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01 Apr 03. The FT reported that companies are reacting to business opportunities post-Iraq. The US military calls them “lessons learnt” from conflict. For the defence industry they could be business opportunities.

Companies are already benefiting from President George W. Bush’s budget request for $4.5bn for the elite Special Forces, an increase of 50 per cent on the previous year.

The Pentagon has learned that it needs more mobile, quickly deployed shock troops for unconventional confrontations, using a broad range of information technologies. This puts an emphasis on a range of new projects, including future combat systems for wireless connection of everything in the battle area, missile defence technologies, and lighter, mobile equipment.

Companies are also beginning to reflect on the longer term impact of the war on defence strategy and spending.

Iraq’s use of Scud missiles in the 1991 Gulf war was a catalyst for the expenditure of tens of billions of dollars on a range of missile defence technologies. This time, if the conflict develops into house-to-house fighting, satellite and sensor technologies will give way to the development of other products, such as better body armour and sensors to see building occupants or determine between guerrillas and civilians.

Unmanned aerial vehicles – small remote-controlled reconnaissance aircraft such as Northrop Grumman’s Global Hawk and Pegasus, General Atomics’ Predator and vehicles in development by Boeing and Lockheed Martin – are probable beneficiaries.

Warfare inside Baghdad could also renew interest in tanks and helicopters, shown by Israel to be an important element of guerrilla warfare in tight city spaces
where air bombing can kill civilians.

Companies watching this closely are General Dynamics, with armoured vehicle programmes such as the Stryker, and Boeing, Textron, United Technologies and Europe’s EADS, which can replace or upgrade an ageing US fleet of helicopters.
More than any other conflict, the action in Iraq will also test the US military’s efforts to connect everything flying, driving, sailing and walking with information network technology.

On top of all this, a protracted war will bring business for companies in replacing matériel that has been used or destroyed.
Nevertheless, shares in defence companies have not enjoyed a war premium. The Amex defence index has fallen more than 17 per cent this year after plunging from historic highs in the middle of last year.
Many analysts, however, remain bullish on defence stocks. Investors had unrealistic expectations of annual 11 per cent increases in defence spending after the September 11 terrorist attacks in 2001. Nevertheless, new funds for military modernisation this year are set to grow a surprising 6 per cent over last year.

More importantly, analysts say, the Bush administration projects the same annual growth until 2009, despite a return to federal deficits, bringing that year’s defence spending to $484bn, which, adjusted for inflation, would be higher than the peak during the Reagan administration.
The likelihood of a prolonged al-Qaeda threat could also keep defence spending up. “This current conflict is apt to be a long, grinding affair,” said Byron Callan, analyst at Merrill Lynch.

But anti-war sentiment – perhaps following a longer-than-expected conflict – could coincide with a stalled economy and a presidential election making defence spending unpopular again.

“A postwar scenario could change the picture rapidly, and a coming election year could add pressure to revise the agenda to include economic priorities and cause a resurgence of deficit politics,” said Christopher Mecray, analyst at Deutsche Bank.

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