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We
all intuitively know that following 9/11 there has
been a major increase in attention to national
defense, but due to a number of key factors, we tend
to underestimate the huge growth impact this means for
the defense industry. When we consider the
trickle-down through the supply chain and service
providers, in addition to growth in the big defense
firms, this impact is felt just about everywhere. This
represents a major opportunity for creative businesses
looking for new markets to target. Let's first look at
the real budget numbers (source - White House OMB):
National
defense spending is up by an overall 23% ($70B) for
the two-year period 2001-2003. This included a 9%
($31B) increase in the most recent year, while the
portion of this spending devoted to procurement and
research funding for defense contractors rose by 19%
($21B, from $110B to $131B). These increases do not
even include the $10B increase in the same 2002-2003
year for aviation security and other homeland security
expenditures, much of which is earmarked for defense
industry procurement.
Why
do we tend to underestimate the impact of defense
industry growth?
First,
aerospace and defense tend to be blended in our
perception. While the same companies often play in
both markets, the markets are really very separate. Of
course, we are all too aware that fewer airplanes are
being sold by Boeing & Airbus, and that the entire
commercial aerospace industry is suffering as a
result. However, commercial aerospace represents less
than 40% of the combined aerospace and defense
industries. Defense makes up more than 50% (the % is
growing), with the "space" part of aerospace
representing the balance.
Second,
the defense industry tends to be rather insular, and
what happens there tends to be a bit invisible to the
rest of the economy, even during a general slowdown
when there are many good people seeking jobs.
Finally,
defense budget growth does not directly translate into
commensurate defense industry job growth, due in part
to the increasing competition forcing productivity
improvements throughout the industry. In addition, the
defense industry has also suffered a loss of good
talent in recent years. The initial causes of the
exodus were pre-9/11 defense funding reductions and
the layoff impact from massive defense industry
consolidations over recent years. The talent drain was
then fueled by increased pressure on defense
companies' resources due to the DoD's demand for
post-consolidation efficiency savings. Finally, the
problem was made worse by the drastic reduction in
defense company market values -- making defense
company stock options worthless as retention tools,
and causing 401k investments by employees to dwindle
away. As a result, there has not yet been as much new
great talent flooding into the industry as there has
been increased defense and homeland security funding.
What
are the growth areas in the defense industry?
In
2003, defense industry spending is expected to
emphasize national missile defense, surveillance,
intelligence, and reconnaissance, unmanned aerial
vehicles, and precision munitions. However, defense
contractors must construct their product portfolios
wisely, as the DoD has a clear vision of the future -
a more network-centric, lighter, and highly mobile
force - and systems and products that do not fit this
vision are at risk of cancellation. This provides
another opportunity for visionary defense contractors
in a growing market, as absolute growth is even
greater in consideration of such cancellations. In
homeland security, defense contractors will
participate in many areas including sensors,
surveillance, intelligence, information technology,
systems integration, and border security.
What
are the implications for growth-focused companies?
The
growth in the defense industry represents a great
opportunity for businesses seeking new markets. The
decision is a no-brainer whether to be interested in a
market that is growing annually in excess of 20%, but
the right positioning is critical to success. The
growth-focused company must do their homework wisely,
and must ensure that they have the right tools,
talent, and resources to compete for opportunities in
the defense market.
Jeff
Black can be reached by email at black@mbsearch.net. |
