London hosts massive arms exhibition

[September 13, 2011]  LONDON (AP) -- It's billed as the world's largest arms fair: 1,200 defense manufacturers converging on London to showcase everything from the latest unmanned aircraft to camouflage body paint.

But as the Defence & Security Equipment international show kicks off Tuesday, the companies know they'll be facing a common enemy in the double-whammy of military budget cuts and the drawdown of military operations in Afghanistan.

"The industry is bracing itself," said Endre Lunde, a defense consultant at IHS Janes. "It's already feeling the impact of the financial crisis and it's going to feel it even stronger soon -- and that's before the whole drop related to the end of operations in Afghanistan really hits."

The show known as DSEi is expected to attract more than 20,000 attendees -- from military experts to international procurement officials. Among new items on display are an "invisibility cloak" for tanks and gas masks equipped with Camelbak-hydration systems.

Companies without large contracts for aircraft, ships or products with long lead times will be scrambling particularly hard to guarantee long-term work -- or pick up the few Afghanistan-related contracts left.

"The last ten years have really been the exception for the rule for military procurement," Lunde said. Urgent operational requirements for Iraq and Afghanistan rushed products to the battlefield without the typical 15-20 year development and production timeframe.

"A lot of people now are finally realizing this little gold rush is coming to an end," Lunde said.

That means making up the cash in other places -- particularly for manufacturers of armored vehicles, which were bought up in bulk for the Afghan battlefield.

Defense companies are looking for new ways to breathe life into the industry. Some are rebranding products born out of Afghanistan, while others are placing greater emphasis on responding to the evolving threats of cyberwarfare and information security.

Others still are pushing into the civil security space, looking for ways to work with other industries to make up for the decreased military spending. The push there will be easiest for technology companies, experts say, who can market computers and surveillance equipment with multiple uses.

Cost-effectiveness and long-term capabilities are a common refrain in the pitches flooding the Excel exhibition center in London as vendors pay heed to the challenges governments themselves are facing as they attempt to maintain military defense capabilities while writing fewer checks.

Britain's Defense Secretary Liam Fox has said that the Treasury agreed to a 1 percent a year increase, in real terms, to the defense equipment and support budget from 2015-16 to 2021-21.

But spending cuts are weighing heavily in the U.K., leading to forced redundancies in the armed services and concerns over where the government's 80 billion pounds ($130 billion) of austerity measures over the next four years will hit the hardest.

As the British government has warned of military spending cuts and job losses for servicemen, it also has looked to the defense industry as a possible driver for recovery.

Britain boasts the second-largest defense industry worldwide behind the U.S. The U.K. defense industry generated more than 22 billion pounds of sales in 2010, according to a survey published Monday by ADS, the trade organization advancing UK Aerospace, Defence, Security and Space industries.

Increasingly, exports are being pushed as a way out of the crisis -- lauded last week by Gerald Howarth, minister for International Security Strategy, as "critical to a sustainable economic recovery."

With that in mind, exhibitors will be looking to woo contracts from the more than 60 foreign delegations in attendance.

Some of those delegates have raised the hackles of anti-arms campaigners who plan to mount protests around the exhibition.

Bahrain has been a particular focus amid reports U.K.-exported arms were used to suppress demonstrations there, and protesters have questioned why the U.K. Trade & Investment authority will host their delegation.

NATO's Secretary General Anders Fogh Rasmussen underscored the challenges facing militaries and the industry alike as he warned that the alliance and its members at some point might not be able to afford the modern military capabilities they need.

"To carry out successful military missions, such as the one in Libya, we need to develop, deliver, and deploy modern capabilities. But when our economies are in such a parlous state, this is increasingly difficult to do," Rasmussen told reporters in London on the eve of the conference.

He urged allies to undertake multinational solutions to defense spending and operations, cautioning that otherwise NATO will face reduced military effectiveness.

"At the moment, we are all trying to do more with the very limited budgets we have. This cannot continue. All of us need to change our approach," he said. "If we use our money more effectively, if we combine our efforts, and if we share our capabilities, then we can do more with less."

Because defense procurement and arms development take decades, the exhibition is likely to serve less as a futuristic approach to the market than a showcase for the best technologies to come out of Afghanistan.

"You'll see a lot of companies trying to make sense of what the post-Afghanistan environment will look like and presenting a few ideas, but mainly it'll be about the defense industry which has serviced the armies in Afghanistan showing the culmination of their work," Lunde explained.

After the last push for Afghanistan contracts will come transitions toward more long-term solutions in the post-Afghanistan world -- which poses problems for cash and contract-strapped defense companies.

To survive, companies will need to adapt their offerings to post-Afghanistan battlefields. But in order to adapt, the companies will need funding -- such as a government contract -- to conduct the necessary research.

"Its a bit of a Catch-22 for all them," Lunde said. "Unless a lot of these companies get contracts very soon, they will not have the funding needed to help themselves actually adapt."

[Associated Press; By CASSANDRA VINOGRAD]

Cassandra Vinograd can be reached at http://twitter.com/CassVinograd.

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