Is mil-aero industry under attack?
There are many challenges facing the aerospace and defence industry but it is demonstrating the ability to adapt and to survive the worst of global recessions, writes Steve Munns, European mil-aero marketing manager at Linear Technology
A healthy aerospace and defence sector is vitally important for the technology and manufacturing base of the UK and generates over £50bn for the economy annually with exports contributing more than 50% of sales.
The industry directly employs around 400,000 people, with indirect jobs running into hundreds of thousands more.
But is this industry under attack and in decline? You might be left with that impression from headlines in the popular press, so let us take a look in more detail at how this industry is adapting to the many challenges it faces and examine why it still offers attractive prospects.
There is no doubt that defence budgets across Europe and in the US are under huge pressure from deficit reduction programmes and periodically there are the inevitable reports of financial mismanagement and cost overruns.
In the UK, decades of overspending have led to a government proposal to overhaul the defence procurement process with the introduction of a government-owned, contractor-operated entity that will bring new efficiencies and commercial rigour to the process.
Taking a step back, defence budgets have traditionally cycled with major contract awards and companies operating in this area are quite resilient to this. They have long order books and many have already made significant steps to streamline operations to take out cost.
Furthermore, we can see evidence of strategic efforts to re-direct plans for product development into parallel markets. In particular, the transportation, intelligence and security sectors are attractive targets. Defence contractors are also increasingly focusing on broadening their traditional sales territories to take advantage of the opportunities in emerging economies such as Brazil, Russia, India and China.
This is being accomplished through a combination of mergers and acquisitions, joint ventures and organic growth in target markets. According to SIPRI (Stockholm International Peace Research Institute) on average defence budgets increased 4.5% per annum over 2001-2009 and 2010/11 has shown a levelling off effect as new revenues from growth markets cancel out cuts within the traditional European market territories.
The UK defence industry is tightly linked to Europe through complex multi-national ownership of the major defence contractors and so it is important to view the health of the sector from a reasonably high level. For example, the recently announced $1 billion deal between Finmeccanica subsidiary Alenia Aermacchi and the Israeli Air Force for trainer aircraft will also benefit another Finmeccanica subsidiary, Selex which employs 6000 staff in the UK.
In contrast, the aerospace sector and in particular civil aviation has already come through a difficult period during 2009 to see a solid recovery in 2010/11. EADS Airbus in their 2012 New Year Press Conference suggested that air traffic would continue to grow at a rate of 4.8% per year for the next 15 years requiring 27,900 new aircraft over 20 years.
Further evidence of the positive outlook was seen with confirmation of deals on 800 new aircraft worth £45bn at the 2012 Farnborough International Air Show and solid, long term order books translate to a healthy outlook for the many hundreds of companies in the sub-contracting chain.
The role of technology, and in particular of electronics, to deliver new levels of system performance is of critical importance to the success of UK defence and aerospace companies in a global market. Use of electronics is on the increase in all fields of the sector and in some completely new product areas.
Environmental and legislative factors have also become more important, for civil aviation a goal of 2% annual fuel efficiency improvement was agreed in 2009 and the aim is to effectively cap total emissions from 2020. One initiative is the More Electric Aircraft that brings together new ideas; advanced materials, fuels and product development in many areas, including lean burn engine technology and the replacement of heavy hydraulic systems with electric actuators for aircraft control surfaces.
Such systems push the boundaries of what is possible with existing IC solutions. But at the same time, they provide an opportunity for innovation by working closely with semiconductor suppliers.
SWaP (Size, Weight and Power) is frequently cited as one of the most critical issues facing designers; consider military vehicles for example, within a confined space there are now jammers, communications and navigation systems, data terminals and more. Typical alternator outputs have risen from 60A in 1985 to 600A today, and all of those systems are generating heat, which if not properly managed, will impact on reliability.
A flat outlook to the global defence budget does not equate to a stagnant market, there are several areas that continue to receive significant research and development funding even when budgets are tight. One in particular is the security sector where intelligence, surveillance, jamming and countermeasures capabilities have come into sharp focus in recent years. Another area is autonomous systems in the form of unmanned vehicles, robotics and smart weapons.
Many in the industry expect development of unmanned aircraft to largely replace development of future fighter aircraft. Finally, the networked battlefield is creating all sorts of opportunities for soldier and military vehicle electronics to integrate troops in the battlefield with the complex data handling and analysis systems now being developed for command and control.
Shorter business cycles are reducing the time available for new product development and the shift away from government contracts to privately funded development work has increased pressure on design resources, which are increasingly operating as a virtual team from different locations. For major developments, there has also been a trend to increased collaboration between defence companies to share the costs of research and development.
The use of contract manufacturers and the outsourcing of component buying have also become more commonplace in recent years. This presents some challenges of control, especially with regard to the management of materials in the supply chain and avoidance of counterfeit components.
There are many challenges facing the aerospace and defence industry but it is demonstrating the ability to adapt and to survive the worst of global recessions, even to make money in the face of declining sales. For component suppliers, the growing electronics content more than offsets the flat market in defence, whilst the rising market in civil aviation offers a bright future.