Global defense spending is expected to increase between 3 and 4 percent in 2020 and about 3 percent annually between 2019 and 2023, according to a new report from the audit and consulting firm Deloitte.
“Demand for military equipment is on the rise as governments across the globe focus on military modernization, given increasing global security concerns,” says the report, 2020 Global Aerospace and Defense Industry Outlook. “The uncertainty and sustained complexity of the international security environment worldwide is likely to boost global defense spending over the next five years.”
In 2020, global defense spending will reach around $1.9 trillion, driven mainly by the U.S. but also countries such as China, Russia and India, the 14-page report says. It adds that NATO members in Europe, under pressure from the U.S., are also increasing defense spending to hit a target of 2 percent of GDP, and tensions in the Middle East are also driving demand for defense equipment.
By 2023, global defense spending is expected to be $2.1 trillion, Deloitte says.
As defense spending increases worldwide, defense contractors stand to benefit.
“To meet the increased demand and improve production yields, defense companies should leverage highly agile production that adapts to changes in demand, including digital technologies,” the report says. “For instance, adopting smart factory initiatives could drive 10-12 percent gains in factory utilization and labor productivity without major capital investment.”
The report also highlights increased U.S. foreign military sales, which were up 33 percent in 2018 to $55.7 billion and through the first nine months of 2019 were at $44.2 billion. However, a stronger U.S. dollar would hamper foreign military sales and improve the price competitiveness of European nations that export defense items.
In the area of mergers and acquisitions, the report notes that “popular wisdom” doesn’t foresee “megadeals,” such as those between Raytheon [RTN] and United Technologies Corp. [UTX] or the former L3 Technologies and Harris Corp. given regulatory concerns. Still, “disruptive M&A that can further unlock value also remains a distinct focus,” it says, noting that large prime contractors may look for deals to obtain advanced capabilities and expand in global markets.
Deloitte expects deals to be centered around capabilities for C5ISR, commercial aerospace maintenance repair and overhaul, unmanned and autonomous vehicles, hypersonics, and companies looking to achieve scale.
“As the A&D supply chain focuses on transformation for cost and scale effectiveness, further industry consolidation is possible as some of the smaller companies may not be able to meet the increased financial, program management, skills, risk-taking, and investment requirements,” Deloitte says. “Consolidation by parts family, i.e., components, aero-structures, electronics, and interiors, is expected to continue as companies focus on gaining economies of scale.”