force

– Quality Control

– Technology Base and Infrastructure

03/05 34

Worldwide R&D (Cont'd)

• Some ROW Countries Produce Low to Medium

Technology Systems Based on Co-Production and

Reverse Engineering of Acquired Systems

– Ground Force Weapons, Vehicles, MLRS, Small Patrol Craft,

Training Aircraft

• Some Produce Niche High Technology Systems with

Foreign Assistance

– TBMs, WMD, Helicopters, UAVs, Anti-Ship Cruise Missiles,

Diesel Subs

• Industrial Offsets, Collaborations and Consolidations

Future Wild Cards?

Source: SCCS

03/05 35

Worldwide High Technology Weapon Design and

Ref: 0400346_UK.ai

None

Very limited. Dependent on foreign weapons acq. and related co-production, reverse eng, and tech transfer to produce a few low to medium technology systems.

Some low to medium tech. design, development, production capability. Needs foreign assistance in some areas.

Few niche high tech. capabilities. Relies on foreign weapons acquisition and related co-production, reverse engineering and tech. transfer. Broad low to med. tech. capabilities.

Broad med-tech. capabilities; capable of designing, developing, producing many high-tech systems; external assistance required for high performance aircraft and other complex systems.

Broad high-tech. design, development and production capabilities. Indigenous capability to develop, produce high performance combat aircraft, missiles and other highly complex systems.

03/05 36

Worldwide Military R&D Trends


• Without a Clear Technologically Advanced Threat , or a Market for Costly High Tech Systems , R&D Investment Will Decrease , and the Pace of Technology Development Will Slow

– More for Counter-Terrorism, Homeland Defense, Asymmetric

Threats

• Fewer High Tech Weapon Systems Will be Developed in all Major

Categories

• Development and Availability of New Generation Systems

Delayed

• Fewer Producers of High-End Systems

• More Cross-Border/International Cooperation, Pooling of R&D

Resources

03/05 37

Worldwide Military R&D Trends (Cont'd)


• Emphasis on Affordability , Technologies that Reduce

Development, Manufacturing Costs

• Emphasis on Dual-Use Technologies, COTS, System Upgrades

• Future Threats Include Fewer High-Tech, Many Low-Medium

Tech Systems

• Adversaries Can Leverage Small Defense Budgets with Less

Costly Asymmetrical Threats , i.e., IW, TBMs, C/B Weapons,

Mines, CCMs, Small Boats, Terrorism, etc., to Complicate,

Impede US Military Ops

• Caution: A Resurgent Near-Peer Type Threat Would Negate

Some of These Trends

03/05 38

Foreign Science & Technology


Overview

• Technology “Haves” and “Have Nots” Persist

• Technology Increasingly Dual Use

• Technology’s Economic Impact More Important

Than Military’s

• Nations and Industries Will Sell Technology for

Political and Economic Reasons

• Credible Asymmetric Threats Can Offset Some

Technological Advantage

03/05 39

Foreign S&T


Areas of Interest

• Areas of Foreign Technological Interest:

– Anti-Navigation/GPS Systems

– Remote Sensors and Weapons

– Standoff Weapons and Penetration Aids



Ballistic Missiles



Cruise Missiles

– Information Systems and CM



Data Transfer and Interoperability



Data Blocking/Corruption

 False Target Generation

 High-Power Microwave (HPM)

 Encryption

–

Antiterrorism Systems

 Aircraft Protection

 Harbor Protection

 Helicopter Protection



Improvised Explosive Device Detection, Neutralization

 Precision Airdrop Systems

 CBR and Nuclear Weapons Detection, Protection and Defeat

Systems

 ISR and Target Acquisition Systems to Counter Terrorists

 Explosive Ordnance Disposal

03/05 40

Foreign S&T (Cont'd)


Areas of Interest

• Areas of Foreign Technological Interest:

– Nanotechnology

– Robotics

– Low Observable and Masking Technologies and CM

– Diesel Submarine Endurance

– Biotechnology

– Increased Lethality

 Conventional Explosives

 Weapons of Mass Destruction

03/05 41

Foreign S&T Trends

Commercial Technologies Available to All


• Technology Available to Buyers

• Commercial Sector Drives Technology Development

• Emphasis on Technologies That Make Things Happen

• Micro-Miniaturization More Important

• Biotechnology A Breakthrough Area

• Ubiquitous Access to Communications

• Greater Access to Space Based Sensors , and Related CM

• Broader, More Timely Access to Information

• Sophisticated/Interdependent Systems Increasingly Vulnerable To

Single Point Failures

03/05 42


Weapons

Costs

03/05

Weapon System Costs

• Sophisticated System Costs Escalate Faster Than Annual Inflation

Rates

– Techinflation Affects Development Costs of Aerospace, Ship,

Submarine, Armor Systems

• Major Program Initial Costs Underestimated

• Cost Overruns Lead to Stretched Schedules, Smaller buys, increased unit costs

• Sophisticated Programs Expensive – Not Many Countries Can

Develop Them

• Representative Program Costs

•

F-35 JSF ~200B

• *F/A-22 Raptor ~72B

•

• *V-22 Osprey

*RAH-66 Commanche

~46B

~39B

• *Evolved Expendable Launch Vehicle ~31.8B

• Eurofighter Up $20B since ’96; ½ fewer a/c

Note: *Significant cost overruns

Multiple Sources

• *Space Based Radar ~30B

•

Multi-Mission Maritime Aircraft ~26B

• European A-400M Transport ~23.7B

• *SBIR ~8B

•

Kinetic Energy Interceptor ~4.5B

• *Airborne Laser Program more than doubled

03/05 44



Rates






Develop Them


•

F-35 JSF ~200B

• *F/A-22 Raptor ~72B

•

• *V-22 Osprey

*RAH-66 Commanche

~46B

~39B






•



• *SBIR ~8B

•



03/05 45



Rates






Develop Them


•

F-35 JSF ~200B

• *F/A-22 Raptor ~72B

•

• *V-22 Osprey

*RAH-66 Commanche

~46B

~39B






•



• *SBIR ~8B

•



03/05 46

Ball Park Weapons Cost Data


Non-Stealth Bomber

Stealth Bomber

$50 – 150M

1.5 – 2B

Aircraft Carriers

CVN

CV

Non-Stealth Fighter

Stealth Fighter

Non-Stealth Attack a/c

Stealth Attack a/c

30 – 80M

80 – 120M

20 – 50M

75 – 150M

Amphib/VSTOL

Aegis DDG

DD(X)

LCS

Non-Stealth Fighter/Attack a/c

Stealth Fighter/Attack a/c

75 – 100M

150 – 300M

Frigate

Corvette

AEW a/c (AWACS)

Maritime Surveillance a/c*

Military Transport – Med. Range

Military Transport – Long Range

100 – 500M

20 – 40M

40 – 75M

50 – 280M

SSNs

SS

UAVs

Global Hawk w/full sensors

Predator unit cost

ASW Helicopter

Attack Helicopter

Tactical Ballistic Missile

Long-Range Land Attack Cruise Missile

25 – 46M

25 – 60M

3 – 6M

1 – 2M

Land-Based Surv. Radars

Low Tech

Medium Tech

Aerostat

*Old data circa 1996

Army Heavy Tank

Stryker Combat Vehicle

Armored Humvee

$4.9 – 11B

2.4 - 3.5B

1.5 – 3B

~1.2B

1.2 -1.4B

Target<250M

300 – 480M

150 – 300M

1.5 – 3.0B

225 – 475M

28 – 50M

2.5 – 3M

2 – 4M

7.5 – 15M

30 – 50M

2 – 6M

>1.5M

180K 03/05 47


F/A-22 Program

260

240

220

200

180

160

140

120

100

80

60

50

40

30

20

50

80 

750

70 

60

#a/c

40



$38B

Program $

30

20

Number a/c

 a/c cost



Program Cost



10

0

1980 85 90

Note: Program chg to F/A-22 in 2002

 DoD Estimate #a/c

95

(GAO)

800

700



600

500 a/c Cost





$100M



 

277

 218

400

300

200

100

2000 2005

Sources: Multiple

03/05 48

F/A-22 Program Acquisition Numbers


800

750

700

600

500

400

300

200

100

0

1981 85 90

Notes: 1 USAF requirement for 381-762 aircraft

2 USAF Plan

3 Affordable within Funding ceiling

Black figures/lines are DOD

Blue figures/lines are USAF

762

1

381

226

180

277 2

218 3

95 2000 2005

YEAR

Sources: Defense News, “Beyond F-22 Decision” 2 Aug 99

Defense News, “Meet the F/A-22”, 16-22 Sep 2002

Inside Defense, “Rumsfeld Staff Moves Closer to AF Size of F/A-22 Fleet”, 31 Oct 02

Inside Defense, “GAO Doubts DOD’s Readiness to Make

F-22 Production Decision”, 15 Mar 04

03/05 49

Weapon Systems Cost Trends

•

Trends Upward

• Most Prominent Microeconomic Force Affecting Defense

Industries is The Rapidly Rising Cost of Weapons R&D and

Production

• New Systems Cost Far More In Real Terms Than Units Being

Replaced

• Smaller Production Runs Resulting From Smaller National

Requirements and Fewer Export Sales Increase Unit Costs

• Inflation and Currency Devaluation in Buyer Countries Raise

System Costs Accordingly

• Typically, Weapon Costs Increase About 10% Per Year , Doubling

Every 7.25 Years

• Ratio of Increasing New Unit Costs To Defense Budgets Affects

Numbers Acquired

Sources:

• “Hand Book of Defense Economics, Vol. I”; K.J. Arrow and M.D. Intriligator, 1995

• “Global Arms Trade – Commerce in Advanced Military Technology and Weapons”, Congress of the US –

Defense News, LGEN M. Davison, USA, US Defense Security Assistance Agency, 9-15 Feb 1998

• SIPRI Yearbook – 2003 03/05 50


Worldwide

Arms Transfers

03/05

Worldwide Arms Transfers

Overview


• Arms Transfers Down 72% Since Mid-80s

Time Frame

1981 – 88

1989 – 91

1992 – 93

1992 – 96

1994 – 98

1995 – 99

1998 - 02

Average Annual Transfers

$66B in 91$

$40B in 91$

$21B in 91$

$23.8B in 90$

$22.5B in 90$

$22.3B in 90$

$18.5B in 90$

Comment

Cold War

Post Cold War

• US (41%), Russia, France, Germany, UK, Ukraine Account for 86% of Worldwide

Transfers During 98-02

•

Major Recipients, China, Taiwan, India, Turkey, Saudi Arabia, Greece, South Korea,

Egypt, UK, Israel, Pakistan, Japan, UAE, Australia, Account for 83% of Total

Deliveries During 98-02

•

Greater Competition for Fewer Arms Sales

• Many National Arms Industries Need Arms Exports to Survive

– Leads to Creative Financing to Close Sales

Sources: SIPRI Yearbooks 2001, 2002, 2003

Military Balance 2003-2004

Multiple Issues of Defense News, Armed Forces Journal 2001

→2004

03/05 52


• Major Market for Used and Modernized Systems

•

Most Post Cold War Period Sales for Cash

• High Weapons Costs and Intensive Competition for Sales Lead to More

Flexible Arms Transfer Arrangements

– Grant Aid – Primarily by US – Egypt ($1.3B in 03), Israel ($2.1B in 03), and Jordan for Mid-East Peace Agreements; South, Latin American Countries for

Counter-narcotics Ops; Pakistan, Philippines and Others for Counterterrorism Support

–

Loans

– US Loaned Poland $3.8B to Purchase 48 F-16s; Poland Paying Only

Interest First 8 Yrs of 15-Yr Loan

–

Barter

– Debt

– Lease

– US FMS Reached ~$14B in 2003; at a Flat Fee of 2.5%

– Russian a/c Sales to Malaysia, Indonesia for Commodities and Cash

– French Tanks to Saudi Arabia for Oil

– Russian Exchange of Arms for Debt with China, South Korea, Czech

Republic, Other Former East European Countries

– Czech Republic, Hungary Leasing Gripen Fighters from Sweden; Italy

F-16s from US; Denmark APCs from Finland; India an AKULA SSN from Russia for 3 Yrs at ~$100M/Yr

Sources: SIPRI Yearbook – 2003

Defense News – Multiple Issues

03/05 53



Offsets

• More Countries Purchasing Major Weapon Systems Demand

Industrial Offsets or Compensation to Defray Purchase Cost,

Increase Domestic Employment, Acquire Technologies and

Develop Local Industries

– Direct offsets Require Production of Some Weapon Components in the Buyer Country

– Indirect Offsets Include Tech Transfer, Local Investment and Countertrade

• Offsets Becoming Increasingly Expensive – Some at 100% - 200% of Weapons’ Purchase Price

• Offsets Controversial

– House Armed Services Committee Would Ban Industrial Offsets

– Without Offsets, US Defense Industries Would Lose Arms Sales to

Foreign Competitors

– Europe Views Offset Ban As Protectionist, Challenge to Free Trade

• Despite Availability of More Flexible Arms Transfer Arrangements,

Global Arms Transfers Remain Depressed

Sources: Defense News, 24 May 04, 14 June 04, 28 June 04

03/05 54



Offsets

• More Countries Purchasing Major Weapon Systems Demand

Industrial Offsets or Compensation to Defray Purchase Cost,

Increase Domestic Employment, Acquire Technologies and

Develop Local Industries

– Direct offsets Require Production of Some Weapon Components in the Buyer Country

– Indirect Offsets Include Tech Transfer, Local Investment and Countertrade

• Offsets Becoming Increasingly Expensive – Some at 100% - 200% of Weapons’ Purchase Price

• Offsets Controversial

– House Armed Services Committee Would Ban Industrial Offsets

– Without Offsets, US Defense Industries Would Lose Arms Sales to

Foreign Competitors

– Europe Views Offset Ban As Protectionist, Challenge to Free Trade

• Despite Availability of More Flexible Arms Transfer Arrangements,

Global Arms Transfers Remain Depressed

Sources: Defense News, 24 May 04, 14 June 04, 28 June 04

03/05 55

Worldwide Arms Transfer Trends

• Near Term: Likely to Increase Slightly if Asian

Economic Problems Continue to Ease, European

Economies Strengthen, Oil Prices Support Increased

Spending

• Mid Term: Probably Will Stabilize Around $20-25B in

1990$

• Defense Industries’ Survival More and More

Dependent on Foreign Sales

• Continued Strong Competition for Fewer Sales

Sources: SIPRI Yearbooks 2001, 2002, 2003

The World Bank “World Development Indicators – 2004”

03/05 56

1400

1300

800

700

600

500

400

1200

1100

1000

900

300

200

100

0

Notional Arms Export Market


1.6

1.4

1.2

1.0

.8

.6

.4

.2

0

5.0

4.0

3.0

2.5

2.0

1.8

140

130

80

70

60

50

40

120

110

100

90

30

20

10

0

5% 10 20 40

Market Access

Combat Aircraft

Tanks

Naval Combatants

60 100

03/05 57


Worldwide

Defense

Industries

03/05

Defense Industries


Overview

• Post Cold War Search for Peace Dividends Led to Reduced Defense Spending

– Diminishing National Requirements and Foreign Arms

Sales

– Industries Faced with Overcapacity, Obsolescence,

Large and Underutilized Work Force

• Worldwide Defense Industry Comprised of

Public, Private, and Gov’t Owned/Controlled

Companies

– Most State Owned When Cold War Ended

– More Public or Private Today

03/05 59

Selected Worldwide Defense Industries – 2004

Nationalized vs. Privatized


15

10

5

CHILE

CHINA*

FINLAND

INDONESIA

IRAN

ITALY*

MALALYSIA*

N. KOREA

PAKISTAN

SPAIN*

SYRIA

TURKEY

UKRAINE*

GOVT.

EGYPT

FRANCE*

INDIA

PORTUGAL

RUSSIA

SINGAPORE

AUSTRALIA

BRAZIL

GREECE

ISRAEL

POLAND

S. AFRICA

TAIWAN

Note: *Considering Privatization

OWNERSHIP/CONROL

State Owned/Controlled

State/Public Mix

Transitioning from State to Public/Private

Public/Private

AUSTRIA

CANADA

DENMARK

GERMANY

JAPAN

NETHERLANDS

NORWAY

SWEDEN

U.K.

PUBLIC/PRIVATE

Multiple Unclassified Sources

03/05 60



In Transition

• Supply, Demand and Profitability Issues Led to Major

Restructuring

–

Rationalization Leading to Plant Closures and Downsizing of Work

Force

– Consolidation Via Mergers and Acquisitions with Competitors and

Suppliers to Reduce Overcapacity and Redundant Production Lines –

In All Major Weapons Categories

– Especially Aerospace and

Electronics

 Cross-Border Consolidations More Difficult as Nations Protect Defense

Industries from Foreign Control (UK an Exception)

–

Collaboration Among National and Cross-Border Companies Based

Upon Workshares and Units Purchased

• Future Will See More Collaboration and Consolidation , Especially in Naval Shipbuilding and Land Combat Systems

• Issues Remain

– Problem with Gov’t Owned/Controlled Companies

– Protectionism vs. Free Trade

– Tech Transfer

– Does Less Competition Mean Less Innovation

–

Reducing Unit Costs

03/05 61



In Transition


Restructuring

–


Force





Electronics



–









–


03/05 62



In Transition


Restructuring

–


Force





Electronics



–









–


03/05 63

Worldwide Defense Industry Trends


• Privatization – Slow Process

• Consolidation – More National and Cross-Border Mergers and

Acquisitions

• Collaboration – Sharing The Load (and Cost)

• Cessation – Survival of Fittest

• Fewer Developers, Manufactures of Air, Space, Land, Naval and

Electronics Systems

03/05 64


Defense

Economics

Summary

03/05

Defense Economics Summary

Impact on Military Capabilities


• Sustained (2+ yrs) Combinations of Following Economic Conditions Will Pressure

Defense Spending Downward

– GDP Growth Less Population Growth <3%

– Budget Deficit >3% of GDP

– Defense Budget >20% of Revenues

– Debt Interest Payment >10% of Revenues

– Inflation >20%

– Debt >50% of GDP

– Debt ≥ Revenues

• Many Countries , Especially in Europe, South America More Likely to Cut Defense

Budgets Before Public Health, Schools, Welfare, Security and Infrastructure to

Accommodate National Budget Deficits, Debt, Inflation and Other Impediments to

Spending

•

Sustained Lower Defense Spending Leads to:

– Reduced Force Levels – Russia, Spain, Greece, Netherlands, Switzerland, Belgium, Sweden,

Germany, etc.

– Retiring Older Systems Early to Reduce Maintenance Costs – UK, Canada, Belgium, etc.

– Retiring Systems Because Can’t Afford to Upgrade Them

– Canceling, Reducing, Delaying Planned Acquisitions – Argentina, Brazil, Singapore, UK,

Sweden, Norway, Greece, Egypt, Turkey, etc.

– Upgrading Rather Than Buying New Systems – Italy, Israel, India, Denmark, Finland, Greece,

Germany, India, Turkey, Saudi Arabia, China, Germany, Algeria, Australia

– Buying Used Systems – India, Pakistan, Algeria, Australia, Austria, Brazil, Canada, Chile,

China, Czech Republic, Egypt, Greece, Indonesia, Israel, Saudi Arabia, Malaysia, etc.

Sources: The World Bank “World Development Indicators – 2004”

IMF “International Financial Statistics Yearbook – 2002”

IMF “Government Finance Statistics Yearbook – 2002”

Various Editions of Defense News and The Washington Post 03/05 66


Impact on US Military Spending


• Increasing Competition for Defense Share of US Revenues

– Balancing the Budget (FY 04 Deficit est. $413B)

– Servicing and Paying Down Debt (FY04 Debt ~$7.4T; Interest

Payment ~$159B)

– Paying for Tax Cuts

– Increasing Cost of Retiring Baby-Boomers Medical and Social

Security Expenses

– Homeland Defense

– Infrastructure

– HEW

• Increasing Competition for Modernization Share of Defense

Budget

– Rising Personnel Pay, Benefits, Health Care Costs

– Cost Estimates for 10-20 Thousand Troop Increase Range from

$1.2 > $2B Per Yr

– Afghanistan, Iraq, Other Peacekeeping Ops

– Increasing O&M

Source: Washington Post OPED “A Bad Way to Cut the Debt”, Michael Kinsley, 2 Jul 04 03/05 67


Impact on US Military Spending


• Increasing Competition for Defense Share of US Revenues

– Balancing the Budget (FY 04 Deficit est. $413B)

– Servicing and Paying Down Debt (FY04 Debt ~$7.4T; Interest

Payment ~$159B)

– Paying for Tax Cuts

– Increasing Cost of Retiring Baby-Boomers Medical and Social

Security Expenses

– Homeland Defense

– Infrastructure

– HEW

• Increasing Competition for Modernization Share of Defense

Budget

– Rising Personnel Pay, Benefits, Health Care Costs

– Cost Estimates for 10-20 Thousand Troop Increase Range from

$1.2 > $2B Per Yr

– Afghanistan, Iraq, Other Peacekeeping Ops

– Increasing O&M

Source: Washington Post OPED “A Bad Way to Cut the Debt”, Michael Kinsley, 2 Jul 04 03/05 68

Trends Implications

Spending Trends Have Wide Impact


• Fewer Producers of High-End Systems and Fewer New Systems Produced

• More Cross-Border/International Cooperation, Sharing of R&D, Production and

Acquisitions

• Wider Access to Technologies

• Increased Emphasis on Affordability Strategies, Technologies that Reduce

Development, Manufacturing Costs

• Small Market for Costly New Systems

• Big Market for Less Capable, More Affordable Combat Systems

• Increasing Competition for Foreign Sales

• Emphasis on Dual-Use Technologies, COTS, System Upgrades

• Escalating Weapons Costs Affect Military Forces, Capabilities

• Future Conventional Threats Include Fewer High-Tech, Many Low-Medium Tech

Systems

• Adversaries Can Leverage Small Defense Budgets with Less Costly Asymmetric

Threats , i.e., IW, TBMs, C/B Weapons, Mines, CCMs, Small Boats, Terrorism,

Insurgencies and Urban Warfare, etc., to Complicate, Impede US Military Ops

03/05 69


Threats

03/05

Worldwide Threat Overview

Smaller Forces with Mixed Inventories


• 75% of Today’s Threats Are Older Systems

• Potential Adversaries Will Replace Some With More

Capable Systems

• Technology Inserts During System Upgrades

Complicate Threats , Extend Life 10-15 Years

• Wide Variety of Modern Weapon Systems Available for Those that Can Afford Them

• Economic Factors Preclude One-for-One

Replacements, Lead to Smaller Forces

03/05 71

Worldwide Threat Overview (Cont'd)

• Year 2010 Threat Composition

– 85% with Pre-1995 IOCs; 1960-1980 Technologies

– 15% with Post-1995 IOCs; 1980-1995 Technologies

• Coastal Countries that Consider the US a Threat Will

Acquire Capabilities to Attack Forces in Littoral

Waters

• Asymmetric Threats are In Play – More Affordable –

Can Complicate, Slow US Mission Accomplishment

03/05 72

Year 2010 Military Systems


AIRCRAFT

MIG-21/23

F-4/F-5

A-4/A-7

MIRAGE F-1

SHIPS

FFG-7

KASHIN FF

KONI FFL

FF-1056

OSA PTG

KRESTA I/II CG

LEGEND

TECHNOLOGY

PRODUCTION

AIRCRAFT

SUBS

FOXTROT

ROMEO

209 TYPES

F-16/18

MIRAGE 2000

HAWK 100/200

MIRAGE 2000-5

Su-30/35

GRIPPEN

DEVELOPMENT

AIRCRAFT

MIG-25/29

Su-24/25/27

F-14/15

MSLS

STYX

HARPOON

EXOCET BL 1

SHIPS

NEUST*MYY FF

JIANGHU III FF

LUHU DD

LAFAYETTE FF

LOREAL FFL

SHIPS

KHUKRI FFL

KRIVAK FF

LEANDER FF

B’DSWORD FF

SOV*MNYY

HALIFAX FF

FLYVEFISHLEN FFL

DELHI DDG

SAAR V FFL

SUBS

30%*

AIRCRAFT

F/A-18 E/F

RAFAEL

EFA

FSX (JA)

1950

SUBS

UPHOLDER

KILO SS

MSLS

SS-N-22 B1

209 SS TYPE

COLLINS SS

AGOSTA B SS

KILO FO SS

MSLS

SHIPS

(JA)

YS 2000

AIRCRAFT

F-22

MFI

XF-10

SU-37

1960

35%

EXOCET BI-II

C801/C802

SS-N-22 BL 2

HARPOON

UPGRADES

SS-NX-25

MALAY FF

KONGU DDG

KDX DD (SK)

MSLS

1970

20%

SS-N-26

SS-N-27

SHIPS

HORIZON FF

NEW GEN FF

COMMON FF

1980

10%

5%

1990

OPERATIONAL

1995 2000 2005 2010 2015 2020

UPGRADE

EXTENDED OPERATIONAL LIFE

1950 1960 1970 1980 1990 1995 2000 2005 2010 2015 2020

*(U) NOTE: PERCENTAGE (%) IS ESTIMATED YEAR 2010 COMPOSITION.

Ref: 9800648_UK.PPT-4

03/05 73

Year 2025 – 2030 Military Systems


5%

1950 1960 1970 1980

TECH-

NOLOGY DEVELOP PRODUCE

A/C

MIG-21/23

F-4/-5

A-4/-7

MIRAGE F-1

1990

OPERATIONAL

SHIPS

MIG 21/23

F-4/-5

A-4/-7

MIRAGE F-1

SUBS

FOXTROT

ROMEO

209 TYPES

20%

1995

MISSILES

STYX

HARPOON

EXOCET BL 1

A/C

MIG-25/23

Su-24/25/27

F-14/15

F-16/18

MIRAGE 2000

SHIPS

KHUKRI FFL

KRIVAK FF

LEANDER FF

BDSWORD FF

SOV’MNYY DDG

UPGRADE

SUBS

UPHOLDER

KILO SS

2000

MISSILES

SS-N-22 BL 1

40%

A/C

MIRAGE 2000

Su-30/35

HAWK 100/20

SHIPS

NEUST’MYY FF

JIANGHU III FF

LHU DD

HALIFAX FF

FLYVEFISHLEN FFL

DELHI DDG

SAAR V FFL

LAFAYETTE FF

LOREAL FF

2005 2010 2015 2020 2025 2030

EXTENDED OPERATIONAL LIFE

SUBS

209 SS TYPE

COLLINS SS

AGOSTA SS

KILO FO SS

MISSILES

EXOCET BL-II

C801/C802

SS-N-22 BL-II

SS-N-25

HARPOON UPGRADES

20%

A/C

F/A-18 E/F

GRIPPEN

RAFAEL

EFA

FSX (JA)

SHIPS

MALAY FF

KONGU DDG(JA)

KDX DD (SX)

YS-2000

SUBS MISSILES

SS-N-26

SS-N-27

10%

A/C

F-22

MFI

XF-10

SHIPS

HORIZON NEW GEN FF

COMMON FF

DD(X)

LCS

5%

?? ??

?? ??

NOTE: % REFLECTS EST. YEAR 2025-2030 COMPOSITION

2040

03/05 74


Threat Summary

• Mixed Technology Forces in 2010

• Wide Variety of Modern Weapon Systems Including

WMD Available

• Smaller Conventional Forces

• Asymmetric Threats In Play

03/05 75

Asymmetric Warfare

• Exploits an Adversary’s Strategic, Tactical,

Technical Vulnerabilities by Innovative,

Unexpected, and/or Less Costly Means in Order to Deter Action, Deny Access and/or Delay

Mission Accomplishment

• An Attractive Option for National, Sub-National and Transnational Groups to Employ Against

Stronger Adversaries

Source: Institute for National Strategic Studies, National Defense University; 1998 Strategic Assessment

“Engaging Power for Peace”

03/05 76

Asymmetric Warfare


Applications

• Exploits National Will , Public Aversion to Casualties

• Targets Coalition Cohesiveness

• Employs IW for Perception Management

• Threatens US Homeland , Nationals, Allies

• Attacks National Infrastructure , Civil Facilities,

Population

• Employs Low Cost , Low Technology Solutions to

Counter High Cost, High Technology Threats

03/05 77

Asymmetric Warfare (Cont'd)


Applications

• Selectively Acquires , Uses, Threatens to Use

Niche High Tech Sensors, Weapon Systems , i.e.,

– WMD and Delivery Systems

– Cyberweapons to Disrupt C4ISR Systems

– IW Countermeasures

• Fights in Environment Less Favorable to US

Capabilities

03/05 78

Asymmetric Threats


Examples

• Naval, Land and Anti-Helo Mines

• Cheap Aircraft with Explosives or Precision

Guided Munitions

• UAVs Equipped with Explosives

• Terrorists with Small Arms, Rockets, Explosives,

Chemical/Biological Agents

• Remotely Controlled Explosive Devices

• Swimmers with Limpet Mines, Explosive Charges

• Pier-Side Attacks

03/05 79

Asymmetric Threats (Cont'd)


Examples

• Chemical, Biological Warheads for Coastal Cruise

Missiles, Anti-Ship Cruise Missiles (ASCMs),

Theater Ballistic Missiles (TBMs), Artillery, Mines,

Bombs

• Urban Warfare

• Information Warfare

• Cyberwarfare

• Satellite Interference, Denial

• Etc.

03/05 80

2002 Defense Budgets


(US 2000 Dollars)

VG#70

<$500M

$500M − <$1B

$1B − $2B

$2B − <$5B

$5B − <$10B

$10B − <$20B

>$20B

03/05 81

TCS Requirements IPT Operational Situations/Target Sets

Defense

Economics

Abstract

Executive Summary

Executive Summary Continued

Executive Summary Continued

Executive Summary Continued

International Defense Economics

International Defense Economics (Cont'd)

International Defense Economics (Cont'd)

2002 Economic Data

2002 Economic Data

2002 Economic Data (Cont’d)

2002 Economic Data (Cont’d)

Defense

Spending

Worldwide Defense Budgets – 2002

10-Year Defense Budget Growth (%)

1993

→

2002

Estimated Worldwide Defense Modernization

Funding – 2002

Defense

R&D/S&T

• Areas of Foreign Technological Interest:

Weapons

Costs

Worldwide

Arms Transfers

Worldwide

Defense

Industries

Defense Industries

Defense Industries

Defense Industries

Defense

Economics

Summary

Threats

2002 Defense Budgets

(US 2000 Dollars)

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