As we enter 2021, 2020 must rank as one of the most turbulent, unpredictable years in recent memory. The COVID-19 pandemic slowed global economic growth and sent unemployment skyrocketing. The US-China trade war has inflamed tensions between the two countries, along with sending big ripples through the electronics and defense communities. Geopolitical conditions are deteriorating as the great power competition and regional conflicts heat up and the US just recently concluded a change in administration and transition of power.
The defense industry has not been immune to the effects of these events, but it has responded well. Despite this, there are some potential points of inflection on the horizon, which will create opportunities and headwinds to growth for companies involved with the defense industry. This blog investigates a number of important trends that we see affecting the defense industry in 2021 and beyond. It also suggests a framework for Strategy Analytics to help you and your company position for success in the future.
Defense budgets are notable for their size, with total expenditures approaching $2 trillion and their stable, low growth rates. Defense budgets are not monotonic, but they are far less volatile than spending swings in commercial markets. Since 2000, the CAGR (Compound Annual Growth Rate) of defense spending has been ~3%, with yearly growth rates falling between +7% and -2% during that period.
One of the contributing factors to the stability of defense expenditures is the budgeting process itself. Governments negotiate defense spending in advance of a fiscal year starting and barring any big unforeseen events, the defense industry spends that money. Since the money has been allocated, the defense markets do not need to plan for and react to the sentiments and buying patterns of the end users as quickly as the commercial market.
COVID-19 has disrupted defense supply chains. Product development efforts and production lines have slowed in response to health and logistical challenges resulting from the pandemic. How has this affected the spending and production profile of the defense industry and how does this trajectory change as the industry moves forward? We can help you understand the key areas of disruption in the supply chain and the recovery plan. This, coupled with future defense budget forecasts, can help you position your company to increase market share and profitability for the opportunities that will arise post-COVID.
A second big enabler of defense spending is economic growth. Defense budgets and spending link closely to GDP growth for each country. Short of any military action, the percentage of GDP allocated to defense spending does not vary significantly from year to year. The effects of COVID on the global economy have been severe and big declines in GDP may have serious implications for defense spending. What long term effects will COVID-related economic contractions have on defense spending? Strategy Analytics can help you understand how future economic trends will influence defense spending on a country-by-country basis.
The United States is the largest defense spender in the world. At this time, the US is in the midst of a transition to an administration controlled by a party espousing more concern with social programs and economic stimulus than defense spending. What are the implications of the new regime in the US to defense spending? Defense budgets globally, and certainly in the US are large spending items. Will they become the “low hanging fruit” and the solution of first choice for economic stimulus plans?
If the US defense budget changes in response to COVID effects on the economy or the new administration, do spending priorities change? Defense programs have long development cycles and long lifetimes, so the industry can absorb some funding changes easily. However, what are the priorities for the new US DoD? Long development cycles mean elevated levels of investment and effort and Strategy Analytics can help you understand and position for these new US priorities.
The world has always been a dangerous place and this period is no exception. In the last several years, we have seen the growing influence of the “Great Power Competition” between the US, China and Russia. In addition, China has become more aggressive in the South China Sea and toward some of its neighbors, there are a whole host of regional conflicts that threaten to heat up and the outcome to the US-China trade war remains uncertain.
What are the implications of these factors and others? How does battlefield strategy change? The Great Power Competition involves very sophisticated and expensive platforms and capabilities. Which of these platforms present the best opportunity and what do the funding profiles and performance characteristics look like for these platforms? How can semiconductor and component companies take advantage of these opportunities? The US DoD seems to be pushing toward a “Mosaic Warfare” strategy. What does this entail from a requirements standpoint? What is the likelihood that the US implements this strategy? Strategy Analytics can collaborate with you to supply actionable insights and information to address these issues.
The defense industry is noteworthy for its size and the momentum that entails, along with its market stability. A confluence of events, including the global COVID pandemic, the simmering US-China trade war, the Great Power Competition and a changing US administration have created uncertainty and volatility. This volatility will create opportunities for companies all along the supply chain. Strategy Analytics can help you chart a course through these turbulent waters. We have a long history of analyzing and supplying actionable intelligence and insight into these opportunities. We are happy to explore these trends in more detail to help you maximize your revenue and optimize your participation in these opportunities.
If you’d like to explore these or any other topics in more detail, please feel free to give me a call.
-Eric