“Steady” is a common word used by distributors serving military and aerospace markets when they’re asked to describe business conditions in the sector. It is less susceptible to the ups and downs of commercial and industrial markets, they explain, fueled in part by a steady stream of government spending. Today’s ongoing war efforts and the ever-present need for newer and better technology is helping to fuel the trend, keeping electronic components distributors bullish on the military/aerospace market despite lingering threats over budget cuts in Congress.
Still, defense budgets around the world are expected to shrink as the wars in the Middle East (expectedly) wind down and global economic conditions remain tight. The U.S. defense department plans to cut $78 billion in defense spending over the next five years, for example, and some countries in Europe are pondering similar cuts. As a result, North American distributors remain focused on growth in the military/aerospace sector, albeit at a slower pace than they have seen in the last decade.
“We think the defense budgets are peaking,” says Bryan Brady, vice president/director of vertical markets for Avnet Electronics Marketing Americas. Also, Brady does not expect the double-digit year-over-year increases Avnet has seen in the military/aerospace sector over the last 10 years, but he doesn’t expect a steep drop-off anytime soon, either.
“We expect another strong performance this year from the sector,” Brady says. “There is a lot of hand-wringing in the industry about potential cuts [and] funding levels, but we have not seen a decline in our overall sector business.”
The United States is the world’s largest aerospace and defense market and home to the world’s largest military budget. To counter the spending cuts expected here at home and in Europe, many original equipment manufacturers (OEMs) and contract manufacturers are looking to capture a larger share of growing military and aerospace sales in the Middle East, Asia, and South America. Brady says he expects U.S. firms to win their fair share of that business, noting that U.S. companies have traditionally held about half the military and aerospace business worldwide.
Trends And Issues
The demand for new technology and enhanced systems among military and aerospace equipment manufacturers makes the sector an attractive target for electronic component distributors of all sizes. Those with firm footing in the business continue to extend their reach, building business with existing customers and expanding through acquisition.
A pointed example of this is Arrow Electronics’ late 2009 acquisition of A.E. Petsche Co., an Arlington, Texas-based distributor specializing in serving military and aerospace customers. A.E. Petsche supplies interconnect products including specialty wire, cable, and harness management solutions to customers in North America and Europe. At the time it was acquired by Arrow, A.E. Petsche had roughly 250 employees, 3500 customers, and sales of about $220 million.
Such distributors are adapting to a few prominent trends among military and aerospace customers these days. Shorter business cycles, a renewed focus on reliability, and demand for “off-the-shelf” solutions are at the top of the list. Distributors are responding with heightened service levels, a better understanding of compliance and traceability issues, and a wider range of solutions to meet today’s design challenges.
Shorter Design Cycles
“We think the design cycle is shrinking,” notes Avnet’s Brady. “There seems to be more need to get to market quicker.”
Much of that urgency is driven by the war effort and the need to get products, equipment, and new technologies in the field faster. Multi-year development and production cycles seem to be a thing of the past as military leaders seek new products and technologies. Brady points to anti-IED (improvised explosive device) equipment needed in the Middle East as one example.
“We see more of our customers talking about getting a program designed and out in a year,” Brady says of the defense sector in general. “Certainly, the current leadership at the [Department of Defense] has demonstrated that a way to get your program cancelled is to not get your program done on time and on budget.”
Distributors are responding with a focus on service and design capabilities, adding new research tools and design assistance programs, and even putting more “feet on the street” to work with customers who have lost engineering expertise of their own due to downsizing. Future Electronics prides itself on the latter issue, investing more and more each year in engineering personnel who can “hit the ground running” to help customers of all types solve design challenges and get their products to market faster.
“Customers have reduced the number of engineers designing their products, so they are looking to their supply base for more,” Lindsley Ruth, corporate vice president at Future Electronics, said in an interview with SourceESB earlier this year. “[They] are looking for knowledgeable, well-trained engineers with the ability and the tools to design product in. So, every year we invest a little bit more [in that].”
Shorter design cycles are also tied in to the trend toward “off-the-shelf” systems, in which customers buy and modify a system rather than buy components to build that same system. Brady points to this as a continuing trend among defense and aerospace OEMs.
In addition, he says customers are adopting more advanced supply-chain solutions, including order fulfillment, inventory control, storage and consignment programs, and point-of-use replenishment.
Legitimacy And Reliability
Distributors serving defense and aerospace customers are also witnessing a renewed focus on legitimacy of supply and reliability of product. This is largely driven by concerns over counterfeit products.
Counterfeiting is a problem across the entire electronic components supply chain, and defense and aerospace markets are no exception. The Department of Commerce released a report on counterfeit electronics in the defense sector in 2010, noting that 39% of nearly 400 companies and organizations interviewed encountered counterfeit electronics between 2005 and 2008.
Companies studied included original component manufacturers, distributors and brokers, circuit board assemblers, prime contractors and sub-contractors, and Department of Defense agencies. The study also found that counterfeiting in the industry is on the rise, going from nearly 4000 reported incidents in 2005 to more than 9000 in 2008 (see “Counterfeit Concerns Plague The Military/Aerospace Markets”). And distributors are taking note.
“I see a renewed focus on the legitimate source of supply of components relative to concerns over counterfeit products,” notes Brady. “Obsolescence is a key driver in the counterfeit issue, which tends to drive OEMs to the broker market. Moving forward, programs must foster a total cost of ownership perspective by encouraging sustainable solutions to obsolescence.”
This, in turn, is driving demand for parts management services, in which distributors can help customers determine that the parts selected for a project are right for the application and will last over time. This includes programs to manage compliance issues, bills of material for obsolescence, and similar efforts to ensure reliability. Brady points to semiconductors as one product group example.
“We see the pendulum swinging back toward high-reliability semiconductors in the form of enhanced plastic and mil-temp plastic flows,” he says. “We see more robust parts management flow downs that challenge OEMs to demonstrate that the parts selected are appropriate for the application and are sustainable over time.”
Despite the challenges inherent in serving defense and aerospace markets, most distributors expect a solid performance from the sector this year. Indeed, industrial production rose 6% in the first quarter, including a 6% gain in defense and space equipment, according to Federal Reserve data released in April.
Industry watchers remain hopeful the trend will continue as part of overall manufacturing growth that continues to fuel the economic recovery.
“Even though we consistently heard that projects were on hold due to the budget issues in Congress, we continued to post growth numbers year over year,” says Brady. “In fact, March was one of the strongest months in the segment on record.”