UK defence firms can absorb military spending cuts

By Will Smale
Business reporter, BBC News

image captionThe UK's armed forces face spending cuts, but British defence firms can rely on overseas orders

As the government unveils large cuts in defence spending, it might seem logical to assume that the UK defence industry is under pressure.

Not so, according to industry observers.

The UK's defence sector is one of the country's biggest export earners, a clear indication of how UK defence giants such as BAE Systems, Thales and Rolls-Royce have dramatically reduced their reliance on UK contracts as their international operations have expanded.

Hence, while the Royal Navy now finds itself in the unenviable position of working out what it will do with two aircraft carriers that will not have any planes for their first years of operation, the defence firms can continue to turn their attention to lucrative markets overseas.

'International firms'

These markets are worth more than £5bn ($7.86bn) a year for UK defence firms, which makes Britain the world's second-largest defence exporter after the US, according to trade group ADS (Aerospace Defence Security).

"Companies like BAE Systems and Rolls Royce, they are actually now international companies, for whom UK orders represent a relatively small part of their business," according to Professor Ron Smith, defence economist at Birkbeck College in London.

"So for those two firms at least, the impact of the government's defence spending cuts is relatively small."

Howard Wheeldon, defence specialist at BGC Partners, agrees, saying firms such as BAE Systems have "gone global".

"Today, BAE's UK revenues are only about 18% of its total," he points out.

Some will suffer

However, both Prof Smith and Mr Wheeldon were keen to stress that the worldwide clout of such firms would be of no comfort to those within their workforces who are affected by the cuts to UK defence spending - or smaller firms in their supply chains.

"Many defence sector employees in the UK will still be affected by the government's cuts," says Mr Wheldon.

"The key to remember is that generally in the defence sector you don't make things in volume. It's not like building cars.

"Instead you have highly specialist teams, often across lots of small firms, producing the little sub-component parts of a bigger project.

"These could be greatly hit by the government announcement."

Global business

While the cuts to the UK defence budget are being mirrored across western Europe, there remains a lot of global business for UK defence firms to chase.

Worldwide military spending totalled $1.5tn (£972bn) in 2009, according to the most recent annual figures from Stockholm International Peace Research Institute (Sipri), a 5.9% rise from 2008.

Of this total, the US was the biggest spender, accounting for 43%. BAE Systems has been particularly successful in the US in recent years.

And spending there remains solid, in spite of President Barack Obama's desire for US military spending to be slightly lowered, as the Pentagon's annual budget has risen by 63% since 2000 to $661bn.

Meanwhile, Saudi Arabia, India and Brazil are all continuing to increase their defence spending, according to Sipri.

Base closures

image captionThe Eurofighter has been an international success for a consortium including BAE Systems

In the UK, it is not just defence firms that are keen to assess the impact of the spending cuts.

Small firms across the services and retail sector are expected to be hit by the closure of a number of military bases.

"Military sites need everything from cleaners to food suppliers, maintenance staff and transport firms," says Russell Lawson, spokesman for the Federation of Small Businesses.

"And in many of these cases, it is small firms who do this work.

"They will be greatly affected by any base closures. This is the unseen impact."

Related Internet Links

The BBC is not responsible for the content of external sites.