Significant Decrease in Global Defense Expenditure

Survey results show that 32% of respondents from defense buyer organizations expect a ‘significant decrease’ in global defense expenditure while 46% expect a ‘moderate decrease’. Notably, only 22% of respondents expect a ‘slight decrease’ in defense expenditure.

Global expenditure in defense is directly linked to the economic growth of various countries; with clear signals of an evident slowdown in the global economy, an overall decrease in defense expenditure looks inevitable.

A ‘weak economy’, ‘budget deficits’ and ‘channelizing funds for essential services’ are considered the key factors affecting defense expenditure. Survey results show that 65% of respondents from buyer organizations and 78% from supplier companies within the defense industry consider a ‘weak economy’ a key factor aiding a decrease in defense expenditure, while 64% and 77% of respective respondents consider ‘budget deficits’ an important factor.

Of all respondents who expect a decrease in revenue, the average decline is expected to be 10.7% for defense contractor organizations and 10.9% for other service providers. Overall, 33% of respondents from defense contractor companies and 21% from other service providers expect revenues to decrease by 5%–10%.

European defense cuts are expected to reduce expenditure on research and development (R&D) and could affect the procurement of many popular platforms such as the Eurofighter Typhoon fighter aircraft, Navy FREMM frigates, army wheeled combat vehicles and military satellites.

Many countries are expected to decrease defense expenditure procurement over the next two years with proportionate variations. The ‘weak economy’, ‘budget deficits’ and ‘channelizing funds for essential services’ are considered the key factors affecting defense expenditure.

Decreasing the workforce, divesting, outsourcing or integrating functions accordingly and acquiring companies are some of the measures adopted by companies in order to cut costs. Salaries and employee benefits are one of the principal costs to companies and as a result many consider lay-offs to be a reasonable measure to cost saving.

Overall, 55% of respondents from defense contractor organizations and other service provider companies expect an increase in the number of collaborative projects, anticipating that they will either ‘increase considerably’ or ‘increase slightly’. The key drivers behind such collaboration are revenue increases, decreased costs, the need for expertise and the optimum utilization of resources.

Uncertain economic conditions, extensive competition, opportunistic expansions, a lack of liquidity and the need to reduce costs are key reasons for an increase in M&A activity. Large companies, which expect to venture into high-demand segments find it easy to acquire smaller companies with the relevant expertise during challenging economic times, as smaller companies are often stuck in liquidity crisis.

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Source: ASDReports - Market Research
Date: Jan 28, 2012