The A&D sector faces a sharply different operating environment as governments around the world cut defense spending to contain growing budget deficits. Over the next decade, many industry observers predict that there will be far fewer big design projects – perhaps one new fighter, helicopter or satellite instead of the customary two or three. This means that pricing and competitive pressure will intensify as companies wrestle to land make-or-break projects.
A smaller market will also mean consolidation, and M&A activity will likely gather steam as A&D organizations resize and scale their assets. Despite the severity of the recent downturn, however, the sector emerged in a strong cash position. Those healthy balance sheets will work to the industry’s advantage as it sheds non-core assets, pursues deeper vertical integration, and enters new lines of business. Unlike previous downturns, which caused significant consolidation at Tier 1, this can be seen as a portfolio shaping at Tier 1 with the opportunity for mid-sized firms to significantly grow capability and revenue, as well as market presence.
The commercial industry is also facing major disruption in its business model as it fends off incursions from private jet manufacturers and from emerging geographies, such as Russia, that are focused on breaking into the commercial airline market. At the same time, India and China present tremendous growth opportunities. As those countries build out their infrastructure, we will likely see foreign investment soar along with an increase in joint ventures between the major global players and their local partners. In addition, India is emerging as a major buyer on the defense side; in fact it is becoming so significant than all major suppliers globally will most likely enter that market.
In response to these opportunities, the sector will continue to refine its value chains, partnering with fewer suppliers, but extending those relationships beyond cost management into top line activities, such as innovation and marketing. It will also explore better and more cost effective ways to design and engineer products – some organizations are already experimenting with 24/7 virtual design and manufacturing to speed development and tap into specialized global skill sets.
The present economic uncertainty brings with it plenty of challenges, but for a sector used to flying at 30,000 feet, mastering such changes on the ground should be well within reach. Expand your horizons – contact your local KPMG advisor to find out how.
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