English version - Hexagon Composites ASA

COMROD COMMUNICATION ASA – LISTING ON THE OSLO STOCK EXCHANGE
to the costly ongoing military operations in Iraq and Afghanistan. Also, in 2005 the effects of the
hurricanes Katrina and Rita also played an important role.
Another factor that has influenced the increase in military expenditure is the high prices on minerals,
oil and gas. Military expenditure in countries like Algeria, Azerbaijan, Russia, Saudi Arabia, Chile and
Peru are to a large extent resource-driven. Increased military spending from countries like China and
India, on the other hand, are linked to their economic growth.
FIGURE:THE 10 COUNTRIES WITH THE HIGHEST MILITARY SPENDING IN 2005 – IN BILLION USD
0 100 200 300 400 500 600
USA
478,2
UK
France
Japan
China
Germany
Italy
Saudi Arabia
Russia
India
48,3
46,2
42,1
41
33,2
27,2
25,2
21
20,4
Source: Stockholm International Peace Research Institute, 2005 yearbook
Market characteristics
The defence sector is highly project driven, and demand can be extremely volatile driven by defence
programs initiated by governments, usually handled by various Ministries of Defence (“MoD”). A
number of suppliers and sub-suppliers may be involved in one single program, and the decision
process may last for several years. Suppliers have to qualify by meeting pre-defined quality standards,
e.g. like the NATO standard for communication on military vehicles. Once qualified, the manufacturer
may need to take part in extensive research and development programs to tailor-make the product(s) to
the end-user’s needs before the actual delivery takes place. Manufacturing and delivery can typically
take place over a period of time targeting different “milestones” throughout the project. Once the main
delivery has been completed, the supplier will typically undertake to deliver spare parts to the products
for a specified number of years. Consequently, a defence order may last for several years, including
spare parts delivery. It is not uncommon for a defence contract to last for ten to twenty years. As a
result, having signed a contract, the manufacturer will have secured an order backlog over a relatively
long period of time. The contract lengths and the fact that the products are usually tailor-made to each
customer, reduces the risk of competition from substitute products substantially. The barriers to entry
in the defence market can be characterized as relatively high.
Given that the time to market products in the defence sector takes so long, building relationships over
time is a key factor to success. Suppliers need to be active within lobbying towards both customers,
like OEMs, and the end-users (usually Ministries of Defence).
To some extent deliveries to the defence sector can be characterized as cyclical. This can be attributed
to two factors. First, orders are mainly project based. Once a contract has been secured, the timing of
the bulk deliveries will be predictable, both in terms of timing and quantities. Secondly, the spare part
delivery programs will normally represent a yearly order, which is typically a percentage (often 10 –
15%) of the bulk order. Such spare part orders often materialize at the end of a calendar year. The size
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