Nordic Defense Conference 2010

Opening address by Minister of Defence Grete Faremo
Oslo, 22 September 2010

Introduction
Thank you for inviting me to the Nordic Defence Conference and this opportunity to share my views related to defence and industry.

In recent years, hurricanes, flooding and international financial crisis have caused major ripple effects throughout the world. In addition, unrest and strife in remote areas increasingly affect us. In the aftermath of the financial crisis we have become acutely aware of how complex and interconnected the world really is. Evolving changes within technology, communication, energy, environment and migration reshapes our attitudes and way of life.  All these dynamics have major impact on the world’s economy and international security.

Interpreting change and planning for the future is paramount in decision-making, - both in defence and business. Both sectors also rely heavily on information gathering to provide security. I am sure that you haven’t invited me here to give concrete investment advice. My focus will be on the comprehensive modernization of our armed forces and the cooperation with our defence industry, and thus provide a relevant backdrop for your conference.

The needs of the Armed Forces
Based on its own needs, the Armed Forces engage in broad strategic cooperation with R & D communities and industry. This cooperation related both to procurement and operations involves national as well as international partners.

Each year, the defence sector spends about 35 billion NOK, - out of which 25 billion is allocated to operations, and slightly less than 10 billion NOK to materiel procurements and construction. The sector employs about 20 000 people, and also contributes to  employment outside the sector since a substantial portion of the operations budget is spent on goods and services from domestic and foreign suppliers. Thus the Armed Forces needs and activities contribute significantly to national value creation.

Interaction with commercial enterprises is always based on the needs of the Armed Forces, and in accordance with national legislation and regulations. Therefore Norwegian industry needs to be competitive in order to supply military equipment.

Today’s dynamic and complex global security challenges require responsive military organizations and readily deployable forces. In order to meet the broad spectrum of challenges both at home and abroad, the Norwegian Armed Forces have undergone major transformation. By creating a leaner and more efficient military organisation, it has also been possible to free funds for investments.

Every year, we invest about 7-8 billion NOK in new military equipment. This procurement rate is essential to realise the transformation of our defence structure, and ensure that it remains relevant to meet evolving security challenges.  We have recently procured major new systems like the Nansen class frigates, the NH-90 helicopters and the Skjold class corvettes. Others, like the Archer Artillery System, the CV 90 update and a new Logistics supply vessel, are still in the pipeline, not to mention the procurement of our new combat aircraft, the F-35.

In short, Norway has been very successful in managing to maintain a high investment rate. At about 20-25 % of the total defence budget, we have one of the highest materiel investment rates in NATO, - surpassed only by the US and the UK.

Other allies have so far not been able to modernise their defence forces at the same pace, and due to unavoidable cuts in defence expenditure in the years to come, they are now facing huge challenges.  The Norwegian Armed Forces, however, will most likely maintain its investment rate, - especially when we start renewing the combat aircraft fleet.

This high investment rate ought to make the Norwegian Armed Forces attractive for both foreign and national defence suppliers in the years to come.

Due to the increased complexity of modern military systems, we also envision that the Armed Forces will benefit even more from civilian competence and resources in the years to come.

Role and importance of defence industry
The Norwegian government recently initiated a broad national dialogue aimed at boosting employment, knowledge and competence levels. The long term focus is to create and develop companies that can accommodate the workforce of the future, and in this context, the defence sector is highly relevant

The sector contributes significantly to employment and revenue throughout Norway. Its annual turnover is more than 10 billion NOK and it employs about 6000 highly skilled engineers and workers in defence related activities. It consists of world-class, competitive and innovative technology companies that contribute to valuable spin-offs to other high-tech sectors.

In recent years, export revenues generated by the Norwegian defence and security related industry has been growing steadily and reached 4, 8 billion NOK in 2009. It has grown by an impressive 64 % from 2005 to 2009. Based on this trend, and synergies with other sectors, the government expects the Norwegian defence and security industry to be an important driver for further growth in exports.

More importantly we rely on the strength and capabilities of the defence industry to equip our soldiers. The main goal of the Armed Forces’ acquisitions is to provide the right equipment, in time and at the right cost. These aspects are always emphasized in order to maximize the output of our investments while strengthening our defence capability. 

Materiel investments also have important ripple effects:  The need for advanced military materiel contributes to significant competence building, technology development, employment and exports, - in other words it boosts Norwegian value creation. For this reason, the government is also very focused on how military needs affect the national defence industry, - and we are committed to ensure that defence acquisitions also benefit Norwegian companies.

The recognition of the mutually beneficial links between the Armed Forces and industry is the foundation of our industrial strategy. The government aims at further developing and exploiting this collaboration. The main rationale for this effort is to better meet the needs of the military:  After all, access to national competence, materiel and services is paramount to our soldiers’ operational effectiveness, - as well as their security. Improving this collaboration also serves to boost international competitiveness and augment GNP.

Competence building through cooperation
Like in most other countries, the know-how, competence and products of the defence industry can be attributed to close cooperation with the Armed Forces. Interaction with operative user groups and military Research and Development environments is important to meet our need for military materiel, but it also contributes to strengthening the skills and competitiveness of Norwegian companies.

In a national context, the Norwegian government is pursuing a Defence Industrial Strategy which seeks to forge closer ties between the Armed Forces and industry. The strategy keys on developing Norwegian industry’s ability to support and supply the Armed Forces needs, as well as strengthening the potential for international armaments cooperation. This entails that the implementation of the strategy is tailored to enable Norwegian companies to become suppliers to the Armed Forces, - when and if this is found expedient.

The Norwegian Armed Forces is a very demanding customer. They continuously push industry to perform and excel to meet the high standards and requirements of sophisticated military equipment.  This way, the Norwegian military community contributes towards the development of world class defence technology.  In addition, companies that succeed in supplying their national defence forces stand a much better chance of winning international contracts. Competing abroad is extremely difficult unless you have what you may call a “national reference customer”.

Offset - Industrial Cooperation
The Norwegian defence industry is very competent within a number of technology areas and has what it takes to succeed internationally. But innovative, proven and competitive solutions aren’t always sufficient to win international defence contracts.

Officially all NATO members agree that the main driver in military acquisition processes is to pursue the best solutions with affordable expenditures. This entails avoiding duplication of efforts when sourcing military equipment and technology. By extension, this requires a willingness to place contracts abroad. This logic applies in Norway, and we source more than 70 percent of our equipment abroad.

This philosophy ought to govern military acquisitions throughout the Alliance, especially in times when many defence budgets are stretched to the limit. Most of our key allies however, have a preference for “national champions” and procure most of their equipment domestically. This is especially true in the US where national security considerations and Buy American regulations often inhibit imports of foreign produced materiel. The US only imports about 2 % of their military equipment, and of that the UK has a 70% market share.

Market access for foreign companies is also a major challenge in other countries like France, Great Britain and Germany.

It is quite clear that defence trade is politically driven.  It has never been, and will most likely never become, a truly open market, - based solely on supply and demand.  To counteract this market imperfection, the Norwegian government therefore actively pursues offset to provide market access for our defence companies. This entails that we require offsets for all defence procurement abroad that exceed 50 million NOK.

Over the years this strategy has proven very successful in terms of creating viable and long lasting business opportunities for Norwegian defence suppliers.

In recent years, Norwegian industry has been involved in industrial cooperation projects created through offset obligations amounting to about 2 to 3 billion NOK per annum. During the same period, more than 150 companies from 14 counties have benefitted from this regime. Foreign defence companies currently have offset obligations to Norway for about 9 billion NOK. With the support of the Ministry of Defence, these commitments are continuously being transformed into concrete and viable projects aimed at strengthening Norwegian companies’ market access. 

As I said earlier, a thriving defence and security industry is important to Norway. The prime actor among these companies, Kongsberggruppen, is the cornerstone of its local community. In addition to employing around 4000 people, it engages with more than 150 suppliers from all over Norway. NAMMO is also a major economic driver in its region. Along with a number of other defence companies ranging from Kitron and Simrad Optronics in the south to Natech in the North, they contribute significantly to local employment and prosperity.

F-35 Industrial Participation represents promising prospect for the Norwegian defence industry. The total production potential identified by the aircraft manufacturer and the engine producers is about 6 billions USD (that is 5 billon related to aircraft component production and 1 billion connected to engine parts).

Through the best value system, which entails strong international competition, Norwegian companies have already won contracts for about 350 million USD. This demonstrates that Norwegian companies have the skills, competence and production facilities to meet the very demanding standards of the aerospace industry.

The Nordic Defence Cooperation (NORDEFCO) initiative also holds promising prospects both for the participating nations and their industry. This far reaching security initiative aims at promoting joint Nordic troop contributions to international peace missions as well as joint officer training and exercises. This requires that the states have fairly common (interoperable) military materiel, and cooperate on development, procurement and maintenance of equipment. Through efficient collaboration and rationalisation, it is expected that the Nordic countries will get more operational effectiveness out of their defence spending. A resulting benefit for industry is potentially larger contracts.

In some respects, multi-lateral defence cooperation may also bring challenges. It will introduce more interdependencies between nations as it leads to more specialisation. So, whereas, NORDEFCO will represent greater opportunities for defence companies in general, it may also bring about industry consolidation and perhaps also make some companies redundant. These aspects need to be addressed when initiating future cooperative projects in order to ensure sound balances.

EDA
A few words about the European Defence Agency (EDA). The EDA aims at developing European defence capabilities and promote defence related R & D. This also entails promoting defence materiel cooperation and establishing a competitive European defence market, as well as strengthening the European Defence Technology Industrial Base.

As the only third party nation, Norway has attained a special arrangement with the EDA which ensures Norwegian access to some 20 projects and Joint Investment Programmes.  In addition Norway subscribes to the voluntary Code of Conduct on Defence Procurement, which promotes transparency and competition on defence. This also opens important opportunities for Norwegian companies.

International sales and export control
We believe that our policies and market support mechanisms are effective. In recent years Norwegian companies have succeeded in a number of foreign markets. This is of course primarily a result of the companies’ excellent technology and marketing efforts. But without the support and interaction with the Armed Forces, or market access made possible through offsets, this success would have been more difficult to reach.

Norwegian defence industry has expanded significantly under the current government. And, to eliminate any doubts, this government welcomes this growth, - provided that Norwegian arms exports are carried out in accordance with our strict regulations and the highest ethical standards. We have one of the strictest export control regimes in the world, and we expect all our suppliers to be compliant with all national and international standards related to ethical procurement and production.  

As a final note, - for those that may view our strict export regulations an impediment to winning international contracts, or a deterrent to investing in Norwegian companies. Consider the following: Norwegian companies are succeeding and prospering despite these perceived limitations. That is a clear testimony to Norwegian companies’ innovation, technology levels and competitiveness. In addition it vouches for reliable suppliers and business partners. (Reihnmetall’s recent acquisition of Norwegian Simrad Optronics also serves to illustrate this point).

I believe that ethics in business pays off. This belief is a growing international trend which many European and US defence companies also share. Together with Transparency International they have created a global standard for ethical guidelines. The so-called  ”Global Principles of Business Ethics for the Aerospace and Defence”  aims at making ethics a competitive element, and thus promote a more level playing field among international defence companies. A growing number of international defence suppliers now understand that this is the smart thing do; - it benefits them, industry and society at large.

Conclusion
Our industrial cooperation benefits both our Armed forces and defence industry, and thus Norwegian industry and employment in general. However for this partnership to last, it is important ensure that this cooperation is based on the needs of the Armed Forces.

The close cooperation between the Armed Forces and industry contributes to creating a competitive national industry, which again contributes to cost effective solutions for our military organization. 

Finally, as the defence sector also relies on capital investments, I hope this has supplemented your market understanding and will support your decision making.  We all have a shared interest in creating stability and long-term security.

Thank you for your attention.