The Economist - USA (2020-02-15)

54 Business The EconomistFebruary 15th 2020

2 and its suppliers, which include Raytheon

and Britain’s bae Systems. baesold 72 Ty-

phoon jets to the desert kingdom in 2007 in

a deal said to be worth around $7bn (which

the firm is keen to extend). Saudi Arabia

has procured antimissile systems from

Lockheed Martin and Raytheon.

But there are some things that Ameri-

can firms will not—or cannot—sell. Inter-

national arms treaties to which America is

party bar signatories from exporting ballis-

tic missiles, as well as certain cruise mis-

siles and armed drones. China, which has

stayed away from these compacts, faces no

such constraints. Once limited to supply-

ing communist revolutionary movements

with small arms, it has become one of the

world’s biggest arms exporters.

Dragon flies

Strategic rivals like India (the world’s sec-

ond-biggest arms importer behind Saudi

Arabia), will not touch Chinese wares. But

China’s armsmakers are making forays

into Africa and the Middle East, especially

with armed drones. Although these may

not be as advanced as American ones, they

can be just as effective—in 2018 the uae

used a Chinese drone to kill a Houthi rebel

leader in next-door Yemen, where it is

fighting an insurgency in a Saudi-led co-

alition. And they cost a quarter as much.

Peter Navarro, President Donald

Trump’s trade adviser, has complained that

the Wing Loong II, made by the Chengdu

Aircraft Industry Group, is a “a clear knock-

off” of the Predator drone built by Ameri-

ca’s General Atomics (ga). Rainbow ch-4

drones, developed by the China Aerospace

Science and Technology Corporation, look

an awful lot like ga’s smaller Reaper. Mr

Trump has sought to ease restrictions on

exports of the American models. Neverthe-

less, points out Pieter Wezeman of sipri,

the deals allow the Chinese to build rela-

tionships in the region, paving the way for

future sales of other systems. Qatar already

has Chinese-made ballistic missiles.

Russia, with domestic sales in decline

since 2016, also covets more Middle East-

ern custom. Like Chinese kit, some of its

technology is cut-price and comes with no

strings attached. Though a lot of it is no

match for the best European or American

equipment, “it’s good enough”, sums up

one industry insider.

Russian firms have yet to break into the

Gulf’s lucrative market; in Dubai the affable

Mr Kladov seemed keenest to flaunt non-

military kit, such as a wine-storage system

made of military-grade materials and a

Kalashnikov passenger hydrofoil. But they

have been supplying deadlier products to

Egypt, temporarily denied American arms

after a military coup in 2013, as well as to

Syria and Iraq. Russia’s government says it

is in talks to sell Sukhoi’s su-35 combat jets

to the uae (though Emirati airmen would

prefer, and will probably get, America’s

snazzier f-35s). The Saudis are discussing

acquisition of the s400 anti-aircraft mis-

sile systems made by Russia’s Almaz-

Antey. America would be miffed if the king-

dom turned to Russia. When Turkey (a

nato ally) agreed to buy the s400s, Ameri-

ca reacted by refusing to sell it f-35s.

Chinese and Russian firms also look

poised to benefit from an arms embargo

which some northern European countries

have imposed on Saudi Arabia over its con-

duct of the war in Yemen and the murder of

a dissident journalist. Germany has

banned weapons made or co-developed by

German firms, or containing German com-

ponents, from going to the Saudis. Cana-

da’s government is under pressure at home

to block an $11bn contract to furnish Saudi

Arabia with armoured vehicles made by

General Dynamics. Britain has suspended

new export licences for equipment that

might be used by the Saudi-led coalition in

Yemen. bae’s £5bn ($6.5bn) deal to sell

more Typhoons may be in jeopardy.

The last threat to Western dominance

may come from the importers themselves.

Big defence contracts typically involve

joint ventures with local companies.

These, says Lucie Béraud-Sudreau of the In-

ternational Institute for Strategic Studies,

another think-tank, enable the customers

to develop weapons themselves. Australia,

Pakistan, South Korea and Turkey have all

developed local defence industries from

scratch, notes Strategy&, a consultancy,

partly through offsets but also because of

policies to help domestic suppliers.

At the Dubai show the uae unveiled

Edge, a consortium of 25 defence firms.

Saudi Arabian Military Industries (sami),

another national group, was set up in 2017.

The Saudis want to localise half their

spending on arms by 2030, from 2% in 2017.

They are enlisting foreign executives and

experts. China has built a drone factory

there; sami is run by a German. It will be a

while before local companies rival the

Western giants. But the days when the West

could sell the sheikhs out-of-date muskets

are not coming back. 7

Arabian knights in shining armour

Source:SIPRI

Worldwide arms imports

By region, %

2009-13

2014-18

Asia Pacific 47.0

Middle East 20.0

Europe 14.0 Africa 10.0

Americas 9.0

Asia Pacific 40.0 Middle East 35.0

Europe 11.0

Africa 7.8

Americas 6.2 T

he ownerof Burger King had a less

than royal 2019. After a sizzling start to

the year Restaurant Brands International

(rbi) shed a fifth of its market value be-

tween August and December. Although it

earns 58% of revenues from a capital-light

franchise business, a bigger slice than Mc-

Donald’s, its return on invested capital is

lower, partly owing to a string of pricey ac-

quisitions (see chart). On February 10th in-

vestors once again digested disappointing

quarterly results from Tim Hortons, a Ca-

nadian doughnut chain which accounts for

60% of rbi’s sales. The group’s overall earn-

ings beat forecasts thanks to Popeyes, an-

other of its chains. rbineeds more spinach

to catch up with rivals such as Yum Brands

(owner of kfc, Pizza Hut and Taco Bell) and

Starbucks—let alone McDonald’s, whose

market value and net income are roughly

that of the other three firms combined. 7

Fast food does not always equal

fast growth

Restaurants

Chasing Ronald

Happy-ish meals

Sources:Datastream

fromRefinitiv;Bloomberg

*Financial years

ending September

80

60

40

20

0

191817162015

Return on invested capital, %

Starbucks*

McDonald’s

Yum Brands

RBI

250

200

150

100

50

20191817162015

Share prices, January 1st 2015=100

Starbucks

McDonald’s

Yum Brands

RBI

Revenues,2019,$bn

Company-operated Franchised

Yum Brands

RBI

McDonald’s

Starbucks*

0 10 20 30