Most aerospace and defense industry leaders agree that their firms would benefit from increasing the pace of globalization, yet a number of challenges are slowing their efforts.

For most aerospace and defense (A&D) companies, the customer base, sources of production and research and development (R&D) are already international. Operations and the supply chain, however, remain less global than in other high-tech industries, according to a study by PricewaterhouseCoopers (PwC).

The pattern of industry mergers and acquisitions (M&A) over the past decade is one indication that A&D is international but not yet global, PwC’s A&D Insights: Accelerating Global Growth says. The majority of deals by volume and value have occurred in and between the United States and Europe. In 2009, 76 percent of the deals valued above $50 million involved targets in North America, the United Kingdom or the Eurozone, while 19 percent of the deals involved targets in Asia and Oceania. Middle East players were involved in only a handful of deals in 2008 and 2009, after an active 2006 and 2007.

Based on interviews with executives at 15 leading A&D companies, PwC found that most leaders believe their companies would benefit from increasing the pace of globalization. Companies that globalize faster are expected to accelerate improvements in recruiting, efficiency and R&D, as well as gain leading positions in future growth markets outside North America and the European Union.

And while A&D customers and the supply base are already international, significant risks and challenges currently stand in the way of accelerating global growth. PwC found the top two challenges are:

• Weakness of intellectual property (IP) protection in new markets; and
• The complexity of compliance with export controls.

“There are strategies for overcoming these challenges,” PwC states. “Broadly speaking, our interviewees identified a need to adjust leadership tactics and risk management in response both to the risks and the overwhelmingly positive benefits of globalization.”

While A&D firms must accept the risk of IP transfer to enter new markets and offer direct offsets, there are some ways to minimize exposure. For example, some functions can be moved or transferred offshore for an acceptable level of risk, when the IP is not business-critical or sensitive, or is otherwise established with good protection (e.g. through patenting).

Identifying this IP requires a detailed understanding of which functions are affected and what IP is associated with those functions. R&D, for instance, may not be appropriate for markets where IP laws or enforcement are weak. When businesses carefully analyze their IP, they can often identify compromises that balance their need for IP protection with the needs of their customers.

Another tactic to manage the risk of globalization lies in the framework and controls established for compliance with U.S. Sarbanes-Oxley legislation, which can be re-purposed for export regulations.

“Due to the difficulty of complying with both U.S. and European regulations some executives have concluded that U.S. export control compliance is too costly and that U.S. technologies should be avoided or ‘built around,’” PwC reports. “Many small and mid-sized companies, both in Europe and the U.S., have chosen simply not to enter into the market for work that involves U.S. export compliance.”

While export controls create significant risks for A&D companies, a growing number of leaders view compliance as an opportunity to create competitive advantage. Executives expect to gain a range of benefits in return for their investments in compliance, including stronger negotiating positions and fewer unexpected compliance costs. Such benefits are sustained through staff training that develops insight into licensing requirements and compliance-management skills.

Although the costs of building an Export Control Management System can be significant, many organizations already have tools that can be applied to export controls, thus reducing the cost of the system. For example, companies that have invested in Sarbanes-Oxley compliance may have many mechanisms in place that can be re-purposed. The control framework for IP protection is another potential resource.

“The next decade will bring profound change to the A&D industry and will define the winners and losers for a much longer period,” Neil Hampson, global A&D leader at PwC, says. “Accelerating global growth will bring real benefits to those willing to take on the challenges.”

A&D has already turned a corner, according to PwC, and now the race toward true globalization has begun.

“The winners of the race will be those with an appetite for globalization. Globalization may introduce new risks and more complexity into the supply chain, but…the strategies to meet these challenges are known. Most are already in use in some form within the aerospace and defense industry. Others are evident in other high technology industries,” A&D Insights: Accelerating Global Growth says. “Winners will adapt, expand and execute these strategies more quickly and more effectively than their competitors. By doing so, they will lead markets that will drive growth over the next 20 years and beyond.”

Resources

A&D Insights: Accelerating Global Growth
PricewaterhouseCoopers

Aerospace and Defence Industry International but Not Yet Global
PricewaterhouseCoopers, April 28, 2010

Aerospace & Defence 2010 Annual Review and 2011 Forecast
PricewaterhouseCoopers, April 8, 2011