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Defence Industry - UK - November 2017

“Despite possible changes to the level of defence spending set out in the 2015 SDSR, the recent decline in the value of sterling is likely to affect industry trading. The fall has made foreign equipment relatively more expensive to purchase, but has also made domestically-made defence products cheaper to foreign buyers - meaning there may be a surge in defence exports compared to imports.”
– Lewis Cone, B2B Analyst

This Report looks at the following areas:

  • What are the key determinants driving the defence equipment industry?
  • How will the UK’s exit from the EU affect the industry?
  • How has the government influenced and shaped the development of the sector?
  • What are the key issues the UK industry needs to address to maintain its global position in an ever-competitive market?
  • How have companies adapted to cost pressures and the changing nature of threats?
  • What does the future hold for the UK’s defence equipment industry?

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Table of contents

  1. Executive Summary

      • Market size
        • Figure 1: UK defence departmental expenditure limits and defence spending, 2012/13-2016/17, (£ million)
        • Figure 2: MoD equipment expenditure, 2013/14-2017/18, (£ million)
      • Market trends
        • North American and Western Europe spending rose in 2016, but growth is still lower than the early 2010s
          • Figure 3: Defence spending 2012 and 2016, world’s top six, (% world share in $ billion at current prices and converted at the exchange rate for the given year)
        • UK remains Europe’s leading defence exporter, despite third successive annual decline in new business
          • Market factors
            • Uncertainty around Brexit negotiations could lead to changes in industry plans
              • Military capability affected by poor condition of MoD’s estate
                • Industry development
                  • Lockheed Martin maintains its position as the largest defence company in the world
                    • Figure 4: World top 10 defence companies, by revenue, 2016, (£ million)
                  • Forecast
                    • Defence DEL forecast to rise in order to boost future capability and meet emerging threats
                      • Figure 5: Forecast UK planned defence DEL, 2017/18-2020/21, (£ billion)
                    • Competition in defence exports expected to rise, which will threaten the UK’s leading European position
                      • What we think
                      • Key Insights

                          • How will changes to UK warship construction affect the market?
                            • Will the UK’s position in major global defence and military strategy decisions be affected after it leaves the EU?
                            • Introduction

                                • Definitions
                                  • Methodology
                                    • Abbreviations
                                      • Political
                                          • Figure 6: Trends in public sector total managed expenditure, 2006/07-2017/18*, (£ billion)
                                          • Figure 7: Trends in public sector total managed expenditure, 2006/07-2017/18*, (£ billion)
                                        • Market positioning
                                        • UK Economy

                                          • Key points
                                            • Overview
                                              • Figure 8: Forecast GDP development 2017-21, (% annual growth)
                                              • Figure 9: UK GDP quarterly development, 2007-17, (% quarterly growth and gdp in £ billion)
                                            • Inflation
                                              • Interest rates
                                                • House prices
                                                  • Figure 10: UK house price changes, 2006-17, (12 month % change)
                                                • Consumer spending
                                                  • Manufacturing
                                                    • Figure 11: UK manufacturing, 2014-17, (Index, 2013 = 100)
                                                  • Business investment
                                                    • Figure 12: UK GFCF, 2004-17, (£ million, chained volume measures, seasonally adjusted)
                                                  • Imports
                                                    • Exports
                                                    • Market Factors

                                                      • Key points
                                                        • Lowest half-year GDP growth since 2012 could impact equipment procurement
                                                          • Figure 13: GDP growth rate, Q1 2013-Q2 2017, (% change on previous quarter)
                                                          • Figure 14: GDP growth rate, Q1 2013-Q3 2017, (% change on previous quarter)
                                                        • Uncertainty around Brexit negotiations could lead to changes in industry plans
                                                          • Military capability affected by poor condition of MoD’s estate
                                                            • Other factors
                                                              • Regulatory framework changes under the Conservative government between 2015 and 2017
                                                                • The European Council Common Position and the Consolidated EU and National Arms Export Licensing Criteria
                                                                  • The Defence Industrial Policy
                                                                    • The Defence Growth Partnership
                                                                      • The Arms Trade Treaty
                                                                        • Strategic Defence Policy
                                                                          • 2015 NSS and the SDSR
                                                                            • Royal Navy
                                                                              • Army
                                                                                • Royal Air Force
                                                                                  • Defence Operating Model
                                                                                    • Defence cooperation agreements
                                                                                    • Market Size

                                                                                      • Key points
                                                                                        • Defence DEL and spending both rise for first time since 2013/14
                                                                                          • Figure 15: The UK defence departmental expenditure limits and defence spending, 2012/13-2016/17, (£ million)
                                                                                          • Figure 16: UK Defence departmental expenditure limits and defence spending, 2012/13-2016/17, (£ million)
                                                                                        • Single-use military equipment continues to form largest share of capital expenditure
                                                                                          • Figure 17: The UK defence departmental capital expenditure limits, 2013/14-2017/18, (£ million)
                                                                                          • Figure 18: The UK defence departmental cash resource expenditure limits, 2013/14-2017/18, (£ million)
                                                                                          • Figure 19: UK defence departmental cash resource expenditure limits, 2013/14 and 2017/18, (£ million)
                                                                                          • Figure 20: The UK defence annually managed expenditure limits, 2013/14-2017/18, (£ million)
                                                                                          • Figure 21: The UK defence annually managed expenditure limits, 2013/14 and 2017/18, (£ million)
                                                                                          • Figure 22: MoD equipment expenditure, 2013/14-2017/18, (£ million)
                                                                                          • Figure 23: MoD equipment expenditure, 2013/14-2017/18, (£ million)
                                                                                          • Figure 24: MoD research & development expenditure outturn, 2011/12-2015/16, (£ million)
                                                                                        • MoD Procurement Contracts
                                                                                            • Figure 25: MoD major equipment projects, as at 31 march 2016, (£ million)
                                                                                          • PFI
                                                                                              • Figure 26: MoD PFI projects, 2016, (year and £ million)
                                                                                          • Market Trends

                                                                                            • Key points
                                                                                              • North American and Western Europe spending rises on previous year, but growth is still lower than the early 2010s
                                                                                                  • Figure 27: Defence spending 2012 and 2016, ($ billion at current prices and converted at the exchange rate for the given year, % world share)
                                                                                                  • Figure 28: Defence spending 2012 and 2016, world’s top six, (% world share in $ billion at current prices and converted at the exchange rate for the given year)
                                                                                                • UK remains Europe’s leading defence exporter, despite third successive annual decline in new business
                                                                                                    • Figure 29: Identified orders of uk exports of defence aircraft and equipment, 2012-16, (£ million)
                                                                                                    • Figure 30: Identified orders of UK exports of defence aircraft and equipment, 2012-16, (£ million)
                                                                                                  • Armed forces equipment and formations trends
                                                                                                    • Royal Navy and Royal Auxiliary Vessels
                                                                                                      • Figure 31: Royal Navy and Royal Auxiliary Fleet of the UK Armed Forces, 2016 and 2017, (number)
                                                                                                    • Aircraft fleet
                                                                                                      • Figure 32: Fixed-wing platforms and unmanned aircraft systems of the UK Armed Forces, 2016 and 2017, (Number)
                                                                                                      • Figure 33: Rotary-wing platforms of the UK Armed Forces, 2016 and 2017, (number)
                                                                                                    • Militarily-useful British-registered vessels
                                                                                                      • Figure 34: Number of militarily-useful British-registered vessels (passenger, tanker and dry cargo), 2012-16, (number)
                                                                                                      • Figure 35: Number of militarily-useful British-registered vessels (fishing and specialist), 2012-16, (number)
                                                                                                    • Land equipment
                                                                                                      • Figure 36: Land equipment of the UK Armed Forces, 2016 and 2017, (number)
                                                                                                    • Conventional Armed Forces in Europe Treaty Holdings
                                                                                                      • Figure 37: Number of tanks and artillery holdings in the UK, Germany, Cyprus and Gibraltar within the scope of the Conventional Armed Forces in Europe Treaty, 2008-17, (number)
                                                                                                      • Figure 38: Number of tanks and artillery holdings in the UK, Germany, Cyprus and Gibraltar within the scope of the Conventional Armed Forces in Europe Treaty, 2008, 2011, 2014 and 2017, (number)
                                                                                                      • Figure 39: Number of armoured combat vehicle holdings in the UK, Germany, Cyprus and Gibraltar within the scope of the Conventional Armed Forces in Europe Treaty, 2008-17, (number)
                                                                                                      • Figure 40: Aircraft holdings in the UK, Germany, Cyprus and Gibraltar within the scope of the Conventional Armed Forces in Europe Treaty, 2008-17, (number)
                                                                                                      • Figure 41: Military Holdings in the UK, Germany, Cyprus and Gibraltar within the scope of the Conventional Armed Forces in Europe Treaty, by Equipment Group, 2013 and 2017, (Number)
                                                                                                  • Industry Structure

                                                                                                    • Key points
                                                                                                      • Industry development
                                                                                                        • Improvements made to global military spending but at a slow rate
                                                                                                          • Lockheed Martin maintains its position as the largest defence company in the world
                                                                                                              • Figure 42: World top 10 defence companies, by revenue, 2016, (£ million and % of company’s total revenue)
                                                                                                              • Figure 43: World top 10 defence companies, by revenue, 2016, (£ million)
                                                                                                            • SDSR has allowed the MoD to push ahead with the awarding of military equipment contracts...
                                                                                                              • ...but barriers exist that can restrict the entrance of SMEs and non-traditional defence partners into the industry
                                                                                                                • Exports and the UKTI DSO
                                                                                                                  • Single Source Regulations Office
                                                                                                                    • Industry structure
                                                                                                                      • Figure 44: Analysis of the changes in the structure of the weapons and ammunition industry, 2013-17, (number of factories and businesses)
                                                                                                                      • Figure 45: Analysis of the changes in the structure of the air, spacecraft and related machinery industry, 2013-17, (number of factories and businesses)
                                                                                                                      • Figure 46: Analysis of the changes in the structure of the ship and floating structures industry, 2013-17, (number of factories and businesses)
                                                                                                                      • Figure 47: Analysis of the changes in the manufacture of military fighting vehicles industry, 2013-17, (number of factories and businesses)
                                                                                                                    • Structure by employment
                                                                                                                      • Figure 48: Analysis of the employment structure of the weapons and ammunition manufacturing industry, 2016 and 2017, (number of employees and factories)
                                                                                                                      • Figure 49: Analysis of the employment structure of the air, spacecraft and related machinery industry, 2016 and 2017, (number of employees and factories)
                                                                                                                      • Figure 50: Analysis of the employment structure of the shipbuilding and repair industry, 2016 and 2017, (number of employees and factories)
                                                                                                                      • Figure 51: Analysis of the employment structure of the manufacture of military fighting vehicles industry, 2016 and 2017, (number of employees and factories)
                                                                                                                    • Structure by turnover
                                                                                                                      • Figure 52: Analysis of the financial structure of the weapons and ammunition manufacturing industry, 2016 and 2017, (£000 and number of companies)
                                                                                                                      • Figure 53: Analysis of the financial structure of the air, spacecraft and related machinery manufacturing industry, 2016 and 2017, (£000 and number of companies)
                                                                                                                      • Figure 54: Analysis of the financial structure of the shipbuilding and repair industry, 2016 and 2017, (£000 and number of companies)
                                                                                                                      • Figure 55: Analysis of the financial structure of the manufacture of military fighting vehicles industry, 2016 and 2017, (£000 and number of companies)
                                                                                                                    • Defence contracts
                                                                                                                    • Company Profiles

                                                                                                                      • AWE Management

                                                                                                                            • Figure 56: Financial analysis of AWE Management, 2012-16, (£ million)
                                                                                                                          • Company strategy
                                                                                                                          • BAE Systems

                                                                                                                                • Figure 57: Financial analysis of BAE Systems, 2012-16, (£ million)
                                                                                                                              • Company strategy
                                                                                                                                • BAE Systems’ Surface Ships
                                                                                                                                    • Figure 58: Financial analysis of BAE Systems’ Surface Ships, 2012-16, (£ 000)
                                                                                                                                  • Company strategy
                                                                                                                                    • BAE Systems (Operations)
                                                                                                                                      • Figure 59: Financial analysis of BAE Systems (Operations), 2012-16, (£ million)
                                                                                                                                    • Company strategy
                                                                                                                                    • Cobham

                                                                                                                                          • Figure 60: Financial analysis of Cobham, 2012-16, (£ million)
                                                                                                                                        • Company strategy
                                                                                                                                        • EntServ UK (formerly known as HP Enterprise Services UK Limited)

                                                                                                                                              • Figure 61: Financial analysis of Entserv UK Limited (formerly Hewlett Packard Enterprise Services UK Limited), 2012-16, (£ million)
                                                                                                                                            • Company strategy
                                                                                                                                            • General Dynamics UK

                                                                                                                                                  • Figure 62: Financial analysis of General Dynamics UK, 2012-16, (£ million)
                                                                                                                                                • Company strategy
                                                                                                                                                • Leonardo MW Limited (formerly Leonardo Helicopters)

                                                                                                                                                      • Figure 63: Financial analysis of Leonardo MW Limited (formerly Leonardo Helicopters), 2012-16, (£ million)
                                                                                                                                                    • Company strategy
                                                                                                                                                    • Lockheed Martin (UK)

                                                                                                                                                          • Figure 64: Financial analysis of Lockheed Martin (UK), 2012-16, (£000)
                                                                                                                                                        • Company strategy
                                                                                                                                                        • NETMA

                                                                                                                                                          • QinetiQ

                                                                                                                                                                • Figure 65: Financial analysis of QinetiQ, 2013-17, (£ million)
                                                                                                                                                              • Company strategy
                                                                                                                                                              • Rolls-Royce

                                                                                                                                                                    • Figure 66: Financial analysis of Rolls-Royce, 2012-16, (£ million)
                                                                                                                                                                  • Company strategy
                                                                                                                                                                    • Figure 67: Profiled companies’ turnover, 2012-16, (£ million)
                                                                                                                                                                • Forecast

                                                                                                                                                                  • Key points
                                                                                                                                                                    • Market size
                                                                                                                                                                      • Defence DEL forecast to rise to boost future capability and meet emerging threats
                                                                                                                                                                        • Figure 68: Forecast UK defence DEL, 2016/17-2020/21, (£ billion)
                                                                                                                                                                        • Figure 69: Forecast UK defence DEL, 2016/17-2020/21, (£ billion)
                                                                                                                                                                        • Figure 70: Forecast UK planned defence DEL, 2017/18-2020/21, (£ billion)
                                                                                                                                                                        • Figure 71: Forecast UK planned defence DEL, 2017/18-2020/21, (£ billion)
                                                                                                                                                                      • Defence equipment plan
                                                                                                                                                                          • Figure 72: Post-main gate major equipment projects, 2016, (£ million)
                                                                                                                                                                        • New support model launched for Royal Navy following doubts over warship replacement plans
                                                                                                                                                                          • Competition in defence exports expected to rise, threatening the UK’s leading European position
                                                                                                                                                                            • Changes made to merger regulations to improve scrutiny of transactions that could affect national security
                                                                                                                                                                              • Unmanned aerial vehicles are becoming a more dominant sector as the nature of conflict continues to change
                                                                                                                                                                                • Cyber security becoming an integral part of defence strategy
                                                                                                                                                                                  • PFI
                                                                                                                                                                                    • Figure 73: Estimated payment under MoD PFI contracts, based on signed defence deals as of March 2016, (£ million)
                                                                                                                                                                                • Further Sources and Contacts

                                                                                                                                                                                  • Trade associations
                                                                                                                                                                                    • Aerospace & Defence Industries Association of Europe
                                                                                                                                                                                      • ADS Group Limited
                                                                                                                                                                                        • British Naval Equipment Association
                                                                                                                                                                                          • Northern Defence Industries (NDI)
                                                                                                                                                                                            • Trade magazines
                                                                                                                                                                                              • Aerospace Engineering/Aerospace & Defence Technology (Monthly)
                                                                                                                                                                                                • Defence Contracts Bulletin
                                                                                                                                                                                                  • DefenceEye
                                                                                                                                                                                                    • Defence Global
                                                                                                                                                                                                      • Defence Helicopter
                                                                                                                                                                                                        • Global Defence Technology
                                                                                                                                                                                                          • Helicopter International
                                                                                                                                                                                                            • IHS Jane’s Defence Weekly
                                                                                                                                                                                                              • The Engineer
                                                                                                                                                                                                                • Trade exhibitions
                                                                                                                                                                                                                  • Eurosatory
                                                                                                                                                                                                                    • Farnborough 2018
                                                                                                                                                                                                                      • Helitech International 2018
                                                                                                                                                                                                                        • International Defence Exhibition & Conference 2019
                                                                                                                                                                                                                          • ITEC 2018

                                                                                                                                                                                                                          Defence Industry - UK - November 2017

                                                                                                                                                                                                                          US $1,321.06 (Excl.Tax)