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UK Defense Cuts May Hit BAE, Lockheed Martin, Others

Defense manufacturers suffered a further blow recently as the U.K. became the latest European nation to announce military cutbacks as part of austerity measures.

European Union Flag
Jonathan Kitchen | Image Bank | Getty Images
European Union Flag

UK Defense Secretary Philip Hammond said the government planned to axe 20,000 regular army troops and scrap 17 major units by 2020, as part of its ‘Army 2020’ plan.

While the UK cutbacks are targeted at personnel rather than equipment, Alexander von Rosenbach, armed forces editor at research firm IHS Jane’s, said troop cuts would decrease the need for both current and replacement equipment.

“There will be a reduction in equipment currently in service and we expect the army to eventually scrap various pieces of equipment, notably tanks and artillery, in large numbers, as part of its effort to restructure according to the Army 2020 plans,” Rosenbach told CNBC.com. “As a result, future contracts for replacement equipment or modernization work will necessarily be smaller.”

Rosenbach said the 227-millimeter M270 Multiple Launch Rocket Systems, supplied by the US firm Lockheed Martin , will either be redistributed or scrapped under the cutbacks, as they are used only by the 39th Regiment Royal Artillery which will be eliminated under the government’s plans.

Rosenbach added that AS90 self-propelled artillery, currently supplied by British firm BAESystems , is also likely to be reduced.

The merger of the 1st and 2nd Royal Tank Regiments may also reduce the need for Challenger 2 tanks, built by BAE Systems Land and Armaments.

The UK’s Ministry of Defence, MoD, currently spends around 14 billion pounds ($21.8 billion) each year. Other aerospace and defense firms supplying the MoD include America’s Boeing and Northrop Grumman , Italy’s Finmeccanica , France’s Thales and the UK’s Rolls-Royce .

However, Rosenbach said the UK’s announcement on Wednesday could not have surprised defense manufacturers. “The fact that today’s cutbacks have been anticipated for some time and will likely occur in phases across a number of years will lessen the blow to the defense sector,” he said.

He added that the UK’s cuts were part of a broader European trend. “We have already seen extensive personnel, platform and defense budget cuts in Germany, France, Spain and many others. The focus across Europe is on streamlining and cost savings at the expense of capability.

“The state of the British economy has already proven we are not exempt from the deteriorating situation on the continent, and the government has long stated the British Armed Forces will not be immune,” he said.

The UK and other European nations are hoping to pool military resources to help offset the capability gaps that have or will emerge as a result of cuts, said Rosenbach.

“The UK is pursuing bilateral cooperation, as with France, but is also working very actively working with NATO and the EU. If these complex efforts are successful — and there is certainly no guarantee they will be — they should help to keep the British Armed Forces competitive on the world stage,” he said.

— By CNBC.com's Katy Barnato

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