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Analysis 

Concern Grows About International Aerospace, Defense Competitiveness 

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By Aleksandar Jovovic and Matthew Breen 



In recent weeks, earnings calls from the major U.S. aerospace and defense firms showcased the desire for international expansion, much of it outside traditional NATO markets.

The pressure is on senior executives to increase international sales, with the Middle East and Asia providing the most attractive opportunities. But beyond the financial headlines, how do A&D executives really feel about the global marketplace and their firms’ prospects abroad? Furthermore, what can they and governments do to improve industry competitiveness?

Avascent and strategic communications firm FleishmanHillard surveyed more than 350 A&D executives, many of them representing U.S. firms. More than 80 percent suggested the global competitive landscape will be more intense in the coming three years. Moreover, a clear majority expressed considerable doubt that their respective firms were up to the challenge.

To address these issues, firms have been re-organizing their corporate structures, re-calibrating their offerings, and bulking up international business development and sales support. The survey suggests these efforts have a way to go.

Government could provide a vital leg up for A&D firms, but a majority of survey participants expressed skepticism of their government’s commitment to global defense exports. And when such support is applied, many industry leaders express concern about its effectiveness.

In response, officials in Washington have sped up procedures, simplified administrative and export control burdens, and more aggressively marketed the Foreign Military Sales (FMS) process.  While these steps are positive, U.S. industry still faces significant headwinds from an assertive and at times less-than-scrupulous competitive landscape.  Industry and government must do more to counter this evolving competitive threat.

In terms of the most competitive markets, our respondents highlighted traditional markets such as the United Kingdom, Canada, Middle Eastern stalwarts such as Saudi Arabia and the UAE, as well as emerging markets in India, Brazil, South Korea and Poland. Converting a defense requirement into a sale in such a disparate set of countries —from a funding, customer, exportability and requirements perspective — demands a degree of nimbleness that only a limited number of firms can boast of consistently.

But it is not only a diversification of demand, but a proliferation of supply that is creating challenges for established players. Respondents noted a series of emerging, non-traditional competitors including China, Israel, South Korea, Brazil, Turkey, Russia and others. While perhaps easily dismissed individually, this expanding number of firms, often “national champions” backed by enthusiastic home-government support, present a growing competitive challenge.

In both established and emerging markets, Western firms increasingly encounter state-subsidized Russian companies playing the low-cost card and Israeli competitors capable of providing sophisticated defense electronics and systems that U.S. firms cannot easily export. This disadvantage is compounded by aggressive emerging challengers that are capable of offering reasonable near-substitutes at a lower price than gold-plated U.S. and NATO solutions, often laced with attractive ancillaries such as tech transfer and minimal regulatory oversight.  Examples abound: South Korea’s naval shipbuilding, Brazil’s growing airborne capabilities, Turkey’s land sector products, and China’s growing missile defense and tactical air offerings.
 
The growth of domestic players in these markets, for instance Embraer, Roketsan, and KAI, present a formidable driver of import substitution in their home markets and a developing threat abroad. And while Russian and Chinese domestic defense markets are largely non-factors for Western A&D firms, this evolving competitive threat must be addressed in other emerging markets that are important to U.S. and European firms.

Faced with the daunting reality of a “new competitive normal,” established players require additional support from their home governments. Reducing the A&D industry’s regulatory and administrative burden is essential to successfully overcoming today’s competition in defense exports.

Indeed, the recent modest decrease in contracting fees for FMS transactions is a move in the right direction. Two key actions the government could take include lessening export controls on trailing logistics support and increasing transparency into how and why export approval decisions are made.

First, by lessening the required administrative burden and approval process on items within the logistics tail of previously approved systems, such as additional spares for aircraft or training services, the government would position contractors to offer full service support in a timely and sustained manner, something that distinguishes established providers from emerging market players.

By providing contractors with an enterprise-type export license allowing these follow-on sales, industry would be positioned to support equipment sold internationally with fewer resources and time expended on export approval.

Additionally, by more clearly communicating how and why export decisions are approved, U.S. firms and their customers can more accurately design deals that are likely to be approved, rather than negotiating and then renegotiate after export licenses are denied.

By adding transparency and further streamlining the FMS and exportability processes, government can help industry increase its responsiveness and flexibility. This will enable industry to achieve the nimbleness required to address new competitive threats.  

Vision 2020, the Defense Security Cooperation Agency’s recent policy document, lays some of the groundwork, but as is often the case, the proof will be in consistent and evolving implementation of reforms.

However, responsibility does not fall on government alone. In our survey, when presented with an international business development lifecycle methodology, only a quarter of respondents confirmed they consistently evaluated international markets with established criteria. Just 16 percent professed to regularly conducting stakeholder analysis. Some 28 percent of respondents were certain they effectively managed international customer relationships, and only 16 percent were convinced that they successfully shaped international markets and managed their brand.
While an awareness of these shortcomings is a vital first step, firms need to develop substantially more robust processes.

At the corporate level, industry must continue to redirect resources to align with the growing importance of international sales. Additionally, companies must reorganize their corporate structures to present a comprehensive and united front to international customers — not just in an organizational sense but in practice.

At a tactical level, industry should be engaging with U.S. government stakeholders early and often.  By involving government stakeholders early in the sales process, firms can avoid many of the pitfalls and export challenges that occur at the twelfth-hour of a deal, damaging ever important customer relationships.

Additionally, industry must ensure that they approach international sales with a holistic and rigorous business development and capture process.

Competitions must be viewed across the entire value chain of a program and industry must ensure that they have a structured process for engaging the customer, conducting requirements and stakeholder analysis, completing competitive assessments and price-to-win analysis.

Far too often, U.S. firms miss vital opportunities to understand and truly engage in the mission needs of international customers and shape the competition to their solution. This shaping should be aimed at educating customers about a firm’s solutions and helping devise their optimal deployment in the customer’s defense environment — a straightforward process, if done early and armed with a strong understanding of the local funding, technological and competitive context.

The arsenal of business development improvements for leading A&D firms extends further. Ideally, domestic defense programs need to be developed with export markets in mind: from major partnership-based programs like Lockheed Martin’s F-35 joint strike fighter to smaller projects that bake in exportability requirements at the R&D stage. 

Admittedly, these efforts add complexity to a program’s delicate early stages, but the long-term financial and policy payoffs are substantial.

As an example, Raytheon and its partner Saab have just landed — pending two protests — the 3DELRR long-range airborne radar program, a project conceptualized by the Air Force as export-ready and supported by the pilot “defense exportability” features program. 

Indeed, Air Force stakeholders explicitly noted that they viewed exports as a cost-saving driver for the U.S. taxpayer, and designed anti-tamper and other safeguards into system architecture at the onset. Modularity, scalability and cost considerations, vital elements of improved exportability, are all additional advantages best developed at the program onset.

These examples demonstrate that when both industry and government proactively engage in planning for international export, success is likely. U.S. firms remain the technological standard in the A&D market. However, continued vigilance, business and regulatory process improvements, and market situational awareness are required to retain that competitive edge.

Alek Jovovic is a principal and Matt Breen is an associate at Avascent, a management consulting firm. They can be reached at ajovovic@avascent.com and mbreen@avascent.com



Photo Credit: Thinkstock
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