Arms transfers alter Dynamics of international defense market.

• Author: Jovovic, Aleksandar D.
• Position: Industry Commentary - Company overview

* As countries face constrained defense budgets and escalating equipment costs, we are likely to see a significant rise in government-to-government transfers of used defense systems. This trend may affect the defense industry, as it might generate opportunities primarily driven by upgrades, modernization, and sustainment within an expanding customer base.

Annual sales in this market could near $ 10 billion next year Since World War II, the United States has used defense transfers as a powerful incentive for political and military cooperation. Indeed, the Defense Department reports that it transferred some $7 billion of hardware in a single five-year span in the 1990s, while the Navy has provided an impressive 231 ships to 43 countries over the past two decades.

Countries aren't just transferring defense equipment in order to support allies or influence political and security developments. As budgets are strained by international engagements, rising personnel costs, and increasingly expensive systems, countries are looking to clear space for new systems and recoup some costs in the process. As Australia commences a decade of defense modernization, it is looking to sell hundreds of older aircraft, ships and ground vehicles.

Some cases are less auspicious-The Greeks simply cannot afford all their new Type 214 submarines built by ThyssenKrupp HDW, and have embarked on an effort to sell one. Alongside the financial incentives to slim their forces, ministries of defense are engaged in a reassessment of strategic objectives. For the Netherlands, a robust heavy armor arsenal has made less sense with the end of the Cold War, so they have been shedding Leopard tanks through sales for some years now.

The financial upside for industry' is typically not tied to the current value of the used equipment itself--which is sometimes purely nominal--but rather the trailing expenses the buyer incurs to update and modernize the equipment. Several months ago, the Perry Class frigate USS McInerney, now renamed PNS Alamgir, set sail for Asia to join Pakistan's naval contingent in the Arabian Sea and Indian Ocean. The foreign military financing deal for this decommissioned vessel was valued at $60 million including refurbishment, training, and anti-submarine warfare improvements. The transfer is reportedly the first of an eight-vessel purchase.

Viewed individually, the initial deals, largely the result of transactions between governments rather than ministries of...