The aerospace and defence industry is the largest exporter in the USA. But exports are only one measure of globalisation. When we also consider the international supply chain and foreign direct investments, aerospace and defence ranks in the middle among other industries.
The shift in wealth towards emerging economies is changing the competitive landscape, and as aerospace and defence companies expand their global footprints, a race to capitalise on rising opportunities has begun.
The Asia-Pacific region is expected to account for 37% of the value of all new aircraft deliveries over the next 20 years - nearly as much as North America and Europe combined. "Who would have thought 20 years ago that we would be able to sell aerostructure products to China and other countries that were closed markets? This has changed the world tremendously," says Gilles Labbé, president and chief executive of Héroux-Devtek.
Since the end of the Cold War, international threats have changed but not diminished. The world faces adversaries who are often unpredictable and difficult to identify. Regional tensions in the Middle East and Asia keep defence equipment in demand. US companies took $38 billion in new defence orders in the most recent fiscal year, and that could increase.
Globalisation also offers companies greater access to talent and labour. According to some estimates, India produces about as many engineering graduates as the USA, and China produces significantly more engineering and technology PhDs than the USA or India. Aerospace and defence companies cannot remain competitive by relying solely on traditional sources of talent; companies must recruit the best people from around the world.
"I don't think there's a talent shortage, but I think there are particular societies and economies that focus on different areas of expertise," said Tim Mahoney, president and chief executive of Honeywell Aerospace. "Our strategic plan is to hire the best engineers around the world."
In 2008, foreign direct investment by the top 50 global aerospace and defence companies climbed to a record. While the search for low-cost manufacturing remains an important motivation, research and development investments have increased significantly, including the hiring of talent in engineering and other critical areas. The top five recipients of foreign direct investment in the aerospace and defence industry were India, China, the USA, Russia and Mexico.
As globalisation creates opportunities, it introduces challenges that require new management tactics. Industry executives interviewed in the PricewaterhouseCoopers' report A&D Insights: Accelerating Global Growth identified the following issues as their top challenges: protection of intellectual property; cost and complexity of export regulations; ethics and compliance across cultures; increasing financial risk, particularly currency exchange rate risk; and management of expanding offset requirements.
Intellectual property protection poses perhaps the most significant barrier to globalisation - many countries with the highest growth rates have the weakest intellectual property laws and enforcement.
The complexity and limitations of export regulations offer another key challenge. US regulations restrict the export of certain technologies and place regulations on foreign governments such as end-use monitoring requirements. The complexity of regulations creates significant risks and increases compliance costs.
Companies also face challenges in the area of ethics and compliance. They must not only understand local laws and cultures, but also educate their international employees and partners on their own country's regulations and ethical standards.
International customers are demanding more in the way of technology transfer, direct offsets and foreign direct investment. Companies must weigh the competitive and performance risks inherent in these issues, as well as the value of their offset investments. Companies must also manage financial risk related to foreign currencies. This can be particularly challenging because revenue and costs may be in different currencies over a long period, combined with the inherent limitations of the currency hedging markets.
With these issues in mind, companies must conduct thorough due diligence and understand long-term economic, political, cultural, and demographic trends before investing in global markets.
Globalisation is driving growth in the aerospace and defence industry. However, the changing landscape creates new competitive threats and complex operational challenges. The race is on. Companies that can best manage these complex challenges will be tomorrow's leaders.
Neil Hampson is global aerospace and defence leader at PricewaterhouseCoopers.
The A&D Insights: Accelerating Global Growth report