MRO a no-go: Austria to scrap its armoured vehicles

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It's been a mixed few weeks in the news for armoured vehicle manufacturers as the market continues to level out and find its footing in today’s climate of defence cuts.

This week the Austrian Army announced that it is purging its armoured vehicle fleet, reducing the number of tanks from 1,147 to less than 400 over the next two years. Some will be subject to a fire sale, from which the government hopes to raise $26 million (£17 million), while the rest will simply be discarded, although a few will be salvaged for spare parts, according to Defense News.

What does this mean for the armoured vehicle market and how will it affect corporate strategies over the next few years? The news comes against the backdrop of mid-market consolidation and massive contract wins in the industry.

First, General Dynamics announced that it would acquire Force Protection Inc. (NASDAQ: FRPT) for around $360 million, and then Lockheed Martin said it was in discussions with French makers Nexter and Panhard about working together on future projects. It’s likely these will be just the first in what will be a wave of consolidation in the industry as business dries up. Force Protection thrived in the Bush years but the barren contract landscape means that competition will be fierce. As such the sale of the company was believed to be the best strategic move at this time, even though the firm reportedly had $100+ million in the bank to spend on acquisitions.

Competition may intensify, but that’s not to say there aren’t deals to be done. In the UK, Lockheed Martin recently won the contract for the £1 billion Warrior upgrade, and General Dynamics is working on the new Scout SV vehicle for the FRES programme.

Although, since both of these are prime contracts, the likes of Force Protection and Nexter are unlikely to win as it requires a corporation large enough to become the Systems of Systems Integrator (SOSI). So what options are available to second and third tier manufacturers?

The hope is that those smaller manufacturers will be able to survive with increased maintenance, repair and overhaul (MRO) work. But Austria isn’t interested in MRO, it can save $20 million (£13 million) a year by not maintaining those vehicles. Austria’s decision to scrap most of its tanks is the clearest indication yet that this reliance on MRO may not be the wisest strategy for armour manufacturers over the next few years. Consequently it suggests that a diversification of services may be a good alternative for these firms. But diversify into which vertical? Acquisition multiples are inordinately high in cyber security, meaning even the second tier guys are struggling to make headway, and competition in other markets is still prohibitive as sweeping defence cuts begin to hit. That was the difficult question Force Protection couldn’t answer, which is ultimately why it didn’t make an acquisition itself, instead choosing to sell.

Savings of £13 million will be helpful, but hardly radical and redeeming considering the country’s economy is one of the top 12 richest in the world by GDP. Austria cited the need to redirect its money into other areas where new threats are emerging, such as cyber security; cyber is an expensive game, how much infrastructure can be secured with just £13 million? Unless the Austrian government is planning to significantly ramp up its investment in cyber security in conjunction with cutting costs in other parts of its defence budget, the logic behind this armoured vehicle amputation must be questioned.

Contributor:   Andrew Elwell

Andrew graduated from The University of Nottingham with an MA in History in 2003. After graduating Andrew started his career with a niche armour systems manufacturer, which provided ballisitic and blast armour products for the international defence market. His first major undertaking was to project manage a UOR up-armour programme for an in-theatre MoD vehicle. After completion of the contract, Andrew headed up the research and development department at the company. This involved designing, developing, testing and presenting new armour solutions to defeat customer specific threats to all major European and International ballistic and blast standards.

Following this Andrew moved behind the desk and became Senior Editor at a news and data provider, offering proprietary analysis, intelligence, market research and data on the global security and defence industry. The role offered the chance to write widely on the industry, exploring new technologies and getting to grips with corporate finance, mergers and acquisitions and debt and equity fundraisings.

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