Doug Gates, KPMG’s Global Sector Chair, Industrial Manufacturing and Aerospace and Defense provides a perspective on the challenges and opportunities facing manufacturers in the aerospace and defense sector.
Despite economic concerns in the emerging markets (which may impact air traffic forecasts and therefore aircraft sales) and defense budget concerns in the mature markets, the aerospace and defense (A&D) sector seems highly optimistic about their growth potential.
The A&D sector has – overall – taken many of the right steps to back up their optimism. As the data in this report shows, A&D companies expect to ramp up investment into R&D significantly over the next 2 years as they prepare to take advantage of new growth opportunities and new technologies to enter into new markets and geographies.
A&D organizations have also been taking active steps to break into new markets, in some cases to take advantage of cost efficiencies but – more often – to get closer to their new customers in Asia and the Middle East. But they are taking a conservative approach to manage their risks: Joint Ventures and partnerships are the predominant entry strategy, allowing Western A&D organizations to gain experience in new markets without betting significant capital.
However, some caution is advised. Entering new markets and adjacent segments will require A&D organizations to take on new (and often untested to Western standards) partners and suppliers. Notwithstanding the fact that A&D organizations seem particularly confident in their supply chain’s ability to meet their growth expectations, some may find that – without improved visibility into their lower-level suppliers – their growth plans are stymied by failures in the supply chain as local value-chain players struggle to meet the OEM’s global standards and expectations.
With focused investment going into new products and markets, a ‘relatively’ conservative approach to risk and dynamic entry strategies for the emerging markets, the A&D sector has every reason to be optimistic about growth over the medium to long term. Of course, the economy notwithstanding.
Q: What is the greatest threat to growth in A&D sector today?
Doug: Slow emerging market growth and defense budget constraints.
Q: What are A&D companies doing differently do drive growth?
Doug: New, creative and collaborative business models.