Snapshot: the Spanish defence industry to 2015
Despite economic woes Spain is still expected to spend almost $60bn on its armed forces between 2010 and 2015. Using detailed iCD Research market data naval-technology.com reports on a growing market for both imports and exports set against a backdrop of increasing terrorist threats and tense budgetary concerns throughout the EU.
The weak position of Spanish public finances will see reduced government expenditure, including on defence expenditure.
Despite these budget cuts, Spain is still expected to spend almost $60bn on its armed forces between 2010 and 2015 (the forecast period).
The homeland security budget is expected to register positive growth, driven by terrorist threats from Basque separatists and al-Qaeda.
Key challenges facing the Spanish defence industry include budget cuts and project delays arising from the collaborative nature of EU joint weapon development programmes.
Despite its recent weak financial position, Spanish defence imports and exports increased substantially for both the army and navy.
The Spanish Government has mandatory offsets for all defence procurements exceeding $1.3bn. Historically, joint research and development of defence systems has been a successful market entry route.
Spain is expected to spend almost $60bn on its armed forces
The Spanish defence budget, estimated at $10.1bn in 2010, grew at a CAGR of 6.53% during the review period.
In total, Spain is expected to spend $59.2bn on strengthening its armed forces, of which $12bn will be earmarked for capital expenditure, while $47.2bn will be reserved for revenue expenditure.
Furthermore, during the forecast period, the average allocated share for the army, air force and navy is expected to be 34.6%, 13.7% and 13.8% respectively.
However, the Spanish defence budget is expected to register a CARC of -1.05% during the forecast period, to value $9.6bn in 2015, due to the budget cuts associated with the effects of the global economic crisis.
The defence budget avoided further cuts because of costly factors such as international missions, security threats and Spain's strained relationship with Morocco.
Naval defence budget expected to be $1.3bn by 2015
The Spanish Navy received an average 13.9% of the total defence budget during the review period. Although this is not expected to change significantly over the forecast period, capital expenditure on the navy is expected to increase at a CAGR of 3.99% to average at 26.6% of the total budget for the forecast period.
In total, the navy is expected to spend $8.2bn during the forecast period on the acquisition of military hardware.
Although the nation is not expected to embark on a naval modernisation programme, the country is expected to procure multimission utility helicopters to enhance its search and rescue mission capabilities.
Ships are the most exported defence goods
Spanish defence exports mainly comprise of naval defence systems such as ships. During the review period, ships accounted for 70% of Spanish defence exports, followed by aircraft, sensors and artillery, with shares of 27%, 2% and 1% respectively.
However ships, aircraft and sensors were the only defence goods to be exported by the country in 2009. The Spanish naval sector is primarily dominated by Navantia, a government-owned company, which is the largest exporter of Spanish defence goods, including frigates, offshore patrol vehicles (OPV) and amphibious ships.
Share of army expenditure expected to increase
During the review period, the Spanish Army received an average of 33.7% of the total defence budget.
Despite cuts to the budget in 2010, this increased to an estimated 36.3%.
During the forecast period, the average expenditure share of the army, air force and navy is expected to be 34.6%, 13.7% and 13.8% respectively. Other expenditure, which funds the Secretary for State of Defence (Secretaría de Estado de la Defensa), intelligence services (Estado Mayor de la Defensa) and Secretary of Defence (Ministerio y Subsecretaría), is expected to account for 37.9% of the total defence budget. Of the three armed forces, the army receives a higher share of the budget due to its large troop size.
This also results in a higher budget allocation for personnel expenses.
Armoured vehicles account for majority of imports
Spain is dependent on foreign sources of arms for land-based defence systems, largely due to the limited number of domestic firms operating in this sector. Furthermore, security threats posed by internal and external terrorist organisations, and the need to enhance the operational capabilities of the Spanish Army on overseas missions, require the nation to enhance the safety and mobility of its troops.
Consequently, armoured vehicles accounted for 49% of Spanish defence imports during the review period, followed by sensors, 16%, and missiles, 15%. In 2009, this trend remained fairly constant, with armoured vehicles accounting for 48% of the total imports, followed by missiles, with 28%. However, the share of aircraft increased from an average of 8% during the review period to 16% in 2009.
Terrorist threats a key driver of defence expenditure
The Spanish homeland security budget is expected to grow at a compound annual growth rate of more than 2% during the forecast period, primarily driven by an increase in the threat posed by terrorist organisations such as Euzkadi Ta Askatasuna (ETA) and al-Qaeda, maritime security threats and the rise in the illicit drug trade.
Spain has a long, and recent, history of terrorist attacks from Basque separatists and al-Qaeda. During the forecast period the security threat posed by these groups is expected to increase the demand for perimeter protection systems, internal anti-intrusion control systems and surveillance systems.
Defence budget cuts and project delays are key challenges in the defence industry
Public financial constraints will lead to cuts to the Spanish defence budget. Estimated at around $10bn for 2010, the budget has suffered annual declines and is expected to continue to do so. Furthermore, the country is expected to spend only $1.7bn of this decreased budget on capital acquisitions, which limits the investment opportunities present within the country.
Additionally, joint weapons programmes between EU countries have led to delays in the execution of projects, as member countries are often unable to agree over issues such as specifications. This can lead to the escalation of costs or cancellation of projects.
Spanish arms imports and exports increase
Despite its weak financial position, in 2009 the volume of Spanish defence imports increased annually by more than 50%.
Between 2005 and 2009, Germany emerged as the largest arms supplier to Spain, followed by the US, Italy and France.
Over the past decade, Spain has enhanced its naval and aerospace sectors significantly. As a result ships and aircraft account for the majority of Spanish defence exports.
The key consumers of Spanish defence goods include emerging economies such as Malaysia, Chile and Brazil.
Offset policy mandates investors to invest 100% of the contract value
In order to enhance the capabilities of its domestic defence sector, the Spanish Government has mandatory offsets for all defence procurements exceeding $1.3bn. The main objective of the offset programme is to build domestic defence capabilities, thereby increasing overall arms exports.
Investors are obligated to invest 100% of the contract value into the nation's economy. Although there is no provision for multipliers, in the case of under-performance the foreign contractor is liable to pay a penalty. Furthermore, while Spain allows foreign direct investment in its defence industry, a foreign company is only allowed to possess a limited share of the company without seeking government approval.
Joint research and development of defence systems is a successful market entry route
Many companies enter the Spanish market by collaborating on research and development projects. This gives companies an opportunity to design, develop and market products within the country. EADS entered the Spanish market via this route in 2009.
Germany emerged as significant arms supplier to Spain
During the review period, Germany emerged as the largest arms supplier to Spain, with 52% of imports, followed by the US with 16%. The share of Germany and the US further increased to 55.7% and 17.9% respectively in 2009. However, Spain also imports from France, the US, the UK and Switzerland.
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