CDI Global
Login

Defense Industry Trends – November 2020

At CDI Global, we are seeing three core drivers of the growth of the defense business in the coming years:

  • Worldwide defense spending continues to grow and should exceed $2 trillion annually in the next couple of years.
  • Defense Original Equipment Manufacturers (OEM's) and their suppliers are increasingly required to be highly agile while also producing the highest quality products.
  • Digital technologies, efficiently enhancing the speed of development, are leading defense to the forefront of manufacturing.  

While these drivers affect all companies across defense, we see the environment for middle-market manufacturing suppliers of the OEM's as follows:

Continued growth in specialized vehicles

The defense industry continues to move towards producing an ever-growing variety of highly specialized vehicles. The military is demanding a growing number of air, ground, and sea drones as well as even more specialized vehicles for transporting soldiers. It expects to use exactly the right piece of equipment for every mission.  Hundreds of different vehicles are now produced in small quantities and more are planned.

Technology has changed the design process

The development of these specialized vehicles is facilitated by improved design and simulation technologies. Almost every component can now be designed, tested virtually, built, and then tested physically. The availability of the technologies permits engineers to perform iterations on the design – designing, building, and testing repeatedly to constantly improve performance.  Prototypes will be made, tested, and then discarded for the next better performing version. Upgrades will now be ongoing.

Suppliers must adapt

The OEM's need the redesigned components manufactured quickly and with consistent top quality. Many traditional defense sector suppliers are geared for manufacturing large production runs of components at the lowest cost with ample lead time. Changing expected delivery times from months to days requires a substantial change at the suppliers. If existing suppliers cannot become agile, defense OEM’s will find alternatives.  Additionally, in this new environment of small orders needed now, quick customization and delivery have become more important than price.

Agile quality manufacturers will become acquisition targets

Successful middle-market component suppliers may become acquisition targets by three groups: (1) traditional, slow-moving suppliers to demonstrate that they have a fast-moving arm; (2) existing agile suppliers looking to broaden the product line or expand the market penetration; or (3) private equity building a comprehensive defense industry component supplier.  Quickly delivering quality customized components will be well rewarded going forward.

Considerations

  • Does the increasing demand for acquisitions favor exits by private owners now, especially with the potential for increasing capital gains tax rates? 
  • With groups of active buyers, is this a good time for large enterprises to carve out non-core business segments or assets?

William Surman, Senior Partner, and Co-Leader Aerospace & Defense

Connect with a CDI Expert. Request a Call Back.

News & Insights

Read more

October 10, 2024

Specialty Chemicals Markets Are Challenged by Increasing Sustainability Requirements

Read more

October 2, 2024

Saxenhammer among the Top 5 M&A advisory firms in Germany

1
How to Thrive in a Tough M&A and Fundraising Market: Key Insights for Technology and Growth Companies
2
Is ARR a Golden Ratio to value an IT business, or just an easy way to run a financial model?
3
Trade Restrictions and their Consequences for the Global Economy