The Defense News Top 100 captures some of the changes — but not all — that are taking place among global defense contractors. As well, there are some enduring characteristics that are reinforced by the 2017 rankings.

Rankings data back to 2003 underscored a prominent, enduring characteristic — namely the stability among the top 10 companies. Lockheed Martin as always been ranked No. 1 in terms of sales. Unless there is merger among two or more of the other top 10 companies or Lockheed Martin is broken up, it’s hard to see how this position will be challenged for years to come. The F-35 program is still growing, and missile and missile-defense production is increasing. The CH-53K should transition from development to production.

Lockheed Martin’s relative position increased in 2017 compared to the next largest defense contractor. For 2003-2016, its defense sales had risen from 10 percent greater than the No. 2 ranked firm to 47 percent greater in 2016. In 2017, its defense sales were twice as much as the No. 2 ranked firm.

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For all the talk of rapid acquisition and the U.S. Defense Department’s desire to bring in more nontraditional contractors, none of this is showing up in the Defense News listing. SpaceX is not listed, but that’s only one possible candidate; their defense-related launch sales should be entering a range that would merit a listing. Obviously, the sort of engagement that the Defense Innovation Unit Experimental or other rapid acquisition outreach organizations undertake at the Department of Defense or other ministries of defense wouldn’t show up in a listing where the one-hundredth ranking firm has $194 million in defense sales. But possibly, that changes by 2020-2022.

The biggest gap in the Top 100 remains the absence of Chinese defense enterprises. If China has the second-largest defense budget in the world after the U.S., then there must be five to 10 enterprises that could be included in the listing. As China privatizes more of its enterprises that provide defense products and services, there should be data that can be added to the Top 100.

There are other global enterprises that are not listed but that may matter more in years to come as the industry evolves. Poland’s PGZ is one example, and aspirations of the United Arab Emirates and Saudi Arabia to build their respective defense sectors also matter for any contractor that competes in those domestic markets, and globally. PGZ is a defense exporter, and so competition outside of Poland as well as the UAE’s ties with Turkish and American contractors are another factor to consider in how global defense trade is changing. Cooperative programs, such as the Serbia-UAE ALAS system that has been sold to Pakistan, are developed and produced by enterprises that aren’t on the Defense News list, but that are likely to be greater competitive factors in the coming years.

The list begs that question of scale needed to compete in defense. There’s no one-size-fits-all answer here. With U.S. defense and federal services, the General Dynamics-CSRA acquisition reinforced beliefs that optimal scale had moved from approximately $5 billion in annual sales to $10 billion. But in other sectors, just being big or bigger may not ensure competitive success in defense. That doesn’t mean either that “small is beautiful” and that the companies at the bottom of the Top 100 are destined to inherit the future; however, small, innovative firms will continue to be the object of attention by larger contractors.

There are two other factors to weigh in thinking about how rankings could change in 2018-2021. One is increased trade protection and the impact of tariffs and quotas. For the U.S. and European firms, defense has mostly been an export business. Products are built in the American states of Missouri and Texas, or France, and are exported. There are some “multi-domestic” business models — BAE Systems is one example, and General Dynamics Land Systems Europe is another. Countries typically have wanted offsets to their defense purchases, but there has been more focus on preserving or enhancing domestic sources of defense capability in Australia, Canada, Poland, Romania and the U.K.

The other is currency. This has always been a factor in any series of sales data where local currencies are converted to U.S. dollars. The 2017 inclusion of Almaz-Antey in the top 10 was more a function of currency translation than a surge in Russian rouble-based sales. Its 2017 defense sales were about the same in U.S. dollars, as reported by Defense News for 2014, when defense sales of $9.2 billion were reported. However, in Russian roubles, sales were 7 percent higher than in 2016 and almost 50 percent higher than for 2014.

Short-term swings in currency are unlikely to impact decisions on what weapons or services to buy or where to locate facilities. But longer-term trends in the relative strength of the U.S. dollar, or euro, or British pound could bear on how industry is globally configured.

Byron Callan is a policy researcher at Capital Alpha Partners and is an expert in financial and defense industry analysis.

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