F(2).

Global Industry Type

Industry Definition:

The global aerospace and defense industry deals with building and contracting defense
systems, military electronics, military and civil aerospace parts and equipment, which
also includes space equipment and civilian planes. The major areas this industry
operates in are North and South America, Western and Eastern Europe, and Asia-
Pacific regions.

Market Size: $920.6 billion

Growth Rate: 0.4%
NACIS Code: 33641

Key Rivals and Market Share:

The company faces aggressive international competitors, including Airbus, who are
intent on increasing their market share. Boeing Defense, Space and Security (BDS)
business also faces strong competition in all market segments, primarily from Lockheed
Martin, Northrop Grumman, Raytheon Company and General Dynamics. Non-US
companies such as BAE Systems and European Aeronautic Defence and Space
Company (EADS), the parent of Airbus, continue to pursue a strategic presence in the
world market by strengthening their global operations and partnering with US defense
companies.

Market Share: 7.4%

Scope of Competitive Rivalry:

Players in the aerospace and defense industry are generally very large multinational
companies with countless acquisitions of smaller companies to try to increase their
competitive edge. These companies such as Boeing, Lockheed Martin, Northrop
Grumman, and BAE Systems fight fiercely for government contracts all over the world to
increase their presence and share in the global market. “Companies in the industry are
obliged to adhere to strict regulations involving national security, export restrictions, and
military good licensing.

Concentration vs. Fragmentation:

The share of the top 5 companies in the industry has increased from 22 percent in 1990
to 43 percent in 2005 with a continuing growing command of the industry. With the
amount of acquisitions growing between larger companies and emerging ones each
year, the market continues to be concentrating into the top five large companies. One
area that has become very fragmented is the amount of wholly owned subsidiaries that
each company has come to attain. Many of the subsidiaries operate almost entirely
independent of the management of the parent company causing problems in market
expansion strategies for each company (DataMonitor 13).

Number of Buyers:

There are approximately 1,400 major buyers of aircraft and defense systems around the
world, whether they are countries or companies. There has been an increase in the
number of orders/deliveries due to the expansion of the regional and very-light jet
markets. Aircraft orders have diverged from their correlation with fuel price and airline
profitability because airlines want to replace their expensive fleets with newer, more cost
and fuel efficient jets (Samadi 7). Additionally, Chinese air transportation is forecasted to
grow by 9.3% over the course of two years, and India is forecasted to buy 280 new
planes by 2011 (Samadi 10).

Demand Determinants:

Demand for the Global Aerospace and Defense industry is mainly dependent on activity
among airlines, other air transportation providers, government spending, and economic
stability. When airlines need to expand their fleets to accommodate a growing number of
passengers, demand for products within the industry will increase. Similarly, if airlines’
capacities fall, industry operations will experience a drop in the number of orders. Air
transportation providers may choose other reasons to update their fleets, such as the
introduction of new and more efficient models, involvement in war or an aging fleet.
Thriving economic climates push government spending in aerospace and defense to
new heights and increased contracts, while weak economies do the opposite.

Degree of Product Differentiation:

The degree of product differentiation between these global companies is very small.
Most of the differences are just variations of previously available technology equipment
that have just been upgraded for efficiency and fuel economy. New products tend to be
the same way as well, with few being developed many years later than the initial product
with small changes (DataMonitor 8).

Product Innovation:

“The industry is plagued by limited new product development. Over the past five years,
most new aircraft in the market have been variations of existing airplanes that were
introduced to reduce operating costs. For instance, Boeing’s 787 Dreamliner is a
variation of a wide-body plane that seats more than 200 people but has 20.0% better
fuel efficiency. Globally, Airbus introduced the largest passenger plane, the A380, in
2006. Although the domestic industry has yet to introduce a brand new aircraft that is
like no other, product development has been slow and limited, which is characteristic of
a declining industry. Grave delays of the 787’s production also point to technological
difficulties faced by the industry.” While the some may point to the success and rise of
the business jet market, the commercial aircraft market dominates the industry, and as
such, has had the net effect of putting the industry into a general decline (Samadi 15).
The defense market has seen the same type of staggering effect. With the amount of
security clearances and tests that must be passed, it takes years for new technology to
be affluent on the market and by that time, it is already outdated.

Key Success Factors:

Research and Development - Increasing R&D from acquisitions in emerging markets

has made this a key factor in staying competitive in the global market.

Size of Companies - The size of the companies in the industry allows for a good
reputation with buyers and suppliers to finalize deals. It also helps to drive costs down
when buying components from suppliers.

Openness of Industry for Foreign Participation - Foreign participation in the industry has
been a key factor in acquiring new technologies faster than ever before by gaining
increased R&D capability.

Demand and Budget - The demand and budgets for aerospace and defense that
emerging countries are throwing into the ring is ensuring that the major players in the
industry have a lot of room to grow and capture market share.

Supply / Demand Conditions:

Conditions are based primarily over consumer travel tendencies, oil prices, government
defense spending, and the movement of world markets. Recently, there has been a
divergence from oil prices and the level of aircraft orders and manufacturing, where
higher oil prices and lower airline profitability traditionally reduces demand for new
aircraft.

Analysis of Stage
in
Life
Cycle:

“According to

IBISWorld, the global aerospace and defense industry is declining. Indicators of this
phase of its economic life cycle include contracting value added, falling participation and
increasing levels of import competition. Growth in profit and in the number of
establishments within this industry are both negative.” (Samadi 14). As for the defense
contracts within emerging countries, there has been a two-fold increase in the amount of
budgets available for government spending on technology and defense equipment.

Pace of Technological Change:

Technological change in this industry is high. Components need to be designed with

greater accuracy and aircraft need to be designed so that they are lightweight and
capable of the same performance with less energy expended. The idea is to make
aircraft more environmentally friendly and more cost efficient (Samadi 40). R&D
activities receive about 3% of industry revenue. Recent developments include the 787
Dreamliner, which has advanced avionics systems and it built using composites which
provide an overall fuel cost savings of 20%. Unmanned aerial vehicles (UAV’s) are also
becoming widely recognized as a future mode of defense (Samadi 41).
 Vertical Integration:

Continuous acquisitions in the global aerospace and defense markets make vertical
integration in the industry a very normal thing. With Boeing alone buying Vought Aircraft
Industries and Argon in the same year to keep up with technological innovation and
control more of the supply chain, it is clearly a game of important acquisitions. Suppliers
in the market are those entities that provide raw materials and components and are
continuously targets for purchase. On the other hand, since the industry is under a lot of
strict regulations for security and licensing, they must be very careful before they jump
into any purchase decision.

Economies of Scale:

“The ability to reap the benefits of economies of scale during production runs is a
significant success factor. Larger-scale operations can achieve significant cost savings
across product ranges” (Samadi 25).

Learning / Experience Curve Effects:

There is a very high amount of learning and experience that must be had to get started
or continue in the industry. The higher amount of degrees and certifications one has, the
better they will fair in expansions due to the extremely tedious process of becoming
certified in the industry.

Barriers to Entry:

• High start-up costs – Land acquisitions, technological investment.

• Competitors outsource manufacturing activities – FDI’s difficult for new entrants.
• Industry dominated by skilled labor – Highly qualified labor is hard to come by.
• Licensing regulations – A high level of corporate governance must be demonstrated.

Regulation / Deregulation:

Companies must comply with local laws, satisfy trade security measures, meet
documentation requirements, understand complicated tariffs, and coordinate various
regulatory parties in order to conduct business internationally. The Aerospace &
Defense industry is specifically impacted due to ITAR (International Traffic in Arms
Regulation), which is a set of United States government regulations that control the
export and import of defense related articles and services on the United States
Munitions List (USML).

Globalization:
“Complementing the medium level of international trade, the industry has a moderate
level of globalization, a factor that is on the rise. The industry is dominated by US-based
Boeing, France-based Airbus, Canada-based Bombardier and Brazil-based Embraer.
The first two companies are the only players in the large commercial aircraft market,
whereas the latter two are the industry leaders in the regional and business airplanes
market where prominent brand names include Learjet and Legacy jets” (Samadi 30).
Many domestic operators developed subsidiaries overseas to minimize overall risk and
increase sales. There is more globalization in the civilian manufacturing sector than in
the military sector. Due to high U.S. budget deficits, miliary manufacturers expect to
realize more international sales.

Trends:

The global aerospace and defense market had a total revenue of $920.6 billion in 2009,
representing a compound annual growth rate of 8.7% for the period spanning 2005 -
2009. Defense sales were the most lucrative in the global aerospace and defense
market in 2009, with total sales of $660.8 billion, equivalent to 71.8% of the market’s
overall value. The performance of the market is forecast to decelerate, with an
anticipated CAGR of 5.3% for the five-year period 2009 - 2014, which is expected to
drive the market to a value of $1,190.5 billion by the end of 2014 (DataMonitor 7).