Industry Breakout - Aerospace, Defense & Security
R&D among aerospace, defense and security firms is primarily driven by two sectors: the U.S. Department of Defense (DOD) and the global airline industry. The major aerospace and defense contractors plan R&D in close coordination with DOD to meet the needs of national defense and global security, while capacity, economics and efficiency are drivers for civil aviation requirements. Recent declines in U.S. R&D have been the result of reductions in defense R&D and procurement spending and reductions in commercial aviation R&D, driven largely by Boeing’s R&D returning to a more typical level following the Dreamliner launch.
Internal R&D and technological integration in materials, electronics and communication and surveillance technologies, within both civilian and defense aerospace, is partially offsetting reduced government funding by creating more efficient, cost-effective capabilities.
The economic and policy climate indicates a small decline in 2014, and we project (-1.2%) retrenchment for aerospace/defense/security industry R&D, reaching $12.6 billion. Beyond the U.S., global industry R&D spending remains stable due to growth among major non-U.S. aerospace firms in Asia, Russia and Europe, reaching $26.4 billion in 2014.
Trends and Forecast
The aerospace, defense and security (ADS) industry comprises the major aerospace firms—almost all serving both military and commercial aerospace markets. It also includes navigation, instrumentation and communication suppliers, and other firms engaged in defense and homeland security-related activities. Firms in this industry typically maintain close R&D ties with the U.S. DOD, through collaboration and contract research.
The DOD funds a wide variety of contract research activities that fall outside the scope of this specific industry forecast.4 Our estimates and forecast for the U.S. and global ADS industry R&D are based on company-funded efforts only and do not include the value of defense-related contract research. However, ADS firms’ internal R&D investments are often strongly aligned with the direction and substance of these contract R&D efforts.
Overall defense spending, and hence R&D spending, has been declining over the last few years in a somewhat consistent and expected manner. The impacts of sequestration, however, caused additional across-the-board reductions in both contract research and procurement, leading to declines in revenue at ADS contractors. Together, these reductions caused ADS firms to more directly reduce their own R&D budgets now and into the future. 69% of our ADS industry respondents believe their 2014 R&D budget is likely to be affected by reduced U.S. federal R&D investments.
While the impact of federal spending on the ADS industry is noteworthy, it is important to recognize the significant role U.S. commercial aerospace has on ADS innovation and R&D trends, especially among some of the largest firms in the industry. For example, Boeing typically spends more than 60% of its annual R&D on commercial airplanes, with more funds and a larger share of investment during major jet liner development.
With the combination of reductions in defense spending, and a commercial market that is essentially flat in R&D expenditures, we forecast a small decline of 1.2% in U.S. ADS R&D to $12.6 billion in 2014. Outside the U.S., the ADS industry’s R&D will be generally flat, leading to a total global industry decline of -0.9% to $26.4 billion in 2014.
Factors Driving R&D Investment
Unlike other industries examined in this forecast, concern over federal budgets and spending is a significant factor in U.S. ADS company R&D investment. Reflecting these concerns, 56% of ADS respondents are more pessimistic about their 2014 budgets. Cost cutting and budget reductions in recent years appear to be taking a toll on R&D investment and functions in the industry. Approximately 40% of the respondents believe their R&D staff budgets are not large enough to accomplish their goals. R&D costs are becoming a significant issue for 46% of the ADS industry, and 44% of the respondents are concerned their aging R&D infrastructure is affecting their work, again to a greater degree than any other industry.
Even with reductions in defense-related aircraft R&D budgets, growth in commercial aviation and non-traditional defense and homeland security technologies, such as UAVs, will continue to provide momentum in ADS R&D investment. R&D related to improving the fuel efficiency, operating costs and production of commercial aircraft will continue to benefit from the growing demand for global air travel. Growth in the deployment of UAVs, primarily (but not exclusively) from increasing military demands, is driving R&D related to structures, materials, electronics and communication and surveillance technologies. As border security and civilian uses of similar autonomous vehicles emerge over the next few years, R&D efforts will evolve to develop payload and sensor platform technologies for a wide array of new applications.
As external funding declines and costs continue to increase, industry leaders are looking for ways to increase R&D efficiency and spread the financial and development risks. Nearly half (47%) of the ADS respondents believe increased collaboration would be beneficial to their R&D operations. Such collaborations are becoming more important to the ADS industry. One illustration is the recently announced government-industry partnership between NASA and six aerospace prime contractors to advance composite materials research, development and certification.
Changing Technology Landscape
Given the competitive nature and security requirements of the U.S. and global ADS industry, it is not surprising that in-house development (identified by 85% of the respondents) is by far the most important mechanism for technology development. No other approach reaches the all-industry average.
The development of autonomous vehicles and related technologies has increased in importance over the last two years as 70% of our ADS industry respondents now cite it as a key area of development over the next three years, compared to 57% in our 2012 forecast. Among the ADS respondents, development of cybersecurity technologies also has taken on increasing importance. 45% of the respondents in our current survey cite it as a key development area, compared to 31% two years ago. Both robotic/drone systems and composite materials are cited by half of the respondents in both years’ surveys, indicating a continued platform level of development is expected in these areas. Finally, within a new response category, half of the respondents cited more development in commercial space technologies as important over the next two years.