US companies and the UK defence market

Publication date: 2007

• Introduction
• The opportunity for US companies
• Emerging opportunities
• Issues to consider
• The UK market
• How UK defense procurement works

A proven route for US companies wanting to access European defense (UK spelling: defence) markets is to establish an initial market position in the United Kingdom, where a shared language and a cultural empathy generated by a long and mutually supportive relationship provide a good launch pad.

The UK itself is a valuable market with a defense budget set to increase from $52.5 billion in 2004/05 to $59 billion in 2007/08. A diversity of major land, sea and air projects are currently under development offering significant prospects for US companies.

The UK is not only home to the world’s second largest defense sector but also a leading defense industry crossroads, a magnet for buyers from the rest of Europe, the Middle East and the Asia Pacific region.

A business position can be created in the UK by a start-up venture – labor laws rest lighter on the employer than in some other European countries – or via acquisition. A joint venture with a UK based company (which might itself be American) or the appointment of a local representative / distributor are potential initial solutions.

International defense markets offer unprecedented opportunities to US companies. And that doesn’t mean just the major corporations. A wide range of second tier suppliers and niche specialists can also benefit from the radical changes taking place in European markets.

What are the factors bringing about these changes? The global war against terror is a prime driver. The terrorist attacks of recent years have made governments everywhere recognize that no nation can stand alone. This translates not just into a unity of purpose, but also a need to share intelligence, skills and technology as never before. When it comes to meeting this demand, Europe looks to the US as the natural world leader in innovative technology and service provision.

The collapse of the Soviet Union and the subsequent migration of former Warsaw Pact nations to NATO are also creating important new markets as ‘new Europe’ seeks to equip itself for compatibility in peace-keeping roles. This has resulted in a demand for proven and affordable systems upgrades of Soviet era land, sea and air platforms to NATO standard.

In a wider context, the drive towards interoperability is another significant trend. NATO is making major strides towards removing silos within its collective defense capability, while the European Union (EU) has developed the European Security and Defence Policy. The aim of the policy is to strengthen the EU's external ability to act through the development of civilian and military capabilities for international conflict prevention and crisis management. EU capability has already been deployed in areas such as Bosnia.

Nations such as the UK recognize clearly that interoperability with the US, the benchmark country for operational effectiveness, is fundamental to the future operations of their armed services.

Another important driver is the development cost of defense systems and the generally smaller numbers required by the governments that sponsor them. The suppliers of these systems have a strong incentive to find export markets to provide economies of scale. For the same reasons nations, particularly in Europe, are having to take a collaborative approach to the acquisition of defense assets to make them affordable, a key point of focus being areas such as training.

The story is not all about high technology though – there are potentially valuable niche opportunities in areas such as legacy aerospace parts.

While the acquisition of platforms has traditionally dominated the defense business, the increasing emphasis on through-life support of platforms presents another significant area of opportunity. Governments are looking to obtain maximum life from investment in defense assets, so upgrades and other technologies that enhance performance or reduce cycle times are increasingly in demand, as well as the standard support procedures.

The demands of expeditionary warfare have also brought through-life support to the forefront of procurement thinking. This is not just an opportunity for the big international contractors; there will be periods in the long lifespan of these programs when the role of suppliers of niche technologies and services will be crucial. This will not only benefit suppliers of cutting edge technology but conventional systems such as Radio Frequency Identification (RFI) will also be in demand.

One way to capitalize on this trend is to become part of the supply chain of the OEMs. However, governments are not only looking for longer life and enhanced performance. Cost savings are always high on the agenda and a reduction in dependence on the OEMs can help stretch their budgets considerably.

Increasingly through-life support is being incorporated into new acquisition programs at the very outset. This means that if you want to become part of the through-life action, you will need to be in play from the start and, ideally, influence the design phase. However, there are also opportunities associated with existing platforms and operations, for example those companies that can provide a competitively priced quick fix or bolt-on upgrade.

These developments mean that the role of the systems integrator is becoming ever more important and these must be included in the list of those to reach and influence.

When looking at European markets, as with all markets, there are important factors affecting business that have to be borne in mind:

The foreign policy of the US towards nations you are targeting: And vice versa, do they want to do business with you? Where the US is concerned, this is not an issue with the UK and the majority of other NATO countries.

Security issues affecting the US: Selling to nations that could conceivably use the capability against you is obviously going to present major problems. Furthermore, systems in US use could be downgraded in effectiveness if details were made available to third parties. Policy in this area is clearly laid down by the US Government and is generally controlled by US export licensing requirements such as ITAR and EAR.

The sovereignty requirements of the customer country: The extent to which the potential user wants data such as source codes for purposes of their own operational independence can have an impact on a contract.

Protectionism: The US is Europe’s largest supplier of defense systems and equipment and is acknowledged to be the leading center of excellence. While European defense markets are not totally free from protectionism, it is being defeated by an increasing acceptance that decisions today have to be based on economic models rather than national workshare issues. Equally, for those European nations without domestic defense industries there is a strong imperative to buy the systems and equipment that best meet their needs in terms of performance, value for money and the demands on interoperability.

Offset obligations:Suppliers’ cases are strengthened if their solution creates some value in the customer country. Offset obligations are generally part of any major export from the US to Europe and the business relationships arising from offsets can be the first step towards a valuable alliance with a European company in a relevant industry sector.

The UK market is one of the most open to competition and a major purchaser of US platforms, systems and support services. Relations with the US are regarded as paramount and great importance is attached to the interoperability of US and UK front- line forces, which have a long history of standing shoulder to shoulder.

An important recent development in the UK is the Defence Industrial Strategy (DIS) published by the UK Ministry of Defence (MOD) in December 2005. The DIS sets out those technologies that the UK considers core to its future military needs and highlights the sectors where the MoD wishes to maintain onshore capability through special relationships with specific companies. At the same time the DIS identifies those sectors which should be open to competition by potential suppliers from all approved sources. Frequent reference is made to US companies and the transatlantic relationship.

Recent years have increasingly seen the use of Private Finance Initiatives (PFIs) in the UK. Under these schemes major areas of activity that were originally under the control of the military – such as maintenance, training and IT services – are contracted out to industry. This is creating significant new opportunities which are being capitalized on by US companies.

There are two ‘internal customers’ involved in a UK defense procurement project. Customer 1, the Equipment Capability Customer, is the service staffs within the MOD; they are responsible for identifying the capability needed to meet a particular defense requirement, gaining budgetary provision so that it becomes an approved program, and then acting as the lead internal customer until the capability is brought into service. Bids for a program are sought and assessed by an Integrated Project Team (IPT). There are over 70 IPTs managing around 1,000 projects. The second internal customer, known as Customer 2, is the Armed Forces, generally embodied in a single Command (for example, Commander-in-Chief Fleet for naval systems) – the user of the capability that has been procured. Customer 2 is responsible for integrating the newly procured equipment into an operational defense capability and for through-life support. The Chiefs of the three Armed Services – Royal Navy, Army and Royal Air Force – advise Customer 1 on all factors affecting defense capability.

The UK Ministry of Defence uses a streamlined version of its procedures to support operations by buying equipment quickly. Known as Urgent Operational Requirements (UORs), these procurement initiatives can create valuable opportunities for suppliers that can meet the demand. The UK MOD Defence Contracts Bulletin (DCB) provides details of all current programs.

Source: DSEi
Publication date: 2007

Resources for Defence Suppliers

• UK MOD Procurement Opportunities

To find out how your company can identify and secure procurement opportunities with the UK MOD, contact Jeffrey Strategic.