Swiss Defence Industry in the Global Arms Trade – Successes and Challenges

When we talk about the Defence Industry (DI), arms transfers, and military expenditures we mostly refer to data accumulated by the Stockholm International Peace Research Institute (SIPRI). In the SIPRI Top 20 list of largest exporters of major arms for 2019, small states hold consecutive positions: Israel takes 8th place, Switzerland is 13th, and Sweden, Norway, and Belarus place 15th, 17th, and 20th respectively. The author analyses the Swiss DI case due to several reasons; its place in SIPRI Top, its sharp rise of Swiss arms exports in the recent year, its Swiss neutrality strategy, the country’s multilingual society, and its all-government approach to the arms industry, though still contributing to the limited scholarly studies on contemporary Swiss DI. This paper aims to explore Swiss DI and its strategies, to identify the country’s defence and security policy influence towards DI, and to discuss the Swiss DI stance and future perspectives in the context of the global arms trade. At the same time, this paper also highlights Swiss DI successes and failures that could be of significant use to other small states aiming to develop or enhance their relevant DIs.

largest exporters of major arms, one could see only Israel (8th place), Switzerland (13), Sweden (15), Norway (17), and Belarus (20) representing small states. These five countries together compose a 5.2 percent share of global arms exports. Regarding the SIPRI Top 100 armsproducing and military services companies in the world, Singapore joins these five countries as one of the small countries ranked high on the list (Table 1). Also worth mentioning, Singapore hosts the established subsidiaries and/or manufacturing capabilities of 11 companies from other countries (SIPRI, 2020a).
Each of the previously mentioned countries present an interesting significance, but the author selected Switzerland's DI significance for further analysis based on the following reasons: Switzerland's place in the SIPRI Top 20 and Top 100 lists, the sharp rise of Swiss arms exports in the most recent year, Switzerland's neutrality strategy, the country's multilingual society, its all-government support for the arms industry, and finally due to its limited scholarly studies available on contemporary developments of Swiss DI.
This paper aims to explore Swiss DI and its strategies, to identify the country's defence and security policy influence towards DI, and to discuss the Swiss DI stance and future perspectives in the context of the global arms trade. It highlights the successes and failures of Swiss DI that could be more logically used by other small states to establish or enhance their DIs. The paper also seeks to contribute to the analysis on Swiss DI previously conducted by Stefan Markowski in 1998 as it covers in detail the developments of Swiss DI within the last two decades and discusses other perspectives of Swiss DI that were not taken into consideration previously by other scholars.
The developments of Swiss defence, armaments policy, and the DI field were not extensively analysed by academia. Markowski (1998) analysed the Swiss approach to defence procurements in which he came up with the following findings: procurements are assessed in the context of long term cost effects; domestic DI is encouraged to participate in national procurements; arms exports are supported by the government; most of the contracts are pricefixed with an agreed upon rate of return of capital investments; and some local defence market niches remain protected. Markowski and Robert Wylie noted that Switzerland as a highly industrialised European country which could export their defence products despite a limited home base, but they would find it to be harder to do in the future as weapon systems become more system-based and integrated into cross-platform systems. Therefore, supplies from independent suppliers would likely not be accepted. They foresaw that specialized Swiss manufactures would become second tier suppliers to larger systems (Markowski & Wylie, 2007). Heiko Borchert and René Eggenberger analysed developments in the European Security Defence Policy, discussed the Swiss' role in initiatives towards specialization and pooling of resources, while also considering the impact on Switzerland's defence security policy and military posture if the country were to join the EU. Borchert and Eggenberger focused on the question of where to best to incorporate Swiss armament procurement policies and how to modernize Swiss security and military policy planning processes. They concluded that Switzerland has to direct its own DI on strategically important sectors, team up for international armaments projects, have the Swiss Armed Forces (AF) establish better means of communication, and to make the Swiss Parliament and the public more aware of the need to replace aging equipment (Borchert & Eggenberger, 2003). In his latest study, Keith Harley (2019) reviewed the Swiss DI status with his most current focus on Swiss DI mergers and acquisitions and on defining future prospects for domestic DI.
Internet search engine, Google Scholar, was used to select scientific sources for case study and literature analysis using key words 'Defence industry' and 'Switzerland' to find related information going back to 1998. From the results, the first 20 relevant articles were used for analyses. Additionally, significant data was compiled from several indigenous websites and also the websites of the Swiss Department of Defence, Civil Protection and Sport (DDPS), the Federal Office for Defence Procurement (FODP), the European Defence Agency (EDA), NATO, SIPRI, the State Secretariat for Economic Affairs, and the Swiss AF. Other data was collected from international and local news agencies like Armada International, Swissinfo, and the Voz. The compilation of data was analysed and interpreted using context, quantitative, and qualitative comparative analysis.

The Department of Defence, Civil Protection and Sport
In most countries, the Department of Defence is a standalone structure in the governmental hierarchy. In regards to Switzerland, they are unique in that regard as DDPS has to execute civil protection and sport functions. DDPS consists of the General Secretariat, the S+T's budget for 2020 was 28.9 million CHF wherein there is a planned increase of up to 32.2 million CHF for 2021. The last structural element of FODP is Real estate, which is responsible for planning, management of objects, the realisation of new developments and reconstruction, and for the sale and liquidation of infrastructure that isn't used (FODP, 2020d).
In summary, Switzerland has a unique structure of Department of Defence whose functions encompass spheres of sport and civil protection. DDPS has a centralized procurement element -FODP, which cares not only about Swiss AF, but also supports other DDPS departments. FODP employs about 900 specialists and has four specialized units for different procurement programs, i.e. land systems, which have its own S+T element with an annual 32.2 million CHF budget for 2021.

Swiss Armed Forces
In 2020, the Swiss AF was comprised of 9,333 professionals and 143,372 personnel on active duty. A 21-week conscription in the Swiss AF remains mandatory. Defence spending for the Swiss AF (figure 2) has slightly fluctuated over the last two decades.   In summary, the Swiss AF is comprised of up to 10,000 professional soldiers with an active conscription system and vast reservist system. Swiss land and air forces are also well equipped with some locally manufactured upgraded major arms systems. Defence spending is stable averaging 0.8 percent GDP in the most recent decade.

Swiss participation in other organizations
As Switzerland is committed to permanent and armed neutrality, it has no intent to become a NATO member. However, even as a non-member, Switzerland is still engaged in some of the cooperation areas with NATO that are specified in the Individual Partnership and To be more precise, as Switzerland is committed to neutrality, the extent of its participation in international defence organizations is limited. Nevertheless, the Swiss government is looking for opportunities to engage in multiple activities without being legally restricted which allows the AF and DI to gain needed experience and knowledge. NATO, the 9 EU, and the EDA are organizations which are attracting Swiss interest for further cooperation in the defence sphere.

Swiss armaments strategy
Switzerland is no longer involved in the complete development and production of large defence systems, regardless of the fact that the Swiss industrial structure provides a basis for self-reliant defence efforts, especially when it comes to the development of weapon platforms.
Switzerland is in no position to force other countries to buy Swiss products and can only sell their products abroad if they are competitive based on cost and quality. Switzerland has a long tradition of supporting small firms by imposing entry restrictions to larger companies allowing smaller businesses to survive (Markowski, 1998).
The Swiss federal government has the following mechanisms to support their domestic security-relevant technological and industrial base (STIB) and boost the competitiveness of Swiss research facilities and defence companies: domestic procurement, offset, international cooperation, applied research, promotion of innovation, exchange of information with industry, and an export control policy. Switzerland, like countries of a similar size, is dependent on imports for armament. As civilian innovations influence technological developments in the defence sector, systems become more reluctant on the manufacturers which pose greater security risks, such as unexpected external controls or external system monitoring (Swiss Federal Council, 2018). However, when all goes well, the overall effort provides great opportunities.
The DDPS armaments strategy is guided by the Federal Council's principles for the armaments policy, which references the needs of the Swiss AF, as well as the support necessary to maintain and build indigenous DI capacity. The Federal Council highlights the need for timely supply and requirements for the processes based on the economic principles which are accomplished in a transparent manner. FODP is responsible for the implementation of the Armament strategy within DDPS (FODP, 2020a;Swiss Federal Council, 2018).
Armament procurement is conducted while ensuring required competition among suppliers and seeking an efficient and economical outcome. It is expected that the competition among suppliers would drive innovation and ensure an optimal cost-to-benefit ratio. It is also desired that procured goods and processes for services would be fully developed, custom made, and interoperable. Foreign security interests are consistently followed in order to strengthen STIB of Switzerland. In this way, competition and/or economic efficiency criteria become less relevant. The use of offsets in arms procurement is also not restrictive in Switzerland. It is recognized that the close cooperation among the AF, the administration, the research institutions, the DI, and the security policy relevant partners in Switzerland and abroad are the key elements for modern, innovative, and effective STIB (FODP, 2020a).
During the procurement process, the FODP must ensure that: the contracts without security considerations should be publicly advertised and awarded in open competition; the contracts with security considerations are awarded after direct or invitation tendering with domestic companies; RUAG MRO Switzerland should be considered from the beginning; procurement of goods and systems with short life cycle and/or fast developing technologies must be avoided; the cost should be estimated throughout the entire life cycle of goods and systems; whenever possible, procurements must be accumulated to achieve economies of scale; and in a monopoly situation, transparency for pricing must be introduced (FODP, 2020a). DDPS is interested in a defence market with multiple suppliers as it creates competitiveness leading to innovation and achievement of the best price-performance ratio. In all situations, involving monopolies, or only using as little as one valid tender, offers transparency in the pricing which could be achieved through the legal right to inspect the basis for the bid (Swiss Federal Council, 2018).
The procurement of weapons, ammunition, and services required for defence and security is exempted from the international WTO obligations. Switzerland is using exception when, a) procuring security related goods and services that would preserve Swiss key STIB capabilities, or b) requiring initial and subsequent procurement of goods or services for the ability to integrate procured items into existing systems (Swiss Federal Council, 2018).
If DDPS is concerned with the project's compatibility with foreign policy, it must consult the Federal Department of Foreign Affairs, the Federal Department of Economic Affairs, Education and Research, and relevant State Secretariats (Swiss Federal Council, 2018).
The international armaments market is not an open market, and is governed by national constraints. This could also be applied towards technologies or key components where availability is subject to foreign government approvals and controls (Swiss Federal Council, 2018

Armament life cycle process
FODP tend to procure previously proven and durable systems instead of systems which have the latest technological advancements. FODP seeks to acquire systems that provide reliable performance over time and offer future upgrades and adaptations (Markowski, 1998 Switzerland follows lengthy sequential procurement procedures wherever it conducts independent arms equipment testing and evaluation after equipment has been used elsewhere.
This requirement adds additional costs and time necessary to conduct procurement, as well as

Research and Development
Switzerland spends a sizable amount of budget for R&D. In 2017, 3.3 percent of the GDP was devoted for R&D -22 billion CHF. As Switzerland was overtaken by Israel, South Korea and Sweden, it took fourth place in the world for highest spending for R&D in 2017 (OECD, 2020).
S+T is assessing technology needs for the Swiss AF in the future-oriented context, by conducting modelling and simulations. S+T prioritize research on focus and themes, finance, plans, controls, which it then transfers to the AF's ongoing projects. For that reason, long-term and yearly research plans are made in close coordination with the Swiss AF. The knowledge gained is transferred through workshops, symposia or presentations. In 2020, six major research programmes were ongoing: the reconnaissance and surveillance, communications technology, cyberspace and information, impact, protection and safety, unmanned mobile systems, and technology foresight (figure 4). Technology foresight provides information about the level of maturity of technologies that are optimal for investment and enables awareness of future technological developments. Tracking of technological developments in multiple fields is a challenging effort. Therefore, S+T's Swiss AF also supports this effort.

Offsets
Swiss compensation through offsets is requested because procurements of armaments outside the country lead to a potential loss in sales for Swiss companies. This way, the Swiss economy benefits from defence acquisition for the Swiss AF (FODP, 2019). DDPS has to work closely with the industry organisations and interest groups and keep them informed at an early stage of offset implementation. This is one of the prerequisites for the successful implementation of offset transactions. Additionally, Swiss Government first seeks for the Swiss industry involved in offset transaction to be competitive, and then, to be able to generate additional value after the offset deal is completed. Swiss Federal Council highlights that 'offset transactions must not be used to pursue policies to maintain structures.' The Federal Council delegates DDPS to manage offsets in a transparent way and to have proper management and controlling instruments available (Swiss Federal Council, 2018) Since Switzerland is not an EU member, it is not obliged to follow strict offset policies.
Switzerland's policy on offsets is on the pro side as it allows for transfer investments to the  Council. This is followed by precise requirements for offsets which are drawn and forwarded for competing enterprises and industry partners. In the seconddraft contract stage, procurement contracts with offset agreements are prepared and assessed, allowing for the extent of offset to be foreseen. In the third stagepreparation, contracts are approved after the Armament programme has been confirmed by the Parliament. In the fourthimplementation stage, the winning bidder / prime contractor establishes a contract with a Swiss company, or companies, to implement an offset agreement. The monitoring of indirect offset implementation is conducted by the Berne offset office which is financed by the Swiss beneficiaries of an offset transaction. In case of a direct offset implementation, FODP controls the progress. In the lastfollow-up stage, the experience gained through the process is analysed and used for future offset deals (FODP, 2019).
The Annual offset register provides valuable details on procurement projects, implementation timelines, foreign suppliers, local beneficiaries, and any regional offset distribution. The government aims to ensure overall offset allocation is provided geographically among linguistic regions in Switzerland: 65 percent to German, 30 percent to French, and 5 percent to the Italian speaking region (FODP, 2020c).
To epitomize the situation, Switzerland seeks out offset solutions when arms or equipment is procured from a foreign seller, and offsets are expected to be at 100 percent of procurement value. DDPS has the ultimate responsibility of managing offsets in a transparent way to ensure proper management is being carried out. All offset implementation procedures are clearly defined in order to allow Swiss authorities to attain optimal results from offset implementation: Swiss DI involved in an offset transaction has to be competitive and able to result in added value once the offset deal is complete.

Swiss defence industry
The restructuring of Swiss DI that lead to downsizing, mergers, and acquisitions leading to a de facto situation started in 1990. The MOWAG Company was acquired by General Motors and later transferred to General Dynamics. Oerlicon Contraves was acquired by Rheinmetall from Germany. Swiss SIG was sold to Swiss Arms and two other entrepreneurs (Hartley, 2019).
In similar fashion, Swiss DI started to expand civilian and dual-use technology production and opted to follow other rationalisation measures. Export oriented companies such as Oerlikon Contraves have refocused on niche markets and secured orders through the membership of international business networks and marketing consortia. Smaller companies, e.g. MOWAG AG, the Swiss Industrial Company (SIC), Recta SA, Leica, and Omnisec AG also focused on niche marketsin the development of wheeled armoured vehicles, small arms, precision instruments, and cryptology (Markowski, 1998).
SECO provides annual statistics on arms exports. A court case won against SECO by journal WOZ helped to reveal more contemporary data on Swiss made arms exports, DI locations (figure 5), their specialities, and turnaround (Jirát, Surber, & Bamert, 2020).
. Swiss Avionics, Security, and DI is composed of a mix of around 100 large and mediumsize companies consisting of SMEs, subsidiaries of larger multinational manufacturers groups, overall employing more than 10,000 personnel. Some of the profiles for these companies show that they are dedicated to manufacturing armaments, however, a large portion of the companies produce dual use products along with the armaments they produce, i.e. varieties of equipment, assembly parts, and provisions of special and engineering services. Some companies are also parts and equipment suppliers for domestic and foreign original equipment manufacturers (Giger, 2013). Employment in DI fluctuates due to various country arms policies, the situation in global arms markets, and national defence spending. In the worst observed scenario which occurred in 1990 there were only around 3,000 workers employed, but nevertheless, as export markets continued expanding, Swiss DI managed to gain its own momentum and reached  As the Swiss DI base is very thin, Switzerland has to focus only on its own development work and building of required competencies in several sectors. At the same time, Swiss DI has to be aware that nonessential modifications of Swiss AF equipment, the so-called 'goldplating', will be avoided as using off-the-shelf products make more sense economically (Borchert & Eggenberger, 2003).
To summarize, the shifts of the global arms market in the 1990s challenged Swiss DI.
This led to a temporary slowdown, optimization, and series of mergers and acquisitions.

RUAG
RUAG was formed in 1998 and is focused on aeronautics and defence engineering. It is also an industrial partner for Swiss AF that upgrades and maintains weapon and defence systems (Hartley, 2019). In the last two decades, RUAG Holding AG was listed in the SIPRI Top 100 arms producing and military servicing companies in the world list (table 2). No other Swiss companies were included on the list. to streamline its portfolio or it would lack the resources necessary to continue at a consistent pace. For that reason, RUAG International has to continue financing developments in the core areas, sell off the areas which are of less importance, and/or attract capital market. From the latest press releases, it is clear the company will focus its activities on space and aerostructures, optimizing, preparing, and becoming privatized within the upcoming 5 years. It is important to note that it is already the second transformation of RUAG. The first one occurred in the 1990s when four Swiss companies were forced to merge into RUAG due to declining domestic and international markets (RUAG International, 2018).
In summary, RUAG is the only Swiss DI company highlighted in the SIPRI Top 100 list that managed to sustain its position on the SIPRI list over the last two decades. The latest RUAG reorganization starting in 2020 aims to split the company into two parts: MRO Switzerlandfocusing on Swiss AF needs, and RUAG Internationalproviding services to international customers and focusing on space and aerostructures. RUAG International still has to streamline its portfolio even though some privatization, sell-off, and capital attraction options remain available. Currently, EDA is dealing with only one Swiss National DI association -Swissmem.

Swiss defence industry associations
To be specific, FODP officially cooperates with two Swiss industry associations uniting more than 1260 different Swiss companies. Only some members of Swissmem belong to the DI sector. However, both industry associations provide advice in multiple fields, share knowledge through different forums, enable joint projects, deal with politicians in a centralized way, and represent members in meetings with social partners. Moreover, both associations host meetings between DI, Swiss AF planners, and governmental acquisition bodies. In regards to a global scale, none of the Swiss associations belong to ASD.

International collaboration
The scope of Swiss international collaboration in the arms sphere is primarily based on the needs of the Swiss AF. During the planning phase, the AF identifies its skills, gaps, and technology needs and works with FODP to define its procurement needs. Timely considerations within DDPS allow using the potential of international collaboration more effectively. The trends of DI consolidation, limited availability for security technology skills, and limited resources indicate a need to 'collaborate more closely with other countries and seek partnerships within the framework of international organisations.' Collaboration could be conducted more practically in any step of arms or services development, e.g. during exchanges of information, during R&D, during collaborative procurement of materials, combined logistics, or testing, and even during negotiating contractual agreements with external industrial service providers (Swiss Federal Council, 2018 The means of closer cooperation with Europe in the armaments sphere would pose a challenge to Parliament as individual members would no longer vote simply on armament programmes, but could instead consider an armament program as a tool to acquire knowledge or to be used as a means of influence while participating in joint European projects requiring funds and manpower (Borchert & Eggenberger, 2003).
To summarize, the international collaboration in the DI field remains a priority for Federal government as it likely enables access to foreign technologies and markets. FODP, as a responsible entity in the DI field, has identified potential cooperation venues such as NATO, the EU, and the EDA wherein the cooperation is based on bilateral and multilateral agreements.
It is assessed that DI skill, gap, and technology needs could be adjusted utilizing international collaboration tools such as exchanges of information, R&D, procurement of materials, improvements towards logistics, improved testing, and the negotiation of contractual agreements.

Conclusion
Switzerland continues with a similar supportive strategy for the local defence industry as Stefan Markowski defined it in 1998. Switzerland promotes local companies in national defence procurements, uses offsets extensively to gain technologies and knowledge, and protects certain defence industry niches. It is highly likely that the efforts mentioned contributed to the revitalization of Swiss defence industry after a sharp decline in the 1990s. More importantly, all offset implementation procedures are clearly defined as Swiss authorities are looking for optimal results from offset implementation: Swiss defence industry involved in offset transaction has to be competitive and able to generate additional value after the offset deal is over.
Contemporary Swiss defence industry is composed of more than 100 companies mostly manufacturing technologically advanced subsystems or individual components with only few exceptions, e.g. RUAG and Rheinmetall that are able to develop entire systems. Regardless of the fact that the Swiss defence industry exports less than one percent of total country exports, the Swiss government ensures proper support of this economic sector in a coherent manner.
Additionally, the Swiss government looks for efficient ways to boost defence industry and is ready for big reforms, e.g. RUAG's reorganization in 2020 aimed to split the company into two parts: MRO Switzerlandfocusing on Swiss AF needs, and RUAG Internationalproviding services to international customers and focusing on space and aerostructure niches.
Switzerland protects and supports developments of its own STIB, key scientific technical competencies, and key capabilities of the indigenous defence industry. Therefore, DDPS is in charge of periodically defining the economic sectors that form the potential core set of STIB. Universities, research institutes, and companies contribute to the development of the competencies in each identified area. Switzerland has an exclusive R&D support environment, including defence related R&D initiatives that are supported by multiple sources. FODP has its own structural element -S+T engaged in sustaining skills, capabilities, and developing required expertise in six major research programmes. S+T element's annual budget for 2021 is 32.2 million CHF. S+T employs innovative approaches to enhance defence R&D by running different Defence Campuses, testing and competence centres, and promoting and attracting talents of Master, PhD, and Postdoc levels.