An Altered World

A Note to The Reader

This section covers various issues concerning altered circumstances in the defence industry due to changes in the realm of national and international security policies.

Here you can read about the conditions and challenges faced by the defence industry.

Background

There are still a number of factors that sharply distinguish the defence market from other types of international markets. The defence market is characterised by strict export regulations.

Several national markets are dominated by a single domestic actor with close ties to a state customer.

The purchase of defence materiel often entails a considerable financial commitment from the customer and is a decision with long-term repercussions.

Considerations concerning military technology, international security and other areas weigh heavily in decisions to buy defence materiel.

Demands are often made for commitments from the seller, such as in the shape of technology transfer or various forms of industrial collaboration. These commitments are of great significance in enabling the establishment of a favourable long-term relation with the customer. The ability to offer the customer a favourable financing solution also provides an important competitive advantage.

Recommended reading

The author recommends the following texts that relate to this story: In chapter Adaptability for new requirements under the heading Security Policy Changes in chapter Ensuring long-term operations capabilities under the heading Continuing To Grow and under the heading Planning and Implementing Capability Development.

This section concerns the highlighted areas of A Journey of Change in the Aircraft Industry

Summary

The market for defence materiel is becoming increasingly international. On the one hand customers are now more open to alternatives from many different suppliers, on the other hand a great deal of development work is conducted in international partnerships with companies from different countries.

Sweden's main concerns are ensuring that defence industry expertise is kept in the country and that Sweden is involved in advanced defence industry development partnerships. This is important for the fulfilment of Sweden's foreign and security policies.

Adapting to the altered circumstances resulting from the Swedish state's actions as regards its emphasis on operational defence has brought a number of areas into focus for Saab. Strategic choices have been made, such as increased and altered cooperation with partners, investments in technology development and technology demonstrators, and the streamlining of operations.

Technology demonstrators are a good way to develop expertise and strategic partnerships. They enable the implementation of practical tests of new product concepts in order to gain greater understanding of the needs of the Swedish Armed Forces and the most important international customers.

Content outline

  • Over the past decade, the defence materiel market has become increasingly international and the export of high technology involves more than just weapon systems, with international partnerships being key to success.
  • Development in Saab's markets is driven by changes in security needs and threats, in both the military sector and civil society.
  • Securing continued cutting-edge expertise in critical technologies is also a powerful incentive for Saab.
  • In both Sweden and abroad, we have seen a change in direction in the supply of materiel and this has had consequences for the market.
  • The altered circumstances of the defence industry and the changing trends in international security policies have established new demands on cooperation and integration.
  • Trends in the defence sector have set the focus on high-tech solutions, providing new opportunities for research and development.
  • At the end of this section, we quote statements from a discussion on the conditions and challenges faced by the defence industry. This discussion took place in 2010 between Marcus Wallenberg, Chair of the Board of Saab, and Håkan Buskhe, President and CEO of Saab.

High Technology Exports – Strictly Regulated

The market for defence materiel is becoming increasingly international. On the one hand customers are now more open to alternatives from many different suppliers, on the other hand a great deal of development work is conducted in international partnerships with companies from different countries.

There are still a number of factors that sharply distinguish the defence market from other types of international markets, such as the fact that it is governed by strict export regulations.

Several national markets are dominated by a single domestic actor with close ties to a state customer. The purchase of defence materiel often entails a considerable financial commitment from the customer and is a decision with long-term repercussions. Considerations concerning military technology and international security, as well as other aspects, weigh heavily in decisions to buy defence materiel.

Demands are often made for commitments from the seller, such as in the shape of technology transfer or various forms of industrial collaboration. These commitments are of great significance in enabling the establishment of a favourable long-term relation with the customer, and even the ability to offer a favourable financing solution provides an important competitive advantage.

This provides long-term positive effects for the buyer country, as well as new business opportunities for other companies. Saab's home markets, and the Swedish market in particular, are where much of the development work that results in new product generations takes place. Close collaboration with the Swedish Defence Materiel Administration and the experience of being a system integrator for the Swedish Armed Forces are of great importance to Saab. The Swedish home market is, however, relatively small.

Accordingly, it is in the interests of both Saab and the Swedish state for Saab to increase its export share and international partnerships. For Saab's part, this entails creating a broader customer base.

This is accomplished with sales of existing products, varying degrees of adaptation and modification to meet customer requirements, and the development of new systems and products in cooperation with customers and manufacturers outside Sweden.

In Sweden, the Swedish Inspectorate of Strategic Products (ISP) is the body that grants export permits, following the guidelines issued by the Swedish parliament. Work is under way in Europe to harmonise export regulations.

The cost of defence materiel in Sweden – the Swedish government supports Saab's export initiatives

Participation in international crisis management efforts also places demands on Sweden's armed forces and materiel functioning well in international contexts. Moreover, increased exports contribute to reduced costs for production series in Sweden, and so the Swedish government supports Saab's export initiatives.

A competitive project portfolio comprising products of good technical quality and performance is an obvious starting point for an export agreement. However, a competitive product is not the only factor that determines whether an agreement is reached.

Established partnerships in the international defence materiel market are of central importance. One example of such a partnership is when Saab and Britain's BAE Systems cooperated on developing and marketing the Gripen for a number of years. BAE Systems is one of the world's largest defence materiel manufacturers with industrial and financial networks that span the globe. BAE Systems and Saab collaborated via the jointly owned company Gripen International, which marketed the Gripen internationally.

Being receptive to customer wishes is key to forming a successful partnership.

A Changing World – The Effects of New International Structures

Saab is affected by a number of external conditions and driving forces, which entail opportunities, threats and challenges. Development in Saab's markets is driven by changes in security needs and threats, within both the military sector and civil society.

Moreover, political developments, and in the longer term even the global economy, are important driving forces. Over the years, new international structures have evolved and increased cross-border partnerships, which has resulted in a shift towards network-based defence and international intervention forces.

The armed forces in the Nordic countries have on numerous occasions expressed their ambitions to increase their cooperation, which places demands on technology wherein various systems and components can interact, generally referred to as interoperable solutions. An increasingly large share of development work to create new products and systems will take place in different types of partnerships. There is growing market demand from armed forces for products with proven technology and solutions regardless of origin, and this is a trend seen throughout the world.

Partnerships between public and private actors – PPP solutions

These trends result in a need for the defence industry itself to finance an increasingly large share of its research and development. Advanced cutting-edge technology is a prerequisite for participating in international industry projects in the field of defence, which is why partnerships between public and private actors is an important aspect.

Parallel to this, it is increasingly common for major operation and maintenance agreements in both military and civil spheres to involve public and private actors in so-called PPP solutions (public-private partnership). Armed forces increasingly outsource entire training, operation and support activities. This development also increases demand for training, support and maintenance.

Saab, for example, has a long-term contract with the Swedish Defence Materiel Administration (FMV) regarding full responsibility for the SK 60 aircraft system, wherein Saab as the principle supplier is responsible for the operation, maintenance and upkeep of all SK 60 aircraft.

Broad, comprehensive and long-term solutions are in demand. Another consequence of continuing integration is that customers in both the military and civil sectors increasingly request broad, integrated solutions, often with more service content.

Development is moving towards comprehensive undertakings for operation and function throughout the entire life cycle, with solutions evaluated in terms of not only their performance, but also their costs of ownership and operation. Despite the trend towards increased international cooperation, the need for a strong local presence is key to success in both the civilian and military markets.

Customers – locally anchored suppliers and alliances a requirement

Customers want integrated solutions from companies that are familiar with local circumstances. This considerably increases the opportunities to be the customer's preferred supplier and, not least, to receive part-funding from the customer for development work.

In recent years, Saab has realised that the greatest business potential is in the internationalisation of operations. The reason for this is developments in the military sector, in both Sweden and a number of other countries, and the extensive growth of civil security needs throughout the world, including in international flows.

The current Swedish military doctrine is based on cooperation primarily within the frameworks of the EU and the UN, and compliance with NATO standards is a requirement for the majority of materiel and solutions. Closer international partnerships spur a growing international market. This, in turn, demands a stronger international presence.

This development also requires that Saab secures cost-effective solutions, in both manufacturing and operation. New technologies must gain wider application, preferably within both the military and civil markets, and be adapted to international standards.

Strategic Hr Planning – For Critical Technologies

Securing continued cutting-edge expertise in critical technologies is also a powerful incentive for Saab. To a large degree, this involves allocating R&D resources to areas that have the potential for leading positions and, preferably, broad applications. Sweden's defence policy affects Saab's product development. Over the years, the Swedish state, via the Swedish Armed Forces and the Swedish Defence Materiel Administration (FMV), has been behind a large share of Saab's product development.

The background to this was Sweden's policy of neutrality with a focus on defence against invasion, that is, maintaining large units with a relatively low state of readiness. A domestic military industry ensured that Sweden had materiel in the event of blockades while also having time to develop quality materiel as the need was not urgent. The armed forces could work with ten-year plans. Since the beginning of the 2000s, the situation is completely different. Instead of neutrality, Sweden focuses on all forms of international cooperation.

Invasion defence has been replaced by operational defence, that is, more or less qualified units that at short notice can be deployed to operations throughout the world in cooperation with other nations.

New Focus for Materiel Supply

The Swedish Armed Forces and the Swedish Defence Materiel Administration (FMV) have reorganised their materiel supply. It is increasingly important to rapidly obtain new equipment, and this need increases the interest in buying fully developed products.

This change means that Saab needs to finance a larger share of product renewal, even if there are still areas where product development remains dependent on customer funding. The clearest example is the Gripen system, which in the long term is decisive to Sweden's capability to assert its sovereignty. As long as Sweden uses the Gripen, further development of the system must be financed by the Swedish state, although with some collaboration with other customers.

In Saab's other product areas, the Swedish Armed Forces do not have the same ambition to finance major R&D projects. Consequently, Saab must create sufficient scope for such R&D projects by continually working with the general streamlining of operations.

Active product management – for offensive R&D investments with partnerships

Pursuing active product management is essential, and this entails making active choices about the areas in need of R&D investments. The starting point has been a focus on renewing and further developing products for the areas in which Saab has a favourable internationally competitive standing.

A large degree of modularisation is decisive in the areas in which Saab invests. Modularisation enables product solutions to be reused.

Traditionally, Saab has focused on conducting much of its development work in-house. As a consequence, Saab has had to master many different technology areas. The long-term strengthening of development capacity requires increased cooperation within the various technology areas. Accordingly, cooperation with a number of partners will be strengthened with development programmes.

Moreover, risk exposure has been reduced by cutting lead times, which has involved increased adaptation to the customer need to quickly obtain materiel.

Altered Circumstances of the Defence Industry

Adapting to the altered circumstances resulting from the Swedish state's actions as regards its emphasis on operational defence has brought a number of areas into focus for Saab. Strategic choices have been made to achieve profitable growth, such as increased and altered cooperation with partners, investments in technology development and technology demonstrators, the streamlining of operations and a focused portfolio.

Historically, Saab has been an exceedingly innovative Swedish company in the field of advanced technology and retaining this capacity is important for Sweden. Saab has lived with cost constraints for many years, and despite this Saab's products deliver world-class performance and cost efficiency.

This has entailed a number of different activities over the years. We have evaluated our market position, identified growth potential that matches Saab's capabilities and adapted our portfolio to areas where we have strong competitive advantages and such growth potential.

The long-term geopolitical developments seen in the 2010s have moved us towards supranational structures, wherein states cooperate and follow a security policy doctrine. This doctrine is based on common interests and joint responsibility, which has drastically altered the circumstances of the defence industry.

Fragile national finances throughout the world and growing civil security needs favour suppliers that are flexible and cost effective.

International partnerships – political, economic and military – increasingly focus on securing the common interests and shared functions of a society dependent on global flows. Increasingly, nations are following a security policy doctrine wherein we have common interests that are greater than individual interests and a joint responsibility to defend them.

Globalisation and economic integration generally lead to political power and economic resources being transferred from a national level up to a supranational level and down to a local level. Today, comprehensive economic partnerships between countries, major cities, interest groups and globally active companies can be considered important stakeholders in the international political arena.

Security policy developments – demands on collaboration place demands on integration

In practical terms, developments in security policies have resulted in individual states becoming less autonomous and acting more collectively, both strategically and operationally. This has major implications for the defence industry, as regards both the focus and financing of development work.

Unique, isolated weapon systems are gradually losing their relevance in our collaborative world with its demands on integration and coordination. Consequently, an actor in the global defence industry cannot to the same extent as before base its development on the defence budget of an individual state. Instead, companies must to a greater extent self-finance their development work or collaborate in international projects.

Increasingly more countries and international bodies want, quite simply, more defence capability for their money. Demands on coordination and cost benefits favour flexible and cost-effective industry players.

In the 2010s, the focus has shifted towards network-based defence using joint international forces, which is based on widely accepted international mandates and creates a collective readiness to act. Joint interventions require systems that can not only be coordinated, but also work under an overarching operational command.

Strategic direction – focus on strategic objectives

Since the mid-2000s, Saab has worked with different efficiency programmes. One important outcome of this work is a more integrated company as regards goal orientation, priorities and processes.

The results have included many functional synergies, increased financial resources and, not least, the development of new standardised processes. The company has established a number of centres of excellence in research and development that provide collective resources and expertise in various technology areas for the entire Saab Group. The results have contributed to increased capability and more flexible cooperation within the Group. The cost reduction programme initiated in the mid-2000s has been well established and institutionalised and is now an integrated part of routine operations.

The work with objectives is focused on four strategic areas which together provide a concentrated focus on activities. These areas are as follows:

  1. Profitable growth from partnerships, professionalism initiatives and increased sales of existing products.
  2. Investments in the existing product portfolio and in partnerships for new products.
  3. Efficient operations via different partnerships and excellent existing and future organisational capabilities.
  4. Employees via strategic HR planning to develop leadership and corporate culture and to strengthen internationalised working procedures.

Investments in high-technology solutions

Product development is characterised by a strong strategic focus, and attaining the greatest possible efficiency in this is essential.

Altered customer behaviour, as regards both purchasing and the operational use of the products, demands new solutions that fulfil the requirements of many customers. An excellent way to realise this in practice is to cooperate with customers and various partners in order to develop different technology demonstrators which demonstrate new technical solutions that increase customers' operational capability.

This is exemplified by the following technology demonstrators:

  • FILUR – a programme to develop expertise in low signature/stealth technology.
  • SHARC – a programme to show that Saab could rapidly and cost-effectively demonstrate autonomous flight.
  • Neuron – a programme to demonstrate a number of techniques and technologies for a UCAV system. It demonstrated a tactical and, not least, economical way in which armed intervention against ground targets could be achieved in a modern command and decision support environment.
  • Gripen Demo – which demonstrated the new capabilities of the Gripen system with extended range and increased operational capability.

Technology demonstrators are a good way to develop expertise and strategic partnerships, as well as to implement practical tests of new product concepts. They provide greater understanding of the needs of the Swedish Armed Forces and the most important international customers.

Owing to this, work with product management is important for focusing on and selecting the right areas for R&D investments. Moreover, modularising as much as possible enables Saab to reuse product solutions.

Much focus has been placed on optimising the development processes and utilising model-based development, on both methods and various frameworks, in order to effectively govern complex processes such as the development of complicated software products and open source code.

These actions contribute to reducing the costs of developing systems and custom solutions while also reducing risk exposure. Moreover, lead times can be reduced and the capability to deliver in less time increased, thereby meeting the customer requirement to quickly obtain materiel.

Saab works continually with investments in new technologies, and this is done in areas where the company is a market leader or is in a strong position to become a leader.

Parallel to this, the company continually evaluates existing products and new opportunities as regards which products support the core business and which do not. Considerations are continually weighed as to which new technologies can help strengthen the company's cutting-edge technology and continued product development.

Over the years, Saab has created many innovations and products that are used not only within the company's strategic product areas, but also outside Saab's core business. Some of the innovations and products produced work well in unexpected applications, but are not in line with Saab's core business and strategies.

Since 2001, Saab has established thirteen spin-off companies, and these can even encompass a technology that may form a new offering from Saab.

Trends in military aviation

Growth in military aviation is driven by states with both larger and smaller air forces that want to replace earlier generation fighter aircraft with new aircraft that offer better performance, greater flexibility and more favourable total cost of ownership. A large number of procurements have been postponed due to international financial turbulence. Alliance membership and political considerations weigh heavily in this market and the need to reduce defence spending is increasing the significance of performance and life-cycle cost.

Sensors, communication and precision are important in armed interventions. The information systems must be able to integrate large quantities of information from many sources and provide effective decision support. New types of military operations and new technology also drive the need for exercises and training. It is increasingly common for countries to procure support and service for procured materiel from the industry via long-term full service undertakings.

In times when resources are scarce, the focus is on not only security, but also functionality and efficiency. Customers in both the military and civilian sectors increasingly want broad, integrated solutions with greater service content, such as training, exercises, support and maintenance. Solutions are evaluated in terms of not only performance, but also the costs of ownership and use. Development is moving towards comprehensive undertakings for operation and function throughout the entire life cycle. It is also increasingly common within the military sector to outsource activities which were previously conducted internally.

International partnerships are important in securing cross-border flows and keeping conflict hotbeds and conflict areas in check. The general long-term development is towards alliances in peacekeeping missions and efforts to stimulate growth.

Current trends in alliance formation, however, include the growing importance of regional partnerships and bilateral agreements. Furthermore most larger defence materiel acquisitions include extensive offset commitments in the shape of industrial collaboration. Additionally, it is increasingly common for major development projects to involve public and private actors in so-called PPP solutions (public-private partnership).

Strategic direction – focus on strategic objectives

The trend towards international cooperation and system integration demands open systems that can be coordinated and integrated operationally. This results in an increasingly large share of development work taking place within partnerships, which contributes to the defence industry being less able to finance its development via national defence budgets.

It is also the case that shrinking national budgets no longer leave much room for research and development (R&D). Moreover, to an increasing extent armed forces the world over want access to the best the market has to offer, regardless of origin, and they want it delivered quickly. Consequently, an increasingly large share of research and development must be financed by the defence industry itself.

Local presence often essential

Despite the trend towards increased international cooperation, the need for a strong local presence is key to success in both the civilian and military markets. Customers want integrated solutions from companies that are familiar with local conditions and that can adapt their solutions accordingly. As a result, to achieve success it is important to establish operations locally and to accumulate local expertise and knowledge of the local situation.

This considerably increases the chances of being chosen as a supplier or subcontractor, as well as of receiving part-funding for development work from national budgets.

Another important aspect of the defence industry's future is the fact that rapid technological development changes the conditions for capability development, as well as for planning and acquisition processes.

With clear requirements and under fair market conditions, industrial collaboration becomes a complement to the systems, products and services that form the basis of a customer offering. In practical terms, industrial collaboration means financial investments, engaging subcontractors from the local market and enabling local industry to benefit from new business opportunities.

The requirement for industrial cooperation in connection with defence industry contracts varies. In some countries it is a legal requirement, in others it is not. There are also countries where the customer's decision varies from one deal to another as to whether industrial cooperation should be part of the commitment and, if so, how this should be structured. However, there must always be a commercial basis for creating long-term profitability.

Conditions and Challenges for The Defence Industry

The following is taken from a discussion about the conditions faced by Saab and other companies in the defence industry. The discussion concerns factors that affect companies when external demands change and many customer countries have major imbalances in their national budgets to resolve. Parallel to this, international military alliances and the need for civil security are both on the increase.

The text is taken from Saab's annual report. This discussion took place in 2010 between Marcus Wallenberg (MW), Chair of the Board of Saab, and Håkan Buskhe (HB), President and CEO of Saab.

The question was: How do changes in the world around us affect Saab AB?

MW: The global economy improved in many respects in 2010, but there are still major structural problems that directly and indirectly affect Saab's ability to conduct business. Many countries in the West, especially in Europe, have large debts and fiscal deficits, which is increasingly affecting how they think strategically about their defence investments. In an effort to get their budget deficits under control, it is inevitable that more nations will start to reassess their defence budgets.

HB: One current trend that is becoming more prevalent is the coordination of defence resources between countries and political alliances in order to maintain capabilities at the same level without increasing costs. In Europe, the extensive military alliance entered into by the UK and France in 2010 and the Nordic cooperation previously established through NORDEFCO are examples of collaborative initiatives.

MW: Shrinking investments are forcing countries to buy cost-effective solutions that offer value for the money – in this case, defence capabilities.

HB: A growing number of customers in the defence market want to buy the best solutions available regardless of the country of origin. Smaller national budgets mean that more companies that previously relied on the defence authorities in their homelands now have to go out and compete in the international market. This requires, however, that their defence systems can be integrated into larger systems and work in international alliances. This is leading to tougher competition and changing the competitive landscape

MW: At the same time that we are seeing greater competition, there is a risk of protectionism when governments have to explain to their citizens how their tax money is being spent. This is one of the big unresolved questions.

HB: The overarching, long-term change that is affecting Saab's opportunities internationally is the growing importance of emerging economies. Traditionally we have focused on the West, but defence spending there is shrinking. We are therefore turning to countries such as India and Brazil, where budgets are expected to increase.

MW: To a growing extent, the global economy is being driven by demand from emerging economies, which is leading to more competition for natural assets from a global perspective. This is creating new conflicts of interest and of course affects defence needs as well.

HB: The world's oceans are playing a greater strategic role in maintaining production, trade and demand from growing populations. This has changed threat scenarios and placed more emphasis on maritime security.

MW: To maintain such investments, Saab must increase its profitability.

HB: Saab's strategy has been carefully reviewed and lies firm. Since September we have defined the main features in order to concentrate on implementation. It is important to keep momentum going and drive and implement our strategy. We will create profitable growth through a focused portfolio and by implementing efficiencies at every level with committed, qualified employees. We have to create a culture of execution, where we trust each other. This requires a common vision of where we are going and an understanding of what we have to do.

MW: Focusing is critical, since it is so hard to get an overview of this complex industry.

HB: We are clearly focused on the regions and selected markets where we want to expand our local presence. In addition, we are working continuously to develop our portfolio in a way that strengthens areas where we have leading technology and invest in new areas that we feel can improve our offerings and core competencies. Our systems know-how is unique, and the ability of our employees to integrate solutions is our core competency. This can never be compromised. On the contrary, we have to keep our cutting edge, which we can do by always listening to and working with customers to create value for them and, by extension, for our shareholders and our own organisation.

MW: Saab is a pioneer in many respects. From a historical perspective, it has been an innovation powerhouse for advanced Swedish technology, and it is important that this capacity remains in place – for both Saab and Sweden. Many innovations generated here have later been further developed outside Saab and today employ tens of thousands of people. It is important to keep this in mind when looking at Saab from an overarching perspective.

HB: Innovation means not only coming up with new ideas but applying them in practice. Our strength is that we have both technical and social capabilities. Social systems and cooperation between different cultures are extremely important and contribute to improved efficiency. Personal relationships are an important part in succeeding with complex development projects.

MW: This is especially true of international industrial alliances, which are critical in order to deliver on large, complex systems orders in the best way, and then get them to work on an operating level. To a large extent it involves cooperation and social engineering.

HB: We started going international many years ago, when we realised that our growth opportunities were outside Sweden, especially since the Berlin wall fell. Today many of our competitors find themselves in a situation where their countries are spending less on defence, and they have to compete internationally more than before. This gives us a head start in terms of both presence and efficiency. We have lived with cost constraints for some time, and today it isn't only the performance of our products that is world class. Few, if any, of our competitors can beat us in terms of cost effectiveness.

MW: The Gripen is a good example of this. In addition to its operating capabilities, which are just as good as if not better than the competition, we are far more cost-effective throughout the supply chain: in development, production, delivery and operation. This is more obvious from a life-cycle perspective.

HB: The implementation of our efficiency programme – the Billion+ programme – has led to further improvements, and underlying profitability continued to rise in 2010. We will not lose our focus on continuous efficiency. This will be decisive to compete going forward. We must constantly increase efficiencies in our core business.

MW: This strong focus on efficiencies has improved our underlying profitability and generated very strong cash flow. As we look ahead, we have to keep our eye on market developments – at the same time that delivering on our financial objectives and Saab's strategic priorities is crucial in order to remain competitive.

HB: Our core competence is the ability to integrate our own and others' systems and components in complex, cost-effective solutions. This drives Saab's employees every day.

The author´s reflections