THE COUNCIL TAKES NO INSTITUTIONAL POSITION ON POLICY ISSUES AND HAS NO AFFILIATION WITH THE U.S. GOVERNMENT. ALL STATEMENTS OF FACT AND EXPRESSIONS OF OPINION CONTAINED IN ALL ITS PUBLICATIONS ARE THE SOLE RESPONSIBILITY OF THE AUTHOR OR AUTHORS. Defense Industrial Restructuring in post Cold War Spain: A Summary Antonia Casellas Spain has significantly downsized its defense industry in the 1990s with mixed results in moving workers and facilities into civil sector activities. In the 1980s, the electronic and aerospace sectors enjoyed the support of governmental policies which targeted them as engines for Spanish re-industrialization. As a result, they managed to advanced their technological capability and became more competitive in the production of subsystems for the international market. Improvement in technological capability improvement, specialization in subsystems, and internationalization have also benefited civil production in these sectors, which now accounts for more than 50% of total sales. In contrast, the naval and armament and ammunition sectors have not been able to adapt to the new defense environment. Both sectors had gone through a deep production crisis while remaining totally dependent on defense markets. Post Cold War budgetary defense cutbacks have taken place in all Spanish defense industrial segments. Defense sales decreased by 29.5% in the period 1990-96, and the Spanish defense industry lost 54% of its total direct employment. While the decrease in defense sales is linked to lower military expenditures, the extensive job loss is also attributable to an ongoing industrial restructuring process in publicly-owned firms initiated in the 1980s. Despite the magnitudes of cuts, the Spanish defense industry has exhibited little supply-side resistance to defense downsizing. First, though there are some defense-dependent cities, there is no defense-dependent region in Spain. Second, until now, the defense industry has been dominated by the public sector, which in 1996 accounted for 73% of the total defense sales. Third, despite the opposition of labor unions to labor cuts, their bargaining power has been limited due to economic and political circumstances. Job loss is attributable to complex causes: budgetary constrains imposed by the Maastricht Treaty since 1991; merger strategies among electronic firms in the early 1990s; continued downsizing of the majority of public-owned defense firms until mid-1990s; and more recent privatization of public-owned defense firms. Agreements between firms, the government and unions regarding defense workforce cuts have involved two strategies: early retirements and resignation incentives. Low supply-side resistance to defense downsizing is also due to the fact that from an industrial perspective, Spain is a second-tier defense producer with a relatively small defense industry in terms of direct employment, sales and assets. Sources disagree on numbers, but scholars estimate than the Spanish defense industry represents less than 1 % of the total Spanish industrial product. Nevertheless, in the 1980s it played a key role in Spanish re-industrialization policy. In this sense, Spain is an example of the importance that a small second-tier defense industry may have for a medium-sized industrialized country. In the 1980s, the Spanish government targeted electronic and aerospace sectors with the goal of creating strong national companies which could compete in high-tech industrial niches. Within this context, the government embraced offset agreement programs supporting technology transfers and extensive participation in European R&D defense projects. These polices did not succeeded in their goals of creating a defense industry with adequate financial and technological resources to supply, in a mid-run, the Spanish Armed Forces and to modernize the Spanish economic industry. The policies did help the electronic and aerospace defense sector to gain experience in subsystems for the international market. When in the early 1990s the Spanish government shifted to a policy characterized by budgetary austerity, the experience gained in offset agreements and European R&D defense projects brought to the Spanish defense electronic and aerospace firms prime contracts with international companies. It also attracted international capital into the public-controlled defense firms. At the firm level, the government encouraged mergers among the electronic sector in the 1980s. Simultaneously, Spanish participation in European arms development programs encouraged the creation of spin-off companies specialized in engineering and aircraft components. Both firm strategies were linked to expectations of growing defense procurement budgets. Spanish government policy has not been clearly targeted on conversion. Spanish central government did not take advantage of the EU initiative for military conversion framed in the KONVER program. In 1993, KONVER I financed 50 % of seven Spanish projects, which represented a 5.8% of total KONVER I funds (Molas-Gallart, 1996). For the period 1994-1997, Spain captured 4.7% of the total KONVER II funds, which represents a smaller percentage than the previous funding (Brömmelhörster, 1997). Thus the increasing share of civil sales over total sales in the aerospace and electronic sectors is more the indirect result of a combination of governmental policies and firm strategies than the implementation of an intended conversion policy. The privatization of public-owned firms and the internationalization of the Spanish defense industry has recently established a new context in which dual-use production may play an increasing role. However, a successful policy must include the following. First, due to the characteristics of the domestic defense industry, the government should direct its defense industrial policy towards dual use strategies. The recent budgetary trends for 1998 and 1999 are not in that direction. The budget shows a general increase on military expenditures, a high percentage of governmental R&D in the defense sector, and new procurement plans. This policy can be justified by the need to modernize the equipment of the new professional Armed Forces as well as to attract foreign companies for the privatization of public-owned defense firms. Nevertheless, it has the negative effect of increasing the dependency of Spanish firms on governmental subsidies and procurement while undermining the importance of the civil production. Second, there is a need to open the debate on military conversion and double-use industrial strategies and their potentials for the Spanish defense industries at the company level. At the firm level, it is widely and inaccurately believed that conversion or dual production implies industrial downsizing. As a result, firm managers as well as governmental and defense officials have assumed that conversion does not apply to a second-tier defense producer country such as Spain with an already limited defense production. Third, the privatization of aerospace and electronic firms should guarantee the technological, organizational and financial stability of firms. Fourth, because new industrial plans for the public-owned naval and armament and ammunition firms imply further labor cuts with a strong negative affects in already weakened local economies, adjustment programs for displaced workers should be implemented. Finally, as the internationalization of the defense industry proceeds and subsystems become the main industrial product for countries like Spain, there is a need to revamp arms trade statistics. Disagreement among sources regarding Spanish defense exports in the 1990s underscores the need to rethink the methodology that governmental as well as non-governmental organizations use in data collection. The growing importance of defense subsystem production can result in severe misconceptions about the real level of defense industrial production of second-tier defense countries. The responses of Spanish defense firms to the post Cold War era are linked to the economic, political and military transformations that Spain has undergone since its democratization process initiated in the mid-1970s and its subsequent integration into EU, NATO and WEU. Despite historical particularities, the case of Spain is instructive because it foreshadows the dilemmas Eastern European countries may encounter in the transformation of their military forces and industries as these countries recover their democratic institutions, integrate into international organizations and move towards a global market economy. The lessons from a second-tier defense producer such as Spain show the limitations of targeting defense industries as engines of re-industrialization. Nevertheless it also suggests the potential for advancing and rationalizing domestic defense production to find a niche in the international defense market. Specialization in subsystems may facilitate a dual use strategy and thus position the defense industry to advance into the civil production. -------------------------------------------------------------------------------- Brömmelhörster, Jörn. 1997. Konver II. Report 9 Bonn: Bonn International Center for Conversion. Molas-Gallart, Jordi 1996. "Industria, tecnologia y comercio en la produccion militar: el caso espanol" Cuadernos Bakeaz. 15. Junio 1996. Last Updated: 2-December-99