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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:
https://www.patreon.com/PerunAU

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:
https://www.lockheedmartin.com/content/dam/lockheed-martin/eo/documents/annual-reports/lockheed-martin-annual-report-2021.pdf

Stockholm International Peace Research Institute Arms Transfer Database:
https://www.sipri.org/databases/armstransfers

F-35 price declines:
Lockheed Martin (graphic)

AIA facts and figures:
https://www.aia-aerospace.org/report/2021-facts-figures-u-s-aerospace-defense/2021-facts-and-figures-u-s-aerospace-and-defense/

News coverage:
https://www.defensenews.com/air/2019/10/29/in-newly-inked-deal-f-35-prices-fall-to-78-million-a-copy/

India T-90S procurement:
https://www.defensenews.com/land/2019/11/26/india-pays-russia-12-billion-in-technology-transfer-fees-for-t-90s-tanks/

Impact of Defence Spending on Economic Growth - RAND
https://www.rand.org/pubs/research_reports/RRA739-2.html

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