The Defense Market is Dying (Not) – Some Great Contrarian Opportunities over the Next 5 Years

The Defense Market is Dying (Not) – Some Great Contrarian Opportunities over the Next 5 Years

According to Anup Shah at Global Issues, defense spending dropped half a percent from 2011 to 2012—to approximately US$1.7T a year worldwide. Many observers are projecting future declines in the defense budgets for North America and Europe of up to 10% over the next 6 years.

Offsetting this decline are defense budgets forecasted to rise up to 4% over the same period in the Asia-Pacific and Mid East North Africa (MENA) market. The net result for the global defense market is perhaps as much as a 5% drop in global spending over the next half-decade–from US$1.7T a year to US$1.62T a year.

These numbers do not show a market with the bottom dropping out–so don’t run away from it too fast!

For those planning to stay and grow in the defense business, many opportunities will arise as others exit the market in fear or significantly reduce their exposure to the sector. The next few years will present opportunities for mid-sized defense firms to expand by acquiring key capabilities with ample prospects for growth.

However, following this strategy to stronger performance in an increasingly globalized defense market will mean concentrating on some key guiding principles.

Here is AMI’s view of some of these “high yield” aids that will help you navigate future defense market conditions:

  1. Be international—not just in name but in deed. This means international is a core focus and company leadership is invested in expanding multi-national operations.
  2. Don’t view the international market as a “foreign military sales” subset to your more important or comfortable domestic market – there should be nothing “foreign” about your approach to the international market!
  3. Be prepared to find and enter non-traditional markets and segments in the global space to generate new revenue and offset flat or declining performance in current core markets.
  4. Find joint ventures or acquisitions that establish and/or grow existing in-country presence and credibility with the local customer.
  5. Work the offset strategy harder—make sure your market approach specifically addresses meeting bigger and harder offset targets now being set by international customers. Unfulfilled offsets are an opportunity and/or a problem—making them a priority early in the business plan helps avoid them becoming the latter.
  6. Help train new buyers—especially among smaller or newer customers–in defense acquisitions/life cycle support strategies. These are the two most misunderstood and mismanaged areas in the international defense market.
  7. Build on your in-place processes that have proved successful in the international market.
    –Refine your Bid/No-Bid process to maximize wins and promote your ability to no-bid. 
    –Identify your “Must-Wins” at least 2 to 3 years in advance to ensure sufficient time for positioning. Allocate sufficient resources for success given higher competitive rivalry. 
  8. In the near term, focus on modernization and upgrades of military hardware as new construction programs are scaled back or canceled in the large advanced economies.
  9. Be mindful of professional services growth opportunities beyond 2015 as a generational turnover is beginning to occur and will continue over the next decade.