Commoditized Weapons in Ukraine: Are the Allies Getting the Procurement Right?
Ever since Russia’s invasion of Ukraine in February 2022, the Ukrainian government has scrambled for the weaponry its military desperately needs. Despite bold announcements from Western nations about arms deliveries, these shipments have often been delayed. Thus, from mysteriously sourced North Korean rockets to decommissioned Italian howitzers, the Ukrainian armed forces have no choice but to fight with whatever they can get their hands on.
The Biden administration’s stop-gap measure to send 155 mm howitzer shells loaded with cluster munitions to Ukraine stems directly from a Western inability to provide sufficient numbers of less controversial versions of this ammunition. Ukraine currently consumes roughly 90,000 rounds a month according to one U.S. official, but Ukraine’s defense minister places the monthly demand at 250,000, quadruple American and European pre-war production capacity. To increase supply, Ukraine’s supporters are necessarily spending massive sums of money.
Ukraine sorely needs these munitions quickly, but the European Union’s new acquisition and regulatory policy is unlikely to accomplish this efficiently. Just as importantly, Europe’s effort will do little for the long-term health of its defense industrial base. This is because the munitions used by Ukraine, while vital to its defense, are essentially commodities: basic manufactured goods that are largely substitutable, produced in bulk, and made by multiple suppliers worldwide.
European nations, and to a lesser extent the United States, are conflating the strategic importance of these items with the industrial organization of their production. The European Union should take a page from current American procurement policy and buy more commoditized weapons from cheaper producers in emerging markets. Indeed, in the interest of efficiency, the Department of Defense should purchase even more types of munitions from such sources as it supplies Ukraine and backfills the inventories of itself and its allies.
The Russo-Ukrainian war provides Ukraine’s supporters with a compelling moment to re-examine defense acquisition policy. The conflict has reminded every government that wars involving great powers are likely to transform into wars of attrition and that once engaged in fighting, armed forces will burn through munitions at an alarming rate.
But the wrong lesson to draw from this experience would be that everyone should produce everything — and dump money into these industries to bolster duplicative production capacity. Instead, the United States and its European and Asian allies should focus their scarce resources on producing (and exporting where prudent) advanced technology, while relying on global suppliers to manufacture commoditized defense items like artillery shells. The large, combined purchases of munitions by the United States and European Union could make this an oligopsonistic market, where a small number of market-making buyers have power over a multitude of suppliers. This power could incentivize increased standardization, ensure continued access to munitions, and avoid wasting taxpayer money by domestically sourcing every unit of low-technology items that many other states will compete to produce more cheaply.
Everything is a Toaster
A commodity is defined by its fungibility: Products are bought in bulk and a competitive market will treat various versions of the good as near-equivalents. While commodities are often equated with natural resources and agricultural staples, many mass-produced products including industrial chemicals and computer memory chips also work this way. Over time, most products become increasingly commoditized because, as Columbia Business School’s Bruce Greenwald memorably quipped, “In the long run, everything is a toaster.”
Artillery rounds, cheap drones, and even shoulder-launched missiles are simple to make, generally interchangeable, and relatively low cost. Ammunition specifications are standardized; any 155 mm shell is largely compatible with many different artillery barrels. While some drones are sophisticated, the vast majority used by both sides are expendable and can be bought from any number of commercial suppliers. One observer described Turkey’s TB-2 as the “Kalashnikov of the 21st century,” epitomizing both the weapon’s ubiquity and its commoditization.
Just as there are advances in toasters, quality differences certainly exist between drones and even shells. Smart 155 mm munitions such as Excalibur, BONUS, and SMArt, provide significant increases in range and precision, at 20 to 100 times the price. Variations in “dumb” shells have caused gun barrels to wear out more quickly. The unpredictability of mortar round weights have forced Ukrainian commanders on the front line to recalculate ballistics using an industrial scale and an Excel spreadsheet.
But these differences are small in the face of massive demand. There have been only 12,000 SMArt rounds produced in its 25-year production history. The United States has supplied Ukraine with over 2 million ordinary 155 mm rounds compared to 7,000 precision-guided rounds. Ukraine is apparently firing captured North Korean rockets, even though they are “very unreliable and do crazy things sometime,” because according to a Ukrainian BM-21 Grad operator, “We need every rocket we can get.”
The closer a weapon comes to a commodity in its economic characteristics, the more the purchasing government’s procurement approach needs to adapt. Any business school professor or management consultant will argue that commoditization is usually great for consumers and tough for firms. Profit margins are slim, and producers compete on price through speed, scale, and cost reduction. The production cycle is boom-and-bust: Demand soars and then craters when militaries transitioning to peacetime short-change ammunition purchases to fund longer-term investments in costly platforms like planes and ships.
Investing in commodities production does not create high-quality jobs or provide a base for high-technology development. The defense firm BAE proudly announced that its £280 million contract with the United Kingdom for 155 mm shells will employ an additional 200 people — $1.8 million per job — low even by the desultory standards of the defense industry. There are good economic reasons that the United States and Europe generally outsource manufacture of commodities like cement and textiles to the “Global South.”
Purchasing Faster and For Less Money
An effort to purchase military commodities quickly and cheaply should take these products’ industrial organization into account. While the United States and Europe have both committed to increasing their supply of munitions, they differ drastically on acquisition and regulatory strategy. The chief executive officer of munitions manufacturer Nammo, which supplies both, predicts “a longer route in Europe” because the United States is both “less protectionist” and has “more of a long-term view on the market,” key virtues in a commodities market.
The United States intends to ramp up yearly artillery shell production to over a million 155 mm shells by 2028. Congress recently appropriated $1.5 billion for the fiscal year ($8 billion over 15 years) to modernize the Army’s organic industrial base, which specializes in such munitions. European states are supporting their defense firms’ plans to exceed 1.5 million shells annually by that year. On top of national efforts (Germany recently contracted with Rheinmetall for $4.5 billion in tank ammunition), the European Union has committed over $2 billion to send a million 155 mm shells to Ukraine this year, as well as to invest in increased production capacity over the longer term. NATO has another billion-dollar plan to jointly procure munitions. Sorting out where national budgets end and multinational ones begin is tough, but these figures are enough to buy a lot of ammunition. But beyond the order and budget sizes, similarities between American and European industrial efforts largely end.
While Department of Defense decision-making may be “informed and pressurized” by the Ukraine war, it is notable that only about 15 percent of the $36 billion in the Department of Defense’s Fiscal Year 2024 munitions budget will go towards conventional ammunition of any sort rather than strategic and tactical missile rounds. Overall, the Department of Defense focuses its procurement on items where it enjoys enormous market power, and thus global political influence, which are not necessarily the items that “are key to the Ukraine fight.” On the other hand, nearly a third of the E.U. Peace Facility’s spending for Ukraine will go towards buying artillery rounds and subsidizing the building of increased manufacturing capability for these munitions.
For artillery purchases, the United States appears comfortable approaching other countries — Australia, South Korea, Japan, Egypt, and even European Union countries like Bulgaria — for needed supplies. Conversely, Peace Facility funds can only go to shells made by E.U. member states and Norway. At the end of 2022, Congress specifically directed $1.3 billion, roughly what the Peace Facility will spend in total this year, towards purchasing foreign-produced munitions.
Finally, Congress has also waived significant pieces of regulation to facilitate more rapid purchases. The European Union’s regulatory responsibilities and authorization to purchase have yet to be settled. Europe’s defense firms appreciate the money, but are expressing nervousness about regulations and the complexity of managing competing orders by the European Union and its member states.
Give in to Commoditization
There is a far greater need to rationalize European markets for the common production of weapons platforms such as fighters and advanced missiles, with their large economies of scale and enormous development costs. For 155 mm shells, Europe has 15 producers capable of manufacturing a largely identical product, not to mention the many external manufacturers of the same kit. That is a sector where the market should sort things out quickly with little management required, producing a cheap and reliable product for a market-making bidder as large as the European Union.
On the other hand, five European prime contractors are largely responsible for building and maintaining 29 different types of frigates and destroyers. Since the European Union undoubtedly wants to be competitive in the production of higher-end weapons platforms rather than in military commodities, it is here where it should focus its reform efforts.
Ironically, E.U. policies for supplying Ukraine are actually making its technologically sophisticated weapons manufacturers less competitive. For example, in compensation for the Warsaw Pact-era weapons it has sent to Ukraine, Poland will receive over a billion dollars in Peace Facility funds to purchase American and South Korean howitzers, tanks, rocket launchers, and combat aircraft as replacements. This further entrenches American dominance in the top end of the global arms industry, while Europe competes against emerging market economies that are producing shells for export.
Rather than recreate multiple arsenals of democracy for every weapon type, Europe and the United States should not only recognize the commoditization of many weapons used in Ukraine, but should also encourage it. NATO, and the Ukrainian military, lament the lack of standardization. Rather than directly subsidizing production, the first step is for Europe to financially reward firms that provide a munition that meets a clear standard. Firms rather than defense budgets profit from product differentiation, according to an industry source quoted in Reuters, “Companies are making money out of the fact that ammunitions are not interchangeable, that they can dominate their national markets with their munitions.” Second, procurement organizations must anticipate and manage the bust that always follows the boom, to maintain enough capacity for an emergency at the right price. Multi-year purchases can bring some stability, but robust commodities markets require futures contracts. Strategic reserves of commodities are a unique form of economic art — defense acquisitions has much to learn from the petroleum and agricultural sectors. Finally, allies should identify more potential commodities, weapons where the technology is not so precious that it outweighs efficient production in bulk. More countries and more firms should probably build Stingers and Javelins for the “value arms market.”
Europe should buy more munitions. But rather than engaging in extensive industrial planning, the overwhelming goal of Ukraine’s supporters should be to deliver the most shells at the best price in the least amount of time. When left alone, commodities markets tend to do this effectively.
While Defense News correctly noted that this is “new territory” for the European Union as an arms buyer, the hope that the current approach will be a “catalyst for rapid growth in the defense industry” remains to be seen — more to the point, it would be a missed opportunity if the commodity-oriented part of the industry grows at the expense of high-tech weaponry. In short, if Europe’s goal is to arm Ukraine it is buying in the wrong way, and if its goal is to develop a robust and efficient defense industry, it is focusing on the wrong product. The European Union is right to insist on the crucial importance of bolstering the continent’s security at this historic juncture, but it should adopt sound procurement policies in order to make that a reality.
Jonathan D. Caverley is professor of strategy in the Strategic and Operational Research Department of the Naval War College’s Center for Naval Warfare Studies and a research affiliate in the security studies program at the Massachusetts Institute of Technology.
Ethan B. Kapstein is executive director of the Empirical Studies of Conflict Project, Princeton University.