Britain s defence boom is built on sand

The FTSE All-Share Defence and Aerospace index has climbed throughout 2023 and is now approaching 9,000 – up from its pre-pandemic high of almost 6,000.

That’s some very solid equity performance, and in many quarters it is being hailed as a sign of massive growth for British defence companies in coming years.

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But we should remember that share prices do not necessarily mean that anything real is happening: they reflect investors’ perceptions as much as anything.

And investors’ perceptions of the defence sector are long believed to have been negatively affected by the rise of thinking driven by environmental, social, and corporate governance (ESG), particularly among large institutional investors.
The idea that making weapons is somehow evil or wrong in itself may or may not have gained traction among finance professionals, but it has definitely been built into the various ESG metrics and indices which nowadays seem to matter so much.

This is likely to have been a factor holding down aerospace/defence shares for some time. Perhaps now it has been belatedly realised that weapons manufacturing is a perfectly ethical investment in a world which contains the likes of Vladimir Putin, Xi Jinping and the Iranian mullahs.


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n Thursday, British defense company BAE Systems PLC (OTC: BAESY) announced signing an agreement with the U.S. Army for M777 lightweight howitzer major structures under an Undefinitized Contract Action (UCA), which is currently limited to $50 million.

BAE Systems will work with its supply chain in the U.K. and the U.S. to manufacture M777 titanium structures, which form the basis of the gun.

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The company has seen an increase in interest from across Europe, Asia, and the Americas in the M777 gun system, creating an opportunity for a restart of M777 production in the U.K.

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"This restart of production of the major structures for the U.S. Army's M777s comes at a critical time, with howitzers deployed on operations in Ukraine," said John Borton, vice president and general manager of BAE Systems Weapons Systems UK.

This artillery piece, last ordered five years ago, is seeing renewed interest due to its battlefield effectiveness in the ongoing Ukraine conflict, reported the Wall Street Journal.

BAE Systems anticipates future contracts for complete M777 guns, as inquiries from over eight countries have increased since the war's inception, as per the report.

Related video: BAE systems getting $35M to upgrade micro-chip manufacturing facility (WMUR Manchester)
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The M777 howitzer, despite needing to be towed into position, has gained preference for its reliability, ease of use, and simple repair process compared to more nimble self-propelled howitzers, the report added.

"The M777 will remain at the forefront of artillery technology well into the future through the use of technical insertions, long-range precision guided munition developments, and flexible mobility options," Borton added.

Price Action: BAESY shares closed higher by 2.26% at $58.55 on Wednesday.

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

Photo via Company

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.


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But is there any real reason to expect a major increase in the size of the British defence industry?

Defence spending is distributed on protectionist lines, and the onshore UK industry is heavily dependent on just one customer: the Ministry of Defence.

The MoD hasn’t suddenly got a lot more money than it had before. There are no new revenues on the table.

Yes, BAE Systems in particular says it is having a good year, with plenty of large orders, but there is no sign that it will book greatly more revenue for 2023 than it did in 2022.

It’s also important to remember that BAE has not really been a British company for a long time: of its 93,000 employees, barely a third are in the UK.

Much of the business it is celebrating is being done in the US and elsewhere. Military technology developed in BAE’s walled-off US subsidiaries is specifically not permitted to spread overseas to the rest of the company.

Yes, various nations are placing orders to rebuild their stockpiles of munitions sent to Ukraine. In particular, as is well known, the Ukrainians are firing 155mm artillery shells far faster than the Nato nations can manufacture them – and even so are having to ration their gunners severely in the face of heavier Russian bombardment.

But a standard 155mm shell is pre-World War One technology. It’s not high-value-added sophisticated stuff of the sort that makes real profits for companies like Babcock, Rolls-Royce and BAE, such as jet fighters and missiles and nuclear reactors.

One reason it is proving slow work to ramp up 155mm production is that, in Western service, such shells are almost obsolete.

When Western forces defeat a Soviet-equipped army, as in 1991, 2003 and 2011, they do not fire many 155mm shells: the enemy is knocked out with precision weapons.

The restocking contracts for 155mm shells that everyone keeps talking about are not sophisticated high margin stuff and aren’t big money.

But surely there’s big money to be made replacing all the tanks and warships Britain has sent to Ukraine?

No, there isn’t. We sent 14 old Challenger 2s which we were disposing of anyway, and Sandown class minehunters which, again, we were disposing of anyway.

We Brits and the French did send a few precision strike weapons in the form of the Storm Shadow / SCALP cruise missile, but that, too, is an old weapon – it is a somewhat modified version of the French APACHE runway-buster of the 1980s – and stocks were being run down as long ago as 2016.

The various replacements for Storm Shadow do not represent new business.

In this context, there’s also a lot of congratulatory talk about the Global Combat Air Programme, GCAP, under which Britain has allied with Japan and Italy to build “the next generation of fighter jets”.

This is seen as especially good news for the British parts of BAE.

But there are reasons to doubt that this will be good business. GCAP was formerly known as “Tempest”, which always seemed like a bad omen to anyone familiar with the disastrous histories of the preceding Typhoon and Tornado F3 fighters.

Both were wildly late and over budget. The Typhoon and its ongoing horrific support costs, indeed, are the biggest single factor behind the UK’s ongoing defence funding “black hole”.

The F3, for its part, was eventually acknowledged as one of the worst fighters ever built. Neither was an export success.

As no GCAP nation has built anything more advanced than a fourth-generation jet, it seems clear that the “next generation” will be the fifth generation.

The problem here is that a fifth-generation fighter is already available for export sale: the F-35 Lightning II.

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The pricey F-35B Lighting II is in service now around the world - Mary R. Jenni/Cannon Digital
The pricey F-35B Lighting II is in service now around the world - Mary R. Jenni/Cannon Digital
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Right now it is expensive, understandably so as it has had hundreds of billions in development funding ploughed into it – not to mention the fact that the US, leading that development, had already produced three operational Stealth warplanes before the F-35.

None the less, the F-35 is in service now around the world.

GCAP is supposed to come on the scene in 2035 – probably much later in reality.

It will be the partner nations’ first stealth warplane. It will not receive more than a small fraction of the development funding that the F-35 did: the partner nations simply do not have the money.

It will be a miracle, therefore, if the GCAP fighter is as capable and affordable as the F-35 is today, let alone the advanced generations of F-35 which will be available then, benefiting as they will from economies of scale.

GCAP is highly unlikely to ever be a competitive export product: its best commercial hope will be of becoming another cripplingly expensive, largely irrelevant millstone around the MoD’s neck, like the Typhoon and F3 before it.

It’s about time defence stocks, for one, were released from foolish ESG restraint: but even then there’s little bonanza on offer for the UK defence industry.


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