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India, China pushing aerospace growth: Report

business Updated: Jun 26, 2011 12:10 IST

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Suppliers operating in the global aerospace and defence sector are set to experience significant consolidation as the industry attempts to benefit from increased cost efficiencies, says a new report.

According to Deloitte's Global Manufacturing Industry Group report -– 2011 mid-year outlook for the global aerospace and defence sector -– passenger and freight traffic is expected to grow faster than global GDP for the next 20 years, with maturing economies of China, India, and the Middle East expected to take a higher percentage of commercial aircraft sales and deliveries.

In addition, with the introduction of single aisle aircraft manufacturers, as well as next generation twin aisle commercial aircraft products, suppliers worldwide are expected to increase production.

"Despite increased cost-cutting pressures, we have seen a significant amount of consolidation in the global aerospace and defence industry, as the industry attempts to gain concentration, scale economies, and cost efficiencies, resulting in better value to the end customer," Pauline Biddle, Aerospace & Defence partner at Deloitte, said.

"Stringent antitrust laws and potential EU and USA restrictions may prevent further mega-deals from happening. However, hundreds of companies involved as suppliers to the top companies could gain scale and cost efficiencies by merging," she said. "This group of smaller companies has seen a significant uptick in M&A activity in the last year, and we expect continued consolidation among tier one, two, and three suppliers in 2011 and beyond," she added.

The industry enjoys high cash levels and investors seek greater returns on these balances.

Supplier consolidation should lead to cost efficiencies, resulting in lower pricing to customers. Also, consolidation will likely continue the trend toward innovative process technologies that reduce the labour content in products — resulting in more competitively priced products.

Given the significance of overseas revenues, UK companies should be looking to leverage many of the global opportunities highlighted in the report, whilst also at the same time being aware of, and managing the impact of the challenges that lie ahead in many of the western markets, the report said.

Global governments face increasing pressure to reduce defence budgets, however, Tom Captain, Deloitte Global Aerospace & Defence sector leader, said there is a bright side for the global defense segment, with some markets showing promise.

"Emerging defence markets notably in India, Saudi Arabia, Brazil and the United Arab Emirates (UAE), are markets that present significant opportunities, with announced acquisition deals or ongoing procurement selection processes," Captain said.

India in particular represents a near term opportunity for global defence contractors, he added.