U.S. Companies Eyeing Partnerships to Increase Global Competitiveness
In order to continue growing their businesses and remain competitive in a difficult budgetary environment, U.S. defense and aerospace companies are looking to cultivate international partnerships, said experts and industry executives.
“Whenever we see decreases in the domestic budget, the most logical place that corporations are looking to are international markets,” said Erin Moseley, a senior partner at ISM Strategies, a Washington, D.C.-based consulting firm. “This is not the first time it has happened, and probably won’t be the last,” said Moseley, who previously held senior positions at BAE Systems, Lockheed Martin and General Dynamics.
KPMG International’s Global Aerospace and Defense Outlook 2015 found that more than a quarter of aerospace and defense organizations that responded to a global manufacturing survey said they would enter into new geographic markets to drive growth. Thirteen percent of respondents stated that rebalancing their global footprint was a top priority.
“For the U.S. companies, international is a great place to go because the margins are higher,” said Bill Inglee, a senior partner at ISM Strategies. “They’re generally more profitable — an international sale compared to a negotiated sale internally with the U.S. government — so for them it’s a good deal even though it’s an incredibly competitive market space.”
The international marketplace is also attractive because there’s a lot of opportunity to sell given the current security environment, he said.
Brad Curran, an aerospace and defense industry analyst at Frost & Sullivan, said regional growth in defense spending is expected to increase in places like the Middle East and Asia-Pacific where security threats are surging. Most of that spending will be used to modernize weapons systems.
“Basically if you’re on the Russian border, if you’re on the Chinese border, or you’re on the Iranian border, you’re spending on defense and you’re improving your capabilities. You’re modernizing your equipment,” he said.
The Asia-Pacific region is expected to see the most growth, according to Frost & Sullivan’s 2015 Defense Outlook. The report estimated that defense spending in that area — including money spent on procurement; research, development, test and evaluation; and a portion of operations and maintenance — will grow at a rate of 5 percent annually through 2019 up from $136 billion expected to be spent in 2015. The Middle East-North Africa region has the second highest projected growth rate at 4 percent annually from an estimated baseline of $65 billion in 2015.
There will be a lot of focus placed “in the Middle East and Asia-Pacific partly because of the nature of the conflict, the nature of the tensions that exist in those regions,” Moseley said. “The opportunities for larger programs and the ability to compete in larger programs, it doesn’t exist [in Europe] the way it will and does in the Middle East and Asia-Pacific.”
Partnering with foreign-owned companies could give U.S. manufacturers a channel to the international marketplace, especially in the aforementioned regions, said industry executives.
The Asia-Pacific and Middle East regions are of high interest right now, said Michael Andersson, president and CEO of Saab North America. Saab has recently teamed up with a U.S. company in the Asia-Pacific for a sale within the region, but the official release for the deal has not been finalized.
“Those partnerships are being formed and forged right now and have great potential,” he said, adding that U.S. firms benefit from working with a company like Saab because it has already developed a major presence in those areas. U.S. companies that have historically focused the majority of their energy within their own internal market could benefit from that existing global network, he said.
Alan Pellegrini, president and CEO of Thales USA, a subsidiary of France-based Thales Group, said most foreign-owned companies have had to cultivate strategic relationships in the past because defense spending in Europe is traditionally much lower than in the United States. “Thales for a long time now has grown its footprint in most of those key markets around the world in an aggressive way, including the Middle East. … I would say in general the U.S. companies up until now have not had to rely so much on that approach,” he said. “Now that the U.S. and defense contractors are starting to look abroad, the tables are turned a bit.”
The need to meet offset requirements in countries where the United States has previously done business is another advantage to partnering with a company that has a greater global presence, said one executive.
U.S. companies have offset obligations where some foreign-owned companies have offset credits, said Peter Lengyel, president and CEO of Safran USA, the U.S. subsidiary of France’s aerospace giant Safran Group. Companies incur offset credits by offering a country that buys a product some benefit or level of participation in that system. An offset typically takes the form of co-production, a technology transfer, employing the local workforce or a direct investment into the buyer’s country.
“If you come in and you’ve sold something and you’ve promised some level of work share or industrialization or technology transfer” and have not fulfilled that promise, offset obligations are acquired, Lengyel said. “You see countries like India and Turkey being very aggressive about this. They don’t want to just buy something. They want you to invest in them and then create that capability in their country.”
Moseley said providing some level of involvement is going to be necessary in order for U.S. companies to compete in the international marketplace.
“I see countries becoming more sophisticated in their offset requirements and more stringent in holding companies to their offset obligations,” she said.
Andersson said an advantage for U.S. manufacturers partnering globally is the ability to use existing technologies that have been developed by other countries, which is less expensive than building a product from the bottom up. “There need to be more efficient solutions, more cost-effective solutions. That often means you cannot develop everything from scratch.”
However, while partnering is beneficial to U.S. companies that are trying to expand their international footprint, experts and executives stressed that it is a two-way street with significant advantages and opportunities for foreign-owned companies.
Defense spending in the United States is expected to remain flat in the coming years, but the nation still spends far more in that sector than any other country. In 2015 procurement spending across the globe is projected to total $647 billion, according to the Frost & Sullivan report. U.S. spending comprises the largest chunk of that at $235 billion.
“The United States’ technology base is massive and defense spending in the United States is significantly larger than probably the top 30 countries or more combined, so access and penetration back into the U.S. technology base is clearly beneficial” for international partners, Moseley said.
Lengyel said by partnering with a U.S. company, a foreign firm gains entrance into the market and can be closer to the U.S. customer. “Our number one end user is the United States government,” he said. The ability to freely bring the products and technologies Safran develops overseas into the United States for that end user is important, he added.
He noted the partnership between Safran and Albany International as an example of a mutually beneficial joint venture. The French company teamed up with Albany, a Rochester, New Hampshire-based corporation that specializes in advanced textiles, to develop a composite material that can be used in the production of fan blades and cases for aircraft engines. The material incorporates a three-dimensional woven design derived from 16th and 17th century weaving techniques, Lengyel said.
The composite technology will be used on the LEAP engine, the next-generation of engines from CFM International, a 50-50 joint partnership between Snecma, a subsidiary of Safran, and General Electric. The LEAP aircraft engine will power the newest versions of single-aisle commercial jets, including Airbus A320neo and the Boeing 737 MAX. There are currently 9,000 of those engines on order book, Lengyel said.
Albany and Safran have built twin plants in Rochester, New Hampshire, and Commercy, France. The plant in France will give Albany more access to its overseas customer and vice versa for Safran in the United States, Lengyel said.
The T-X program is another example of a potentially beneficial partnership between a foreign-owned company, Saab, and a U.S.-based prime contractor, Boeing. The program is estimated at over $1 billion dollars and would replace 350 of the Air Force’s T-38 Talon jet trainers. The winner would also have an opportunity to sell thousands of airplanes overseas.
Partnering with a large U.S. contractor like Boeing gives Saab an opportunity to compete for large platform programs that it might not otherwise have the ability to participate in, Andersson said.
“There are product niche solutions that we are able to win ourselves directly, but if you … go up to the platform level, I don’t believe that’s very realistic,” he said. Conversely, Saab adds value to the partnership by contributing high-quality technologies “that will make our partners more competitive,” Andersson said.
The T-X partnership has also benefitted Saab because it opened doors for future partnerships in other high-profile programs. In February the duo teamed up to demonstrate their ground-launched small diameter bomb that builds on Boeing’s existing air-launched system.
While experts agree U.S. companies are pursuing global partnerships more rigorously, they don’t see those companies relinquishing their role as a lead on the majority of large programs, especially within the United States.
“There’s still an underlying desire to have the market be U.S. driven. This is one of those industrial sectors where we’re really the leader and we don’t want to relinquish that leadership,” Inglee said. “The companies build partnerships because it enables them to sell more broadly in the international sphere, but they never really give up the crown jewels. I mean they’re not sharing stealth technology with people and the government doesn’t want them to.”
Moseley said the United States has such a large industrial base and workforce that it may not need to partner internationally for certain capabilities. “So clearly the United States is going to always fall to a U.S. technology first” mindset.
That doesn’t mean that there aren’t certain cases where there is going to be foreign technology that a U.S. prime is using as part of a larger system, she said. “You see that all the time. But if it’s a full-up weapons system I would expect almost always it’s going to end up being indigenous to the country,” which is natural because most countries want to first and foremost build up their own industrial base, she said.
With these growing partnerships, there is going to be a lot of co-production because U.S. companies have to offer those types of opportunities to be competitive on the international level. However, a U.S. company “would try to continue to do as much development as possible on its own,” she said. “But I do wonder if over time … co-production is not going to be enough.”
She said the next logical step for foreign countries would be to seek co-development opportunities to build their R&D base, similar to how they have been improving their manufacturing base. They could use that desire as leverage, choosing to buy only from companies that offer those opportunities.
“I think that’s a logical next step,” she said. “I wouldn’t expect it to be for a decade, but I would expect that eventually just doing co-manufacturing or building a manufacturing base is not going to be sufficient.”
The Medium Extended Air Defense System, or MEADS, is an example of a program that is seeking to gain market share by allowing other countries and partners to both co-develop and co-produce certain aspects of a system. MEADS is a multinational program with Germany and Italy. It is developed through MEADS International, a cooperative venture between Lockheed Martin and German company MBDA Deutschland.
“MEADS is co-development. So from the very beginning … it was Americans, Germans and Italians in the same room,” said Marty Coyne, MEADS business development manager at Lockheed Martin. Once the concept was designed, radar systems, launchers and software code were developed and built collaboratively, he said.
The MEADS program was seen as being at risk when the U.S. Defense Department decided in 2011 to stop funding it past 2014. Prior to that, the Army had paid for 58 percent of the development costs. Germany’s decision to buy the system in June brought new life to the program. Germany is the designated NATO leader for air and missile defense, and it is hoped that by taking the lead, other NATO countries will follow and purchase the system, Coyne said.
To make the system more attractive, MEADS International is allowing potential buyers to adopt its open architecture, giving them the opportunity to plug in capabilities based on their own inventories, requirements and budgets, he said. The venture is also looking to be competitive by allowing countries to increase involvement through a flexible industrial model.
“We’re open to inviting in other countries’ industries into the partnership or at the lowest level to help us produce the system for their particular country,” Coyne said. This will “allow us to be attractive to other countries,” even outside of NATO.