How aerospace and defense companies can compete in emerging markets

What are the key emerging markets for A&D?

Defense expenditure by a country is very strongly correlated with its GDP. Among the top 15 countries in terms of defense expenditure, six countries — China, Saudi Arabia, India, Russia, Brazil and Turkey — are emerging markets. These markets have an average expected GDP CAGR of 4.5%, during 2017–20, as compared to an average of 1.9% for developed economies.

In addition, other key factors, such as political stability, terrorist activities and relationships with neighbors, also play an important role in determining the level of defense expenditure of a country. Among emerging markets, countries with greater political instability and higher vulnerability to terrorist attacks tend to spend more for defense purposes.

Given the increased defense spending in the emerging economies, companies continue to seek opportunities in these markets. Furthermore, the governments of most of these countries are seeking to modernize their armed forces. They are also focused on developing their local defense manufacturing base and encouraging global majors to invest in their local industries.

In commercial aerospace, these markets, especially China and India, would drive demand for new aircraft deliveries over the next two decades. This makes it beneficial for manufacturers to expand their operations and grow their footprint in these markets to bring their businesses closer to where their customers are.

However, some of these emerging markets are closed markets, thereby providing limited investment opportunities for foreign defense players — nevertheless, they still remain among the top countries in terms of defense spending. The growth of their domestic defense markets would be important to watch for. Furthermore, trade relations among these countries play a critical role in these markets.

How can A&D companies expand their footprint in emerging markets?

Here are some of the key strategies adopted by global A&D players to compete in these markets while contributing to the development of the local industries:

• Set up local manufacturing centers and build a local supply chain
  A&D companies are entering into partnerships with local players. While foreign A&D firms can increase their geographic presence and reduce cost of production through these partnerships, the emerging countries benefit from enhanced capabilities and employment. A&D companies are also roping in local players from emerging countries as their global suppliers.

• Focus on aftermarket opportunities in emerging markets
  Most of the emerging countries have a fragmented and uncoordinated A&D aftermarket, characterized by an inexperienced workforce, immature logistic network and regulatory oversight challenges. However, rapid growth of air traffic in these markets is expected to fuel demand for MRO services, opening up opportunities for foreign players.

• Engage in contracts involving technology transfer
  Emerging countries are increasingly seeking to enter into defense contracts. This involves technology transfer from foreign A&D players to strengthen their indigenous manufacturing capability. Foreign companies that share technologies with these countries enjoy enhanced collaborative opportunities for the developing local research, manufacturing and aftermarket capabilities in the local market.