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On the offensive: How defense firms can adapt and succeed in emerging markets

Portrait of Rahul Gangal
Partner
Montréal Office, North America
+91 12 4415-2535
6 augusti 2019

New challenges for big original equipment manufacturers in the global aerospace and defense trade

In the past decade, emerging markets have dominated defense imports, with 10 of 13 largest arms importers being emerging market economies. The defense industries in these economies are in their early stages of development, yet face significant security challenges from geopolitical conflicts. As a result, they have emerged as major but little understood buyers in the global aerospace and defense (A&D) trade. In our white paper, we examine recent changes in these countries and outline how original equipment manufacturers (OEMs) can adapt their business models to these trends, thereby ensuring profitability and future competitiveness.

Several new trends are forcing aerospace and defense OEMs to adapt their business models.
Several new trends are forcing aerospace and defense OEMs to adapt their business models.

What we found out

For ease of analysis, we apply some general rules in the paper. The first is labeling the US, Europe, Israel, Russia, and China as the key exporting countries. Similarly, we label states that place equipment orders in the global markets as importing countries. These are numerous but include large buyers, such as India, Saudi Arabia, Gulf Cooperation Council states, Algeria, Pakistan, and Australia. Australia is unique because, while it has the capability to produce in-market, it also makes significant imports. Second, our analysis considers only the top 15 export markets of each of the 10 key exporters.

"Several new trends are forcing A&D OEMs to change the way they operate in emerging markets, meaning they cannot continue to do business in these regions as they used to."
Portrait of Rahul Gangal
Partner
Montréal Office, North America

How are emerging markets changing?

The increasing defense budgets of these emerging markets are directly attributable to their economic growth. With little or no homegrown defense manufacturing industry, growth has resulted in higher spending on imports of equipment. Expenditure is primarily focused on new acquisitions, modernization of forces and management of outmodedness. However, we don’t believe this past reliance on imports will be as strong in the future. The trend is weakening as, in general terms, emerging markets focus on and prioritize their homegrown industries, specifically platformists.

What does it mean for OEMs?

OEMs are feeling the impact of these changes in different ways, depending on their exposure to the market, control of IP and the extent of globalization. But no matter how they are affected, firms operating in emerging markets will have to completely re-think their business models if they are to profitably leverage the situation and maintain competitiveness.

Five key trends driving A&D strategy change in emerging markets

Most OEMs have historically viewed emerging markets as export opportunities for products and services. While some emerging markets continue to offer export opportunities, this situation has become complicated over the past two decades due to the introduction of offset regimes by many export destination markets. This has put the additional liability on OEMs who now have the situation of offset becoming the norm in most markets, hence the need for these OEMs to plan for more work as well as greater cost outlays.

The way forward

In summary, it is clear that several new trends are forcing A&D OEMs to change the way they operate in emerging markets, meaning they cannot continue to do business in these regions as they used to. The solution is for OEMs to adapt their business models to new trends, thereby ensuring profitability and future competitiveness.

Study

On the offensive: How defense firms can adapt and succeed in emerging markets

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Recent changes in emerging markets are making it hard for big aerospace and defense manufacturers to do business in them. What are the solutions for this?

Published August 2019. Available in
Further reading
Portrait of Rahul Gangal
Partner
Montréal Office, North America
+91 12 4415-2535