An evolving aerospace and defence sector

Since the mid-90s the defense industry has been dominated by legacy prime contractors. But recent spending trends suggest that some of this dominance has eroded with the military customers becoming more reliant on less exquisite, commercially-derived solutions that can be fielded more affordably. (from Finance Monthly magazine).

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Spotlight On...

An Evolving Aerospace & Defence Sector
Randy Starr, Strategy&

SPOTLIGHT ON...

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Randy Starr Partner - Global and US Aerospace and Defense Practice Leader Email: [email protected] Web: www.strategyand.pwc.com

Since the mid-90’s the defense industry has been dominated by legacy prime contractors, many of which emerged from the last spending downturn as consolidated entities. But, recent spending trends suggest that some of this dominance has eroded with the military customers becoming more reliant on less exquisite, commercially-derived solutions that can be

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he downward trend in the procurement of high-end, exquisite weapon platforms—and the increased timespan between new platform designs —is attributed to increasingly complex technology requirements and unaffordable costs of new systems. For industry, this puts business volumes at risk as some companies face the possibility of entering a spiral of declining volume and rising costs, and the need to restructure their operating models and the attendant economics. But, unlike the 1990’s, solely relying on reducing overhead costs through

to consider investing in the type of commercial industrial capabilities that are needed to respond more effectively to procurement trends , and to help environment. In core markets, where the focus is on building, integrating and maintaining sophisticated platforms, OEMs need to control unit costs in the face of declining volume—and understand how programs are effected by cost-volume trade-offs. In other sectors that have adopted commercially-derived solutions, many large OEMs face a different set of challenges: vulnerability to less exquisite providers exploiting global and commercial scale; quicker product development cycles, and competition from a diverse and inherently agile industrial base. As requirements evolve, and defense customers strive to increase the value of procurement spending – some a more affordable acquisition environment. This begins with approaching affordability as a mindset to doing business. And there are three important tenants that underpin a “culture of affordability”: should-cost capabilities and a more diligent supply base approach to producing the most affordable products possible. As many OEMs have shifted their focus to systems integration and outsourcing, they have overlooked the criticality of maintaining should-cost capabilities within lower tiers of the supply base. With the increasing complexity of sub-systems requirements, this isn‘t surprising. A second important tenant is migrating affordably and Scale-able Low-rate Infrastructure. The challenge for programs facing declining volumes, or approaching

the end of their production cycles, is maintaining unit costs as overhead is applied to a lower base. Failing to do so creates the risk of falling behind the curve production volume declines and labor rates increase. The third tenant is having a Fit-for-Purpose Design Philosophy that challenges product complexity and understands when and how complexity pays off. This requires working closely with customers to performance, and lifecycle cost in order to maximize the value of what is spent on new systems. Designcost trade-off analysis across system requirements, help avoid designing unnecessary complexity into new systems. Industry would serve itself and its customers more effectively by embracing affordability proactively— not when it has no other choice. Industry can achieve this by reducing cost structures in anticipation of declining volume, and by creating the ability to exploit advantaged cost positions. And as the customer community strives to increase the value of its procurement spending, it is equally important to recognize the role defense procurement agencies plays incentivizing the desired behaviours, maintaining the base, and developing internal capabilities to support a more productive acquisition environment.

some sectors. The downward trend in complex system procurement has led to a gradual decline in industrial capacity as the industry has faced numerous plant closures over the past two decades. The impact of rising program costs and greater technical complexity have emergence of newer, commercially-oriented entrants with less exquisite, more affordable, and highly innovative systems derived from existing product lines, often with internal investment. Many defense businesses in the 1990’s were actually part of larger commercial conglomerates with capability systems that could be readily exploited in the defense market. Few still exist today. But, this does not mean that large defense contractors should evolve into commercial companies, or venture into adjacent commercial marketsas many defense players attempted unsuccessfully during the last downturn. But, they—and their customers—ought

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