Tighter military budgets in the United States and Europe are hitting the world's top arms makers hard and the prospects for the industry are even grimmer.
Only the most diverse companies are prospering, buoyed up by their major airline divisions. Everyone else is watching their revenues and margins flatline or dive.
Those are the conclusions of a survey of the top 20 global aerospace and defence companies (A&D) published this month by the international accountancy firm Deloitte.
Based on mid-year financial results, Deloitte figures show the top weapons makers have "experienced a decline in their global revenues of US$1.3 billion [Dh4.77bn], or a 1 per cent decrease, after a 3.3 per cent decline in 2011".
The top 20 companies, including Boeing, BAE and Lockheed Martin, represent about 71 per cent of total global industry revenue. Overall, the industry posted increased operating earnings of 8.8 per cent to $20bn in the first half this year.
"But [that was] largely due to the beneficial impact of higher deliveries of commercial aircraft, company cost cutting and efficiency initiatives in advance of expected continued declines in defence budgets," the Deloitte report notes.
It added that when taken separately, the defence divisions of the US giants showed flat growth in revenues and margins. And the European defence firms' performance was even worse, with revenue declining 4.5 per cent.
In July, Boeing's first-half results delivered a 3 per cent profit increase that handily beat forecasts from Wall Street analysts, who worried that sales in Boeing's defence division would post a loss. At the time, Boeing said it was reining in costs to prevent any revenue loss in the division that produced Chinook helicopters and F-18 fighter jets.
But the impact of the defence cuts could be seen in the revenue performance of the company's two main divisions, which are about the same size. Defence revenue rose by only 7 per cent, while revenue in the commercial aircraft division jumped 34 per cent.
"Boeing's defence unit is vulnerable to potentially severe military spending cuts in January," say analysts at FactSet Research Systems.
In its outlook to its first-half figures, published in August, BAE Systems said more declines loomed. "The risk of further reductions in US defence budgets remains, including sequestration if it comes into force in January 2013."
BAE's defence revenue had decreased 9.7 per cent due to lower volumes in the land and armaments business primarily reflecting the completed family of medium tactical vehicles programme.
"In the near term, the land and armaments business faces a challenging market environment," the Deloitte report warns. "The business continues to focus on capturing key new domestic programmes and export opportunities, while improving its competitive position through ongoing rationalisation and efficiency programmes."
The slowdown is already hitting share prices, according to Deloitte.
"Due to continued instability in defence spending forecasts for major global economies, share price performance was mostly down, with aggregate market capitalisation decreasing 0.6 per cent in the first six months of 2012," the report says.
"While companies associated with the boom in commercial aircraft production saw stock valuations rise in the first half of 2012, share prices of other companies fell - principally due to lower revenues and the expectations for cuts to various defence programmes.
"Only eight of the top 20 firms posted a gain during the first half of the year. This follows a decline in defence industry shares in 2011, where aggregate market capitalisation fell 6.3 per cent."
Hanging over the global industry is the future US defence budget. More than $50bn will definitely go from next year's budget and last year's US Budget Control Act would trigger in January about $487bn in additional cuts over the next 10 years should congress fail to find reductions elsewhere.
Already, leaders in the US defence industry are ringing alarm bells.
"In the absence of resources to modernise and refurbish fleets, the nation will witness a long-term decline in defence capability," says Lawrence Farrell, the president and chief executive of the National Defence Industrial Association.
"We need to recognise and account for the ageing of some of our major platforms."
The Deloitte report suggests that as US and European military budgets decline over the next several years, "there will be revenue growth pressure on major defence contractors as competition" over major programmes intensifies.
"Companies with heavier exposure to the defence sector will compete for a smaller share of total market and thus be challenged to fill the revenue gap," it says.
To try to beat the slowdown, five of the world's biggest arms and aerospace contractors are joining forces to enter the clean energy, environment and climate-change markets.
Finmeccanica, Lockheed Martin, Northrop Grumman, Raytheon and Saab have agreed to cooperate on "challenges that have proven too complex to be addressed by any individual government, sector, business or agency on an international level", they said in a joint statement.
In advance of next month's E3DS defence markets conference in London, they announced plans to muscle in on sectors from clean energy, environment, climate, transport and logistics, as well as the humanitarian and disaster-relief sectors.
"Our experience in providing innovative mission solutions uniquely positions us to support government and other industry sectors as they endeavour to tackle these complex challenges," the companies said.
The Deloitte report also offers a ray of hope for arms makers.
"Defence budgets in Asia and the Middle East are expected to grow, which represents an opportunity for defence companies to drive growth with foreign military sales," it said.
However, Tom Captain, the head of the aerospace and defence practice at Deloitte, is sceptical about whether the emerging nations would really ride to the rescue of the defence giants.
"US companies in particular are becoming more successful [at foreign military sales]", Mr Captain says. "Especially in those areas of the world where defence budgets are going up, like India, the UAE, Brazil, Singapore, South Korea and Japan. But there are plenty of other companies, western European, Russian and more, all going after that same small pool of customers."
dblack@thenational.ae
In numbers: PKK’s money network in Europe
Germany: PKK collectors typically bring in $18 million in cash a year – amount has trebled since 2010
Revolutionary tax: Investigators say about $2 million a year raised from ‘tax collection’ around Marseille
Extortion: Gunman convicted in 2023 of demanding $10,000 from Kurdish businessman in Stockholm
Drug trade: PKK income claimed by Turkish anti-drugs force in 2024 to be as high as $500 million a year
Denmark: PKK one of two terrorist groups along with Iranian separatists ASMLA to raise “two-digit million amounts”
Contributions: Hundreds of euros expected from typical Kurdish families and thousands from business owners
TV channel: Kurdish Roj TV accounts frozen and went bankrupt after Denmark fined it more than $1 million over PKK links in 2013
Meatless Days
Sara Suleri, with an introduction by Kamila Shamsie
Penguin
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UPI facts
More than 2.2 million Indian tourists arrived in UAE in 2023
More than 3.5 million Indians reside in UAE
Indian tourists can make purchases in UAE using rupee accounts in India through QR-code-based UPI real-time payment systems
Indian residents in UAE can use their non-resident NRO and NRE accounts held in Indian banks linked to a UAE mobile number for UPI transactions
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
ENGLAND%20SQUAD
%3Cp%3EFor%20Euro%202024%20qualifers%20away%20to%20Malta%20on%20June%2016%20and%20at%20home%20to%20North%20Macedonia%20on%20June%2019%3A%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3EGoalkeepers%3C%2Fstrong%3E%20Johnstone%2C%20Pickford%2C%20Ramsdale.%0D%3Cbr%3E%0D%3Cbr%3E%3Cstrong%3EDefenders%3C%2Fstrong%3E%20Alexander-Arnold%2C%20Dunk%2C%20Guehi%2C%20Maguire%2C%20%20Mings%2C%20Shaw%2C%20Stones%2C%20Trippier%2C%20Walker.%0D%3Cbr%3E%0D%3Cbr%3E%3Cstrong%3EMidfielders%3C%2Fstrong%3E%20Bellingham%2C%20Eze%2C%20Gallagher%2C%20Henderson%2C%20%20Maddison%2C%20Phillips%2C%20Rice.%0D%3Cbr%3E%0D%3Cbr%3E%3Cstrong%3EForwards%20%3C%2Fstrong%3EFoden%2C%20Grealish%2C%20Kane%2C%20Rashford%2C%20Saka%2C%20Wilson.%3C%2Fp%3E%0A
A MINECRAFT MOVIE
Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
Rating: 3/5
Real estate tokenisation project
Dubai launched the pilot phase of its real estate tokenisation project last month.
The initiative focuses on converting real estate assets into digital tokens recorded on blockchain technology and helps in streamlining the process of buying, selling and investing, the Dubai Land Department said.
Dubai’s real estate tokenisation market is projected to reach Dh60 billion ($16.33 billion) by 2033, representing 7 per cent of the emirate’s total property transactions, according to the DLD.
CABINET%20OF%20CURIOSITIES%20EPISODE%201%3A%20LOT%2036
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COMPANY%20PROFILE
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How to join and use Abu Dhabi’s public libraries
• There are six libraries in Abu Dhabi emirate run by the Department of Culture and Tourism, including one in Al Ain and Al Dhafra.
• Libraries are free to visit and visitors can consult books, use online resources and study there. Most are open from 8am to 8pm on weekdays, closed on Fridays and have variable hours on Saturdays, except for Qasr Al Watan which is open from 10am to 8pm every day.
• In order to borrow books, visitors must join the service by providing a passport photograph, Emirates ID and a refundable deposit of Dh400. Members can borrow five books for three weeks, all of which are renewable up to two times online.
• If users do not wish to pay the fee, they can still use the library’s electronic resources for free by simply registering on the website. Once registered, a username and password is provided, allowing remote access.
• For more information visit the library network's website.
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
