ightglobal.com 11-17 June 2019 | Flight International | 71
PARIS
Corporate outlookScott Thompson tells FlightGlobal that this is,
indeed, “a very challenging time”. Funding is a
critical issue, because the DoD – like its counter-
parts across the West – is strapped for cash and
spending carefully. The traditional cost-plus
funding formulae that financed so much war-
time and Cold War defence spending are no
longer politically viable and could break down.
Also, says Thompson, the traditional pro-
curement method, whereby the military sets a
requirement and industry responds, is giving
way to a model in which companies will have
to be more willing to spend substantial sums
of money to realise visionary systems that can
then be sold to government. Complicating this
picture is the fact that technologies like artifi-
cial intelligence are expensive to develop and
development efforts are very likely to fail.
Clearly, that model favours companies that
develop dual-use technologies or those devel-
oping consumer technologies that can be
adapted to military use. The legacy defence
contractor base does not fall into that category.
The upshot is that demand for research and
development (R&D) is outstripping govern-
ment spending. China, says Thompson, is
putting a “fair amount of money” and focus
on new technologies like artificial intelligence
and autonomy. Russia, too, is being “really
smart” in getting bang for the buck. It is
spending on next-generation conventional
warfare to project power with new technolo-
gies and also on what Thompson calls “dis-
ruptive deterrence”; that is, on information
technology and hacking capabilities – cyber
warfare – that can be devastating without
going as far as the nuclear option.
Where the USA stands in relation to this is
not clear. A lot of US spending is classified, says
Thompson, so not much is known about it.
However, US defence companies are cash
rich. Total spending by the DoD began to grow
during the tail end of the Obama era and has
continued rising under President Donald
Trump. And the 2017 Trump tax cuts have left
big companies with cash to both splash on in-
vestors – through dividends and share buy-
backs – and on R&D.
Having said that, PwC notes that aerospace
and defence companies have “limited R&D
firepower to prosecute this prospective tech
race”. Other work by the consultancy found
that, for 2018, R&D spend by 32 publicly listed
aerospace and defence companies decreased
slightly, dropping by half a per cent to $22 bil-
lion. Notably, the sector lags far behind others
in “R&D intensity” – that is, total R&D spend as
a percentage of revenue. For aerospace and de-
fence, R&D intensity was just 3.9%, compared
with 14% for software and internet companies,
11.4% for healthcare and 7.3% in computing
and electronics; even automotive out-spent
aerospace and defence, at 4.1%.MISSION FOCUS
There are, however, ways forward that aero-
space and defence firms can exploit. First, says
Thompson, small, innovative companies are
unlikely to sell very much directly to the
government, as such procurement would be
very difficult to manage. Indeed, he says, we
should not expect the government to change its
procurement model; the US government has
encouraged consolidation in aerospace in part
to effectively manage its own procurement,
and buying from small suppliers as technology
“fragments” would be a “very different model
for the government to pull off”.
Moreover, says Thompson, the govern-
ment’s role should be to fulfil missions by
going to contractors looking for a solution.
That is, the government should define a mis-
sion without defining the technology that will
meet it. Such a formula in practice precludes
much acquisition from small, innovative
companies, because such firms tend to be fo-
cused on single technologies.
One approach is to become a “partner of
choice” for technology start-ups. As PwC’s
chief executive survey observes, examples of
recently formed venture capital funds that in-
vest in small start-up companies include
Lockheed Martin Ventures, Boeing HorizonX
Ventures, Honeywell Ventures and Airbus Bi-
zlab. Critically, PwC advises: “Defence con-
tractors must overcome their resistance to
long-term investment cycles and in takingrisks on projects that may never pay off.”
In practice, those concerns may not be sig-
nificant obstacles. Thompson observes that
while big mergers and acquisitions (M&A)
that make aerospace headlines have been
happening for years, they tend to be geared to
creating scale. In contrast, M&A designed to
acquire innovative technology is small money.
PwC reckons that aerospace and defence
contractors should view M&A as “an efficient
approach to building technology scale and
scope”. A related piece of advice is to “play to
your strengths”, with PwC citing the example
of Boeing’s ongoing investment in autono-
mous systems, which anticipated USAF and
commercial demand for this technology.
Make-or-buy decisions should be re-exam-
ined, adds PwC’s report. The supply chain
“can be a channel for creativity” when
working with suppliers with unique technol-
ogy. An example cited is Lockheed Martin’s
selection of Harris as the supplier of a next-
generation F-35 central data processor, which
cut unit costs by 75% and boosted computing
power by 25 times. However, warns PwC, reli-
ance on any single supplier comes with haz-
ards – a partner could be acquired by a rival.
And, ultimately, the importance of recruit-
ing the “right talent” should not be
overlooked. Aerospace and defence compa-
nies, notes PwC, are “emphasising workforce
training in areas such as data science, automa-
tion, cyber and advanced manufacturing [but]
evidence suggests other industries are way
ahead in the race to hire and retain talent”.
This talent gap looms large. Thompson
says the days are rapidly ending when Wash-
ington DC-focused aerospace and defence
had some geographic protection from Cali-
fornia-based big technology companies.
Names like Google and Amazon are in the
process of establishing second headquarters on
the US east coast and, he warns, will
imminently be recruiting tens of thousands
East coast colleagues will be joining soon of young people. ■
John G Mabanglo/EPA-EFE/ShutterstockTrump tax cuts have left big firms
well funded for spending on R&DREX/Shutterstock