Budget cuts always call for some belt-tightening in an organization. But when those budget cuts loom as large as those requested by President Obama, some organizations may simply run out of notches in the belt. Analogies aside, Mr. Obama’s request for a total reduction of $2.4 trillion in US spending over the next decade includes a decrease of $325 billion in the defense budget. For suppliers of defense electronics products, the proper “countermeasures” approach is not to panic, but to plan ahead.
Changing business focus quickly is certainly easier for smaller companies. Many microwave companies relied on defense spending for their growth from the 1960s through the 1980s. When the “first generation” of cellular communications infrastructure emerged, many of these companies seized on the opportunities offered in wireless communications markets. Some of these smaller companies couldn’t support the large product volumes required to compete in commercial communications, while others abandoned their existing defense business for the lure of commercial markets. Still others diversified and successfully supported both markets.
When the commercial communications markets slowed a few years ago, some of these smaller companies switched back to defense markets, while others couldn’t make the switch. But for larger defense electronics companies, a major change in customer spending requires long-term strategy and planning.
A recent newsletter from the Association of Old Crows reported that Europe’s largest defense contractor, BAE Systems, would be spurred to action by the budget cuts. BAE’s home country, the United Kingdom, is also planning for an 8% reduction in defense spending over the next four years. BAE already does about twice the business with the US government as it does with its home UK government market, so these budget cuts will likely trigger some changes in business direction for the firm. As reported in the AOC newsletter, one likely approach is buying companies that are already well established in suitable markets.
One market that may represent a logical transition for many defense contractors is homeland security, and to their credit, some larger defense contractors have diversified into those markets. For example, Raytheon—a name synonymous with radar and missile defense systems—has extended its homeland and transportation security capabilities.
Budgets may be cut, but the need for defense spending is as crucial as ever.