Why you are not yet seeing the war in Ukraine reflected in the profits of arms manufacturers

The one’s – literally – death is the other’s bread. This grim saying also applies to (American) arms manufacturers and the war in Ukraine. Judging by the most recent financial figures, that doesn’t seem to be too bad, but the big gains are yet to come.

Less profit

The world’s largest defense group Lockheed Martin had a lesser year so far compared to the first months of 2021. The maker of, among other things, the F-35 fighter aircraft (also known as the JSF) achieved less turnover. And the profit also fell: from 4.2 billion (converted almost 4.3 billion euros) to 3.8 billion dollars.

The American company sees a bright future and is investing in extra production capacity for making weapons to ‘to defend our country and our allies‘. This also includes the anti-tank missiles Javelin and the missile launcher HIMARS (High-Mobility Artillery Rocket System).

Javelin not HIMARS

These two weapons have been widely supplied to Ukraine by the US military. Thanks in part to the anti-tank weapons, the Ukrainian army was able to halt the advance of the Russian army towards Kiev. And the deployment of HIMARS is one of the reasons that the Ukrainian army has recaptured part of the Russian-occupied country.

The second-largest concern, Raytheon, has had a good year so far. The company posted higher sales and increased profits. This was mainly thanks to the recovery in commercial spaceflightwhere the company gets a large part of its turnover.

Noose for Boeing

At Boeing, another American giant, sales also fell. And the company lost nearly $4.4 billion in the first nine months of this year. This was partly caused by Boeing’s fixed prices agreed for the supply of weaponry.

“Boeing was in a perfect storm of high inflation, a tight labor market and… supply chain issues and suffered from technical setbacks in projects,” explains Frank Slijper. He is a weapons expert for the peace movement Pax for Peace. “That then results in a considerable loss.”

Northrop Grumman then, the number four on the list of greatest weapon makers from the Stockholm International Peace Research Institute. Sales fell by 10 percent compared to the first nine months of last year. And the profit fell by no less than 34 percent. This company also suffered from supply chain problems.

Staff shortage and faltering supply

In that respect, weapon makers are the same as other companies, says Errol Keyner of investor club VEB. In addition to faltering supply from all kinds of countries due to corona vicissitudes, they are also struggling with the tightness in the American labor market. “Just like here, you can’t just open a can with technical people.”

Arms manufacturers are also not able to immediately pass on all their cost increases, as is evident from Boeing. “They may hope that they can pass on the three times higher electricity bill when paying for bombs, but that is of course the question,” explains Slijper.

“A war more or less: these are billion-dollar companies in terms of turnover,” Keyner puts into perspective. “It does matter, but certainly not as much as you might think,” concludes Slijper.

The arms makers are also suffering from the war. Russia is one of the largest suppliers of titanium, which is in high demand from the defense industry. Due to the sanctions against the country, manufacturers have to source this raw material from elsewhere. “That also drives up prices,” says Slijper.

Replenish stocks

On top of that, most of the weapons sent to Ukraine come from countries’ stockpiles. And when they start restocking their supplies, the cash register rings at the gunsmiths. “There is a delay factor in it,” says Dick Zandee, defense specialist at the Clingendael Institute. “The orders to replenish those inventories are not immediately reflected in the profit.”

“It takes years,” Keyner agrees. “Production lines have to be started up or doubled, new staff has to be recruited. Before you see that reflected in the profit, you’re a while further,” adds Slijper.

Investors have already pre-sorted on this. The prices of the four major defense companies have risen sharply since the beginning of this year.

And that while the most important stock index in the world, the Dow Jones, is at a loss.

This is indirectly a consequence of the war in Ukraine. Since the Russian threat on the border with Ukraine, defense budgets in NATO countries have already increased considerably and defense spending has only increased further after the invasion.

Full order books

“It’s cynical: there are few winners in a war, but the arms industry often does,” says Slijper. “Those companies benefit from the disaster that is now going on,” Keyner also notes. The prospects for the arms manufacturers have become a lot more stable and better, he sees.

The Netherlands, for example, has already ordered additional JSFs and armed drones. And recently State Secretary Christophe van der Maat announced that the HIMARS missile system will also be purchased.

That is true not literally in the letter to parliament, but “there is only one system that functions on wheels,” explains Zandee. “This is something that Americans have been at the forefront of for many years.”

The order books of the large companies are indeed already well filled. Raytheon received orders for $ 6 billion in the past quarter, the company has a total of $ 168 billion in orders. Lockheed Martin was able to record 4 billion in orders, with a total of 140 billion in orders on the books.

Hundreds of Billions

Competitor General Dynamics estimates that the has just under 126 billion in orderst and aviation giant Boeing for a whopping $381 billion. The company owes a large part of this to the order of more than 4300 aircraft. Northrop Grumman’s order book is worth about $80 billion.

“In that respect, the big winner of this war is the American arms industry, which will become even bigger than it already was,” concludes Slijper.

Source: RTL Nieuws by www.rtlnieuws.nl.

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