“To manufacture, or not to manufacture ?” . . . that is the question

Friday , 4, October 2013 Leave a comment

Various defense commentators on social media have championed Philippine manufacture of all manner of weapons. From 20mm cannons to sophisticated aircraft and missiles. All too often, however, these Self-Reliant Defense Posture (SRDP) advocates side-step the need to be selective about what we push to make by ourselves. All forms of manufacture, to include weapons manufacture, is subject to laws of supply and demand. If the demand for an item — for example a 20mm cannon — cannot justify the cost of production, then it SHOULD NOT be produced.

The calculus is quite simple:

Per unit cost = Cost of production / Number of items produced

Cost of production includes capital expenditure for production equipment, cost of raw materials, salaries and consultancy fees, and other business start up costs.

The AFP cannot buy a weapon maker’s wares for forever, resulting in a limited production run.  The Philippines could end up with the most expensive examples of a specific type of equipment.

To sustain the business, therefore, the weapon maker must be able to sell his wares overseas. Given the number of established players for various arms segments, a new company with no track record will be at a significant disadvantage. Whatever employment opportunities such a venture would open could very well be short-lived, as production lines shutdown for lack of demand. A fact of business life that established companies like Lockheed Martin and Saab face with their F-16 and Gripen production lines respectively.

The local defense industry’s focus on small arms manufacture reflects pragmatic recognition of the prevailing state of affairs. The market for that class of weapon remains relatively open. While the necessary equipment for quality manufacture still requires significant investment, the potential rewards still justify the risks.

Those risks increase in direct proportion to the complexity and capability of the weapon. This is already apparent even while still focusing on the small arms category, but simply going up to the high-end of the caliber scale — 12.7mm/0.50. There’s a reason why the Browning M-2 and the DShK are still kings of the hill in those caliber categories despite their age. Although there are indeed pretenders to those two thrones, these arguably will remain ankle-biters for the foreseeable future. The specialized nature of these weapons translates to limited market growth which is already served by existing solutions and suppliers — Military channel documentaries not withstanding.

There is prestige in make systems yourself. But such vanity pursuits have to be tempered by practicality. You would be hard-pressed to find a successful businessman, with an eye for profit, who would risk capital in saturated weapons markets. The Government Arsenal (GA) could theoretically get involved in such ventures since profit is not their goal. But that would still be a poor use of the people’s hard earned taxes. Those funds could be applied to more sustainable SRDP endeavors that give the people more bang for the buck. The GA’s push into small arms manufacture, and even the upcoming production of small bombs for the Philippine Air Force, as well as the Navy’s focus on relatively unsophisticated boats (e.g. MPACs, etc.) — all of which focus on already-present, and unsatisfied, local demand — reflect the conservative approach that effective stewardship of the people’s money requires.

Does this mean that the Philippines should abandon all hope of manufacturing systems beyond the simple ones that it can now? Not at all. It simply means that it needs to pick its battles and choose sunrise technologies that still offer hope for, at the very least, profitable market penetration or at best market leadership. Production of me-too products will yield limited benefit.

Patriotic considerations aside, some items are simply best bought from existing vendors overseas. For examples of companies that have successfully found niches in the local defense industry, see Sustainable defense manufacture in the Philippines.


This article is also on Timawa.net here: http://www.timawa.net/forum/index.php?topic=35948.0