Aerospace & Defense

New trends in Defense segment on the cards

Following General Dynamics' agreement (at the start of June) to buy U.S. electro-optical and infrared sensors firm Axys Technologies (Axys) for $643 million, the industry is likely to see further similar announcements in the near future. A deep cut in the U.S. defense budget will certainly impact the earnings growth for the defense companies. Also, the U.S. is rethinking applicability of weapons that the Pentagon no longer wants or needs. All these may lead to a wave of consolidation in this sector over the next 12 months. Meanwhile, defense companies are also turning to overseas governments such as Brazil and India for military product sales. Boeing is trying hard to get contracts for its C-17 cargo plane, while Lockheed and Raytheon are pushing for the missile defense equipment to the Middle East nations, fearful of threats from Iran.

Yet, for the global defense industry, there remains but one primary buyer – the U.S. government. For long, it has been a lucrative and mutually beneficial relationship. In the past eight years, defense spending was up more than 40%, fueled in part by spending on wars in Iraq and Afghanistan. Much of the money flowed to defense contractors that supply the Pentagon everything, from warships to bullets.

Now that U.S. appetite for big and expensive weapons is waning, many players are turning to the global markets for sustenance. This shift in focus is also helped by countries worried about security threats from nations such as North Korea and Iran. Many European allies need to upgrade their aging equipment, and are turning to U.S. companies for supplies. However, in Europe, U.S. defense companies are likely to face stiff competition from suppliers such as Saab, European Aeronautic Defense and Space Co., and BAE Systems. Lockheed, for example, is trying to hold together a coalition of nine potential F-35 buyers also being courted by makers of the Eurofighter jet.

Defense companies are now striving for contracts to maintain and sustain aircraft for U.S. military services and foreign countries, an increasingly attractive market given that budget woes are keeping many aircraft in service longer than expected. By focusing on product innovation, process improvements, and new revenue opportunities, defense companies will be well-positioned for an economic turnaround.

“The United States defense sector is likely to witness a spate of half-billion dollar acquisition deals in the high-tech sectors by the end of the year.”

"Weapons could be the single biggest U.S. export item over the next 10 years," said Loren Thompson of the Lexington Institute.