The Arms Industry's "Super Cycle"

Arms manufacturer Rheinmetall booms, record-breaking contracts - for weapons aimed at Russia and China in particular.

DÜSSELDORF |

DÜSSELDORF (Own report) - Düsseldorf's Rheinmetall arms manufacturer is enjoying a sumptuous upswing in sales for its arms sector and a record-breaking number of contracts. Whereas the company's automotive sector is marking a downswing in sales, in comparison to last year, due to 2019's signs of weakness in the overall auto industry, the current boom in armaments is more than compensating. The shareholders are "delighted," boasts stock exchange reports. At Rheinmetall, there is talk of a "'super cycle' in the company's military sector." Western governments - the company's current and potential customers - are engaged in a massive arms buildup. Whereas this year's military budget for the Bundeswehr will be increased to €45.1 billion - nearly 40 percent more than it was in 2014 - the military budgets of the European countries together will be more than €300 billion. The US military budget is more than US $700 billion. Rheinmetall is benefiting also from the Arab countries' arms buildups against Iran, but above all, from the buildup of the western world against Russia and China.

Excellent Business

The losses suffered last year by Düsseldorf's Rheinmetall group in its automotive sector, was more than compensated for with the sumptuous growth in its military division. Whereas, the intake from the automobile supply branch suffered a 6.6 percent slump, the revenues from the arms sector surged by 9.4 percent, to more than €3.5 billion. That was sufficient to raise the overall sales 1.7 percent to €6.2 billion. The military sector also permitted an increase in its operating result by 35 percent to €343 million - improving the operating margin to 9.8 percent over last year's. The business outlook is excellent. Last year, Rheinmetall was able to land orders valued at nearly €5.2 billion, the orders to be fulfilled total approx. €10.4 billion - 21 percent more than the previous year's (€8.6 billion).[1] "We are also well-positioned for the future in key markets" the company announces. "In our role as an international system provider for armed forces, we are benefiting from the super cycle in the defence technology business."

Bundeswehr - Main Customer

In a "super cycle" - in essence, this is an arms buildup in the global power struggle - all western countries and their allies are current or potential Rheinmetall customers. For years, the Bundeswehr, its main customer, has been increasing its budget. Whereas, in 2014, its military budget was at €32.4 billion by 2019, it had already risen to €43.2 billion - a 12.2 percent increase over 2018. A further increase of 4.2 percent to €45.1 billion is planned for this year. Arms manufacturers will be the direct beneficiaries. Whereas the budget item "military procurement" had already been increased in 2019 by around 36 percent to €15.31 billion, it is planned to be increased by another €655 million.[2] Among the more recent orders placed with Rheinmetall in December, were those, for example, for the modernization of around 70 "Marder" armored personnel carriers (APC) that will inject around €110 million into the company coffers, and the supply of simulation technology for "Puma" APCs valued at up to €142 million. The company will sell 1,000 new military trucks to the Bundeswehr, calculated at €382 million.

Forerunner in Armament

Other western powers and the EU are also experiencing a boom in military expenditures. The European Union's next budget earmarked €13 billion of it defense fund to subvention transnational armaments projects. As with the case of Germany, since 2014, the year in which the power struggle with Russia began to escalate, the countries of Europe - with the exclusion of Russia and Turkey - have begun to systematically increase their military budgets, which, next year, will cross the US $300 billion threshold, according to an analysis of Jane's. Together they constitute the second largest arms market in the world (far ahead of China, with its US $181 billion in 2019).[3] Even the world's forerunner in the arms buildup, the United States, is continuously increasing its military budget. Following a 6.6 percent increase, the official volume for 2019 was around US $685 billion and is projected in 2021, to be further increased to US $705 billion, according to the Pentagon whereas experts estimate the true volume, which includes the covert military spending hidden in other budget items, to already run at around US $934 billion.[4] Rheinmetall hopes to also expand on the US market, where it recently transacted five percent of its sales. The company launched cooperation with the US Raytheon Company in February 2017. Raytheon is one of the world's largest weapons producers.[5]

Arming Against Russia

Aside from supplying various Arab countries [6] - not least of all for their power struggle with Iran - Rheinmetall is also benefiting from the escalation of the power struggle with Russia. This is particularly the case for the Bundeswehr. Within the framework of the Bundeswehr's efforts to completely equip its units for NATO's "Spearhead" - "Very High Readiness Joint Task Force" (VJTF) by 2023, the company in Düsseldorf has received orders valued at around €470 million.[7] In principle, NATO's "Spearhead" can be deployed anywhere in the world, however, currently it is concentrating on Eastern and Southeastern Europe. Since some time, the countries in that region have also been engaged in a massive arms buildup - due "to growing perceptions of a threat from Russia," this is despite the fact that Russian military spending "has fallen for the past two years," explained an expert of the Stockholm International Peace Research Institute (SIPRI) in April 2019.[8] Already back in 2016, together with Krauss-Maffei Wegmann (KMW), Rheinmetall had received an order from Lithuania's military for a supply of 88 "Boxer" armored transport vehicles, worth €390 million. Last year Hungary placed an order in Düsseldorf for tank accessories worth €300 million. An array of other lucrative business deals with Eastern and Southeastern Europe are currently being negotiated.

The Super Arms Customer

To a growing extent, Rheinmetall is also benefiting from the power struggle with China. The share of the company's military sector's sales to Australia/Oceania grew in its total sales from 13.2 percent in 2017 to 14.8 percent in 2018. This is especially the case for sales to Australia, which, over the past few years, has taken a particularly aggressive posture toward Beijing. In August 2018, Rheinmetall received an order from Canberra for the delivery of 211 "Boxer" wheeled tanks worth around €2.1 billion. That was the largest single order in the company's entire history. Already in 2013, the Australian military had placed an order for trucks at a total value of €1.2 billion from the company in Düsseldorf. In 2018, both sides agreed on a follow-up contract for the delivery of more than 1,000 more trucks valued at €430 million. In the fall of 2019, Rheinmetall also received the order for the delivery of a test model of the "Lynx" APC. Should the company land the contract, it will mean the delivery of 450 vehicles worth €9.5 billion. For Rheinmetall, Australia is becoming what experts call a "Super Arms Customer."[9]

 

[1] Vorläufige Zahlen für das Geschäftsjahr 2019. rheinmetall.com 02.03.2020.

[2] Verteidigungshaushalt weiter im Aufwärtstrend. bmvg.de 15.11.2019.

[3] David Reid: Europe's defense spending nears $300 billion as experts say Trump's pressure is paying off. cnbc.com 31.10.2019.

[4] Kimberly Amadeo: US Military Budget, Its Components, Challenges, and Growth. thebalance.com 13.02.2020.

[5] Rheinmetall Defence und US-Hersteller Raytheon vereinbaren globale Zusammenarbeit. rheinmetall.com 17.02.2017.

[6] See also Man schießt deutsch (II) and The Generals' Partner.

[7] System Panzergrenadier: Rheinmetall modernisiert Ausrüstung und Schützenpanzer Puma für die NATO-Speerspitze VJTF 2023. rheinmetall.com 22.07.2019.

[8] World military expenditure grows to $1.8 trillion in 2018. sipri.org 29.04.2019.

[9] Gerhard Hegmann: Rheinmetall winkt neuer Mega-Panzerauftrag in Australien. welt.de 17.09.2019.