The promise and limits of foreign markets.

• Author: Erwin, Sandra I.
• Position: Defense Watch

* U.S. manufacturers are the ones to beat in the international arms market. Sales over the past two years have exceeded $60 billion, and there are still no signs that distant runners-up in Russia and Western Europe will catch up any time soon.

Pentagon contractors, despite their dominance, need their international arms business to grow substantially if they hope to compensate for declining sales to the U.S. military.

Targets of opportunity do exist overseas. Between now and 2018, countries outside the United States expect to purchase more than $100 billion worth of conventional arms, according to estimates by The Avascent Group, a consulting firm. Half of those opportunities will be in Asian countries, and the other half about equally split between Europe and the Middle East. Countries whose defense markets are legally off limits to U.S. firms, such as China, Russia and Vietnam, were not included in the estimates.

The data crunched by Avascent paint a promising picture for U.S. defense firms, but also illustrate the steep climb they face as they seek a bigger slice of the global arms pie. The Pentagon--projected to spend $158 billion on weapons research, development and procurement in 2013--is such a huge customer that all other markets pale by comparison. The equivalent investment in weapons by all of Europe, for instance, is $68 billion, followed by $67 billion in Asia and $41 billion in the Middle East and North Africa.

Of these regions, though, Asia will experience the fastest growth in the years ahead, says Avascent partner Douglas Berenson. It will not be long before Asia's defense spending surpasses Europe. He estimates the compound annual growth rate from 2013 to 2018 for European arms sales will only be 1 percent, in contrast to 6 percent for Asia and 5 percent for the Middle East and North Africa.

A handful of countries have been tagged as hot markets--India, South Korea, Saudi Arabia and Brazil. "Every aerospace and defense company is there now," says Jon Barney, also a partner at Avascent.

The most coveted arms deals are likely to be in Asia. "The only defense budgets in the world that are climbing are in Asia," says Air Force Gen. Herbert Carlisle, commander of air forces at U.S. Pacific Command. "We want to expand that engagement." Military leaders overseas are champions of American manufacturers because they believe they can build doser ties with allies if everyone owns the same equipment.

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