Defence economics, and the US production advantage

Sponsored by Ground News:

Video info:

In some of my earliest coverage of the Ukraine war, I noted that just comparing defence spending between countries was extremely difficult and not all budgets are created equal.

Today following a Patron vote, I'm going to try and unpack that a little more by diving into the world of defence economics and production 101. In doing so, we're going to try and answer some questions.

Why does America dominate the global arms market?
How can a 5th generation fighter be cheaper than those decades older than it?
And why do so many nations chose to buy in arms rather than build their own despite the fact it leaves them highly reliant on other countries?

Get ready for an "exhilarating" mix of economic theory, budget figures, and many, many stories of countries failing to build a good jet engine and just buying one from General Electric instead.

This video is not financial advice, and I'm not an American, but if you're going to talk about scale in high-tech military production, you have to talk about the US of A.

Patreon:

Caveats:
Just because I throw up an image of a system when describing challenges - that does not mean I think whatever I've put on the slides is a bad system. The Avro Arrow was a masterpiece - but it's a good picture of risk because it ended up cancelled and a bunch of resources were wasted for example. Arjun is a good example for competitive advantage because, while India was willing to back it domestically, Arjun 1 had nothing like the export successes of the major players (Abrams, Leopard, and the Russian Ts)

Figures from groups like the AIA are taken and presented as is - I obviously have not independently audited Lockheed Martin's annual report or the AIA facts and figures

As mentioned in the video - I have focused on comparing defence spending to other sorts of defence spending. I am not seeking to do opportunity cost analysis against other forms of spending.

I'm also not arguing for higher or lower military spending in this video, I'm just trying to explain why the impact of a procurement budget is highly contingent on where stuff is manufactured, and things like that.

Sources:
Lockheed Martin annual report 2021:

Stockholm International Peace Research Institute Arms Transfer Database:

F-35 price declines:
Lockheed Martin (graphic)

AIA facts and figures:

News coverage:

India T-90S procurement:

Impact of Defence Spending on Economic Growth - RAND

Timestamps:
00:00 -- Opening words
01:33 -- What am I covering?
02:46 -- SPONSOR: GROUND NEWS
04:20 -- What's in a defence budget
05:56 -- People Costs
07:03 -- System Costs
09:04 -- System Sourcing
09:36 -- Example 1: Bring it in
12:29 -- Example 2: Domestic production
14:58 -- The make or buy decision
16:49 -- The hard decisions
17:58 -- Foreign Import
19:01 -- Kit Assembly
20:28 -- Licensed/local production
22:22 -- Domestic productions
23:07 -- Why not indigenise
23:28 -- Barriers to domestic production
23:56 -- Complexity and cost of entry
27:03 -- Indigenous fighter programs
29:16 -- Manufacturing scale
31:50 -- Development risks
33:59 -- Competitive advantage
36:55 -- Case Study: The US advantage
37:21 -- Dominant consumer & producer
39:59 -- Production costs
41:13 -- Scale
43:17 -- Learning curves
45:03 -- Risk mitigation
46:54 -- Accumulated advantage
49:40 -- American arms ecosystem
52:42 -- A tale of two aircrafts
55:26 -- A question for another time…
55:57 -- Conclusion
57:13 -- Channel update

[PerunAU]

This video is really a kind of thank you to all the Patrons who have supported me for months, and who voted for me to take a dive at a topic which I probably wouldn't have the courage to look at otherwise (it's a bit niche compared to covering an active war).

I'd also like to say thanks also to returning sponsor Ground News (these guys have been happy to back me even when I cover niche topics, and I thank them for it):
Compare news coverage from diverse sources around the world on a transparent platform driven by data. ground.news/perun

[KingsandGenerals]

The content is very, very good, but beyond the content, it is difficult not to notice a great work ethic - you are going to have a big channel!

[OtterTreySSArmy]

I'd like to add something to the whole US production advantage: ALL manufacturing centers in the US by law are required to be compatable of military production. We have this thing called the DPA(Defense Production Act), and once it's invoked, all domestic production of non-essential consumer goods are halted and are converted to military production. The government owns gigantic warehouses full of production equipment that in a time of war are sent out to various factories and those lines pump out whatever they're designated to do. Also large consumer manufacturers in the US are defense contractors as well. GM, Ford, Chrysler, and Boeing(obviously) all have defense divisions.

I work in a car factory, and if the DPA is invoked, we become a tank factory within a month. Most countries in the world don't do that, nor can they do that.

[julesgro]

Perun, your work here is the single best thing to come out of this whole bloody affair.
These could straight up be official presentations at NATO defense college or some such.
Keep it up my man!

[sunny-sqci]

another thing to add is that generally speaking the US military and the tech it funds in r&d is somewhere 10-20yrs minimum ahead of everyone else. that is not cheap to support.

[TekGriffon]

The thought experiment on how the Ukraine war is going to long-term impact the Russian arms export business sounds fascinating. It'll be a lot of theory-crafting, but I'm excited to see what hard data you pull in to support your theories. Thanks for another great video, man.

[owd]

Once again, some of the best content available anywhere. This is honestly as interesting, informative and in depth as a lot of content from places like CSIS and ISW.

[Coondawgwoopwoop]

I’m so happy there are still creators like yourself still on this platform. It really makes my day when I see you’ve posted a new video.
Everyday we live is a day we get to learn.

[blessedsnake]

Never thought I'd be so excited about military economics lecture

[SittingOnEdgeman]

This is honestly fascinating because it explains some of the most poorly understood aspects of the defense industry - most notably it helps explain American (and to a lesser extent, Russian and Chinese) "soft power" in the Defense industry. The closer your alliance with America, the more stuff of ours we let you buy, the more cost effective your own military becomes - and the more dependent you are on maintaining that relationship with America. It also helps explain why AUKUS was such a diplomatic break between France and Australia+USA, because the French industry probably isn't as resilient to losing such high-technology connections and contracts.

I also previously had been a major skeptic of the F-35 JSF program in that it felt like a political decision more than a military one. This definitely helped me grasp a lot of the benefits of unifying the fighter choice between military branches, and why it makes sense from a cost perspective - you can probably afford twice as many F-35s as you could afford a "Bespoke" Army or Navy aircraft. And having more platforms probably outweighs having one that's 5% better for your particular application.

[foxtrotcharlie]

When I first watched your channel, you were at just over 20k subscribers, the content consistency and quality speaks for itself. Congrats on 200k!

[Partstim]

Something that could have been included with this - another advantage that the US Mil-Ind complex has is using the military-funded R&D for civilian manufacturing products. Those can be hugely profitable after the kinks have been worked out on the military side. A new indigenous start-up lives and dies on the one customer it has, where Boeing knows it can make money further down the line on the civilian side.

[BovineFreedo]

This is fast becoming one of the best parts of my Sunday. I like the job you are doing.

[truckerallikatuk]

That Saudi F15 contract is pretty much a "Just add personnel" contract. They're getting everything they need for those aircraft with the only added costs are the people to use and maintain them, and maybe additional munitions if they get into a fight.

[JoelJames]

I would like to mention that I like the slideshow format. I listen to you while I go on long walks, so knowing I’m not missing much visually is a good thing.

Also, I would love to see a video on why America commands less than half the export market despite all the advantages you listed here.

[kalmenbarkin]

I work in the defense industry on the machining side and one thing about large/small volumes is that when we start a new line and tool up etc it takes months before we work out all of the little kinks (eg machines stop breaking down twice a shift as we figure out exactly what speeds coolant ratios and the like we can get away with running stuff at)
Efficiency of manufacturing on the very same tools and the very same machines is much higher in month 6 than it was in month one

[ScrapKing]

Another defence spending difference is some countries include their coast guard in their militaries, others don’t. The U.S. does and Canada doesn’t, as one example. The Canadian Coast Guard is part of Canada’s Department of Fisheries and Oceans, and is more about enforcing fisheries quotas, civilian water safety, etc., than coastal defence. Whereas in some countries it may do those things as well, but also have a military component.

[moseszero]

15:30 - I would LOVE to see a breakdown of the knock-on effects of so much russian/soviet made equipment being sent to ukraine and backfilled with NATO standard equipment. Russia had a decent market for selling military equipment but after this war there will be fewer countries with a need for russian made parts. AND the sanctions are preventing the manufacture of many of their most advanced jets and tanks. I don't think Putin could have done more to cripple the russian military industry if he tried.

[davidcpugh]

As an under equipped grunt on the sharp end, and since then an economic and financial wonk, your presentations are bang on the money. No puns intended?

[thcdreams]

You always knock it out of the park. Stay on your grind homie. Thanks.