Back to news

August 19, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

Market exposure in the Top 100: Defense, commercial aviation and much more

By: and Chris Higgins

This year's Defense News Top 100 list of global defense companies coincides with a steep economic downturn created by COVID-19. Although the defense sector has faced pandemic-related business disruptions, it remains a safe haven, with most defense-oriented firms reporting only modest impact on revenues and profits. Seeing how diversified players rely on their defense units is of particular interest at a time when the commercial aviation market has all but collapsed. While many defense firms are bracing for stagnation in defense-spending growth, other markets could experience an extended downturn.

Avascent drew on the Top 100 list to examine the broader mix of market exposure among firms comprising the global defense industrial base. We segmented company revenues across more than two dozen defense and commercial end markets. This analysis provides insight into how companies with defense business leverage exposure to other markets, either as a complement or as a hedge to their defense activities.

One can think of defense companies in three categories:

Defense/government pure-plays: Companies that focus overwhelmingly on military markets generate about 23 percent of the defense-oriented revenue on this year's list. To the extent these companies have revenue outside defense, it comes from close adjacencies in intelligence, civil space or others. Indeed, the top ranks of the Defense News Top 100 list includes numerous firms for whom defense and government comprise 85 percent or more of total revenue. Lockheed Martin, Northrop Grumman, BAE Systems, LIG Nex1, and Huntington Ingalls Industries and many others fall in this category. BAE Systems and L3Harris maintain significant positions in the commercial aviation supply chain, but these activities represent a small portion of their total revenues.

The unique demands of military and government markets — complex acquisition processes, challenging sales channels, burdensome regulatory compliance — has led many leading defense players to maximize their position across the defense product range. These frustratingly unique features of government customers have deterred many commercial technology firms from pursuing this space, a fact that the U.S. Department of Defense is struggling to reverse. Firms in this category have optimized their financial management, business development and other processes to the particular demands of government customers.

Within government markets, the different economics that characterize the sale of products and services has increasingly led to the separation between these two distinct segments. Many of the market leaders in U.S. government services, including Leidos, Booz Allen Hamilton, CACI International, SAIC and others, feature a near-exclusive focus on government customers. A range of firms providing such services continue to find business with both the government and commercial clients, to be sure, including Bechtel, Jacobs, Babcock International and KBR, to list just a few on this year's Top 100 list. But companies with a significant focus on mission-oriented requirements have increasingly focused solely on government customers.

Commercial and defense sectors: Nearly 60 percent of the defense revenue tracked in the Top 100 list comes from firms that compete in sectors that cross the defense-commercial divide. These include shipbuilders and automotive manufacturers, but the vast majority of firms serving both defense and commercial customers are focused on commercial aerospace. A range of firms recognize the unique complementarity between military and commercial aerospace technology in their business mix. Airframe primes like Boeing and Airbus are chief among these, sitting atop vast aerospace supply chains. But many other household names have sought opportunity in commercial aviation, either as airframe primes (General Dynamics via Gulfstream, Textron via Cessna) or as suppliers of avionics, structures, and other content.

Because it calculates 2019 revenue, this year's Defense News list does not count Raytheon Technologies, which was created with the merger of Raytheon Company and United Technologies Corp. in April 2020. The new “RTX” would have pro forma 2019 revenue of about $43.4 billion in defense and $33.7 billion in commercial markets; this excludes Otis (elevators) and Carrier (air conditioners), which were spun off concomitant with the Raytheon-UTC merger.

Many firms with heavy commercial market exposure now face unprecedented economic headwinds. Between March 1 and Aug. 1, 2020, stock prices for firms spanning defense and commercial aerospace declined by 33 percent, as global air travel nearly ground to a halt amid the coronavirus pandemic. By contrast, an index representing defense/government pure-plays has dropped by just 5 percent over the same period. Conglomerates were in the middle, declining about 16 percent.

The silver lining, however, may be the ability of some companies to draw on defense-related cash flows to sustain commercial aerospace investment in preparation for an eventual upturn.

Industrial conglomerates: Finally, there are firms with a foot squarely in defense but which also pursue markets far afield, in terms of customer types and market economics.

About 18 percent of the defense revenue tracked in the Top 100 list is earned by firms with interests that have almost no technical or customer link with defense. Large Asian conglomerates — including China North Industries Group Corporation Limited, also known as NORINCO; Japan's Mitsubishi Heavy Industries; and South Korea's Hanwha — top this category in total revenue.

But several Western firms also follow this approach to varying degrees: Textron, Ball Corporation, Diehl Group and others combine widely disparate product lines in a holding company structure.

With defense versus commercial valuations relatively high, there may be competing instincts in the boardrooms of these giants. On one hand, these companies may decide to reorient their portfolio more toward defense activities by exiting underperforming industrial businesses. On the other hand, firms could elect to use defense cashflows to support the broader corporation and position the company for an economic rebound.

Trends to monitor

While defense budgets could face downward pressure in much of the world, many U.S. contractors have good predictability through 2021 because of DoD outlays already in process. It is the wider commercial economy where the real uncertainty lies.

This makes it hard to predict how many firms active in defense markets will fare over the next year, given the variety of other markets they serve.

Over half the revenue earned by the Defense News Top 100 is generated from commercial sectors. Commercial aviation markets are likely to languish at pre-2019 levels through 2022 or later.

The outlook for other commercial markets is more heterogeneous, but challenges exist across areas like shipbuilding, automotive, industrial equipment and energy. To the extent that countries pursue infrastructure-led stimulus, some of the more diversified companies may find pockets of sunshine amid the gloom.

Doug Berenson is a managing director at Avascent, where Chris Higgins is a principal.

https://www.defensenews.com/opinion/commentary/2020/08/17/market-exposure-in-the-top-100-defense-commercial-aviation-and-much-more/

On the same subject

  • COVID Disrupts Network Tests – But Army Presses On

    May 12, 2020 | International, Land, C4ISR

    COVID Disrupts Network Tests – But Army Presses On

    The Army pushed hard to field-test new tech with real soldiers. Then came the coronavirus. Now the service will have to rely much more on lab testing. By SYDNEY J. FREEDBERG JR.on May 11, 2020 at 5:11 PM WASHINGTON: The Army is taking a calculated risk to field much-needed network upgrades known as Capability Set 21 on time next year. To do that, the service needs to start buying radios, computers, satellite terminals, and much more in bulk this year so it can start fielding them to four combat infantry brigades in early 2021. Many Army weapons programs are staying on schedule because they're still doing digital design work and long-term R&D, much of which can be done online. But Capability Set 21 is so far along that much of its technology was already in field tests with real soldiers — testing that has been badly disrupted by precautions against the COVID-19 pandemic. As a result, said Maj. Gen. David Bassett, Program Executive Officer for Command, Control, & Communications – Tactical (PEO-C3T), the Army may have to rely on more testing data from the lab to make up for limited testing in the field. “As soon as we possibly can, we're going to get this back in the hands of soldiers,” Basset told the C4ISRNet online conference last week. “In the meantime, we know an awful lot from the lab-based risk reduction that we've done.” “The risk,” he said, “is pretty manageable.” Risk & Return The field tests done before the pandemic, combined with extensive lab tests, should be enough to prove the technology will work, Bassett said. In fact, the Army already largely decided what technologies to buy for the upgrade package known as Capability Set 21, he said. What it still wanted soldiers to figure out in field tests, he said, was how they would use it in the field. That feedback from those “soldier touchpoints” would help both fine-tune the tech itself and figure out exactly how much to buy of each item – say, single-channel radios versus multi-channel ones — for each unit. Going ahead without all the planned field-testing means the Army will have to make more fixes after the equipment is already fielded, a more laborious, time-consuming, and costly process than fixing it in prototype before going into mass production. It may also mean the Army initially buys more of some kit than its units actually need and less than needed of other items. But CS 21 is a rolling roll-out of new tech to four brigades a year, not a once-and-done big bang, Bassett explained. So if they buy too much X and too little Y for the first brigade or two, he said, they can adjust the amounts in the next buy and redistribute gear among the units as needed. It's important to make clear that the Army's new technologies have already gone through much more hands-on field testing from actual soldiers than any traditional program, and have improved as a result. In the most dramatic example — not from CS 21 itself but a closely related system — blunt feedback from soldiers and quick fixes by engineers led to major improvements in prototype IVAS augmented reality goggles, a militarized Microsoft HoloLens that can now show soldiers everything from live drone feeds to a cross-hairs for targeting their rifle. Doing such “soldier touchpoints” early and often throughout the development process is central to the 20-year-month Army Futures Command's attempt to fix the service's notoriously disfunctional acquisition system. But to stem the spread of the COVID-19 coronavirus, the Army – like businesses, schools, and churches around the world – has dramatically cut down on routine activities. “Units are either not training, or they're training with significant control measures put in place – social distancing, protective equipment, and things like that,” said Maj. Gen. Peter Gallagher, head of the Network Cross Functional Team at Army Futures Command. That's disrupted the “access to soldiers and the feedback loop that's been so critical to our efforts.” Nevertheless, the Army feels it has enough data to move ahead. It may also assess that the risk of moving ahead – even it requires some inefficient fixes later – is lower than the risk of leaving combat units with their existing network tech, which is less capable, less secure against hacking and less resilient against physical or electronic attack. 2021 And Beyond Capability Set 21 focuses on the Army's light infantry brigades, which don't have many vehicles to carry heavy-duty equipment, as well as rapidly deployable communications units called Expeditionary Signal Battalions. It includes a significant increase in the number of ground terminals for satellite communications, the generals said, though not quite as many as they'd hoped to be able to afford. It'll be followed by Capability Set 23, focused on medium and heavy mechanized units riding in 20-plus ton 8×8 Strykers and 40-plus-ton tracked vehicles. While units with lots of vehicles can carry much more gear, they also cover much larger distances in a day. That means CS 23 will include much more long-range communications through satellites in Low and Medium Earth Orbit, “which give us significantly more bandwidth at lower latency,” Gallagher said. “In some cases, it's almost having fiber optic cable through a space-based satellite link.” Even with CS 21 still in final testing, the Army's already gotten started on CS 23. It's reviewed over 140 white paper proposals submitted by interested companies in January, held “shark tank” pitch sessions with the most promising prospects in March, and is now negotiating with vendors. An Army slide summing up the systems being issued as part of the Integrated Tactical Network. Note the mix of Commercial Off The Shelf (COTS) and military-unique Program Of Record (POR) technologies. There has been some impact from COVID,” Gallagher said, “[but] we will have all the contracts probably let no later than July.” The chosen technologies will go into prototype testing next year, with a Preliminary Design Review of the whole Capability Set in April and a Critical Design Review in April 2022. Further Capability Set upgrades are planned for every two years indefinitely, each focusing on different key technologies and different parts of the Army. Meanwhile, Bassett's PEO shop is urgently pushing out more of its existing network tech to regular, Reserve, and National Guard troops deployed nationwide to help combat COVID-19, Bassett said. That includes everything from satellite communications links to military software on an Android phone, known as the Android Tactical Assault Kit (ATAK). Originally developed to help troops navigate and coordinate on battlefields, ATAK is now being upgraded to provide public health data like rapid updates on coronavirus cases. “Any soldier that was responding to this COVID crisis that needed network equipment, we wanted them to have a one-stop shop,” Bassett told the conference. “They would come to us and we'd go get it for them.” https://breakingdefense.com/2020/05/covid-disrupts-network-tests-but-army-presses-on

  • Contracts for June 28, 2021

    June 29, 2021 | International, Aerospace, Naval, Land, C4ISR, Security

    Contracts for June 28, 2021

    Today

  • High-tech French army truck maker sees demand for low-tech artillery components

    April 7, 2023 | International, Land

    High-tech French army truck maker sees demand for low-tech artillery components

    French armoured truck maker Arquus, specialised in manufacturing high-tech off-road military vehicles, has gone back to producing more low-tech undercarriages for howitzers as the ground war in Ukraine boosts demand for artillery.

All news