These new competitive pressures — along with uncertainties surrounding American military commitments under the Trump administration — will change the way U.S. defense contractors shop their wares to the world. “I think, for U.S. firms, they’re going to have to navigate this a little differently,” Barney says.
Among European NATO allies, for instance, European defense contractors competing with U.S. companies could make the case that with American future military support uncertain, it makes more sense to source critical military systems from within the European Union. How U.S. defense contractors counter such claims and reach out to European militaries — a market to which they’ve given relatively little attention since the end of the Cold War — will determine which companies benefit from the coming uptick in European defense spending.
Such an environment could make it difficult for smaller American companies in the defense space to make inroads with foreign militaries, while major U.S. defense primes, like Lockheed Martin, Boeing, Raytheon, Northrop Grumman and General Dynamics, which already do business overseas, will continue to benefit from those relationships, Schweizer says.
New challenges notwithstanding, global spending is moving in the right direction for defense contractors, he says. In Europe in particular, governments are experiencing pressure to boost spending that hasn’t existed in a quarter century. “Momentum is clearly to the upside,” Schweizer added. “I think European defense spending has bottomed.”
Meanwhile, while Trump’s unique brand of diplomacy may complicate arms sales in the near term, most governments that are ratcheting up defense spending are doing so in response to challenges and priorities that will outlive any U.S. presidency.
“A lot of these countries that have been big consumers — Saudi Arabia, Japan, UAE — the underlying threats and economic drivers for them to procure defense products are all still there,” Barney says. Barring something unforeseen, that demand isn’t going anywhere anytime soon.
“There’s been a reshaping of the international order,” Schweizer says. “These are multi-decade challenges that these countries are going to prepare for.”
— By Clay Dillow, special to CNBC.com