Aerospace & Defense: Competitive Landspace

1.0 Summary

AerospaceSociety reviewed the Global Aerospace & Defense market structure, where 30% of industry’s total revenue was generated by four highly-concentrated players, with an ever so slightly decline with each year’s passing. These large contractors remain dominant in the current market climate due to the capital-intensive nature of the industry, pivotal in developing and manufacturing advanced equipment. The rest of the market share is segmented by manufacturers who are willing to take the role of suppliers for the contractors.

2.0 Vital success indicators

The key success factors are well known in the Global Aerospace & Defense industry. The first factor of success is the ability to deliver products on time, lost sales can be a result of not delivering what was promised. Furthermore, to maintain profitability, companies must be able to expand and curb their operations quickly in order to meet the peaks and valleys of the market’s demands. To be more competitive as an operator, it is required to have fully fledged management systems. Another factor that would provide an edge on the market would be lobbying skills; having the possibility of government assistance is a great asset to have and would aid in the company’s success. Additionally, having a good grasp on economics of scale would aid a company by spreading costs over larger volumes when scaling up production; as a result, overhead costs can be minimized which would allow the company to have cost leadership. One final factor is having the access to the most recent and efficient technology and processes. Possessing the latest and most efficient technology will allow companies to minimize costs and provide a more competitive product.

3.0 Cost structures

There are many aspects of the industry which are key cost drivers, the following is a list and a discussion of each:

3.1 Purchases

The cost breakdown for the aerospace and defense industry is heavily weighed down by the company purchases; it’s the major expense in the industry. Roughly around 46% of the revenue is accounted for the acquisition of the various inputs in the industry. Numerous manufacturers are hesitant about switching suppliers since the biggest drivers for cost are the material and supplies. However, this climate of supply cost has led manufacturers to lack any sort of knowledge about the true price of a component and if the supplier is on the lower echelon in terms of quality.

3.2 Wages

The next biggest cost driver is the labor cost which accounts for roughly 20% of the industry cost. To sell more technologically advanced products, large operators have to hire highly trained and skilled workers. Another reason as to explain the high labor costs for large operators is the broad product lines and the wide geographical markets. Generally labor wages are much higher in developed nations compared to recently industrialized countries.

3.3 Profit

Earning before interest and taxes is defined as profit margin; this margin has lately been pressured due to the declined government defense budget in the US and Europe. It is difficult for contractors to increase prices due to the strong international competition which caused foreign buyers to have more negotiating power.

4.0 Basis of competition; foreign & domestic

There is a great variance in competition from country to country; however, companies are willing to compete based on price, product, reliability and aftersales assistance. Contracts are always given to companies that provide a competent product at the most affordable prices, yet some geopolitical aspects may cause some complications

Domestic producers seem to have a home field advantage for contracts within their own country; therefore, there’s less foreign competition for domestic manufacturers. In addition, companies that employ lobbyist to garner more political support from their respective government tend to land more governmental contracts even if offering inferior products.

Many manufacturers employ “offsets” in order to win over foreign contract; these can be subsidies or incentives given to a foreign buyer. These “offsets” may be favorable loan agreements, manufacturing of components in the buyer’s nation or a transfer of technology.

The biggest contributor for foreign producer sales is the relationship between nations. Allies are more likely to proceed with defense related contracts; as opposed to having poor relations which would lead to countries closing their defense market to unfavorable nations.

5.0 Barrier to entry and industry globalization

Barrier to entry in the aerospace industry is currently high; start-up costs are large, as well as acquisition of land, technology and skilled laborers. However, the barrier to entry is low for component manufacturing and the auxiliary industries.

The aerospace and defense industry is moderately globalized due to many operators deriving revenue from domestic markets. However, in the coming years, it is predicted that there will be more emphasis on foreign sales. The defense spending cuts and increased price for advanced products will cause a shift to a better collaborative climate for many countries.  

6.0 Conclusion

The global aerospace and defense industry has been always competitive. AerospaceSociety predicts that the industry will become even more competitive for newcomers due to the barrier of entry and what is required to become a successful producer in the current environment. However, as previously stated, defense spending has been under pressure lately and many nations are cutting down their defense budget; in addition to the increased cost for technologically advanced products, there will incentive for nations to join forces and collaborate together.

About AerospaceSociety:

AerospaceSociety provides insights, professional development and networking events to aerospace industry professionals. To learn more about AerospaceSociety, visit:

[1] Deloitte 2017 Global aerospace and defense industry outlook.

[2] IBISWorld Industry Report, 2017 Global Military Aircraft & Aerospace Manufacturing

[3] US Bureau of Public Debt

[4] The World Bank GDP Data 2018

[5] 2018 STEEL PRICE FORECAST, Trading Economics


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