The development of the Swedish defence technology complex

Martin Lundmark, FOI, PhD (Swedish Defence Research Agency) martinl@foi.se The development of the Swedish defence technology complex Prepared for Export Vooruzheny Table of contents Introduction 3 How has defense strategy affected the development of defense industry in Sweden? 4 Development the last fifteen years 6 Strategy towards national defence industry 6 Industry structure 7 International collaboration 11 Defence innovation 12 Repositioning in industrial systems 12 SMEs in defence innovation 13 Technology policy 13 Europeanization 14 Export 15 Industrial effects of direct military offset 15 Reference customer – importance for defence export 17 The Swedish defence market – present situation 18 Conclusions 19 How has globalization and international economic integration affected the supply chain of military industry in Sweden? 20 References 22 Acronyms 23  Introduction The following paper represents a summary and synthesized knowledge which has been derived in the FIND Programme. FIND was a project for international defence industry studies financed by the Swedish Ministry if Defence that lasted from 1990 to 2010. The purpose of the FIND project was To analyze the development of, the collaboration within and the conditions for the international defence industry, and how that affects the conditions of the Swedish defence materiel acquisition The FIND focus has been on Western Europe and the US. The project continued up until 2010, with an unbroken financial support from the Ministry of Defence. The project has been conducted all through its life in close cooperation with universities in Sweden and abroad, and with international specialists and analysts on different aspects of the international defence industry. On an annual basis, a year’s focus has been defined in close discussion with the Ministry of Defence. Everything finally comes to an end, and the project was transformed into a related research area. The project has had two important characteristics that set it apart from (the few) other established, international research groups on the defence industry: 1) It focuses on the strategies of the defence companies and 2) it has been based on academic theory from the area of business administration Most other studies are performed with theory from the academic fields of political science or economics.. The FIND project has thereby differed from most related analytic groups or think tanks, since the others usually have had a theoretical perspective from political science, economics, engineering or a broader government policy perspective. Thereby, the FIND project has focused on how the companies strategically respond to the conditions of the marketplace. Many other analysts have a focus on how a defence industry contributes to the security or military interests of a state, or to the macroeconomic benefits of a state. Outline of the paper The outline of the paper follows the following sequence: Introduction How has defense strategy affected the development of defense industry in Sweden? Development the last fifteen years Strategy towards national defence industry Industry structure International collaboration Defence innovation Europeanization Export Conclusions How has defense strategy affected the development of defense industry in Sweden? Sweden was during the 17th and 18th century a nation highly engaged in warfare. Wars were fought with Denmark, Prussia, Poland and Russia. The wars were partly in order to expand the national territory, but were also profoundly influenced by the conflict between the Protestants (e.g. Sweden) and the Catholics. During the early 17th century, Sweden controlled most parts around the Baltic Sea. In order to support the strength of such a warring nation, an armaments-production infrastructure was developed. Naval shipbuilding was started in Southern Sweden, artillery foundries and powder production was established. Certain oak forests were earmarked in order to supply wood for the Navy’s ships. From the mid-18th century onwards Sweden’s military strength and, accordingly, its warring activities diminished. The latest Swedish war engagements were in 1814, a minor participation in the Napoleonic wars and a short engagement with the Norwegians. By the late 19th century, Sweden especially had two highly developed facilities for armaments production: Bofors, which built artillery (established in 1646 as an iron ore plant, started with cannons in the late 19th century. It was at that time owned by Alfred Nobel and also started with large-scale powder and ammunition production. Karlskronavarvet (established in 1689) produced naval ships for the Swedish Navy. Bofors started to export its cannons and became strong global competitors to Vickers (UK) and Krupp (Germany). Karlskronavarvet later became Kockums. More about Bofors and Kockums later in this paper. Sweden was not engaged in World War I. During World War II, Sweden was surrounded by the war but managed to stay neutral (as Switzerland). In 1940 Sweden acquired over 300 Caproni aircraft, which experienced numerous problems and crashes. Partly as a consequence of the experiences of Caproni, Sweden gradually built up an unusually strong domestic defence industry, during WWII and afterwards. Indigenous jet aircraft (later to become Volvo flygmotor), jet aircraft (Saab), artillery and missiles (Bofors), surface ships and submarines (Kockums) together with radar and communications systems and several other types of armaments. The firm Swedish military and security posture was to be non-aligned, in order to be able to remain neutral in case of war or un-rest. Sweden also had a highly stable political climate, with the Social democrats in power from 1932 to 1976. There was however strong consensus with the three other parties in the parliament (Farming Party, Liberals, Conservatives) regarding the Swedish policy relating to non-alignment and neutrality. The Communist Party was also in Parliament, but they were not allowed to take part in military policy until the 1990s. The Swedish build-up was, as in all of NATO Europe, strongly supported by the U.S. in the build-up of military technology and military production. Sweden remained non-aligned and thus not a member of NATO. Sweden had an important strategic position with a long border, by the Baltic Sea towards the Soviet Union. Sweden allocated large resources to a continued build-up of the domestic defence production. Sweden was seen as being almost entirely self-reliant in defence materiel. There was however a highly developed, secret interaction with the US. The US supplied Sweden with highly sophisticated defence technology and systems, especially in radar, avionics, missiles, jet engines and C3I. By the 1980s, Sweden was indigenously developing and producing missiles of most sorts, jet aircraft, submarines, radar, communications systems, artillery, armoured vehicles, torpedoes, surface ships and also other systems. This was the peak of the Swedish breadth and sophistication of armaments development and production. There was a close and developed interaction between the defence companies, the Armed Forces and the Procurement Agency (FMV). FMV had design centers for e.g. aircraft, surface ships, submarines and missiles. After the rather abrupt end of the Cold War in 1989, the Swedish security situation was drastically altered. The military threat of the Soviet Union dwindled. The doctrine and setup of the Swedish Armed Forces suddenly became organized for a disappeared threat, and what the new military threats were, was highly unclear. It was apparent that the size of the Swedish ‘Military-industrial complex’ was now oversized and too broad. The defence industry had orders for several more years. The Armed Forces and the Procurement Agency – it can be argued – continued as usual for several years, not much influenced by the drastic change of the threat perception. During the late 90s, Sweden started to increasingly engage in military collaboration within Europe. Sweden had very little experience in such cross-border collaboration; the most part was within the benevolent (from the US) bilateral collaboration with the US, especially in aerospace. The larger European nations (France, Germany, UK, Italy – with France and Germany the most active) had however started cross-border collaboration in the 1950s. This collaboration gradually deepened. From being procurement collaborations in the 50s and 60s, these evolved into joint ventures and later into autonomous companies like Airbus and Eurocopter in the 90s. At the turn of the millennium, several of these companies were merged (fueled by political will) into companies like EADS and MBDA. Sweden was however not a part of these decades-long processes. Therefore, Sweden was in relation to the other companies quite inexperienced in these intra-European processes of defence technology and defence industry integration. In 1998, the Letter of Intent (LoI) initiative was presented. Through this Sweden was one of six exclusive partners (UK, France, Germany, Italy, Sweden and Spain) that decided to cooperate in a harmonization of e.g. defence regulations, R&D collaboration and transparency. This was one of the founding steps in creating a stronger European defence initiative, albeit LoI was not in any way orchestrated by the European Commission. Europe had for many years been highly dependent on the US for advanced air-to-air missiles (e.g. Sidewinder and AMRAAM). In order to decrease this dependency, the project Meteor was created between the LoI six in 1998. This had a high symbolic value for European defence cooperation. There have been numerous attempts to initiate defence materiel collaboration based on pan-European incentives, but most of them fail. The European, larger programs that have succeeded are created as bilateral agreements, or within smaller groups of nations. Such successful examples are e.g. Eurofighter Albeit economically not so successful …, Iris-T, Neuron, Scalp/Storm Shadow, NH90. Development the last fifteen years Regarding the last fifteen years, I will now describe these thematically under the following headlines: Strategy towards national defence industry Industry structure International collaboration Defence innovation Europeanization of the defence market Export Each heading corresponds with specific research efforts within the FIND project. Strategy towards national defence industry Several nations in Europe have adopted a domestic ‘Defence industry strategy’. The most frequently referenced is Great Britain’s Defence Industry Strategy (DIS). Several others have de facto policies; one can in the domestic defence industry-related decisions distinguish a pattern in national defence postures and relations with national defence industries. The Swedish government planned to formulate a defence-industrial strategy around 2006. One part was to identify and define defence-technological niches in the defence research, defence technology and defence industry community. After a few years’ of preparatory work, the newly elected (2006) conservative government chose not to establish an official defence industry strategy. Sweden’s neighboring countries, Denmark, Norway and Finland, have a much closer relationship vis-à-vis their domestic defence industry. Their defence-industrial interest organizations are organized together within a ministry, and the government openly supports its domestic defence industry and uses offsets in order to help fill their order books. These three nations also have substantial government ownership of its domestic defence industry. The present Swedish government (in power since 2006) has a much more hands-off, market liberal relationship to the domestic defence industry than did its social democrat predecessors. In 2006, the Swedish Armed Forces and the FMV launched a Defence Materiel Acquisition Strategy More specifically “Strategy for the defence materiel acquisition of the Armed Forces” (translated).. This strategy was intended to make the acquisition more cost-efficient and predictable, and to ascertain that materiel was supplied at the right time. The strategy focused on five performance measures (cost, freedom of choice, military needs, time and security of supply) and seven means (conscious choices, iterative demand adjustment, international collaboration, coordination of the strategy with R&D/T, public-private partnerships, integrated materiel command Integrated materiel command (IML): was a unit with co-located personnel from FOI, FMV and the Armed forces which served to coordinate the three authorities work towards the defence materiel acquisition.) for reaching the objectives. An important part of the strategy was a three-part priority for how defence materiel ought to be procured: The primary alternative should be to procure already developed and operative equipment “off-the-shelf” (and if that is not possible:) Develop together with other nations, in collaboration (and if that is not possible:) Develop indigenously An unusual feature of this strategy was that it was it was crafted by the Armed Forces and FMV, and not “forced upon” them by the MoD. In 2009, a government bill was launched, which largely mirrored the strategy. This government strategy more firmly stressed the importance of the Swedish military units being operative at a “good enough” level at the right (i.e. promised) point in time. The assessment of the Ministry of Defence was that the military units had not been operative on time, and that they aimed too high in their technical specifications. The Ministry of Defence modified the strategy in the following way: The primary alternative should be to modernize or upgrade existing defence materiel, preferably in collaboration with other nations The second alternative should be to procure already developed and operative equipment “off-the-shelf” preferably in collaboration with other nations (and if that is not possible:) Thirdly, develop together with other nations, in collaboration (and if that is not possible, only in exceptional cases:) Develop indigenously There is no overarching strategy document which states which technology areas and military capabilities that are the most important, and thus could justify indigenous development. However, the sequence of procurement decisions over the last years shows that the two most clearly prioritized areas are submarines and fighters Regarding submarines, certain underwater technologies will also prove to be prioritized, but this has not materialized yet. For fighters, the prioritized area concerns a range of technology areas (e.g. stealth and avionics) that relate to the ‘Gripen system’.. The strategy is still valid in 2012. Industry structure The evolution of the international defence industry structure is a well-researched area, which I will not aim to picture in this paper. I will concentrate on Sweden and compare it with a few other nations. Sweden was unusually early and liberal in allowing foreign ownership of its defence industry. The following foreign investments are the most important ones:  Company Product area Buyer Year Hägglunds vehicles Armoured fighting vehicles Alvis Plc, UK BAE Systems, UK BAE Systems acquired United Defense. 1997 2004 Agema Infra red sensor systems FLIR, US 1997 Saab Acquired 35 % of Saab. BAE Systems has gradually lowered its minority share since mid 2000s, it is now 0%. Defence conglomerate (electronics, C3I, radar, aircraft, handheld weapons, torpedoes etc.) British Aerospace, UK (minority share) 1998 Kockums Submarines, surface combatants HDW, Germany One Equity Partner, US OEP acquired HDW. Thyssen Krupp Marine Systems Germany ThyssenKrupp acquired the HDW and Kockums parts from OEP. 1999 2002 2004 Bofors Weapon Systems Artillery, artillery munitions United Defense, US BAE Systems, UK BAE Systems acquired United Defense. 2000 2005 Table. Main foreign acquisitions in Swedish defence industry. In the general Swedish debate about defence industry, the phrase ‘Swedish defence industry’, was replaced with the phrase ‘defence industry in Sweden’ in order to reflect the foreign ownership. This has ever since been the case in government bills and other official documents. The foreign acquisitions of Hägglunds, Bofors and Kockums constituted sizeable parts of the domestic defence industry. Saab, however, presently represents around 60 % of the Swedish defence production. There were concerns among some groups that the foreign ownership would be detrimental to the presence of a sophisticated defence-industrial capacity in Sweden. Concerns were that e.g. the foreign owner would cannibalize on the Swedish company and move all its technology to the mother company abroad; that they would close the plant down immediately in order to eliminate a competitor; or that they would move all the production to another country. So how did this turn out? In an FOI study from 2006 Axelson & Lundmark, 2006, the impact of the foreign ownership was analyzed in the companies Hägglunds, Bofors and Kockums. These three companies had been foreign-owned for nine, seven and six years respectively. Company managers were interviewed in all three companies regarding how the foreign ownership had affected the product strategies, market strategies, technology transfer and what kind of synergies that had been created or achieved between the foreign owner and the Swedish company. The study strongly showed that almost no change had occurred regarding those factors, nor had any of the negative consequences mentioned above occurred. Why is this; how come the foreign owner did not strive to achieve more benefits from the acquired company? According to our analysis, some main conclusions can be drawn: Order book: The order books of defence companies do not change very quickly, and a mostly domestically oriented company will take many years to reorient. Technology transfer: The foreign owner is not allowed to transfer defence technology to another nation without the consent of the host nation (in this case Sweden). Intellectual property rights are often owned or controlled by the government of the company’s nation of origin, and governments almost exclusively restrict or forbid the transfer or nationally developed defence technology. In some cases technology transfer occurred under license agreements between the concerned states and the concerned companies. Thus, governments protect the national defence companies and their technology through restrictive or non-allowed technology transfer. According to non-validated sources, there has been a handful of cases when the foreign owner of a defence company in Sweden has attempted to transfer strategically sensitive technology to the mother company, but the Swedish government denied such transfer. The denial would then be based on state ownership of the technology. Certainly, it would also be a means to protect the competitiveness of the Swedish company. Transfer of production: An argument that has been repeatedly put forward is the threat of the foreign owner drastically closing down the production in Sweden and moving it abroad, to the mother company or to a country with lower wages. This has however not occurred at all, and to my knowledge there are no such examples in the defence industry. A number of explanations can be put forward in order to explain why it has not occurred: Technology is national: the mother company is not allowed to do so by the Swedish government which owns the IPR. Defence know-how is sensitive, tacit knowledge: Production cannot be transferred as in the case of assembly of cars or refrigerators. Critical experts cannot be transferred: People will not migrate and follow the production; the company would have to educate a totally new entity and critical mass of engineers and experts. This would be a massive destruction of competence capital. It could turn out that the production is closed down if it no longer receives defence R&D funds, development projects or simply does not sell its products. In that case it would make management sense to close the production, and a positive side effect would be that in the acquisition process a competitor has been eliminated. There has been transfer of certain parts of the supply chain in these foreign-owned defence companies in Sweden, but that is a different question which follows generic trends in globalization of production and supply chains. Market strategy: Some attempts had been made from the foreign owner to foster market synergies, but very few had been reached. In some cases certain national markets were divided between the new mother company and the acquired Swedish company, depending on the security preference of the buying nation. Controlling function: One clear effect was that the auditing and financial control had increased; more financial reports and quarterly reports had to be continuously produced in the acquired companies. If we compare Sweden with two other nations that for a long time have strived for national sovereignty, the US and France, we can make a few comparisons. The US has since WWII been the global dominant defence materiel innovator and producer. It has withheld its dominance, and the dominance became unthreatened after the demise of the Soviet Union. After 2001, the US has through its massive increases in defence spending and defence innovation drastically increased its dominance. France had from de Gaulle onwards for many years a very high ambition for not being dependent on any other nation in defence materiel. France at the same time started defence materiel collaboration with many other nations in Europe in order to complement the national competences. This strategy deepened over the years into what France calls “autonomie partagée” (a shared autonomy). This shared autonomy is together with certain chosen technology peers, primarily Germany (missiles), UK (missiles, nuclear technologies, aircraft carriers) and Italy (naval ships), but also to a lesser extent with Spain (conventional submarines) and Sweden and Finland (certain explosives). The US has always maintained defence technology self-reliance, almost entirely acquiring all-US equipment. During the Cold War Sweden had a high degree of self-reliance in many technology areas (submarines, C3I, armoured fighting vehicles, several types of missiles, torpedoes, surface ships), but relied on foreign sources in tanks and helicopters. The fighter production was to some extent an indigenous affair, but Sweden (partly secretly) relied heavily on the US (and to some extent on the UK) for several crucial aerospace technologies such as radar and propulsion. Sweden has gradually abandoned or weakened its self-reliant posture. In some areas Sweden has very little indigenous development (e.g. radar), in several areas Sweden has moved into multilateral production schemes (missiles). The two areas where Sweden most clearly has maintained a high ambition and indigenous high degree of autonomy is fighter aircraft (Gripen) and submarines (with some associated systems, notably torpedoes). There has also been a process of Nordic (Sweden, Norway, Finland and Denmark) consolidation of industry, procurement and research. There has been a few finalized procurements (e.g. the NH 90 helicopter), but also several aborted programs (e.g. the Swe-Dan-Nor submarine Viking and the Swe-Fin underwater Torpedo-Mine-Sensor program (TMS)). In industry, the ammunition industry in Finland, Sweden and Norway has been merged in to the Norway-owned Nammo, and the Swedish and Finnish explosives industries merged into Nexplo. Sweden’s defence production, export, research and industry have gradually changed in the last fifteen years: Production: Sweden has very few new indigenous developments and production projects. The large, exceptional example is the decision in 2010 to develop the submarine A26, and also the declaration in August 2012 to further develop the Gripen to Version E/F. Sweden has engaged in a small number of multilateral defence collaboration projects: the missile projects Meteor and Iris-T, the UCAV Neuron, and range of smaller projects in artillery (Lemur), precision guided ammunition (Excalibur), together with export-induced derivatives of radars, turrets, AFV:s and missiles. The most important indigenous defence materiel development is the Gripen fighter system, which continues over the years. Defence research: The Swedish defence research has undergone substantial cuts in the last ten years. Funds have been moved in order to better finance the international operations of Swedish troops (e.g. Afghanistan, Libya, several nations in Africa) at the same time as the defence budget remaining rather flat. In total, the Swedish defence research community has been reduced by about 50 % in the last ten years. In most defence technology areas, defence research has been reduced with certain percentages overall. In a small number of defence technology rears that are seen as critical for Swedish integrity, defence research has not been reduced: electronic warfare and countermeasures, underwater technology and technologies associated with the Gripen fighter system. Export: as in many other nations, the Swedish government has since 1990 gradually reduced indigenous development and defence research. Thereby the bonds between state and industry have weakened. In many nations the state has, in order to remedy the loss of domestic funding and in order to maintain domestic defence technology (and employment), increased its export support for these concerned companies. This has happened in USA, France, UK, Germany, Sweden and others. In Sweden the defence export has trebled in the last ten years, and the domestic share of the defence companies’ order books has decreased down to about 50 %. Some companies have as low as 5-20 % Swedish share of their order books. Ownership: as mentioned above, a large share of the industry is foreign-owned. One thing to also point out is that there is no state ownership in Sweden, as in the UK. In France, Italy, Spain, Norway, Denmark, Finland and others the state ownership is substantial. Together with this in these last nations, the links between ministries and the domestic defence companies are much stronger than in Sweden. International collaboration There are many pros and cons of international defence materiel collaboration. Truly, it requires less compromising and negotiation if it is done within one nation. However, there are clearly economies of scale if for example 120 missiles are produced and production is shared between three nations, than if one nation would indigenously produce 40 each. An FOI report from 2010 came to the conclusion that the following were the most important factors for success in international materiel collaboration: A strategic goal to position the collaborating company through the collaboration. Clearly, if the collaborating company sees the collaboration as strategically important, they will put in a stronger commitment. There are several examples of where the collaboration was more or less forced upon the company by the state, with insufficient fit between companies’ strategies. Previous experience of collaboration between the companies. Collaboration builds upon relations between individuals. Previous collaborative experience creates an important social platform for close and trust-based collaboration. Shared view of the strategic goals of the collaboration: If they have a shared, and openly communicated, view of the collaboration and what the collaboration should mean for their respective and shared future positions; the collaboration constitutes a positive foundation. It reduces possible sources of conflict, and the development can proceed more directly and frictionless. There are many examples of European collaborative effort where the interests diverged and the companies ended up in years and years of negotiation, perhaps without ever reaching consensus. A collaborative design where one single company has lead responsibility. A hierarchic organization where one company makes certain, crucial decisions is an advantage. It reduces the risk of lengthy negotiations (processes that may erode trust). The company in lead must however have a sufficient over-arching system integration understanding and competence. A factor that has a clear negative impact is if the work share between the companies is entirely shaped by people not in the companies (e.g. politicians, the military, procurement agencies). Defence innovation Under this heading, the following themes will be addressed: Repositioning in industrial systems SMEs in defence innovation Technology policy Repositioning in industrial systems In an FOI study from 2008, the question was whether it is possible for a defence company to reposition itself in an industrial hierarchy from being a prime integrator (e.g. producing fighters, vehicles, submarines etc) into being a supplier under its former competitors on the prime level. No such examples were found in the defence industry. However, the repositioning of Saab Aerostructures from being a producer of civil, commercial turboprop jets into being a supplier to Airbus and Boeing served as a suitable case study. The reason for the shift was a collapse in the mid 90s in the international market for Saab’s type of aircraft (due to a crash in Cleveland with a turboprop plane (not a Saab aircraft, though)). Saab Aerostructures also produces the Gripen Fighters. What could be seen when comparing with the defence industry, and industry in general, is that such repositioning into a lower network position to a different (but related) industrial network is extremely rare. The repositioning case of Saab Aerostructures is an unusual story, but for its success, the following factors for repositioning from prime in one industrial network to 1st tier supplier in a different industrial network were identified: Based on our case study, we saw the following internal factors as critical for succeeding with a repositioning from OEM OEM: Original equipment manufacturer. (i.e. defence prime) to supplier in a different market: Access to competitive internal resources: Niche technologies that can be exploited in the new market; existing complementary resources such as production facilities, production know-how, existing personnel pool with adequate competence and experience. Saab Aerostructures had a strong competitive strengths and technology synergies in also producing the Gripen fighter. Organizational change: Companies must change e.g. organizational routines and approaches to customers in order to transform from a role of OEM to that of a customer-oriented supplier. Such a change takes many years and is supported by intensive interaction with the customer. Synergies with established business: If resources are used for both the existing market and the new market, this generates cost and learning synergies. Clear strategic vision: A clear and robust strategic vision of the future position is an important change carrier. The vision must be balanced between stability and responsiveness to external change. The repositioning is influenced by external factors in the business environment: Development of supply chains: The repositioning is enhanced if OEM companies on the new market are focusing more on core competences and thereby invite suppliers to take a larger responsibility for development projects. The reason is that such change creates an advantage for suppliers having technological competences that are broader than the scope of the system they provide. That is, it is change that potentially favours a company with a past as OEM. Restructuring of supply chain structures: Repositioning is facilitated and supported by political deregulation of nationally organized supply chains, and by fundamental change in demand (e.g. technology, performance, type of supplier). Strategic supplier: The repositioning firm must be perceived as a unique strategic supplier to OEMs in order to avoid strict competition by price. This is particularly important in light of the cost structure, which is a legacy from the time as end-product producer. SMEs in defence innovation As in many other European nations, the importance of SMEs (small and medium-sized companies) for defence innovation is an issue that reaches political attention. In many nations several years of fewer defence programs and lowered defence budgets have lead to the largest defence companies achieving ever-larger shares of the defence procurement that is financing true innovation. SMEs are thereby achieving less innovative defence orders. In recent years this has become apparent that a consequence of the fact that Sweden to a much lesser extent develops its own defence materiel and that it increasingly is buying already developed defence materiel. This is seen as detrimental to the defence technology innovation in defence SMEs. The EU (through its defence authority EDA (European Defence Agency)) is therefore together with many European nations launching initiatives in order to support SMEs in being or becoming a part of the defence innovation. A study of the role of SMEs (2011) in defence innovation came to the following conclusions, three suggestions for action: support easier SME access to markets – both nationally and internationally through information facilitate SME involvement in different business networks as a means for increased business opportunities create initiatives or means that facilitate for the SMEs to identify and employ people with the demanded skills. Technology policy According to the Swedish Ministry of Defence and in line with recent government bills, the Swedish Armed Forces ought to redirect its approach to technology development. In short, it should in certain areas transform from being a leader into becoming a follower. The leader tradition was in Sweden developed during the Cold War with a long tradition of indigenous and ambitious defence technology development. A leader will take on considerable technology risk and challenges. The foremost leader at present is naturally the U.S. As a follower, the Armed Forces and the Procurement Agency must react to the technology development with a certain delay to the cutting-edge defence technology development. In being a follower, a technology acquirer (as e.g. a nation’s Armed Forces) can also be an early follower or follower at a distance. The early follower will take more risk and have a higher ambition regarding its technology level; it wants to consistently remain at and maintain a world-class defence technology leader. France and the UK are in Europe leaders in some areas, but more of an early follower (primarily following the US) in other technology areas. In comparison, Sweden ought to, to the most part, be a follower in the majority of technology areas. Europeanization Alongside the Swedish general transformation from a high level of autonomy in defence materiel, and – gradually – a more and more internationalized defence industry and less Sweden-oriented defence procurement; there has been a gradually deepening process of Europeanization of the defence market. There were previously a number of European-based initiatives for increased harmonization of the European defence market, e.g. WEAG (Western European Armaments Agency), OCCAR (Organization Conjointe de Coopération en Armement), LoI (Letter of Intent). These processes did produce some harmonization and transparency in the Western European defence market, but overall the defence market remained national and fragmented. The European Commission (EC) has 2004 onwards clearly accelerated the degree of harmonization and transparency. The overarching goals have been to create a more ‘Level Playing Field’ (LPF); that the conditions should be more transparent and more equal for defence companies within the EU so that companies can compete for contracts in other member states. Conversely, states should in their defence acquisition achieve increased supply options through the offers from non-domestic companies. Furthermore, the EC stresses that the ‘European Defence Technology Industrial Base’ (EDTIB) should be maintained and strengthened through increased competitiveness and increased intra-EU procurement. Thereby, the EDTIB is expected to better contribute to military needs and capabilities to the EU as an aggregate, and also for individual member states. Underlying these strategic visions, there is of course also a priority of preserving employment in the defence industry. The acronym for the EU market is the ‘European Defence Equipment Market’ (EDEM). Thus, the central acronyms are EDTIB, LPF and EDEM. On August 21, 2009 the EC set into force the Directive 2009/81/EC on defence and security procurement (ratified 2009, transposed 2011). Until then, defence procurement had been exempted from the EU internal market. Preparatory work had been done since 2003 on preparing this Directive. An EC Directive is mandatory to implement in national legislation. By late 2011 most of the member states had transposed the Directive. The main goals of the Directive are http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1250 : Create more transparency and competition for Europe’s defence and security markets: there has been a wide variety of uncoordinated national rules, criteria etc. A tailor made procurement regime for sensitive contracts: other EU procurement regulations have been seen as ill-suited to the specialized needs and conditions of the defence market. To limit exemptions from the internal market rules to the strict minimum: Since the adoption of the Rome treaty in 1957, member states have been able to make exemptions from the internal market in their defence procurement (initially Article 223, then 296, now 346). This right has been widely used; thereby giving states the possibility to procure nationally under the umbrella ‘national security’ in everything from boots to submarines. This directive is an important milestone in the Europeanization of the EU defence market. The Commission established in 2005 the European Defence Agency (EDA). EDA is an intergovernmental (i.e. not federal, not supra-national) agency which works to implement the EC’s visions and priorities for the EDEM. A Code of Conduct on offsets was also launched by EDA in 2008. According to this Code of Conduct, nations should not exceed a 100 % offset demand, and offset should only be allowed as direct military offset (i.e. no unrelated offset (wine, food, tourism etc.), or no indirect military offset). EDA regularly issues studies on the development of the EDEM and the EDTIB, and if a LPF is approaching. FOI has participated in multilateral studies on defining indicators for the development of the EDEM in creating an LPF in 2010-11, and in 2011-12 another study on the dependency in the EDTIB on other nations regarding raw materials, components, systems and systems integration. Export Sweden has, as many other nations in Europe, increased its support for defence export. FXM (The Defence Export Agency), has since 2010 the responsibility to organize the Swedish support to defence materiel export. In the FIND program, two recent studies have been made that relate to defence export: The industrial effects of direct military offset Reference customer – importance for defence export Industrial effects of direct military offset When defence companies of highly developed defence-technology nations export to other sophisticated nations, there will typically be a period of delivery of the product to the buying nation. This period often lasts ten years, and will typically demand a close interaction between the selling country and companies in the buying nation. In an FOI study from 2010, the ‘Industrial effects of direct military offset in defence materiel export’ was analyzed. The report studied four Swedish case studies of defence exports. Buying nation Swedish company Product Company(-ies) in buying nation Year Australia Kockums Submarines Australian Submarine Corporation (created for this procurement) 1987 Singapore Kockums Submarines Singapore Technologies 1995, 2005 South Africa Saab Gripen fighter Grintek, Denel 1999 Netherlands Hägglunds CV90 (armoured vehicle) Van Haldren 2004 Table: Case studies of Swedish defence export (Source. Axelson & Lundmark, 2010) The conclusions of the study were: Export income constitutes the largest part of the Swedish defence companies’ turnover. Industrial ties develop between the selling company and its partner companies in the buying nation. The interaction primarily consists of production for delivery of the system. This industrial ties typically last for a decade. The selling company will in collaboration with the Swedish military, procurement agency and the ministries create a network of mutual obligations and developments together with reciprocal agencies in the buying nation. There is no pattern of long-term, deeper integration or industrial ties after the delivery period. To some extent there may be (as in Singapore) a gradual deepening of trust and reciprocal development which implicitly increases the probability of more export. In South Africa the Saab Group has, in order to fulfill its offset obligation, acquired or invested in South African defence companies, which has created a long-lasting presence. However, it is too early to say what the long-term impact will be for Saab’s business in South Africa. Direct military offset results in extensive cooperation during a limited time. The picture is that extensive cooperation in the local defence industry is a precondition for export to a high-technology country. Whether the requirement is then formulated as offset, or in some other way, is of minor importance. Thus: the ability to create and carry out industrial cooperation is a completely decisive factor for export of defence materiel. The buying nation will typically formally demand 100 % offset. The selling company will, in order to enhance its competitiveness increase this percentage in order to beat its competitors; the actual offset percentage will more typically end up at 160-180 % of the official value of the defence procurement. The buying nation may in rhetoric advocate procurement of off-the shelf products. In practice, practically all nations will organize substantial modification and accommodation of the product to national standards and specific, indigenous technical specifications. Thus, the issue of ‘buying off-the shelf’ is often exaggerated from a policy perspective. In the case of Sweden, the most part of the turnover of defence companies in Sweden is through export, and the buying nation will typically pay for substantial further development and modification of a product often initiated by Swedish development. Therefore, the export becomes an important factor for developing and maintaining the competence of the Swedish companies. Reference customer – importance for defence export Lundmark, 2011:i. A FOI Study from 2011 analyzed the issue of ‘Reference customer’ and its importance for the competitiveness of a defence company. Swedish defence companies had (as many companies in other nations) stated that orders, research financing and development projects from its home nation’s military and government is essential for its international competitiveness and attractiveness. In many nations in Europe, there has been a development over a few decades of fewer indigenous development programs. First of all, it is important to distinguish between the presence of a ’first customer’ (if the product has been sold previously or not) on the one hand, and the issue of a ‘reference customer’ (an organization or user that has experience of the product, and that the potential customer can ask for information). The conclusions in relation to the study’s three focal questions were: What is the importance of the first customer? The first customer fundamentally matters in the defence market, the buyer’s perceived uncertainty increases clearly if the ‘home nation’ has not acquired the company’s product. The buyer expects strong support for the defence company and expedient service and in an aggregate effort from the home nation’s ministries, military, procurement agency and other concerned organizations. If not, the attractiveness is lowered. A foreign first customer occurs, (but seldom) but appears to be a growing trend. Some nations will not, as a principle, buy a product if it is not acquired previously by the home nation. The more times the product has been sold (i.e. to many nations), the less important is the first customer. How does a potential customer evaluate the issue of a first buyer? The more complex the product and the more complex the use of it; the more important is a previous buyer, and the more pronounced the demand from the buyer for additional support and bilateral agreements between defence authorities, military and ministries. Buyers will notice weaker bonds between state and company, and will as a consequence demand assurances of long-term support and presence from the company. If the home nation has not acquired the company’s product, the buyer will typically ask the company (and others) why it has not. How does a potential customer gather information with users in order to obtain references and information about the product? The buyer wants to get to know the product, how it works, its dependability and what the long-term cost is. Further if the company has a track record of delivering on time and to specifications; if it has good relations and bonds to the home nation and its military; their international sales, competence and problem solving capability. The buyer expects expedient readiness and service from the home nation’s military. A defence product’s attractiveness is clearly enhanced if it is ‘combat proven’. Successful participation in multilateral military exercises can also enhance the product’s attractiveness. The Swedish defence market – present situation Presently (2009), the turnover of the defence materiel production in Sweden is around 21 billion SEK ($ 3.1 billion) Naturally, the export varies considerably from year to year due to the impact of specific export orders.. It increased with 15 % from the year before, 58 % was exported. The defence export has tripled in the last ten years. Around 30 000 people work in the security and defence-related companies in Sweden. Out of the 21 billion, 85 % goes to EU, Asia, Australia and New Zeeland. The last 15 % of export go to Africa, South America and the Middle East. The turnover 2009 for the Swedish security and defence companies was $ 7 billion (51 % export). The export was close to $ 4 billion. The total turnover of these companies including non-defence orders was in 2009 $ 9,0 billion. (www.soff.se) The production of products and services is performed on more than 50 places in Sweden, foremost in the cities Stockholm, Linköping (Saab), Karlskoga (Saab, BAE Systems Bofors), Gothenburg (Saab), Örnsköldsvik (BAE Systems Hägglunds), Karlskrona (Kockums) and Arboga. In these cities, local networks and clusters of SMEs have developed around the focal defence companies. The Swedish Defence-industrial Organization SoFF, has 63 member companies, and 50 of these are SMEs. Conclusions I will now comment and reflect upon certain points regarding the future, and the future challenges for the Swedish defence industry. Short-term forecast The Swedish defence industry has had a tremendous development of its export in the last ten years, up around 200 %. Due to the ebb of defence development and indigenous projects, this development is likely to slow off as the competitiveness of Swedish systems probably will decrease. Defence companies are very dependent upon domestic R&D financing. Saab is very close to achieving an export deal for Gripen Switzerland On August, 28, 2012 the Swedish government announced its intention to acquire 40-60 upgraded Gripen Version E/F. This intent rests upon the completion of Gripen export to Switzerland or another nation, a few more exports are likely to occur (Croatia presently also shows interested) This being said in October, 2012. . If the Swedish government chooses to finance the next Gripen E/F version, Saab’s competitiveness will be much more solid, and prospective customers will see less risk with choosing Gripen. The Europeanization process of EDTIB, LPF etc. (described above) will likely have limited impact; national priorities and protectionism will continue to be strongly conservatory powers. Mid-term forecast Sweden will likely have to revert to – in some technology areas – a more self-centered relationship to the domestic defence industry, and less market liberal. Most nations with a domestic defence industry will in all likelihood continue to favor its domestic defence industry. Some of the Brussels visions appear unrealistic in their belief for European altruism in defence matters. As a result of present choices to not finance Swedish defence developments, Hägglunds and Bofors will likely become more dependent upon its mother company BAE Systems and less attached to the Swedish government and military. Bilateral and multilateral defence collaborations with Sweden as one of the partners will for these companies be the primary instrument for maintaining a Swedish position. For the Swedish conditions, two issues stand out as affecting the conditions: Decreased domestic procurement: the companies’ finances are to a lesser extent secured by national defence R&D funding and domestic procurement. The adjoining increased export thereby weakens the bonds between state and companies, and also the dependence of the company from the Swedish state. The companies thereby see themselves as having less of an obligation to support the Swedish military; the company’s internal strategy and international sales matters more in relation to Swedish obligations. Europeanization: the EU’s Europeanization of the intra-EU defence market affects the conditions of Swedish procurement. Sweden must, as other member states, open up the domestic procurement to foreign bidders and make its procurement regulations and procedures more transparent. This will alter present conditions, and also offer new business opportunities. There is no Swedish official government ‘Defence industry strategy’ which states that certain companies should receive special priority or economic support. Firstly, there is in the sequence of government decisions supporting the Gripen fighter system a de facto preference for Saab’s Gripen capability. Secondly, one can discern in the rhetoric an implicit preference for the submarine and underwater technologies. Otherwise, the Swedish government has a clear and very liberal relationship to the defence industry in Sweden; the preferred procurement approach is open and competitive value-for-money procurement with no particular preference for domestic companies. How has globalization and international economic integration affected the supply chain of military industry in Sweden? Globalization and internationalization (more so) have profoundly affected the conditions of the Swedish defence industry, as described above. This can be commented upon under following headlines: Ownership: There is no longer any state ownership in the Swedish defence industry. The Swedish state was in an international comparison very early in allowing foreign ownership of defence companies in Sweden. The foreign ownership has however not profoundly affected the companies’ technology and product portfolios vis-à-vis the foreign owners, their activities have only marginally been merged. Export. The order books of the defence companies in Sweden are now to a much higher extent internationalized, and the total Swedish defence export has trebled in the last ten years. In this sense, one may come to the conclusion that the internationalized ownership has been beneficial for the companies’ business and competitiveness. There is no proof that the internationalized ownership is the cause of this increase. Another plausible, contributing factor is the increased export support from the Swedish government; a policy change clearly announced in government bills – “when the defence technology is beneficial to the long-term capability needs of the Swedish Armed forces”. EU: The Europeanization of the defence market within the EU has profoundly affected the policy and rhetoric of the Ministries and the procurement agency. It has to a lesser extent, but still clearly recognizable, affected the procurement strategies and management behavior of the Armed Forces and the procurement agency. There is, not surprisingly, a backbone reflex to national preference in defence procurement which creates a discrepancy between rhetoric and practice. Defence R&D: The Swedish defence R&D has been clearly reduced and funds transferred to the more short-term needs of the Armed Forces’ international operations. The breadth and depth of the state’s defence technology capabilities has as a consequence thereby been decreased, and to a higher extent been subject to prioritization and de-prioritization. An increasing share of defence R&D is pooled in international defence R&D conglomerates. Globalization: The effect of ‘globalization’ tends to be overemphasized by visionary statements on the future of the defence market and the defence technology development. States to a large extent protect their domestic companies; international transfer of nationally developed defence technology is strongly restricted; international defence collaboration is performed under conditions of cost share – work share which inhibits technology synergies and preserves industrial structures. There is, however, a clearly internationalized defence sourcing of capabilities and components from other nations, where the companies seek to extract competitive advantages from internationalized supply chains. The US dominance: The US is in the foreseeable future the long-lasting defence technology and defence-industrial hegemonic dominant. It has no international peer, and it spends vastly more than all of the other comparable nations. The US has in the last ten years had a defence budget around 2½ times higher than the entire EU, and a defence R&D budget that is 6 to 7 times higher than the entire EU. Less than 2 % of the US defence R&D and defence materiel development is done with other nations (the most part within Joint Strike Fighter). Thus, the defence innovation interaction is truly limited between the US and Europe. Lundmark, 2011:ii. This issue is fundamental for the conditions of the international defence industry. To conclude, the bonds and links between the Swedish state and the defence industry are strong, and have been so for a long time. In the last 15 years, however, the bonds have clearly weakened as a natural consequence of decreasing arms procurement, domestic arms development and defence R&D. At present, Sweden is highly autonomous in submarine technology, partly autonomous in fighter technology and autonomous in certain classified niche technologies. Otherwise, the Swedish defence industry and the Swedish defence materiel acquisition are overall globalized to a large extent. During the present right-wing government (since 2006, re-elected 2010, next election in 2014) a clearly more market-liberal relationship has been established. If there is a shift of political power in 2014, it is likely that stronger links will be established, but still at a much lower degree of interdependence than in the 1990s. References The following references constitute the relevant background research and subject experience for the paper. The FIND Programme was a project for international defence industry studies financed by the Swedish Ministry if Defence that lasted from 1990 to 2010. Axelson, M. (2001), Defence industry shift – from manufacturing to services, FOI User report, FOI (Swedish Defence Research Agency), FIND Programme, Stockholm Axelson, M. & James, A., (2000), The defence industry & globalisation: challenging traditional structures, FIND Programme, FOA, Stockholm Axelson, M. & Lundmark, M. 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(2010) “The ‘Transfer Directive’: perceptions in European countries and recommendations”, No 04/2010, Recherches & documents, Fondation pour la Recherche Stratégique, Paris Schmitt, B. (ed.) (2005), Defence procurement in the European Union – The current debate, Report of an EU-ISS Task Force, European Union Institute of Security Studies, Paris Acronyms EC European Commission EDA The European Defence Agency EDEM European Defence Equipment Market EDTIB European Defence Technology Industrial Base EU European Union FIND The defence industry program (FörsvarsINDustriprojektet), a Swedish research program 1990-2010 FMV The Swedish procurement agency (Försvarets materielverk) FOI The Swedish Defence Research Agency (Totalförsvarets forskningsinstitut) LoI Letter of Intent LPF Level Playing Field 1 23