Will Emerging Markets Outbid Pentagon on Defense Spending?

One home grown U.S. industry that’ doing just fine these days, has in fact been thriving in recent years, is the defense sector. No credit crunch here!

In fact, the Pentagon’s budget for 2008 is expected to surpass that of the entire Dutch economy in terms of size, thanks to ongoing spending for the “War on Terror” including sizeable costs for missions in Iraq and Afghanistan, according to a recent Financial Times article.

But one day, perhaps in the not-so-distant future, fast growing emerging economies in India, China and Middle Eastern countries, may crowd out U.S. Defense Department spending – to become the prime customers for U.S. based contractors.

Of course this is good news for the big-five U.S. based military defense contractors which include: Lockheed Martin (LMT), Boeing (BA), Northrop Grumman (NOC), General Dynamics (GD) and Raytheon (RTN).

In another prime example of going global, by investing local, shareholders in these firms are increasingly betting on globalization in the defense industry.

According to the article, Lockheed Martin, Boeing – along with European firms Dassault and Saab – “are among those eyeing the opportunity of supplying India with a new fleet of fighter jets to replace its ageing fleet of Russian-built MiG-21s.” The oil-rich Middle Eastern states provide another lineup of eager customers; as do the central Asian republics surrounding Afghanistan.

These same aircraft manufacturers and others are also battling for another big contract in supply Japan with new fighter jets to replace its aging fleet of US mad F-4 and F-15 aircraft. Increasingly China’s growth will certainly lead to more defense spending in the future. There are barriers to U.S. companies exporting certain military technology to China, but the share of the pie will certainly grow for both U.S., and especially European firms.

And there’s bound to be an extra tail-wind from consolidation in this industry as well. Recently, Britain’s BAE Systems purchased U.S. defense contractor Armor Holdings, which provides high-tech armoring technology for Humvee’s and trucks, as well as personal body-armor. No doubt the falling value of the buck made Armor Holdings looks particularly attractive in the UK.

The defense industry is going global, and that’s one area of the economy where the U.S. still has a competitive edge – and U.S. firms look cheap.

Comments

[mike johnson]

ITAR and its inherant limitations on the sale of military hardware outside the united states is a significant issue that must be overcome. Already potential customers are going outsiode traditional defence manufatures in the U.S. to bypass this extremly stringent legislation