Equipment Market

Equipping a force

Equipping an integrated Force

The composition of the force naturally follows from the principal missions it is constructed to achieve and the budget limits set. As we have seen with the simple "defence only" force example capital equipment is fundamental to defining any national force. To a large extent the role of the force is operating the capital equipment it is allocated whether that be a $1000 rifle to 10,000 tonne ship. On the other hand there are elements of any organisation which can be extremely effective without much capital equipment at all.

Equipment Prices

The prices used in this study are derived from published orders for the same equipment from other nations.

This study is an alternative history, not a transitional recommendation. As such the prices paid in the last 20 years are the ones budgeted in this Study. In most cases these are slightly inflated for customisation, delivery, training and extra parts. The only time prices will be based on future estimated costs is when the equipment is not yet available (eg the Airbus A400M).

Equipment prices can vary a great deal according to the negotiators and the geopolitical role of the purchasing country. It is noted that New Zealand has to date paid a very high premium for its military equipment compared to other nations. That said in some cases other nations are able to obtain preferential and even subsidised deals. This Study believes that one reason why New Zealand pays over the odds is because it constantly sources its equipment from Australia which on-sells equipment negotiated under domestic offsets deals. For this reason none of the deals cited here are based on Australian suppliers. This is consistant with the geopolitical under-pinnings of this Study that New Zealand should seek a distinct military capability to match its distinct foreign policy stance.

Acquisition Timeframe

The acquisition timeframe contemplated in this study spans the 20 year period 1990 to 2010. This is to provide a force for the Study period 2010 to 2025.

Over this time period, naturally enough, inflation has to be considered. At the same time however there is also the natural turnover of existing capital stock as older stock is replaced. Equally important Governments rarely buy a defence force all in one go (as it is rather expensive). Thus rather than calculate a 1990 constant dollar budget the acquisition process is based on an opportunistic approach essentially swapping the deals achieved by other nations at the time.

The most significant single items of expenditure in the real-world scenario were the Anzac frigates. These replaced the three stop-gap second-hand Leander frigates purchased from Britain from 1982 to 1987 and the New Zealand new frigate (Canterbury) commissioned in 1971.  The old frigates were decommissioned in 1995 (Southland), 1998 (Waikato), 2000 (Wellington) and 2005 (Canterbury) respectively. The ANZAC frigates were commissioned in 1997 (Te Kaha) and 1999 (Te Mana). Care has been taken to ensure that the acquisition period is consistent with this spread of capital acquisition. Under the alternate scenario proposed the Southland and Waikato would have been replaced in 1990 with Transport/Aid ships, the Waikato and Wellington in 2000 with Fisheries Survey ships and the final two Leanders replaced in 2005 with OPVs.  The Naval helicopters would have been replaced in 2003.

Other systems replaced during this period were the M113 APCs and the Landrovers which were effectively falling apart and the UH-1 Iroquois. The scenario postulated here envisages the Landrovers and Iroquois being replaced sooner (around 2003) and the M113s replaced later (around 2008) than in the real-world case.

Exchange Rates

The world's arms industry largely operates in US dollars, although Euros are becoming more prominent. This study has adopted a working exchange rate of $NZ 1.00 = $US 0.5827. This is the twenty year average for the NZ-US exchange rate to December 2006.  The average for the Euro over the same period is .5117. However as all deals sourced for this study have quoted US dollars it is more appropriate to use the USD rate.

In practice however it would be expected that acquisitions would be timed for periods when our exchange rate was more favourable. At times this has reached US$0.7.

Life Cycle Costs

This study does not consider lifecycle costs directly for two reasons:
a) The author is not privy to secret and commercially sensitive information of this sort directly and can only access published reports.
b) The author considers lifecycle costs incorporate too many assumptions on how military capital will be used.

The author has certainly considered lifecycle costs in making recommendations. These have included:

  • seeking to employ systems with lower manning levels,
  •  seeking to leverage off commercial maintenance and support operations where applicable,
  • seeking systems with lower mission energy costs.

This does not mean that the whole study is cost driven. In many cases the best equipment is either not significantly more expensive or is so much more mission capable that choosing second-best alternatives is false economy.

In general terms the study seeks to develop a much more flexible force which is excellent in a few areas rather than mediocre in many. The guiding philosophy is it would be better to have a smaller force that was better paid but extremely good than a larger force that can barely keep itself together.

Suppliers

Before examining the Primary Missions further we should perhaps examine the world arms market.The following general observations are offered in respect to military systems available on the global market.

United States.

The United States is the world's largest consumer of military equipment. Almost all the equipment used by US forces is made by US companies. US military design and acquisition procedures tend to produce systems which are gold-plated. Ever since World War Two manufacturers have loaded military hardware with absurd margins (e.g the legendary $80 hammer etc) even when the hardware was originally bought from commercial suppliers. US development programmes are often marred by in-fighting between the service arms (Army, Air Force, Navy and Marines) and political kickbacks for state economies. US equipment designs ranges from the extremely good, to the very average. Military systems are rarely built with dual use functionality in mind and tend to be as lethal as possible. This does not always work well with less aggressive situations (leaving the only options of massacre or retreat). US systems tend to be better built for the scale of Pacific than European systems but also tend to be overly expensive. In general terms the more expensive the item the better the US is at making it. In terms of reliability of supply the main difficulty facing New Zealand in dealing with US firms would be the relative insignificance of its orders and the State Department's interference with all US-made equipment - even at disposal.

Main Supply Risks:
Political interference risk: high
Strategic risk: low
Cost risk: high
Support risk: low

Europe.

Europe hosts a wide range of military equipment suppliers. These manufacturers are engaged in an extremely competitive struggle for global arms exports (survival) and as a result many of their systems are of high quality. German systems are the yardstick against all else can be compared. Their Rheinmettal guns and vehicles have sold all over the world. British systems (eg British Aerospace - Alvis) tend to be expensive and unique and have rarely been successful in other European markets. They have recent acquired some South African and Swedish systems (Hagglunds). Italian vehicles have not been at all successful in international markets but OTO Melara's guns are the yardstick by which naval artillery is measured and their turret systems for vehicles are also well regarded. French systems have a strong following in both the Middle East and Sub-Saharan Africa. The French tend to go-it alone in order to support their own industry. Their equipment ranges from the good to the mediocre. Spain's aircraft company CASA (now part of European Aerospace and Defence Systems - EADS) has developed some excellent light-medium turboprop transports. Austria's Steyr company, which supplied the infantry rifles our army uses also produces vehicles in association with the Spanish. Switzerland's MOWAG has set the benchmark in light multi-wheeled armoured vehicles weaning most armies off tracks. The more radical and interesting designs tend to come from Sweden which has long pursued a policy of armed neutrality. How long Sweden can afford to remain seperate remains to be seen. Finland's Patria Systems armour and artillery is certainly very high quality. In general the political kickbacks which occur in the United States are mirrored in Europe with a tendency for nationalistic preferences to over-ride pan-European standard setting. To date the only truly pan-European development has been the Eurofighter Typhoon. The formation by merger of European Aerospace and Defence Systems (EADS) suggests some hope for further pan-European development. It is highly likely that European arms manufacturers will continue along a path of mergers and acquisitions for many years to come. In terms of reliability of supply European firms can generally be relied on. Some, however, such as Sweden, may have political limitations on supplying arms. The only other issue regarding European suppliers is their sheer physical distance from New Zealand. The biggest commercial risk is the high value of the Euro compared to the US dollar.

Main Supply Risks:
Political interference risk: low
Strategic risk: low
Cost risk: high
Support risk: low

Russia and the former Eastern bloc.

Russia has an enormous installed base of military equipment around the world. Russian equipment is marked by a combination of daring originality, technical brilliance, low price and shoddy quality. Simpler Russian systems like the AK-47 rifle are legendary for their reliability. The Russians have many standards which make their equipment (deliberately) incompatible with Western suppliers, and selection of a non-standard item may lock customers in to high parts prices. As the Russians have been forced to rely increasingly on arms sales for export earnings the problem of quality has been gradually addressed. Increasingly the bridge between Russia and the West has been bridged by Indian, Israeli and South Afican firms such as IAI and Denel which have provided the westernisation development needed by the Russians to achieve market credibility beyond traditional markets. Certainly Israel has been the systems integrator and guarantor for some Russian systems sold to India. While there is widespread suspicion of Russian systems in the West many of these systems are now very well field tested and proven. It is notable that when no alternative is available Western nations have been quite prepared to lease Russian equipment to achieve the desired results. In terms of reliability of supply it is important that Russian equipment is also ordered by the Russians. It is quite likely that Russian manufacturers who do not have Russian customers will not be around for much longer.

Main Supply Risks:
Political interference risk: medium (not so much from Russia. The US interfered when Chile sought to buy the excellent Mi-17 helicopter)
Strategic risk: high
Cost risk: low
Support risk: medium

South Africa.

Following years of arms sanctions South Africa developed some considerable expertise in weapons systems development. In particular South African wheeled vehicles have a reputation for reliability, mine protection and low cost, even if they lack the styling of competing systems. South Africa's Denel (like Israel Military Industries) makes an impressive range of missiles and UAVs. As a fellow southern hemisphere nation and member of the Commonwealth, South Africa has some points of commonality with New Zealand. South African firms have allied with European and Israeli firms for systems integration. In terms of reliability of supply the South African firms have issues relating to long term viability.

Main Supply Risks:
Political interference risk: low
Strategic risk: low
Cost risk: low
Support risk: medium

Israel.

Israel has a very large domestic arms industry which develops extremely advanced weapons systems . In the land systems market it has shown little interest in exports, other than weapons systems (eg missiles), but in aviation and naval systems it has made exports - often adapting Russian technology. India in particular has a close working relationship with both Russia (as an OEM) amd Israel as a systems integrator. Like New Zealand Israel has a small population. This means military planners emphasise their own troops  survivability so Israeli equipment is usually extremely good. The main risk is one of political association. New Zealand has a vital trade with many Muslim nations, maintaining a balanced position in terms of foreign policy could be challenging.

Main Supply Risks:
Political interference risk: medium
Strategic risk: low
Cost risk: medium
Support risk: medium 

Singapore.

Singapore has developed an arms industry in recent years of some consequence. The island state has built most of its own Navy, including the Endurance class landing ship tank ( more properly a landing ship dock) and its own Infantry Fighting Vehicle, the Bionix and the Terrex AV81. Singapore Kinetics has also built an interesting range of infantry small arms. Singapore's arms manufacturers have shown a typical Singaporese trait for intelligence, high quality and profitable margins. They have not however achieved much market acceptance. The only possible supply issues that may stem from sourcing from Singapore is if the region should, for any reason become embroiled in conflict with Indonesia.

Main Supply Risks:
Political interference risk: low
Strategic risk: low
Cost risk: medium
Support risk: low

Canada.

Canada has three main areas of significant expertise of relevance to New Zealand. These are its early adoption of wheeled armoured vehicles ( Canada supplied New Zealand's LAV IIIs), its Bombardier company's experience with the British ASTOR project and its coastguard vessels which patrol the world's third largest EEZ. Canada is an extremely reliable source of supply although the US$3.5m unit cost of the LAV III seems very high compared to similar sales around the world.

Main Supply Risks:
Political interference risk: medium
Strategic risk: low
Cost risk: high
Support risk: low 

Latin America.

Latin America has two nations of special interest for the purposes of this survey: Brazil and Chile. Brazil's Embraer aircraft manufacturing company has turned heads with its low cost range of business jets, short haul passenger aircraft and military aircraft. Embaer builds a very creditable lead in jet trainer/ light attack jet, a notable counter insurgency turboprop and a long range patrol aircraft which has recently been selected by the United States department of defence as the model for battlefield electronic surveillance. Chile has two systems of note. The first is its employment of the Italian OTO Breda 60mm L70 rapid fire gun on combat vehicles and the second are the ships produced by national shipyard Asmar.  Chile's Navy has some useful designs. In particular the Transport Vessel Aquiles which is more accurate a multi-role vessel. Aquiles has an Ice class B hull and has been used to supply Chile's antarctic missions.

Main Supply Risks:
Political interference risk: low
Strategic risk: low
Cost risk: low
Support risk: medium

Australia

Other than being a slavish customer of the United States Australia has few claims to fame as a military systems vendor. These include Tenix naval systems, the Bushmaster armoured truck with Timoneny suspension and Austal's ships. Austal's catamarrans have blown US planners away and is now the basis for a development of a littoral combat ship. In general however the main customer for Australian defence equipment is the Commonwealth of Australia and us. In general the little Aussie battlers are more interested in pork than good systems at a low price.

Main Supply Risks:
Political interference risk: medium
Strategic risk: low
Cost risk: high
Support risk: low

Offsets

One of the great traditions of military purchasing has been to try and generate jobs by transferring as much work as possible to the host country. This is called offsets. While it provides a sugar-coating for the bitter pill of much military spending the sad fact is that it rarely results in a sustainable industry being formed. Equally importantly there are cheaper and better places to make defence equipment than New Zealand or Australia. While offsets can have their place in many cases it would be more cost-effective to source a complete system from a relatively low-wage economy such as Russia, South Africa or Chile.

New Zealand's best opportunities for offsets are actually not in low wage ship welding jobs but in high value aviation jobs. New Zealand's capability in aviation engineering from Safe Air, Pacific Aerospace Corporation and Air New Zealand Engineering is actually quite considerable. New Zealanders may also be able to compete in the light Unpiloted Aerial Vehicle market, the telecommunications systems market and the military clothing market.

Innovation

The example of Singapore should not be lost on our policy-makers. Singapore has adopted a policy of building almost all its own military equipment. New Zealand has a defence industry and it also has some highly technical firms that would leap at an opportunity to build a new system for the NZDF which they could refine and sell to the rest of the world. This is, after-all, exactly how forms like Denel, Patria, and Singapore Kinetics have developed.

One area where innovation could certainly be applied is as an early adopter of Gibbs Technology Humdinger sports utility vehicles for operations in the Pacific. Another might be the manufacture of 40mmx53 CS-gas rounds.

Ship Construction Costs

Where most equipment is like buying a car or piece of hardware, ships are essentially purpose built. This brings us into the very murky waters of military ship construction costs.

There has been considerable criticism of the way the contract for Project Protector was let to Australian firm Tenix even before the design and specification was fully complete. At best this implies a lack of imagination, at worst an unhealthy relationship between the RNZN and this contractor.

Essentially naval shipbuilding is a hand-out to industry by Governments. Because all but fisheries patrol ships are a loss to the economy while operating there is a heavy emphasis on securing as many jobs as possible from their construction. The problem in the UK and United States is that their domestic shipyards largely have only one major customer - their Governments. Thus their prices are rather high by comparison. 

Ship construction costs are based generally on a cost per ton. The ANZAC frigates cost US$100,165 per ton which is $30,000 higher than the French multi-mission frigate and $40,000 lower than the German built Scorpene frigate for Argentina. By contrast a cruise ship will generally cost US$10,000 per ton and a container vessel as little as US$3,100. For indicative costs of civilian vessels the Finnish shipyard AkerFinnYard (now STX Europe AS) helpfully published its order book on the web showing that a large Channel ferry can generally be bought for about $110 million Euro.

In general terms however the cost of a military combat ship comes down to the cost of its combat electronics and systems. Buidling ships to civilian specifications reduces the cost by a factor of 10.

Fundamentally the way to build a ship cheaply is not "smart procurement" or any other fancy form of bureaucracy which gets presented at conferences. It is to have sensible design processes without grandstanding and have it built by experienced shipyards which have the lowest possible labour costs. That means you certainly don't want to have your ship built in the USA, UK, or Australia!

As we will see later Both Sarah Bartmann (US$19 million) and Aranui-3 (US$22 million) were built in Romania. The Romanian ship industry ( which not surprisingly is being bought into by Daewoo and Norsk as quickly as they privatise it) builds smaller medium complexity ships extremely well and at very competitive prices. While some may scoff and others decry exploitation the Romanian ship-building industry (0.5% of Romanian GDP) wants the work and giving it to anyone else is essentially a large ( in the case of some ships very large) subsidy.

The same logic applies to the well regarded Goa (India) and Colombo Dockyards (Sri Lanka). These yards build Israeli designed boats at a fraction of European prices.

Final fit-out can be carried out closer to home.