UK DEFENCE SURVEY (0)

Transcription

1 The survey is produced by Mike Lee, Head of Market Intelligence at ADS ADS Group Limited Salamanca Square 9 Albert Embankment London SE1 7SP enquiries@adsgroup.org.uk (0) ADS07865/10/2012 UK DEFENCE SURVEY 2012

2 ABOUT ADS ADS is the Premier Trade Organisation for all companies operating in the UK Aerospace, Defence, Security and Space sectors. Farnborough International Limited (FIL) which runs the Farnborough International Airshow, is a wholly owned subsidiary. ADS operates to create the best possible climate in which its Members can do business, including lobbying and media relations work alongside networking and other business-to- business activities. ADS offers a wide range of products and services to help Member companies grow their businesses and widen their contact networks with the wider supply chains in all relevant sectors, including the UK Ministry of Defence, and in export markets. A dedicated team of events specialists co-ordinate and manage a comprehensive events programme encompassing everything from large international trade shows through to table top events and specialist networking breakfasts and lunches. ADS organises many seminars and events to help Members build their export market knowledge and widen their contact networks. ADS also provides world-class advice on export licensing, industrial participation, anti-corruption legislation and ethical issues.

3 CONTENTS About ADS 3 Foreword from the ADS VP Defence 6 Review of Revenue 10 Orders 18 Top Defence Exporters 18 4 Top Defence Importers 19 Research and Development 20 5 Employment 22 Notes 24

4 VICE PRESIDENT S FOREWORD Sir Brian Burridge VP Defence ADS 6 The second ADS Defence Survey covering 2011 provides initial evidence of the immediate impact of government spending cuts on the defence industry and identifies the trends for the years ahead. Overall revenues for 2011 were flat with no growth at all in defence aerospace. By contrast, land revenues declined by 36 per cent compared with 2010 whilst the maritime sector produced a 43 per cent increase over the previous year. Domestic UK land programmes came under particularly heavy pressure last year with sales falling 52 per cent from the 2010 level. More positively, the UK maritime sector was boosted by progress on the Queen Elizabeth class aircraft carrier programme for the Royal Navy. Of note, this 7bn programme last year represented the second largest UK engineering project behind the London Olympics. Some 10,000 people spread across six UK dockyards are involved in this massive project. BAE Systems, Babcock International and Thales are the three prime contractors involved but they are supported by a substantial UK supply chain. Globally, it was a very difficult year for the defence sector with orders declining by 18 per cent over those of Among the sectors, defence aerospace orders fell by a lesser 12.4 per cent. UK defence orders were down 30 per cent, those within the EU down 35 per cent and the US was unchanged. Predictably, the Middle East, Brazil, South-East Asia and India (together categorised as Rest of World) showed 29 per cent growth. Of concern, overall Research & Development (R&D) expenditure in the UK fell by 8.4 per cent. This represents the continuance of a long-term trend driven primarily by the reduction in UK MoD spend. There was, however, a welcome rise of 41 per cent in Research & Technology investment, driven primarily by product improvement initiatives in the defence aerospace sector. Total defence employment decreased by 2 per cent, a trend that we expect to accelerate through 2012 as layoffs already announced become a reality. In the light of the UK s continuing economic difficulties, it is likely that on the supply side, consolidation and mergers will further depress manufacturing employment levels. Similarly on the customer side, a buy off-the shelf procurement policy also risks further reducing employment levels. In an attempt to alleviate the anticipated reduction in domestic spend, defence equipment suppliers are increasingly turning to export markets. The proportion of defence exports to domestic sales rose 12 per cent over the previous year, increasing the percentage of total revenue from 43 per cent to 48 per cent. The maritime sector saw the largest increase in exports sales, up 62 per cent year-on-year, thus increasing its share of total exports. Both aerospace and land s share of exports declined. Looking ahead, it is clear that the requirement of governments to cut deficits will further impact adversely on defence procurement. Of increasing concern to UK-based defence equipment exporters is the on-going uncertainty caused by the potential for sequestration in the US. Whether sequestration occurs or not, it is clear that pressures on the US defence budget will remain. While future geo-political events are by their nature difficult to predict, it is clear that the already announced reduction of allied forces in Afghanistan will continue to impact on future procurement spend. More locally, it is also clear that the UK Defence budget will remain under pressure until the economy recovers from recession. Whilst UK defence revenue held up in 2010, there can be no room for complacency with increased competition and margin pressure evident. If we are to sustain our export performance, industry must have the confidence to invest in a stable environment, spend more on Research, Technology and Development, and generate the confidence to further develop their own Intellectual Property. Many challenges remain but there are also opportunities. While Western governments may be forced to reduce defence budgets as a continuing deficit reduction measure, other governments are increasing their expenditure. Amongst these India, Brazil, Malaysia, Australia and Saudi Arabia are important as potential growth markets. 7

5 REVIEW OF World military spending in 2011 is estimated to have been $1,738bn, which is higher in dollar terms than However, when measured in real terms (excluding price changes and a falling dollar), the total for 2011 is just 0.3 per cent higher than in The Stockholm International Peace Research Institute (SIPRI) forecast presents a picture that world military spending was essentially unchanged in 2011 and breaks a 13- year run of continuous military spending increases. The levelling-out of military spending results from a different set of trends in the various regions. In the US, defence spending fell by 1.2 per cent in real terms year-on-year (y-o-y), the first fall in spending since This was driven by the withdrawal of US forces from Iraq, the gradual drawdown in Afghanistan and the impact of the Budget Control Act on reducing US national debt. A similar trend also occurred in Western and Central Europe where spending fell by 1.9 per cent as countries prioritised deficit reductions, including reduced military spending, above other economic goals. So far, the top three spenders in Europe - UK, France and Germany have made only modest cuts in military spending, but further significant cuts are to come. In contrast, the Middle East produced a substantial 4.6 per cent increase y-o-y. Although the figures for a number of countries had to be estimated, significant increases were evident in Bahrain, Kuwait and Israel. In 2011, UKTI DSO figures highlighted that the UK maintained its position as the second most successful defence exporter behind the US. Although defence exports were down by 400m at 5.4bn, the UK gained over 15 per cent of the world defence market, ahead of Russia, France and Germany. The US led the market with a 35 per cent share. In terms of future defence prospects, the Middle East remains the most important region, followed by Asia Pacific and North America. Over the last ten years, air remains the largest by value UK defence export segment at 80 per cent, followed by land with 12 per cent and maritime at 8 per cent of the total. The ADS Defence Survey for 2011 records no revenue growth at all, which was in line with last year s level of world military spending. Maritime produced the strongest performance, increasing by 43 per cent over the previous year, driven by the construction of four Astute-class submarines, the final Type 45 destroyer and the two Queen Elizabeth-class aircraft carriers. Other maritime projects that drove this excellent performance in 2011 included the Successor Deterrent submarine programme, which is to replace the Vanguard class that currently delivers continuous strategic deterrent patrols. Land revenue fell by 36 per cent over 2010, reflecting the lack of any real volume from existing original equipment programmes and the significant reduction in the operating profile of Warrior and Challenger 2. Apart from the FRES Scout and the Warrior upgrade programme, there is a lack of new volume in land programmes. Defence aerospace was flat y-o-y and has been buffeted by a variety of austerity measures as many key governments have been forced to cut defence expenditure. Spending cuts also made for a difficult year for the UK defence industry, reflected in a 2 per cent reduction in the workforce, with further reductions expected to work their way through in Orders fell by 18 per cent y-o-y and spending on Research and Development (R&D) decreased by 8 per cent, although there was a welcome increase of 41 per cent in the critical enabling Research & Technology (R&T). In addition, productivity per employee rose by 2.5 per cent as a result of achieving flat turnover with a decline in overall employees. The bright spot was again the UK export performance, which increased by 12 per cent in 2011 and now represents 48 per cent (up from 43 per cent) of all defence turnover. Aerospace defence exports increased by 8 per cent y-o-y whilst land exports managed a 5 per cent increase. It was however maritime that again was the highlight with a 62 per cent increase in exports, albeit from a small base, driven by the sale to Brazil of the ex-trinidad and Tobago off-shore patrol vessels, the Sandown minehunter mid-life update in Saudi and the three Khareef class corvettes to Oman. 9

6 UK DEFENCE INDUSTRY TURNOVER AND EMPLOYMENT 2011 UK DEFENCE INDUSTRY TURNOVER BY SEGMENT Sales bn bn Sales bn , ,000 40,000 60,000 80, , , ,000 Employment Revenue Employment Land Maritime Aerospace UK defence industry revenue for 2011 at 22.1bn was flat versus 2010 MoD spending reductions caused defence employment to fall by 2 per cent Land revenue fell by 36 per cent over 2010 due primarily to MoD budgetary constraints and the drive to save money. Maritime revenue rose 43 per cent, driven by the current construction of seven ships and submarines; four Astute-class submarines, the final Type 45 destroyer and the two Queen Elizabeth-class aircraft carriers. Defence aerospace was flat year-on-year, which has been buffeted by a variety of austerity measures as many key governments have been forced to cut defence expenditure

7 UK DEFENCE INDUSTRY TURNOVER BY MAINTENANCE AND MANUFACTURING 2011 DOMESTIC DEFENCE SALES BY SECTOR 2011 Defence related maintenance services and support turnover 31% Total sales 22.1bn Manufacturing turnover 69% Sales bn Land Maritime Aerospace The maintenance and engineering support services segment accounts for 31% of total defence turnover and is a rapidly growing area, as the UK moves towards the gradual development of a more service-based defence economy There are also significant opportunities overseas for logistics, maintenance, repair and overhaul, and systems integration, within countries with major platform prospects. Maritime now accounts for the largest segment of the domestic defence industry and rose by 39 per cent in 2011, increasing its share of the UK domestic market from 27 per cent to 42 per cent.. Aerospace fell 6 per cent in 2011 but retained its 41 per cent share of the domestic UK market Land had a very difficult year in 2011 due to pressure on MoD spend, with sales falling by 52 per cent over the previous year. Its share of the UK domestic market fell from 33 per cent to 17 per cent.

8 EXPORT DEFENCE SALES BY SECTOR DEFENCE SALES BY TYPE Sales bn 5 4 Export 48% Turnover bn Domestic 52% Land Maritime Aerospace Aerospace increased their export sales by 8 per cent and remain the dominant defence export sector with a share of 72 per cent Land remained in second place with a 16 per cent share and, despite a difficult year in the home market, managed to increase their export sales by 4 per cent. Maritime was again the star performer increasing export sales by 62 per cent but still remained in third place behind the land sector with a market share of 12 per cent Exports increased their share of the defence market from 43 per cent in 2010 to 48 per cent in The stronger export performance was driven by a weak home market and growth in the Middle East, Brazil, South-East Asia and India region.

9 DEFENCE SALES BY REGION AND SEGMENT 2011 DEFENCE SALES BY REGION 2011 Rest of the world Sales to the rest of the world 5.3bn 16 USA Sales to the EU 2.9bn UK defence industry sales 22.1bn Sales to the UK 11.5bn 17 EU Sales to the USA 2.4bn Domestic bn Land Maritime Aerospace Domestic sales comprise 52 per cent of the defence market with aerospace and maritime making up 83 per cent of total sales Rest of world sales are dominated by defence aerospace with 69 per cent of total revenue As the size of the UK domestic market becomes more sqeezed, export sales are becoming more prevalent. In 2011, domestic sales fell from 12.6bn to 11.5bn whilst total export sales increased from 9.47bn to 10.57bn. The Rest of World region, predominately Saudi Arabia and India, accounts for 5.3bn and represents 50 per cent of total defence exports in 2011.

10 TOTAL UK INDUSTRY DEFENCE ORDERS BY REGION TOP 5 DEFENCE EXPORTERS (cumulative $bn) 160 Source: UKTI Rest of the world USA $bn 80 EU Domestic bn USA UK Russia France Germany Orders for the UK defence market declined by 30 per cent over 2010 highlighting the impact of government cuts. All other regions also showed a decline apart from the ROW which increased by 80 per cent - predictably driven by the Middle East, Brazil, South-East Asia and India. The USA continues to be the dominant defence exporter. However, the UK maintained its position as the second most successful defence exporter. Although UK defence exports were down in 2011 by 400m at 5.4bn, the UK gained over 15 per cent of the world defence market, ahead of Russia, France and Germany.

11 TOP 5 DEFENCE IMPORTERS UK DEFENCE INDUSTRY R&T AND R&D 2011 (cumulative $bn) Source: UKTI $bn bn R&T R&D R&T R&D Saudi Arabia India USA Australia Canada Saudi Arabia maintained its position as the leading importer of defence equipment. primarily aircraft (inc. 72 Typhoon and a major Tornado upgrade) and missiles (inc. Storm Shadow). India continues to represent an extremely important market for UK defence exports. Their defence spending is growing at a rapid rate, as is India s demand for increasingly complex defence technologies Australia is classified as a Grow market in the ADS International Defence Market Strategy It spent over US$8bn on defence procurement in 2010 and is forecast to spend US$42bn over the next 5 years Canada is classified as a Focus market in the Strategy report. Their requirements span all sectors with the main bulk of open opportunities at the prime level being in Land and Maritime. Spending on Research and Development (R&D) decreased by 8 per cent over The further decline in R&D spend, continuing what has become a long term trend, was driven primarily by reduction in MoD spend. There was, however, a welcome 41 per cent increase in Research & Technology investment, albeit from a small base, driven primarily by product improvement initiatives in the defence aerospace sector.

12 UK DEFENCE SALES PER EMPLOYEE v UK MANUFACTURING 2011 UK EMPLOYMENT PROFILE BY SEGMENT 2011, ONS Apprentice & trainees 2% 210 Technicians 16% bn 200 Total employees 107,455 Other 59% University graduates, engineers & managers 23% 180 UK defence industry sales per employee 2011 UK defence industry sales per employee 2010 UK manufacturing sales per employee 2010 Sales per employee increased to 206K per employee in 2011, representing an increase of 2.5 per cent versus The increase was driven by the workforce decreasing by 2 per cent over 2010 on flat sales The UK defence average of 201K per employee in 2010 per employee is 5 per cent higher than the average UK manufacturing sales per employee Total workforce fell by 2 per cent over This downward trend is expected to accelerate through 2012 due to the lag effect of layoffs already announced. In the light of the UK s continuing economic difficulties, it is likely that on the supply side, consolidation and mergers will further depress manufacturing employment levels. Similarly on the customer side, a buy off-the shelf procurement policy also risks further reducing employment levels.

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