In the same way that iron, steam, and the telegraph marked a mega-shift in travel and military technologies for the mid-Victorian era, new superpowers, photonics, and AI will radically reshape aerospace and defense by the mid-twenty-first century. However, as profound and impacting as these changes are, they only represent one side of the coin. On the obverse side are the contextual undercurrents, which have driven this evolution and are pushing the commercial ethos of the entire ecosystem towards some significant competitor behavior changes. The result for vendors will be increased opportunities, new bridges of engagement, new applications for legacy products, more high-tech opportunities, more niche markets, but also increased volatility, higher investment risks, and increased fiscal challenges. The following summarizes the core elements driving these changes:
- The rapid evolution of technologies with significant military implications.
- Shifts in the global geo-political-military balance of power.
- Defense procurement shifting towards “non-traditional” sources.
- Defense sector business models that are paralleling these changes.
- Uncertain post-COVID-19 global macro-economic behaviors.
Politics aside, the 5G Huawei controversy has demonstrated the unexpectedly large extent to which the West has fallen behind in key technological areas. Equally, only now is the scale of investment that made this advantage possible being realized. As a result, Western military strategies are being reassessed. For example, the US and its partners in the Five Eyes alliance are now prioritizing an independent 5G infrastructure as a key enabling technology. This stems from the belief that only in this way, can the global balance of power be maintained. Commercial opportunities will be significant for vendors who can help meet this goal. Added to the challenges of the technology will be equally pressing business challenges. With defense ministries across the globe, pursuing non-traditional suppliers to meet these needs, the commercial bar has been raised for everyone.
As a result of these trends, some aerospace and defense business behaviors will need to adapt. Analysts have identified the following as indicative:
- A more proactive connection with broader technological trends than has been historically the case. With new companies being approved as aerospace and defense suppliers, the nature of the business practices employed has intensified. Greater alignment to this trend becomes competitively necessary. Furthermore, broader technologies are converging and at a speed and degree of evolution that is accelerating new entrants, thus underscoring still further the imperative to align with these broader dynamics.
- Step-change in improving intra-company performance. Vendors must be more acute in their approach to product design, prototype, and manufacturing efficiency. Additionally, these must be accelerated over time in regards to the performance achieved. As a result, these vendors will benefit from improved margins to fund research and development. The purchaser benefits from better products at lower costs with cheaper maintenance.
- Investment strategies will need to move away from the previously orthodox pattern of low-risk, low yield towards more significant, higher-risk, higher yield, and more capital-intensive projects. Larger defense companies are already starting to adopt some of the parameters used by Venture Capitalists. Aspects of this model are expected to become standard across the ecosystem. Indeed, small non-traditional entrants already behave like this.
- The aerospace and defense ecosystem is probably under more pressure to adopt new approaches to eliminating technological and commercial roadblocks than at any time since World War II. What makes this unique are the commercial pressures to make these changes quickly and cost-effectively. This will require non-orthodox thinking in a world where old paradigms are already being abandoned on a global scale.
- Among many foci here, is participating in the digital integration and robotic revolution. This includes using data as a fuel for growth, an impetus for profound change, and finally integration into sound supply chain management based on Industry 4.0. From the perspective of credibility, vendors must function by the world into which they hope to sell. From a practical perspective, they cannot do so without participating.
- Vendors must swiftly parallel changes in the broader military ecosystem. This may have significant commercial implications by way of providing unexpected high-value market opportunities.
- There is still a general need to adopt the manufacturing technologies utilized in high-tech manufacturing to secure on-going performance and productivity improvements.
- These various trends are inseparable from a corporate need to continually re-image the future by adopting a dynamic of self-awareness, growth and ambition, operational efficiency, and—as we have already noted—a less risk-averse approach to investment. All these must be allowed to shape corporate structures and practices.
- Critical to this point is internal planning that enhances confidence by setting out a series of tactical responses to meet several potentially unfavorable outcomes, events, and environments. Alternative sources, agility, innovation, and cash reserves are all paramount here.
- Finally, by way of maximizing opportunities, vendors must have a firm grasp of the rapidly growing convergence of security and medical-security melding into aerospace and defense at many vital intersections. Technologies that protect citizens, facilities, data, robotics, and autonomics to those facilitating the movement of people and goods, to surveillance and health screening.
As significant as these points are, they must take as their final cue the new economic realities arising across the world, as well as the broader geopolitical/economic realignment, both flowing from the COVID-19 pandemic. Western economies will not function as they did. Developing economies have been set back. Business psychology has changed. The rule book is being re-written across all these spectra. Above all, the global GDP will have taken a huge knock. That is having been said; its impact is far from evenly distributed. Travel tourism, hospitality, and the Gig economy have taken the majority of the economic pain. For aerospace and defense, overall levels of demand—and future growth—remain structurally embedded. There will be significant shifts in demand within these ecosystems.
With its origins in the Hughes Aircraft Corporation, Palomar’s roots go back to World War II. While employees from this period have long since retired, the wealth of knowledge and experience they gained remains an integral part of our corporate knowledge bank together with the wealth of the generations that succeeded them—all the way to the present day. It is this institutional knowledge that has created our range of solutions, but also lies at the practical heart of our Assembly Services in California and Innovation Centers in Singapore and the United Kingdom. Through these hubs, Palomar finds itself on the front line in experiencing many of the trends outlined in this blog and so allowing us to better engage with our customers and expedite processes in meeting their packaging challenges to the standards demanded by today’s needs.
Dr. Anthony O'Sullivan
Strategic Market Research Specialist