SINGAPORE: Over the past year, defense stocks have taken a beating. In the US, Lockheed Martin shares were down by 40%, while Northrop Grumman has lost almost 40% of its value. In Europe, BAE Systems and Thales have fallen by similar amounts.
According to Frost & Sullivan’s Asia Pacific Consultant of Aerospace & Defense Practice Kunal Sinha, governments the world over have agreed to the fact that there is a black hole in the Defense Budget. Hence, they are exploring all viable options for capability downgrading and quantity reductions as well as for complete cancellations of some equipment programmes.
“The US government’s decision to have a foreign policy led defense review in 2010, could spell drastic equipment cuts. The picture looks challenging though. The Core US defense Budget will edge towards USD600 billion a year but the supplemental budget which funds current operations will decline sharply in 2010, as US and other NATO forces winds down in Iraq and wages a more limited campaign in Afghanistan. The total spending on research and new procurement will fall by almost USD100 billion from its 2008 peak by 2010, resulting in a radical shakeup of the sector,” he says.
In the 1990s, after the end of cold war, the industry reduced capacity through a wave of mergers, but with so few players left that is not an option in 2010.
Sinha says, “Instead, traditional contractors will lose market share to ‘disruptive companies’ that offer good enough but not exceptional products. Companies like Eurocopter are expected to do well, by taking advantage of its global scale and ability to adapt commercial products for military use at good prices.”
“Defense Companies are also likely to focus on providing support services, such as Repairs and Training, for the military as Global spending on operations and maintenance overtakes the investment budget for the first time,” he continues.
He adds, “Defense budget rationalization has seen some areas of the budget grow even as the total spending may have declined. In BAE systems, a slowdown in the demand for its heavily armored vehicle has been offset by the pickup in the combat aircraft sales, as production of F-35 ramps up. Defense administration has been shifting funds from expensive platforms to support irregular warfare and current operations.”
Sinha identifies Defense Electronics, Cyber security and Unmanned Aerial Vehicles as some of the fastest growing segment in the defense market.
He continues, “Global companies are scooping up midsized companies in these areas, as was evident in the buyout of Axsys systems by General Dynamics. Exports and Foreign sales are potential bright spot in the defense market. India is expected to spend USD100 billion on military procurement over the next decade. Saudi Arabia and other Middle East Countries are also increasing their defense spending.”
Frost and Sullivan believes that in spite of the budget cuts, countervailing pressures will make it hard for the governments to reduce defense spending, regardless of their financial position.
“As compared to 1990, where there seemed a clear change in the global strategic scenario, this time around there seems to be no such change. The threats remain the same, but what we are currently going through is a period of budget constraint,” says Sinha.
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