This week I've been in Washington DC for the annual Association of the United States Army (AUSA) exhibition and Houlihan Lokey's annual aerospace and defense conference. The first, to be blunt, is basically the biggest arms show in the US every year, and the latter is one of the best gatherings of A&D investors and financiers anywhere. Neither explicitly advertised this theme, but both featured companies that were rapidly adapting to changing patterns of demand, even ahead of their customers.
Here's what I mean. One of the presenters at HL's event, from the aircraft components maker TECT, forecast that things would get worse in his industry before they got better. Business aircraft makers wouldn't recover for several years, they thought, Airbus and Boeing's build rates were still unrealistic, and military forces were still ordering too many jet fighters--whether any of them knew it or not.
Around that point, I remembered how Booz & Company had earlier this year forecast how sharply the Pentagon's investment spending (that's RDT&E plus procurement) might drop over the next few years:
2008. $249B
2009. $214B
2010. $205B
2011. $183B
2012. $166B
2013. $150B
I don't know what method (multivariate Kentucky windage?) they used to devise that slide, but it's an indication of what people are thinking. So were General Cartwright's complaints this week in his speech about how the "Pentagon needs more adaptable, cheaper weapons." (see the Defense Department's press release by that title). Specifically talking about long-range strike aircraft, he seemed to be addressing specifiers and industrialists alike with his warning that complicated, niche solutions were on their way out.
Fortunately, I can say, after many conversations at both events, I left town with the impression that enough of the industry has internalized that message that rapid progress is possible. The problem rests with those marketing expensive, bespoke solutions to Cold War problems. If investment spending really drop by one-third over the next four years, more than a few companies will be in the hurt locker. Look, as one panelist at HL's conference forecast, for a restructuring wave on the order of that from the early and mid 1990s.
