McKinsey: Defence-industry leaders gaining optimism

29 April 2015 3 min. read

Defence-industry executives are gaining optimism, the results of a survey by McKinsey & Company shows. The respondents foresee the biggest growth in spending in Asia-Pacific and the Middle East, with the Middle East now seen as the most attractive market for international growth. Cyber security is seen as the area with the highest potential to expand business lines.

Global management consulting firm McKinsey & Company recently released the results of the second survey of senior executives from aerospace and defence companies around the globe, in which it takes pulse of the industry and its outlook for the next three years. The survey comprised of 37 industry leaders representing business activity across Asia, Europe, and North and South America.

Expecting Decrease

While in 2012, when McKinsey conducted the first survey, the largest number of respondents expected defence spending to decline across both Europe and North America by 10 to 20%, in 2014, the majority of respondents think the decline will not be bigger than 5%. For both South America and Africa, the biggest cohort (around 50%) believes that defence spending will remain the same in these geographies, and for Asia-Pacific and the Middle East, most expect increases in spending of 6 to 10% in the next three years.

As a result of the declining budgets in the North America and Europe combined with the growth in the Asian and the Middle Eastern markets, more and more executives are focussing on affordability, with 85% believing their customers will shift their focus to more affordable systems. For nearly all respondents, affordability has become a top-five issue in their company.

International growth
Seeking increased international growth was mentioned by all but one respondent as a priority for the coming three years; with the majority (77%) feeling the Middle East proves to be the most attractive market, followed by India (50%), and the US (33%). Comparing these results to 2012, the biggest change is seen in relation to Brazil, which was seen as the most attractive market by 62% back then and only by 10% now.

Most Attractive Markets

When considering growing through new lines of business, cyber security is seen as the option with the highest potential by 87% in 2014, an increase of 35% compared to 2012, followed by services, which went up from 75% in 2012 to 83% in 2014, with respondents citing outsourcing, affordability, and performance-based logistics as the biggest opportunities.

Areas that show high potential for growth

McKinsey & Company concludes: “The changes from 2012 to 2014 are clear. Defence executives are more aligned and more optimistic about the global defence market. In their view, defence spending is shifting rather than declining outright. Growth is uncertain but achievable. When asked how many points of margin improvement they were targeting over the next three years, all respondents answered with modest growth of between 1 and 5%. Identifying the main trends and harnessing the shifts can lead to continued growth in the defence industry. The outlook for 2017 is increasingly international and complex, but it is not without opportunity.”