The Challenge of Becoming a Defence Exporting ‘Superpower’
Professor Ron Matthews and Michelle Charles of Cranfield University explore defence sector exporting, the challenges associated with it and the pivotal role training plays in readying the UK for success.
The International Trade Secretary, Liam Fox MP, recently pledged to transform the United Kingdom (UK) into a “21st century exporting superpower”. This assault on the world’s export markets, including huge infrastructural projects linked to China’s one trillion dollar ‘One Belt One Road’ Asian and Middle-Eastern investment programme, may be attainable in the commercial arena, but it is altogether a more daunting challenge in defence markets. In the defence arena, the political rhetoric is more focused on the relationship between defence and development. For example, the 2012 National Security Through Technology White Paper and Philip Dunne’s 2018 Report Growing the Contribution of Defence to UK Prosperity, as well as countless ministerial speeches all highlight defence exports as a lever for wealth creation and prosperity. Despite the government’s traditional reluctance to commit to arms exports, there is no questioning the economic logic that such sales contribute not only to the health of the domestic defence economy, but also via multipliers to the wider economy through commercial supply chains. Additionally, of course, there will be enhanced income and corporation tax contributions to the exchequer. However, the assumption implicit in this discussion is that recipients of UK arms use them responsibly; otherwise the negative political fall-out is likely to outweigh the positive economic benefits.
There are several reasons why defence export success carries more challenges compared to commercial sales. Most obviously, the global arms market is relatively smaller, representing just 2.2 per cent of global GDP in 2017. Additionally, the arms market is burdened with a unique array of imperfections, including export controls, compliance legislation against unauthorised transfers of foreign technologies, ethical and strategic barriers to uncontrolled arms proliferation, threats to the corporate ‘brand’ from corruption, nepotism and unscrupulous agents in customer states, diplomatic and ideological procurement preferences and client-state insistence on access to embedded high technologies in both the weapons product and production systems. The list of defence market imperfections is long, and the need for expertise, monitoring mechanisms, compliance procedures and strategic foresight reduces managerial flexibility, increases delays and adds considerably to cost.
Thus, even though ‘Made in Britain’ connotes technological excellence and proven operationally capability, recent defence export performance has been less than impressive. Across 2013-16, the UK’s foreign arms sales were on a trend of continuous decline. The hope must be that the surge in export value experienced in 2017, reflecting a 53 per cent increase from £5.9bn in 2016 to £9bn, is a turning point – signalling the start of a long-term trend of rising sales. However, this in no way can be guaranteed as arms exports are characterised by ‘lumpiness’, so that a surge in one year’s exports could easily be a one-off aberration. A more appropriate performance metric is rolling averages over multiple years. In this regard, UK statistics offer a comforting picture: using a ten-year average over 2008-17 (based on orders) ranks the UK as the world’s second biggest exporter after the US. Yet, if a more recent, and thus arguably more relevant, five-year average (2013-17) is taken, then the UK ranking falls to sixth place, behind the US, Russia, France, Germany and China. The UK’s arms demand structure also exhibits a high degree of vulnerability, with just two regions, the Middle East and North America, accounting for 77 per cent of defence exports.
Competition and offset conditions affect all exporting states. The UK, however, has additional concerns. Firstly, UK defence and aerospace companies have historically operated in ‘chaotic’ markets, lacking in control and regulatory compliance. Since 9/11, the international defence environment has changed dramatically. Market regulation over the transfer of weapons and dual-use technologies is now pervasive, driven by both national governments and supranational organisations. The US ITAR and EAR regulations are the most stringent, where even unintentional export of US technologies can lead to fines of hundreds of millions of dollars.
Secondly, the world’s defence and aerospace companies are haunted by the spectre of corruption and the damage it can cause to brand and reputation, but following the 2008 Woolfe Report and extensive corporate efforts to improve ethical behaviour, UK defence exporters are now amongst the ‘cleanest’ in the world. Corruption still poses a threat, and offset programmes, in particular, attract a negative press. Presently, the potential for corrupt practices is localised to developing country markets, embroiling both the offset authorities and industrial beneficiaries. Moreover, a recent study by Cranfield University researcher Michelle Charles reveals that ‘proven’ corruption is essentially a problem of procurement not offset.
Thirdly, nationalism has replaced liberalisation as the dominant political force influencing trading relations. Thus, the UK faces extreme uncertainty over the imminence of a ‘hard’ Brexit, and its impact on defence cooperation with European partner states. Additionally, President Trump’s ‘Make America great again’ crusade is problematical. At a time when the UK is adopting a more flexible approach to promote defence exports, Washington is becoming increasingly inflexible with respect to re-export of US technologies.
Finally, there is a growing recognition amongst UK defence industrialists that the government needs to push back on its austerity agenda and reverse budgetary cuts impacting on British embassies. Defence attachés must be provided with the resources to operate proactively to obtain market intelligence and promote sales campaigns. The UK needs a French-style ‘joined-up’ government-sponsored export strategy, signifying the highest level of commitment to engage with overseas Heads of State and extol the merits of UK defence and aerospace systems.
Given the multiplicity of challenges, defence and security exporting is dependent on corporate awareness and a deep understanding of international markets, including the ability to design and implement export packages that go well beyond conventional price and volume considerations. ‘Know your customer’ is a generic and relevant mantra in the context of exporting, but especially applicable in the defence arena. UK military systems are distinguished by their high skill and value content, reflecting technological sophistication, precision, durability and reliability, but these attributes inevitably translate into exceedingly high price tags. Demand is thus constrained and, when combined with growing numbers of competitors, translates into a buyers’ market. Customer countries will seek to exploit the resulting market opportunities by demanding additional offset benefits and favourable through-life packages. The UK vendors need to tailor marketing and solutions accordingly, but at the same time be aware of pressures to maximise revenue and minimise cost, limit the extent of technology transfer, protect the brand through rigorous due diligence procedures and ensure at all times that exports do not fall foul of increasingly complex trade control and compliance regimes. It is essential, therefore, that UK vendors, whether primes or subcontractors, possess the necessary skills to effectively manage the complex variables defining export success.
To address this management need, Cranfield University is launching two programmes in January 2019 designed to offer defence and security corporate executives and public officials the skills required to meet the export challenge. The Post-Graduate Certificate in Defence and Security Export is a new part-time qualification, requiring attendance at five three-/four-day residential schools timetabled across a one-year teaching period. The course modules comprise the following thematics: i) Global Legal, Ethical and Political Defence Frameworks; ii) Defence Marketing; iii) Negotiations; iv) Offset; and v) Strategic Trade Control and Compliance. Additionally, students will complete an Independent Research Project (IRP), undertaken as an in-company consultancy activity. The second programme is a new Executive MBA (Defence Export) qualification hosted by Cranfield University’s prestigious School of Management. The programme is also part-time, requiring attendance at three-day residential schools over a two-year period. Further details of the PgCertificate can be found at www.cranfield.ac.uk/dse and the MBA (Defence Export) at www.cranfield.ac.uk/embadefenceexport.
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