The State should not compete with its own private sector in the defence industry. This would be a strategic mistake

The defence industry has a unique concept. The goods and services, i.e. products, produced in this industry are not subject to the sales conditions of other products sold in the world free market environment. You cannot sell a defence industry product to any country, or even to any company. The production, marketing and sale of a defence industry product is subject to the approval of your state. In other words, you cannot sell your defence industry product to an internal or external customer that your state has not approved its sale.

In this situation, the private sector's investment in the defence industry is not an easy decision or a risk that can be taken easily. The state will decide which product you will produce, and the state will decide to whom you can sell your product. By investing in the defence industry, the investor is actually taking a great financial risk.

States must provide the necessary support for private sector industrial companies to earn, produce and survive, otherwise it will not be possible to find investors to invest in such a sector.

In the last fifty years, the US companies, which are the leaders of the world aircraft market, have merged continuously, why?

For example, McDonnell and Douglas merged to become McDonnell Douglas, which was later acquired by Boeing, strengthening Boeing's military aviation capacity.

While Lockheed, Martin and Marietta companies were separate companies; first Martin and Marietta merged, then Lockheed bought this formation and became Lockheed Martin. Lockheed Martin also acquired the aviation unit of General Dynamics and became the most powerful military aircraft manufacturer in aviation history.

While Northrop and Grumman were separate companies, they merged and became Northrop Grumman, even selling some of their aviation divisions to Boeing.

The century-old US aerospace company Fairchild first bought Hiller and became Fairchild Hiller. Then it bought the civil aviation division of German Dornier and became Fairchild Dornier, then it was bought and became M7 Aerospace, and finally M7 Aeospace was bought by the US company of Israeli Elbit Systems and became Elbit Systems-USA.

The 164-year-old engine company Pratt & Whitney was acquired by United Technologies Corporation, which merged with another defence industry giant, Raytehon.

The marriage and sometimes divorce of US defence industry companies is a continuous and dynamic process due to the conditions dictated by the competitive environment.

Why do US aerospace companies keep merging?

In order to gain market share and survive, they have merged to create synergy and join forces.

What triggered these efforts to join forces was the method applied by the US governments to defence industry support.

For years, the US governments provided serious support to defence industry companies for every product they produced, and this support was especially high before and after World War II, and this support continued during the Korean and Vietnam Wars and the Cold War.

However, towards the end of the Cold War, the following decision was taken: state support for defence systems would not be provided in any case, the state would hold a tender for the design and manufacture of a weapon system to be procured by the state, at least two contractor companies would be identified, these contractor companies would be given incentives for the design of the desired weapon system, then these two designs would compete, and whichever design won, the serial order would be given to that company.

This form of support was a quantitative, pragmatic method that took the US defence industry companies out of idleness, created a competitive environment where the bread was in the lion's mouth, and paved the way for an eco-system where the good, hardworking, talented and strong won. In order to become stronger and gain a competitive advantage, companies actually preferred to merge out of necessity.

Countries whose Defence Industries consisted of SOEs did not succeed

The former USSR is the best example of a country whose defence industry consists of SOEs (State Economic Enterprises). The success or rather failure of the USSR is also evident.

The organisation, human and capital structure of an SOE is contrary to human nature in order to develop, make it efficient and competitive. It would be the wisest and most economical behaviour to form the defence industry from private enterprise companies as much as possible.

The management and employees of SOEs are within the comfort zone of their state; in other words, efficiency, competition, productivity, continuity, survival or earning more are not among their priorities.

The USA, the UK, France, Sweden, Sweden, Israel, S. Korea and other countries that are strong in the defence industry and other industrial sectors have achieved their strength through privately owned companies.

Countries whose defence industries are composed of SOEs could not integrate these industries into their collective ecosystems, and could not be competitive, efficient and successful. They may have continued to produce weapon systems, but they could not be pioneers in the creation of creative designs, and due to their inefficiency, it became necessary to continuously support the unprofitable defence industry SOEs from the state budget. However, eventually, the harsh economic realities gnawed their ecosystems from within and turned them into gangrenous. This situation made negative contributions to the purchasing power of the country and the welfare of its people.

Another danger for efficient and dynamic private companies in the defence industry is that their state-owned SOEs compete with them. This is actually a strategic mistake.

Imagine a private sector company that has a say in a defence system, that can sell its products both domestically and internationally, that can make a profit, that pays taxes, that can carry out R&D because it makes a profit, and that can continuously improve its company and its products, and imagine that a state-owned SOE offers the same product to a private sector company. First of all, for the needs of your own Armed Forces, the product of the state-owned SOE will be preferred, not your product.

In this case, you have lost the domestic market. In the foreign market, your biggest marketer is actually your state and you will not be able to sell your product to a country that your state does not approve. Instead of buying your product, the foreign customer will buy the product used by your armed forces, this is an almost unwritten rule with justifiable reasons.

After all, if you were producing a single product, your company is bankrupt. Even if you have more than one product, you have suffered a serious blow. In such an environment, who would consider investing in the defence industry?

Companies in the defence industry are institutions that are in contact with various industrial sectors of our country and other countries, that have fast reflexes, that have no place for inertia in their efforts, that have to be constantly dynamic, that are competitive but also prone to cooperation. They have to carry out their processes in a systematic ecosystem. They compete with their domestic and foreign rivals, but it is not possible for them to compete with the industrial organisations (SOEs) of their own states.

If the state competes with them through the defence industry SOEs, it closes the way for private sector defence industry companies. This would be a strategic mistake that would block the way for the defence industry, which can and should be dynamic and economic.