Pursuit of international defense growth has been a core goal of many U.S. and European firms, but these goals may start colliding with more nationalist policies and plans in an era where looser fiscal policies still won't satisfy national security needs.   The upshot is more global competition and possible emergence of different defense sector business models to address market needs.  

It is far from a given that U.S. and European firms can retain their global market shares in defense.

Outlook 2017: Perspectives from global thought leaders

Globalization has been checked by the U.K. Brexit vote and U.S. elections in 2016.  President-elect Trump's promise to withdraw from the Trans-Pacific Partnership entails that China's Regional Comprehensive Partnership will likely instead move ahead.  European elections in 2017 may result in more centripetal forces bearing on the EU and Turkey has stated its desire to join Shanghai Cooperation Organization instead of the EU.  

Trump's calls for U.S. allies to assume more of their own defense burden and concerns his campaign raised about U.S. global security engagement are two new factors that should weigh on defense in 2017 and beyond.  

These changes are occurring in an era where many countries face multiple, complex security challenges.  Fiscal austerity may be falling out of fashion but competing social demands and high debt levels may not allow states to address security needs.   Affordability of armed forces and weapons systems remain an issue and some of the most advanced kit built by U.S. defense firms may be too expensive and well in excess of internal threats or regional threats.  

The past 15-20 years have seen consolidation in the U.S. defense market, emergence of European national champions, the rise of globally competitive defense enterprises in China, South Korea and Turkey, a revived Russian defense sector and lifting of export restrictions on Japanese defense products.    The defense industry has mainly been multi-domestic with exports and co-production of major weapons defining characteristics.   These business models could change, driven by three factors

One premise is that if countries increase defense spending, they will want those funds spent to the benefit for their own industries and not necessarily those of U.S. and European exporters.  Exports and offsets may give way to a need for in country partnerships — possibly to develop products that compete with advanced systems now offered by the U.S. and Europe.

A second premise is that defense enterprises may need to think more like automobile companies by offering a range of products that address different market segments.   Ford, for example offers cars spanning entry level to luxury.  Given the affordability issues that will persist, defense enterprises may need to think along these lines too to capture more market share.

A final premise is that the challenges to globalization are going to make it more important for defense firms that intend to compete globally to have a multi-domestic supply chain and manufacturing footprint.  Protectionism will raise costs of imports and that will be knock-on impacts on exports.  

Callan is managing director at Capital Alpha Partners in Washington.

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