Why do so many aerospace and defense (A&D) companies “stay the course”?
Why do so many aerospace and defense (A&D) companies “stay the course” when faced with disruption, sticking with strategies and business models designed for a different era? New Deloitte research found that A&D companies that adapted their strategies and business models significantly outperformed those that didn’t.
Shifts in demand trigger new eras
Why should A&D company executives who have traditionally “stayed the course” consider changing strategies and business models now? Because today’s convergence of disruptive factors will fundamentally change the way the A&D industry is structured, operates, and performs. Sticking with the status quo—or just making small adjustments—won’t be enough to maintain market leadership in the next era of A&D.
To outperform the industry, A&D company executives should take bold steps. In our experience, many companies hesitate to launch new strategies because they lack a systematic set of defined alternatives. This report outlines alternatives to consider, ranging from the most passive (e.g., stay the course) to the more active (e.g., restructure portfolio). Our findings suggest that companies choose a strategy that actively creates value.
Time to outperform the industry
The bottom line is that the inevitable march of commoditization has finally arrived on portions of the A&D market’s doorstep. It’s changing the fundamental basis of competition in the industry and shaking the foundation on which many companies have based their strategies. Staying the course isn’t an option.
Companies that embrace the fundamental disruption in the market have an opportunity to gain market leadership. By rethinking their strategies and business models, they can improve financial performance and outperform the A&D industry over the next decade.
The 2017 Global aerospace and defense outlook by reviews the industry’s financial performance in 2016 and expectations for 2017
The analysis by Deloitte outlines a long-term forecast for aircraft production, as well as an analysis of global defense spending. It also provides perspectives on defense contractor expectations, growth in travel demand driven by wealth creation in Asia and the Middle East, and observations on what travel demand means for the commercial aerospace sub-sector.
This year’s outlook finds global aerospace and defense industry revenues expected to resume growth, driven by higher defense spending.
Trends forecast a return to growth
The global aerospace and defense industry is likely to experience stronger growth in 2017. Following multiple years of positive but a subdued rate of growth, the report forecasts the sector revenues will likely grow by about 2.0 percent in 2017.
The global A&D sector revenue rebound is attributed to a number of factors in both the commercial aerospace sub-sector and the defense sub-sector. Key findings are as follows:
Commercial aerospace sub-sector analysis
Stable global gross domestic product (GDP) growth, relatively lower commodity prices including crude oil, and strong passenger travel demand, especially in the Middle East and Asia Pacific regions, will likely drive the commercial aerospace sub-sector growth.
Despite an expected increase of 96 additional large commercial aircraft being produced in 2017, continued pricing pressure and product mix changes by airline operators will likely result in only a marginal increase of 0.3 percent in commercial aerospace sub-sector revenues.
Defense sub-sector analysis
Defense sub-sector revenues are likely to grow at a much faster 3.2 percent in 2017 as defense spending in the US has returned to growth after multi-year declines in defense budgets, and future growth many be driven by the new US administration’s increased focus on strengthening the US military.
Rising global tensions have led to increasing demand for defense and military products in the Middle East, Eastern Europe, North Korea, and the East and South China Seas. This is in turn resulting in increased defense spending globally, especially in the United Arab Emirates (UAE), Saudi Arabia, South Korea, Japan, India, China, Russia.
US aerospace and defense export growth faces global competition
US aerospace and defense industry export and labor market study by Deloitte
The US aerospace and defense (A&D) industry has been a significant contributor to America’s net exports, a top employer, taxpayer, and major contributor to the nation’s gross domestic product. However, recently we are seeing a slowdown in the industry.
A strong US dollar, increasing global competition, and decreasing export financing are causing US aerospace and defense (A&D) industry export growth to decline. At the same time, employment in the US aerospace and defense sector has declined significantly over the last five years, much of it due to budget sequestration. What can the industry do to change course?
Our latest aerospace and defense industry study includes developments and trends from two important focus areas in the US aerospace and defense industry: employment and exports.
Last year, we developed two separate reports that highlighted industry trends in both of these areas. This year, readers who download the report will experience the same beneficial information tied together in one comprehensive report.
Report findings include:
Export growth slowed at 1.7 percent in 2016
Exports directly supported 1.42 million jobs in 2016
Net commercial exports rose sharply in 2016 by $9 billion or 12 percent
US Foreign Military Sales declined by $13 billion or 28 percent in 2016
Total employment in the US A&D sector decreased in 2016 by 0.3 percent
Direct and indirect jobs lost in the defense subsector between 2011 and 2016 totaled 165,044
According to the study by Deloitte ,in the aerospace and defense industry, mergers and acquisitions (M&A) as we know them have recently changed. Instead of megamergers for the purpose of cost savings and synergies, current aerospace and defense M&A activity focuses on acquisitions that deliver new products and offer expansion into markets such as Asia, the Middle East, and beyond.
Near-term aerospace and defense M&A is likely to focus on growth.
Megamergers are likely to decrease in frequency while acquisitions of smaller targets could increase.
Acquisitions will be used to gain new capabilities, access emerging technologies, and geographic expansion.
Joint ventures and partnerships could replace outright mergers and acquisitions in some instances.