4 minute read 1 May 2019
Military rescue man jumping

Why US defense companies should think globally and act locally

By

Mike Iacono

Ernst & Young LLP Transaction Advisory Services Partner

Trusted and experienced transaction advisor in the aerospace and defense sector. Proud father of three.

4 minute read 1 May 2019

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To capture opportunities in international markets, new business models and partnerships, structured around R&D and innovation, are needed.

Globalization has become the norm for virtually every industry. Yet, because of the sensitive nature of their business portfolios, US government contractors and defense companies have historically faced challenges in channeling local success into an expanded global business. Due to these complexities, these organizations may resist opportunities to set up shop in foreign markets.

But the opportunity is out there. Defense budgets in emerging economies are growing at higher rates than those in developed markets and are becoming increasingly higher percentages of their local GDPs. Against this backdrop, executives should ask themselves: is continuing to be solely an exporter of products and services a sustainable long-term strategy in today’s global business environment?

Fulfilling commitments to the US government while pursuing growth beyond the borders is a true balancing act. Yet the payoffs are great: you gain not just a new end market but a place where you can incubate future technology, explore ways to find and develop talent, and operate production plants at a lower cost.

Looking overseas

Many countries want to expand their local economy through local production, which provides an incentive to US government contractors and defense companies to expand their footprints. These governments may not have the purchasing power of a large country like the US, but they present more than just a selling opportunity.

For instance, international markets can be great sources of talent — in management, R&D, operational excellence and other areas. This is crucial for an industry that has been facing an aging workforce for many years and can benefit greatly from the different skills and perspectives of a diverse workforce. Research shows that teams that rated highly for diversity and inclusion were 45% more likely to improve market share and were 70% more likely to find success in new markets.

Also, expanding R&D functions internationally may foster developments, at a cheaper price point, that can be harnessed and brought back to be further refined and developed for US customers. Using corporate venture capital to drive innovation and incubate new technology, solutions and products could even provide an avenue to the commercial marketplace, and that may prove to be a better use of capital than share buybacks.

Developing a strategy

Many non-US defense companies and government contractors have tapped the US market, but the reverse has not happened in the same manner and extent. As noted, this can be a tricky balancing act for US companies. To manage the risk and capture the opportunities, companies may need to reshape business models so that they are attuned to the nuances of the international market. As part of your strategy, you should:

  • Conduct ample research and due diligence. The geopolitical landscape, labor markets, demographics and government budget/spending priorities all contain potential pitfalls and opportunities for your business, and as such, they demand a tailored strategy, not a one-size-fits-all approach. Perform a market attractiveness analysis from a labor, economic and tax perspective to determine which market has the greatest long-term potential and return on investment.
  • Think about your new market broadly. Be open to establishing R&D and manufacturing centers and developing workforce and capabilities in the country. Developed with the help of your initial research and analysis, these strategies can help you maximize your return on investment, beyond just gaining a new place to sell.
  • Explore joint ventures and partnerships. These are a popular mechanism for penetrating international markets, and sometimes they’re demanded by government offset agreements. Build key relationships with buyers and influencers in these new markets, and partner with local suppliers and involve them in the global supply chain network. And, to satisfy offset obligations, be prepared to responsibly transfer technology to local players, for example.
  • Focus on technology innovation. This is a key component to competing with local players and non-traditional players that may be more nimble, with a disruption mindset. This can be your key differentiator against rivals that don’t have your level of resources.
  • Develop an exit strategy too. Carefully picking your markets to focus on is incredibly important, but don’t overlook the need to potentially change directions quickly when market conditions shift, as they inevitably will. For instance, the US government and your target country could begin to clash with each other, adding a complicating dimension.

With prudent due diligence and an understanding of a market’s possibilities and pitfalls, you’re positioning yourself to seize a world of potential — when other US government contractors and defense companies are still focused on their local market.

Summary

To maximize return on investments, your business must understand the attractiveness of markets, geopolitical landscapes, local competition and threats, and overall long-term potential. It can be a tricky balance to pull off but, when done well, can redefine how you compete.

About this article

By

Mike Iacono

Ernst & Young LLP Transaction Advisory Services Partner

Trusted and experienced transaction advisor in the aerospace and defense sector. Proud father of three.