Aerospace Challenges Go Way Beyond Sequester

Word that Lockheed Martin Corp. plans to cut 4,000 jobs over the next 18 months as the company restructures its space business will likely prompt new complaints about the continuing pain of the automatic federal spending cuts known as the sequester.

And certainly aerospace industry leaders have every reason to protest the next $55 billion installment of annual cuts to defense spending. 

However, without minimizing the dislocations of the ongoing budget cuts, industry participants should not lose sight of the bigger picture. 

Government aerospace and space spending—worldwide and regardless of the sequester—is shrinking and changing, as we noted in a recent analysis of the Colorado space industry.

The Department of Defense and the National Aeronautics and Space Administration project flat to declining budgets for the foreseeable future.

At the same time, cost-pressures and changing government preferences are driving a sea change in the nature of aerospace and space product demands.

Fewer and fewer are government acquisition programs for launch vehicles or satellites insisting on custom complex solutions developed on long timelines using cost-plus contracts. Instead, government customers are redoubling their push for simpler, lower-cost commercial solutions, including fixed-cost, “off-the-shelf” offerings. 

What is more, the heightened emphasis on lower-cost commercial solutions—which will only grow—is transforming the aerospace and defense marketplace, drawing in (in the space realm) new competitors; lower-cost business models such as SpaceX’s commercial launch and flight offering; and disruptive technologies such as the smaller, more affordable satellite systems being offered by Skybox, Surrey Satellite, or Sierra Nevada Corp.

In a word, the aerospace and defense marketplace is roiled now by dislocations far more fundamental than the federal government’s year-to-year budget cuts.

How should industry players respond? By all means they should complain about the sequester.  But most importantly leaders need to take cognizance of the new dynamics and respond aggressively to adapt to a permanently changed aerospace marketplace.

Along these lines, our recent agenda for the Colorado space sector suggested a number of pertinent strategies. In brief, we believe the sector must:

Focus on affordability to secure competitive positions in core government markets. Affordability will both increase an individual contractors’ probability of winning and help ensure that programs remain funded. However, to deliver affordability, space, aerospace, and defense firms will need to drive a step change in efficiency and productivity. Above all, they must change their capabilities and culture to root out the gold-plated solutions mentality that pervades the traditional cost-plus world.

Seek out commercial opportunities in new markets. In addition to becoming more cost-competitive aerospace and defense players must look aggressively for adjacent new lines of business. For example, we urged Colorado space companies to leverage their technologies and organizational capabilities to pursue promising growth in adjacent markets such as aeronautics and cybersecurity, UASs, wireless communications, geospatial solutions, robotics and automation, and renewable energy systems. It’s time to “get off the dole” and seek commercial opportunities.

Commit to innovation and owning the next great aerospace and defense technologies. Likewise, aerospace and defense firms must embrace technology, process, and business-model innovation as a crucial route “out of the box” they are in. Specifically, companies should increase internal R&D investment in next generation technologies such as advanced materials, communications systems and techniques (e.g., new data modulation algorithms), and energy management and storage. In short, industry should set a goal of owning these technologies that will enable the next generation of high-technology products and services.

Foster the nation’s aerospace and defense industrial commons, region by region. Finally, companies in the sector—though they will always compete first and foremost as individual firms—should take this moment to recognize the innovation and efficiency benefits brought to them by the aerospace and defense “industrial commons” of local supply chain synergies. Frequently most intense in dense regional clusters, such synergies can accelerate the sharing of ideas, the pace of problem-solving, and the speed of innovation. Aerospace, space, and defense firms should push aggressively to strengthen the vitality, diversity, and interconnectedness of the nation’s top regional aerospace and defense industries clusters.  Fostering those clusters will support everything else they do.

In short, aerospace and defense firms should not get sidetracked. An inconvenience no doubt, the sequester remains a second-tier distraction when compared to the truly disruptive megatrends now convulsing the aerospace sector. Those are the disruptions to focus on—and respond to—relentlessly.