Aircraft (formerly Air Domain): –
The 2017 Eisenhower School Aircraft Industry team analyzed the strategies of select aircraft firms in the United States and Europe over the last five years in an effort to assess in aggregate their implications for both the Department of Defense (DoD) and the overall national security of the United States. The team conducted research using a variety of methods, including a guest lecture series, visits to key domestic and international defense firms, and independent research. This study analyzed the strategies of the following firms: Boeing, Lockheed Martin, Northrop Grumman, Airbus, BAE Systems, Dassault, Leonardo, and Saab. The study also examined the different national frameworks within which the firms reside as well as China and Russia’s aircraft industry structures. The group identified opportunities and challenges for these firms and characterized various government and firm interactions and the emerging implications for DoD and the U.S. government.
This report examines the influence that government policy choices have on firm behavior in the aerospace and defense (A&D) sector, from the perspective of the firms themselves. The research team focused on the fighter aircraft market and observed that the internationalization and globalization that first transformed non-defense commercial markets decades ago markedly affected the A&D sector later, with an accelerating impact from the end of the Cold War. Globalization’s transformative effects arrived “late” to the sector because of its insulated situation, in which governments were monopsonistic consumers that sought to sustain high degrees of autarkic self-sufficiency. Governments were traditionally prepared to pay a “sovereignty price” to maintain key capabilities within their borders, which might otherwise have been acquired more affordably through trade. Declining defense budgets, at the same time that the complexity of fighter aircraft increased sharply, drove up per-unit costs and drove down the sector’s output, putting intense pressure on existing national A&D sector models.
The more modest the scale of a state, with correspondingly smaller budgets and more shallow markets, the earlier the state faced stark defense industrial base (DIB) choices. Following the fall of the Soviet Union, states progressively recognized that domestic demand would be insufficient to sustain competitive DIBs in the A&D sector. These states had available three general policy responses. They could exit the sector altogether, retain a role through producing components or engaging in teaming to produce aircraft, or seek to expand their exports as well as reliance on foreign components to keep A&D firms viable despite weak domestic demand. The years between 1990 and 2017 tell the stories of these different approaches. The UK in effect exited fighter-production. Italy similarly sought to remain a player through collaborative teaming, component manufacturing, and maintenance, repair, and overhaul work (MRO). Sweden and France clung onto the ability to produce fighters “nose to tail,” using different strategies. In the United States, as was the case in the other national markets, firms were subject to rapid consolidation. Meanwhile, Russia and China, both states steeped in the lingering impulses of command economics, through different policies strove to defy the pressures of globalization.
These pressures toward the internationalization of the A&D sector and the increasing importance of exports, trade, and integration are likely to persist. It seems unlikely that even the United States, despite its large defense budget, requirements, and market, can sustain a competitive DIB organized primarily around domestic demand, assuming other factors remain constant. If this is valid, then the international arms sales market presents a new strategic competition space that will determine the viability and competitiveness of a nation’s DIB more so than in the past. There may be government policy options that could be used to exploit this emerging area of competition. If the security situation worsens (as in case of Ukraine, which increased demand for arms in Europe) and technological trends continue (with a need for both high-cost platforms and low-barrier-to-entry cyber capabilities), states with firms that possess the capacity to develop and produce arms with global markets as priority a rather than as an afterthought will benefit at the expense of others less able to adapt to the changing context. It has been our observation that the firms in the A&D sector are more sensitive to changes in this market than governments have been, and that cooperation between governments and firms in foreign markets represents the most competitive teaming. Foremost is the need for governments to recognize consciously the overall climate their choice of policy options creates.
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