Defense Economics

1. Defense Economics Frank KilleleaNational Security Analysis DepartmentJohns Hopkins University Applied Physics Laboratory March 2005 Note: Additional explanatory material can be found in the Notes view Distribution Statement A – Approved for Public Release; Distribution is Unlimited

2. Abstract This analysis identifies economics factors and conditions that are important to a nation-state’s ability to develop, acquire and sustain significant military forces and capabilities. It examines readily available economic data which influence the size and direction of a country’s defense spending. It is less applicable to subnational and transnational threats whose financial and arms requirements tend to get lost in the background noise. This report is an occasional paper of the APL National Security Analysis Department Its ideas are intended to stimulate and provoke serious thinking. Not everyone will agree with them. Therefore it should be noted that this report reflects the views of the author alone and does not necessarily imply concurrence by APL or any other organization or agency, public or private.

3. Executive Summary (1of 4) This analysis identifies economics factors and conditions that are important to a nation-state’s ability to develop, acquire and sustain significant military forces and capabilities. It examines readily available economic data which influence the size and direction of a country’s defense spending. It is less applicable to subnational and transnational threats whose financial and arms requirements tend to get lost in the background noise. The base year for this update is 2002, the latest year for which data were available. Where available, pertinent data on subsequent years have been included. This analysis addresses:  Economic factors that support or inhibit defense spending  Defense and military R&D spending and trends  Weapon costs and trends  Arms transfers and trends  Defense industries and trends  Defense economics impact on military capabilities  Defense economics impact on US military spending  An economically influenced view of global threats. (Asymmetric threats are included to remain consistent with data contained in the previous external environment assessment.)

4. Executive Summary Continued (2 of 4) Since last updated: • Global defense and R&D spending has trended upward led by the US, China, and Russia to a lesser degree. Other countries spending more include India, Iran, Brazil and South Korea. Most countries spending, however, has either remained flat or increased/decreased slightly. • The value of global arms transfers, which decreased over 70% from the mid-80s through 2002, has shown no signs of leveling off. • Escalating weapons costs have continued to outpace defense budget growth making it difficult (actually impossible) for nations, including the US, to replace aging systems with new models on a one-for-one basis. Few countries can afford to purchase large numbers of modern combat systems. • Global defense industries have continued to contract and consolidate via mergers and acquisitions, with current trends favoring national and cross-border collaborations (teaming) in an effort to share development and production costs, and gain market access. Some insights: • Defense economics analysis remains useful as a means of identifying countries capable of acquiring significant military capabilities that could challenge US forces. • It can alert decision-makers to countries with changing military aspirations, and in effect provide years of early warning to developing threats. • Defense economics can also help decision-makers prioritize weapons spending based upon global weapons development and acquisition efforts.

5. Executive Summary Continued (3 of 4) Findings: • Developing military capabilities in nation states is largely a function of defense spending. In 2002, 73% of the countries worldwide spent under $2B on defense. Eleven countries besides the US spent in excess of $10B, including four over $30B (China ~ $62B). Among the countries spending over $4B, Syria, Iran, Russia and China are probably the only ones that could be considered potential adversaries. (By way of comparison, the US defense budget in FY2002 was $344.8B.) • Escalating costs of all things military including weapons development and acquisition, personnel, operations and maintenance, and infrastructure have led many countries to smaller forces with mixed inventories, retaining older systems longer. • The high cost of military R&D has significantly limited the number of countries capable of developing and producing modern, sophisticated combat systems. Few new state-of-the-art systems, in all major weapon categories are being developed worldwide. • Many countries rely on others to develop the new systems and hope they can afford a few. Unfortunately, the cost of the latest models has escalated beyond the reach of most countries, resulting in a growing market for less costly used and/or upgraded combat systems. • The ratio of defense spending and escalating weapons costs is the most significant influence affecting acquisitions, force size and mix, arms sales, and the global defense industry.

6. Executive Summary Continued (4 of 4) Findings Continued: • Without the amortization of weapon costs across large unit buys, there is little hope to reduce the cost of new sophisticated combat systems to affordable levels. • It will become increasingly difficult to prevent sensitive technology transfers because of industrial offsets related to arms sales, and cross-border industrial collaborations to develop, produce modern weapon systems. • In the US, large federal budget and trade deficits, growing national debt and related servicing costs, and increasing social, welfare, health, infrastructure and domestic security costs will likely pressure non-war related defense spending downward as early as FY2006. • Defense modernization (R&D, Acquisition) will like absorb most cuts as military personnel, medical, and O&M accounts continue to grow as a share of the defense budget. Expensive programs will likely be reduced, stretched or cancelled to accommodate the reduced funding. Likely candidates include the F/A-22, Joint Strike Fighter, National Missile Defense, DD(X), Littoral Combat Ship, Airborne Laser, Army Future Combat System (FCS), and space systems. • Transnational threats are not dependent on large budgets to further their aims. Their employment of asymmetric tactics and inexpensive and readily available weapons and explosives make them a continuing and dangerous threat.

7. Current and Near-Term GEO-POL OverviewUnsettled and Challenging • Post Cold War Period Unsettled and Dangerous • Regional Conflicts Could Involve US • TransnationalThreats More Prominent • Russia’s National Interests StillUncertain • China Perceives Greater Regional Role • NATO’s Future Role Unclear – Europe More Introspective • USEngaged • Countering Transnational Threats • Supporting Developing Democracies • Will Preempt to Defend Interests • Emphasis on Coalition OPS • Conflicting National Interests Challenge Coalition Solidarity, Effectiveness

8. International Defense EconomicsOverview • Economics Analysis Applicable to Nation-States; Much Less To Transnational Threats • Defense Economics Analysis • Identifies Countries Able to Acquire Significant Capabilities, Develop Sophisticated Systems • Provides Early I&W of Countries’ Changing Military Aspirations • Understanding the Economically Feasible Threat – That Which is Available, Affordable and Sustainable – Can Help Defense Planners • Focus on Potential Adversaries with Significant Capabilities • Prioritize Weapons Spending Based on Global Weapons Development and Acquisition Efforts • Few State-of-Art Systems in All Major Categories Being Developed • Not As UsefulAssessing Transnational/Terrorist Threats • Other Than WMD, Most Arms Are Low Tech, Inexpensive and Available • Data Not Readily Available

9. International Defense Economics (Cont'd)Overview • Global Defense Spending • Affected by Strategic and Economic Considerations • Driven by Big Spenders, i.e., US, Western Europe, Japan, Russia, China • Unlikely to Return to Cold War Levels in Foreseeable Future • Defense Forces • Smaller Personnel- and Equipment-wise • Mixed Inventories, with Fewer Modern Systems • Growing Personnel and Operating Costs Pressure Procurement • Military R&D • Investment Driven by US; Western Europe to Lesser Degree • Few Can Afford • Few New Sophisticated Combat Systems Being Developed Worldwide • Europe Needs to Consolidate R&D Efforts to Reduce Duplication and Achieve Greater Investment Mass • Arm Sales • Fewer Domestic Sales for National Forces • Stiff Competition Among Defense Industries for Shrinking Foreign Sales • Prohibitive New Weapons Costs Increasing Market for Cheaper, Used, and Upgraded Systems • Upgrades and Maintenance are Not Cheap; Pool of Used Systems Growing Smaller • An Area in Distress and In Need of Realistic Market Analysis

10. International Defense Economics (Cont'd)Overview • Ratio of Defense Spending and Escalating Weapons Costs the Single Most Significant Influence on Acquisitions, Force Size and Mix, Arms Sales, and the Global Defense Industry • Previous Efforts to Reduce Costs Largely Unsuccessful • Major Defense Industrial Restructuring Has Not Slowed Price Escalation • Streamlined Acquisition Procedures, Including Less Oversight, Use of Commercial Products, Capabilities-Based Process Not The Answer • Still Waiting for Significant Hi-Tech Solutions • Without Significantly Lower Weapon Costs, Foreign Sales Will Continue to Decrease • Without Foreign Sales and Significant National Demand, Production Runs Will Be Short, Fewer Units Produced, and Unit Costs Will Continue To Outpace Defense Budgets • Amortization of Weapons Costs Critical To Lower Prices • Easy Answer is to Reduce Costs and Sell More – But – The Devil is in the Details

11. Defense EconomicsSummaryGlobal Defense Spending • Defense Spending Decline Bottomed in ’98 – Slow Climb Since • Military R&D Spending Also Bottomed in ’98 • Arms Transfers Trend Still Down Since Mid-80s • Higher Priority Economic Considerations Gaining Greater Share of National Budgets • Sophisticated Weapons Cost More Than Systems Being Replaced • Fewer Costly New Hi-Tech Systems Being Acquired, Developed • Greater Competition For Fewer Arms Sales • Leaner Defense Industries • Sophisticated Systems Available, but Few Can Afford Many • Transnational/TerroristThreats Don’t Need Large Budgets, Expensive Weapons

12. 1998 Notional Worldwide Defense Spending Trends DEFENSE BUDGETS WEAPON COSTS R&D WEAPONS TRANSFERS $ MID-80s 2010 2002 CONSTANT 2000 $ TIME VG#7

13. Defense Spending Economic Factors • Economic Factors Impact World-Wide DefenseAspirations • Increasing Social, Welfare, Infrastructure Competition for Limited Revenues • Varying Combinations of Stagnant Economies, Budget Deficits, Large External Debt, Currency Devaluation, High Inflation, Trade Deficits, Limited Foreign Reserves, and Growing Population Drive Defense Budgets Down. Autocratic Regimes Can Delay This For Awhile.

14. Defense SpendingKey Economic Data • Economic Factors That Affect Defense Spending • Gross Domestic Product (GDP)* • Population/Growth Rate/Literacy Rate • Per Capita Income • Natural Resources • Industrial/Agricultural/Output • Exports/Imports – Balance of Payments • Revenues* • Budget Surplus or Deficit* • External Debt* • Inflation* • Currency Devaluation* • Defense Budget/Allocation* *Major Influences

15. Macro-Economic Factors InhibitDefense Budgets • Sustained annual Gross Domestic Product (GDP) growth below 3%, ornegative growth • Sustained annual inflation rate over 15% • External debt equal to or greater than annual gov’t revenues • External debt equal to or greater than 50% of GDP More $ Current defense budget level Less $ Current year +1 +2 +3 +4 Economic Factors Note: Presence of more than one factor increases negative pressure on defense budget.

16. Worldwide GDP & Defense Spending Trends Index: 1986 = 100 140 GDP 120 100 80 60 DEFENSE SPENDING 40 20 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Note: Over this period, worldwide GDP, excluding the U.S. increased by around 36 percent while defense spending decreased by over 30 percent. Source: DIA DI-1912-15-00, Defense Intelligence Reference Document, “Worldwide Defense Expenditures, 1999(U),” Jun 2000 The World Bank: “2004 World Development Indicators” SIPRI Yearbook-2003 World Bank Development Indicators Data Bank, 4 Jun 2004 query VG#11

17. 2002 Economic Data (1of 4) Source: The World Bank “World Development Indicators – 04” SIPRI Yearbook – 2003 CIA “The World Factbook 2003” IISS “The Military Balance 2003/2004” Note: *Range of values reflect differing defense budget estimates in source documents.

18. 2002 Economic Data (2 of 4) Source: The World Bank “World Development Indicators – 04” SIPRI Yearbook – 2003 CIA “The World Factbook 2003” IISS “The Military Balance 2003/2004” Note: *Range of values reflect differing defense budget estimates in source documents.

19. 2002 Economic Data (Cont’d) (3 of 4) Source: The World Bank “World Development Indicators – 04” SIPRI Yearbook – 2003 CIA “The World Factbook 2003” IISS “The Military Balance 2003/2004” Note: *Range of values reflect differing defense budget estimates in source documents.

20. 2002 Economic Data (Cont’d) (4 of 4) Source: The World Bank “World Development Indicators – 04” SIPRI Yearbook – 2003 CIA “The World Factbook 2003” IISS “The Military Balance 2003/2004” Note: *Range of values reflect differing defense budget estimates in source documents.

21. DefenseSpending

22. Defense Spending Overview • Worldwide Defense SpendingBottomed in 1998 • Fewer Producers of High End systems • More Emphasis on Affordability and International Collaboration and Consolidation in Production and R&D • US, Western Europe, Japan, Russia Produce High Technology Systems; ROW Countries Don’t • R&D Down 60% from 1986 to 1998; Up 12% from ’98 • System Upgrades, Software Modifications, Dual Use Technology, Asymmetric and Terrorist Threats Emphasized • Arms Transfers Down over 70% Since Mid 1980s • Greater Competition for Fewer Sales as Industries Fight for Survival • Major Suppliers: US, Russia, France, UK, Germany

23. Defense SpendingSmaller Inventories and Upgrades • New Weapon Systems 2-5 Times More Costly Than Older Systems. Few One-for-One Replacements • Most Weapon Sales Require Hard Cash, Pay-Back Loans, or Barter at Market Prices. Few Discounts or Grant-Aid. Many Countries Lack Foreign Reserves to Buy New Systems. • Sophisticated Weapon Systems Available But Few Can Afford Them • Seventy-Three Percent of Countries 2002 Defense Budgets Under $2B in US 2000$ • Under $800 Million For Procurement • Emphasis On System Upgrades, and More Capable Used Systems • Sustained Defense Spending Over $2 Billion Buys Some Sophisticated Systems

24. Worldwide Defense Budgets – 2002 100 90 90 80 70 60 Number of Countries 50 40 KUWAIT COLOMBIA BELGIUM POLAND NORWAY PAKISTAN 30 IRAN BRAZIL TAIWAN CANADA SPAIN ISRAEL 20 S. ARABIA GERMANY RUSSIA ITALY CHINA 61.5 JAPAN 46.7 U.K. 36 FRANCE 33.6 NETHERLANDS SYRIA AUSTRALIA GREECE N. KOREA INDONESIA TURKEY S. KOREA INDIA EGYPT SWEDEN SINGAPORE 14 13 10 9 6 4 6 4 4 3 2 0 0 $0.5 1.0 2.0 3.0 4.0 5.0 7.0 10.0 15.0 30.0 >30.0 Defense Budgets in Billions Constant U.S. 2000 Dollars Notes: Includes all countries less the U.S., Sources: “SIPRI Yearbook 2003” and “The Military Balance 2003/2004” VG#19 Ref: 9800648B_UK.PPT-4

25. >$10B $5-10B $2-5B $1-2B $0.5-1B <$0.5B 10-Year Defense Budget Growth (%)1993 → 2002 25 CONSTANT U.S. 2000 $ S. KOREA SAUDI ARABIA TURKEY GREECE IRAN ISRAEL SYRIA MEXICO CHILE PORTUGAL OMAN BANGLADESH SRI LANKA IRELAND JORDAN TUNISIA BOTSWANA BURUNDI KENYA PANAMA CAMBODIA CYPRUS SLOVAKIA BAHRAIN 20 15 JAPAN PAKISTAN DENMARK NORWAY POLAND SWEDEN EGYPT MOROCCO HUNGARY ROMANIA LEBANON GHANA NICARAGUA MALTA Number of Countries U.K. GERMANY CANADA SWITZERLAND PERU MOZAMBIQUE RWANDA SEYCHELLES ZIMBABWE BRUNEI MONGOLIA ALBANIA KAZAKHSTAN USA RUSSIA SPAIN NETHERLANDS AUSTRALIA BELGIUM AUSTRIA FINLAND SENEGAL EL SALVADOR BULGARIA YEMEN INDIA BRAZIL COLOMBIA SINGAPORE LETHOSO MALI NAMIBIA NIGERIA TANZANIA ECUADOR ARMENIA LUXEMBOURGE TAIWAN ARGENTINA VENEZUELA N. KOREA THAILAND ANGOLA CHAD SIERRA LEONE GUATEMALA URUGUAY PARAGUAY AZERBAIJAN 10 ITALY KUWAIT MALAYSIA CZECH REP. PHILIPPINES BURKINA FASO CAMEROON MADAGASCAR BOLIVIA 5 CHINA ALGERIA SUDAN UGANDA NEPAL UKRAINE ETHIOPIA ESTONIA LATVIA LITHUANIA LIBYA BELARUS CROATIA ZAMBIA 0 10 Year Growth -100% -50% -25% -10% 0% +10% +20% +50% +100% +150% +250% Avg. Ann. Growth -10% -5% -2.5% -1% 0% +1% +2% +5% +10% +15% +25% Source: SIPRI 2003; Military Balance 2003-2004 VG#20

26. Estimated Worldwide Defense ModernizationFunding – 2002 100 90 90 80 70 60 Number of Countries 50 40 KUWAIT COLOMBIA BELGIUM POLAND NORWAY PAKISTAN 30 IRAN BRAZIL TAIWAN CANADA SPAIN ISRAEL CHINA 61.5 JAPAN 46.7 U.K. 36 FRANCE 33.6 S. ARABIA GERMANY RUSSIA ITALY 20 NETHERLANDS SYRIAI AUSTRALIA GREECE N. KOREA INDONESIA TURKEY S. KOREA INDIA EGYPT SWEDEN SINGAPORE 14 10 13 9 6 6 4 4 4 2 3 0 0 $0.5 1.0 2.0 3.0 4.0 5.0 7.0 10.0 15.0 30.0 >30.0 Defense Budgets $ @ 20% $0.1 0.2 0.4 0.6 0.8 1.0 1.4 2.0 3.0 6.0 >6.0 $ @ 40% $0.2 0.4 0.8 1.2 1.6 2.0 2.8 4.0 6.0 12.0 >12.0 Defense Funds for Force Modernization @20 and 40% Notes: Modernization includes all forces (Ground, Air, Naval Platforms, Weapons, Sensors) $ in billions of constant U.S. 2000 dollars Includes most countries less the U.S. Primary Sources: “SIPRI Yearbook 2003” and “The Military Balance 2003/2004” VG#21 Ref: 9800648B_UK.PPT-4

27. Defense Spending Trends • Trending Upward Since 1998,Led By US (+46B), China (+13.3B), Iran (+8.1B), Russia (+4.3B), India (+3.5B), Brazil (+2.1B) • Likely to Continue Upward Near-Term, Influenced By US, China, Russia, South Korea, and India. Economic Developments Could Slow or Reverse Trend Worldwide Defense Spending in Billions US 2000$ 1988199319982002 909 762 690 784 Sources: SIPR1 2001, 2002, 2003 IUSS Military Balance 2003-2004

28. Defense Spending (Cont'd) Trends • Fewer New High-Technology Weapon Systems Likely to be Developed and Fielded Over Next 10-20 Years Because of Costs • Most Countries’ Defense Spending Flat or Negative Over Time Unless Involved in or Preparing for Conflict, Insurgencies, or the War on Terrorism Sources: SIPRI Yearbooks – 2001, 2002, 2003 The Military Balance – 2003-2004

29. Defense R&D/S&T

30. Worldwide Military R&D Spending Overview • R&D Down 60% from 86 to 98: Up 12% from 98 to 2002 • 2002 Estimated Spending at $66 Billion in 2000$ • $50.6 B by US; $57.4 B by NATO • Most for Aircraft Related Programs • Nine Besides US Spending Over $500 Million on R&D • US, Russia, China* Spending More in 2002 • R&D Budgets Compete with Procurement, Personnel, Maintenance and Operational Readiness Accounts • Aggregate Worldwide Defense R&D Spending Likely to Increase Near-Term as US, Russia, China* Spend More • European R&D Likely to Decrease Somewhat as Major Aircraft Programs (RAFAEL, EUROFIGHTER, A400 Transport) Transition to Production Note: *China Has Made R&D a Priority; Chinese R&D Funding Figures Are Best Estimates Sources: SIPRI Yearbooks – 2001, 2002, 2003 IISS “The Military Balance 2003-2004”

31. Estimated Worldwide Military R&D Spending - 2002 10 9 PAKISTAN 8 SWITZERLAND 7 U.S. @ $50.6B 66.3B in 2004 NORWAY 6 NETHERLANDS 5 Number of Countries POLAND ITALY GERMANY 4 UKRAINE SPAIN SINGAPORE INDIA 3 ISRAEL AUSTRALIA BRAZIL IRAN CHINA 2 ARGENTINA S. AFRICA TAIWAN FRANCE JAPAN 1 GREECE CANADA SWEDEN S. KOREA RUSSIA U.K. 0 $50M 100M 200M 500M 1.0B 2.0B 5.0B R&D Spending in Constant 2000 U.S. Dollars Notes: Includes only countries spending >$50 million Sources: SIPRI Yearbooks – 2001, 2002, 2003 Defense News, 2 Feb 04 Ref: 9800648_UK.PPT-7

32. Worldwide Military R&D Spending Billions of US Constant 2000$ *1995$ **1994$ ***1996$ ****1997$ Source: SIPRI “Yearbook 2001, 2003” IISS “The Military Balance” 2003-2004 Various Defense News Editions

33. Worldwide R&D Sophisticated Systems Costly • High Technology Weapons Development Programs Costly • Most in US, Western Europe, Japan, and Russia • Situation Not Expected to Change Because of High R&D and Manufacturing Infrastructure Costs Associated with High Technology Development Programs • Most ROW Countries Rely on Foreign Acquisition of Complex Weapon Systems • State-of-the-Art Combat Aircraft, Naval Combatants, Main Battle Tanks, IADs, etc.

34. Worldwide R&D (Cont'd)Sophisticated Systems Costly • Most ROW Countries Can’t Develop High Tech Systems • Main Impediments to High Technology Development: • Funding • Technical Education and Pool of Scientists and Engineers • Well-Equipped Research, Laboratory, and Test Facilities • Natural Resources • Manufacturing Facilities and Capabilities • Skilled Work Force • Quality Control • Technology Base and Infrastructure

35. Worldwide R&D (Cont'd)Sophisticated Systems Costly • Some ROW Countries Produce Low to Medium Technology Systems Based on Co-Production and Reverse Engineering of Acquired Systems • Ground Force Weapons, Vehicles, MLRS, Small Patrol Craft, Training Aircraft • Some Produce Niche High Technology Systems with Foreign Assistance • TBMs, WMD, Helicopters, UAVs, Anti-Ship Cruise Missiles, Diesel Subs • Industrial Offsets, Collaborations and Consolidations Future Wild Cards? Source: SCCS

36. Worldwide High Technology Weapon Design andDevelopment Capabilities Ref: 0400346_UK.ai None Very limited. Dependent on foreign weapons acq. and related co-production, reverse eng, and tech transfer to produce a few low to medium technology systems. Some low to medium tech. design, development, production capability. Needs foreign assistance in some areas. Few niche high tech. capabilities. Relies on foreign weapons acquisition and related co-production, reverse engineering and tech. transfer. Broad low to med. tech. capabilities. Broad med-tech. capabilities; capable of designing, developing, producing many high-tech systems; external assistance required for high performance aircraft and other complex systems. Broad high-tech. design, development and production capabilities. Indigenous capability to develop, produce high performance combat aircraft, missiles and other highly complex systems.

37. Worldwide Military R&D Trends • Without a Clear Technologically Advanced Threat, or a Market for Costly High Tech Systems, R&D Investment Will Decrease, and the Pace of Technology Development Will Slow • More for Counter-Terrorism, Homeland Defense, Asymmetric Threats • Fewer High Tech Weapon Systems Will be Developed in all Major Categories • Development and Availability of New Generation Systems Delayed • Fewer Producers of High-End Systems • More Cross-Border/International Cooperation, Pooling of R&D Resources

38. Worldwide Military R&D Trends (Cont'd) • Emphasis on Affordability, Technologies that Reduce Development, Manufacturing Costs • Emphasis on Dual-Use Technologies, COTS, System Upgrades • Future Threats Include Fewer High-Tech, Many Low-Medium Tech Systems • Adversaries Can Leverage Small Defense Budgetswith Less Costly Asymmetrical Threats, i.e., IW, TBMs, C/B Weapons, Mines, CCMs, Small Boats, Terrorism, etc., to Complicate, Impede US Military Ops • Caution: A Resurgent Near-Peer Type Threat Would Negate Some of These Trends

39. Foreign Science & TechnologyOverview • Technology “Haves” and “Have Nots” Persist • Technology Increasingly Dual Use • Technology’s Economic Impact More Important Than Military’s • Nations and Industries Will Sell Technology for Political and Economic Reasons • Credible Asymmetric Threats Can Offset Some Technological Advantage

40. Foreign S&TAreas of Interest • Areas of Foreign Technological Interest: • Anti-Navigation/GPS Systems • Remote Sensors and Weapons • Standoff Weapons and Penetration Aids • Ballistic Missiles • Cruise Missiles • Information Systems and CM • Data Transfer and Interoperability • Data Blocking/Corruption • False Target Generation • High-Power Microwave (HPM) • Encryption • Antiterrorism Systems • Aircraft Protection • Harbor Protection • Helicopter Protection • Improvised Explosive Device Detection, Neutralization • Precision Airdrop Systems • CBR and Nuclear Weapons Detection, Protection and Defeat Systems • ISR and Target Acquisition Systems to Counter Terrorists • Explosive Ordnance Disposal

41. Foreign S&T (Cont'd) Areas of Interest • Areas of Foreign Technological Interest: • Nanotechnology • Robotics • Low Observable and Masking Technologies and CM • Diesel Submarine Endurance • Biotechnology • Increased Lethality • Conventional Explosives • Weapons of Mass Destruction

42. Foreign S&T TrendsCommercial Technologies Available to All • Technology Available to Buyers • Commercial Sector Drives Technology Development • Emphasis on Technologies That Make Things Happen • Micro-Miniaturization More Important • Biotechnology A Breakthrough Area • Ubiquitous Access to Communications • Greater Access to Space Based Sensors, and Related CM • Broader, More Timely Access to Information • Sophisticated/Interdependent Systems Increasingly Vulnerable To Single Point Failures

43. Weapons Costs

44. Weapon System CostsFew Can Afford to Develop or Buy • Sophisticated SystemCostsEscalate Faster Than Annual Inflation Rates • Techinflation Affects Development Costs of Aerospace, Ship, Submarine, Armor Systems • Major Program Initial Costs Underestimated • Cost Overruns Lead to Stretched Schedules, Smaller buys, increased unit costs • Sophisticated Programs Expensive – Not Many Countries Can Develop Them • Representative Program Costs • F-35 JSF ~200B • *F/A-22 Raptor ~72B • *V-22 Osprey ~46B • *RAH-66 Commanche ~39B • *Evolved Expendable Launch Vehicle ~31.8B • Eurofighter Up $20B since ’96; ½ fewer a/c • *Space Based Radar ~30B • Multi-Mission Maritime Aircraft ~26B • European A-400M Transport ~23.7B • *SBIR ~8B • Kinetic Energy Interceptor ~4.5B • *Airborne Laser Program more than doubled Note: *Significant cost overruns Multiple Sources

45. Weapon System CostsFew Can Afford to Develop or Buy • Sophisticated SystemCostsEscalate Faster Than Annual Inflation Rates • Techinflation Affects Development Costs of Aerospace, Ship, Submarine, Armor Systems • Major Program Initial Costs Underestimated • Cost Overruns Lead to Stretched Schedules, Smaller buys, increased unit costs • Sophisticated Programs Expensive – Not Many Countries Can Develop Them • Representative Program Costs • F-35 JSF ~200B • *F/A-22 Raptor ~72B • *V-22 Osprey ~46B • *RAH-66 Commanche ~39B • *Evolved Expendable Launch Vehicle ~31.8B • Eurofighter Up $20B since ’96; ½ fewer a/c • *Space Based Radar ~30B • Multi-Mission Maritime Aircraft ~26B • European A-400M Transport ~23.7B • *SBIR ~8B • Kinetic Energy Interceptor ~4.5B • *Airborne Laser Program more than doubled Note: *Significant cost overruns Multiple Sources

46. Weapon System CostsFew Can Afford to Develop or Buy • Sophisticated SystemCostsEscalate Faster Than Annual Inflation Rates • Techinflation Affects Development Costs of Aerospace, Ship, Submarine, Armor Systems • Major Program Initial Costs Underestimated • Cost Overruns Lead to Stretched Schedules, Smaller buys, increased unit costs • Sophisticated Programs Expensive – Not Many Countries Can Develop Them • Representative Program Costs • F-35 JSF ~200B • *F/A-22 Raptor ~72B • *V-22 Osprey ~46B • *RAH-66 Commanche ~39B • *Evolved Expendable Launch Vehicle ~31.8B • Eurofighter Up $20B since ’96; ½ fewer a/c • *Space Based Radar ~30B • Multi-Mission Maritime Aircraft ~26B • European A-400M Transport ~23.7B • *SBIR ~8B • Kinetic Energy Interceptor ~4.5B • *Airborne Laser Program more than doubled Note: *Significant cost overruns Multiple Sources

47. Ball Park Weapons Cost Data

48. 800 80 700 70 600 60 500 50 400 40 300 30 200 20 100 10 0 F/A-22 Program $257M (GAO)  260  750 240 $72B   220  200 #a/c $179M  180  160 a/c Cost  140 Unit Cost $M Program Costs $B Number of Aircraft  Program $   120 $38B   277  100 $100M 218 80 Number a/c  a/c cost  Program Cost  60 50 40 30 20 1980 85 90 95 2000 2005 Note: Program chg to F/A-22 in 2002 DoD Estimate #a/c Sources: Multiple

49. 2 1 3 F/A-22 Program Acquisition Numbers 800 750 762 700 600 500 400 Number Aircraft 381 300 277 226 218 200 180 100 0 1981 85 90 95 2000 2005 YEAR Notes: 1 USAF requirement for 381-762 aircraft 2 USAF Plan 3 Affordable within Funding ceiling Black figures/lines are DOD Blue figures/lines are USAF Sources: Defense News, “Beyond F-22 Decision” 2 Aug 99 Defense News, “Meet the F/A-22”, 16-22 Sep 2002 Inside Defense, “Rumsfeld Staff Moves Closer to AF Size of F/A-22 Fleet”, 31 Oct 02 Inside Defense, “GAO Doubts DOD’s Readiness to Make F-22 Production Decision”, 15 Mar 04

50. Weapon Systems Cost TrendsNew Systems Cost More • Trends Upward • Most Prominent Microeconomic Force Affecting Defense Industries is The Rapidly Rising Cost of Weapons R&D and Production • New SystemsCost Far MoreIn Real TermsThan Units Being Replaced • Smaller Production Runs Resulting From Smaller National Requirements and Fewer Export Sales Increase Unit Costs • Inflation and Currency Devaluation in Buyer Countries Raise System Costs Accordingly • Typically, Weapon Costs Increase About 10% Per Year, Doubling Every 7.25 Years • Ratio of Increasing New Unit CostsToDefense Budgets Affects Numbers Acquired • Sources: • “Hand Book of Defense Economics, Vol. I”; K.J. Arrow and M.D. Intriligator, 1995 • “Global Arms Trade – Commerce in Advanced Military Technology and Weapons”, Congress of the US – Defense News, LGEN M. Davison, USA, US Defense Security Assistance Agency, 9-15 Feb 1998 • SIPRI Yearbook – 2003