From Tokyo to Berlin Why has military spending increased and what does that mean for arms makers?

Global military spending is witnessing a remarkable increase, from Tokyo to Berlin, in order to cover the strategic need in the face of the challenges posed by the recent tensions in the world. While this puts arms manufacturers in front of a difficult equation, they must respond to the exceptional situation. 

The explosion of the armed conflict in Ukraine, the rise in the level of tension in East Asia, the increase in the threats of North Korea's arsenal of weapons, and Beijing's efforts to annex Taiwan, put NATO countries before the inevitability of responding to all these strategic challenges. This is by directing attention to arming its armies, which explains the explosion in military spending in countries such as Japan and Germany.

Conversely, and from a purely economic perspective, these increasing conflicts threaten defense industry supply chains. This puts arms companies in front of a difficult equation, the two main parties of which are; Firstly, the need to meet this growing global demand, and secondly, to overcome the disruption of supply chains with raw materials and electronic chips.

Japan the explosion of military spending!

Japan faces two main strategic challenges, namely; North Korea's increasing threats and the possibility of an armed conflict in Taiwan. Pyongyang has recently stepped up its missile exercises and tests, and has also moved into a spy satellite test. While China intends to widely develop its nuclear arsenal, to reach 1,500 warheads by 2035.

This also makes it imperative for Tokyo to launch a historic reform process for its defense capabilities, including modernizing the armament and equipment of its military forces. According to Japanese officials involved in discussions related to the new national security strategy, the country plans to acquire "Tomahawk" cruise missiles from the United States, develop its own long-range cruise missiles, and strengthen cyber defenses to counter any potential cyber threats.

These plans, in turn, require huge financial allocations over the next five years, set by Prime Minister Fumio Kishida at $317 billion, an increase of 57% over the country's current military spending plan. This would also raise annual defense expenditures to approximately 2% of GDP.

These expenditures open the door to a political battle for the Kishida government, which intends to change the doctrine of not over-arming that the country has adopted since its defeated exit from World War II. This is confirmed by Takao Toshikawa, editor-in-chief of the "Inside Line" newspaper, in his interview with the "Financial Times", saying: "There is no solidarity within the government or the ruling party regarding this massive increase in defense spending."

Germany Sagging equipment and difficulty in repair

The common factor between Germany and Japan is that they follow a skeptical doctrine regarding armaments after defeat in World War II, which NATO forces them to overcome and increase military spending. This is in addition to the fact that the two countries face heightened tensions close to their borders; In the case of Berlin it is the war in Ukraine.

NATO is pressing for its members to raise their military spending to 2% of the domestic product of each member state. This is what the German government promised to achieve, last June, when Chancellor Olaf Schultz announced the establishment of a special fund to increase defense spending by 100 billion euros to modernize the German army, in response to NATO's goal by 2023.

But in early December, the Schultz government announced that it had failed to fulfill those promises. Its spokesman, Stephen Hebbestreet, downplayed his country's ability to achieve the NATO goal by next year, saying: "It is not clear whether this [the goal] will be in 2023."

On the other hand, the German army's urgent need for modernization and reform is evident through the widespread flabbiness and deficiency of its arsenal. With the announcement of the "100 billion euro" package, the government has not yet converted it into armament contracts, in order to cover this shortfall. Added to this is the depletion of this arsenal by sending aid to Ukraine, which is not being replaced.

This is confirmed by the head of the Federation of the German Armed Forces, Andre Fausner, in statements to the television network "Welt", saying: "The ministry is still in the analysis phase. At the moment, we are still doing good things with regard to the eastern wing of NATO (NATO), and the tasks that it We are currently implementing it in Mali, Iraq and others, but we send equipment to Ukraine and do not replace it. Even the 100 billion euros (which have been earmarked for the development of military capabilities) have not yet been signed with contracts, and this is the truth."

The United States Concerns about the strategic arsenal?

According to analysts , the world is experiencing a paradox today, as America needs two powers such as Germany and Japan to stand by it in its major strategic battles in East Asia and Europe. This is after the two countries were almost entirely dependent on America for their defense. Which explains the pressure of NATO towards achieving its targets for military spending.

On the other hand, the United States itself is living in fears about a shortage that may have afflicted its arsenal, given the supply of arms to Ukraine without replacing it in stores. According to the Center for Strategic and International Studies (CSIS) , in most cases the quantities given to Ukraine are relatively small compared to US inventories and production capacities. However, some US stockpiles have reached the minimum levels required for war plans and training.

According to a previous report published by CNBC , the normal production level of artillery shells for the 155 mm howitzer, which is a long-range heavy artillery weapon currently used in the battlefields in Ukraine, is about 30,000 rounds annually in peacetime, noting that it is the same amount used by Ukrainian soldiers within Almost two weeks.

These concerns, which also include ammunition stocks that the United States needs to keep to support war plans that may be a conflict with China over Taiwan or in the South China Sea, or perhaps with North Korea, according to observers' estimates .

As Jake Sullivan, the national security adviser in the Biden administration, pointed out on Friday : The war in Ukraine has exposed deficiencies in the country's military-industrial base that must be addressed to ensure that the United States is able to support Ukraine. And also be able to deal with emergencies elsewhere in the world.”

Next week, the US Congress is heading towards the final approval of the military budget for the current fiscal year, which is expected to reach about $858 billion, an increase of $45 billion over what President Joe Biden previously requested.

The tough defense industry equation

The goals of the new budget for the Pentagon, according to the "New York Times", include a 55% increase in funding for the army to purchase a new missile arsenal, and a 47% increase in purchases for the Navy. This will cause a boom in the incomes of US military contractors, and more generally defense manufacturers in the world.

That's in addition to $678 million to expand munitions plants in areas like Scranton, Pennsylvania, Middletown, Iowa, and Kingsport, Tennessee, "where contractors are working with the military to replace ammunition that Ukrainian artillery crews are burning at an alarming rate," according to the American newspaper.

However, with this boom, there is a difficult bet that lurks arms manufacturers in the world, whose prominent title is their ability to raise the pace of production to respond to this growing and urgent demand. This is confirmed by Gregory Hayes, CEO of the American company "Ratheon", saying: "We have consumed six years of Javelin antibiotics that we need to manufacture so it will take us years to renew and restock."

On the other hand, and according to the report of the Stockholm International Peace Research Institute (SIPRI), despite the strategic challenges the world is witnessing and the high demand for defense industries, they also put these industries in front of a crisis of disruption of supply chains.

The report notes that the war in Ukraine “presented arms manufacturers with challenges in supply chains,” given that Russia is one of the main suppliers of raw materials for this industry, and therefore, this matter “may hinder the ongoing efforts in the United States and Europe to strengthen their armed forces.” and replenish their stocks.