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Aerospace And Defense

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Challenges the Aerospace and Defense Industry Faces

The aerospace and defense industry is mainly dependent on macro-economic factors and primarily controlled by government agencies. It comprises fivekeysegments, namelyCommercial and Aviation, Military Aircraft, Space Systems, Ground Defense, and Shipbuilding.The industry observes moderate growth globally, hindered by the dependence on a large number of sole-source suppliers, long lead time, financial constraints, order backlogs leading to extensive inventories, and cyber threats.

Dependence on a Large Number of Sole-Source Suppliers

The suppliers of composite components, wing skins, seat track, assemblies, and aircraft engines are consolidated and few. As a result, companies are forced to rely on select suppliers for their needs. And frequent delays in receiving products pose a risk to production halt, eventually leading to cost overrun and delayed delivery.

Order Backlogs and Large Inventories

The aerospace and defense business nature have a longer lifespan; therefore, companies are compelled to maintain high inventories. On the other hand, fluctuating market dynamics pose significant challenges for these players, as high stocks render them incapable of responding rapidly to market changes.

Financial Constraints across the Supply Chain

The need for substantial capital investments to drive innovation hinders industry growth. Suppliers partner with OEMs in long-term contracts, wherein OEMs invest in suppliers for innovation. The scenario results in reduced profit margins for OEMs and weaker liquidity among suppliers.

 

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Where the industry is heading

 

Merger and Acquisition (M&A) Deals

The aerospace and defense industry is highly influenced by the macro-economic environment, which includes volatility of oil prices, industry regulatory trends, political stability, and other global situations. At present, the COVID-19 pandemic has slowed down merger and acquisition (M&A) deals compared to the previous years.

Source: Janes Capital Partners

Q1 2020 observed relatively fewer deals, and the M&A momentum gained in 2019 has been lost. Increasing debt loads, unstable geopolitical conditions, unresolved 737 MAXaircrafts issues, and environmental concerns around air travel contribute to the ongoing industry slowdown. However, the industry is expected to observe a different set of M&A activities, which would transform mega defense mergers to supply chain- and technology-related consolidation.

M&A activities are expected to gain pace once again. In time, increasing liquidity with investors will see the return of investment inflow in the industry. The current lending rates and low demand for aftermarket services are expected to keep investors apprehensive for the moment and in the short term, which will adversely affect the second level of the supply chain, namely tier II and tier III companies that require large-scale capital funding. Adding to this, a highly constrained credit market is expected to slow down business activities.

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Solutions

 

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Impact

Our clients from the aerospace and defense industry include OEMs, suppliers, connectivity providers, systems integrators, distributors, and other stakeholders of the ecosystem. Straits Research helps companies with the latest technological insights and social and consumer trends related to the industry dynamics. Our consulting services have been vital in educating clients about the latest trends in the A&D industry, notable advancements in Industry 4.0.

One of the leading OEMs in the aerospace and defense industry consulted Straits Research regarding uncertainties around technological adoption in various regions. We provided the client with key business strategies, which helped them decrease government spending and a comparative analysis of the industry's product portfolios. Backed by extensive industry expertise, our team has helped companies improve their product portfolios and supported them with an exhaustive study of current investments and divestment opportunities.

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Aerospace And Defense

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