With an eye on the upcoming IDEX expo, one of the Middle East’s premier defense trade shows, Avascent and its strategic communications partner Fleishman-Hillard published an assessment of the international defense offset industry. Defense offsets, an industrial compensation practice that some governments require of foreign suppliers of defense products and services, are increasingly evident worldwide, particularly in emerging defense markets such as the Middle East. Following up on “The Half-Trillion Dollar Challenge” report, this study conducts a two-pronged assessment of the offset landscape, first surveying several hundred offset practitioners across the aerospace and defense industry, and then studies how governments communicate in key markets with both offset obligors and the broader public.
US defense firms reported quarterly earnings last month and the results indicate the industry continues to face revenue and operating income pressure from a customer grappling with funding uncertainties. Avascent’s defense indices show, however, that on average, the industry was able to maintain operating margin and ROIC levels for the quarter and the year. The consensus on Wall Street is that profitability levels are likely be maintained over the next several quarters, due, in part, to industry cost-cutting initiatives and divestitures of low-margins business.
The strength of the industry’s balance sheet and free cash flow generation continues to support aggressive cash deployment in the form of cash dividends and share buybacks resulting in above average payout. The current dynamics in the defense market poses significant challenges to senior industry leadership in balancing short-term budget uncertainties and shareholders’ expectations against investments the industry must now make in order to optimize long-term value creation.
Europe’s modern-day industrial base has its origins in the European nation-states, which took early interest in, and eventual control of, its destiny. Yet, the passing of kings and sovereigns, the end of large continental wars, and the dismantling of cross-border trade barriers have done little to transform state attitudes toward what the French still refer to as “pouvoirs régaliens.” According to an Avascent analysis of Europe’s top defense companies, state participation remains remarkably high across most of the continent. A close examination of all European companies generating more than €400 million in defense sales in 2011 reveals a remarkable statistic: governments owned some 20% of a combined value of €84 billion.
The Department of Defense (DoD) is facing a monumental challenge. After a decade of dramatic growth, the Department has entered a new era marked by declining budgets and continuing missions abroad. Congress has asked DoD to remain capable of addressing a range of threats, while at the same time significantly reducing its top-line expenditures. This challenge has contributed to DoD increasing its emphasis on program affordability; a concept outlined in former Under Secretary of Defense for Acquisition, Technology, and Logistics (USD/AT&L) Ashton Carter’s 2010 memo on Better Buying Power (BBP)1, which is due to be formally updated in January 2013 in the form of current USD/AT&L Frank Kendall’s BBP 2.0.2
In the latest edition of The European, Avascent’s Christina Balis considers the future of the transatlantic security relationship in the aftermath of the US elections. While many in Europe may have welcomed President Obama’s reelection, the President’s emphasis on Asia combined with Europe’s eroding military capabilities pose a long-term challenge to the continued relevance of the US-European security partnership. Without real reform and commitment, Europeans are likely to find themselves increasing irrelevant to America’s global security agenda.