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  • Deloitte says Global Aerospace and Defense sector continues to show resilience – Industry midyear 2010 Outlook expected to hold steady

    Published on July 21, 2010

    India to spend nearly US$80 billion over next five years (2010-15) on new capital acquisitions

    Despite the downward pressure on defense spending and relatively slow sales in the commercial aircraft and business jet segments, the global aerospace and defense (A&D) industry has continued to show resilience in 2010, according to a new study released today by the Deloitte Global Manufacturing Industry Group. Holding steady: 2010 Midyear outlook for the global aerospace and defense sector, examines the quarterly financial statements released thus far in calendar year 2010 by 25 top global A&D companies.

    Sales revenue growth was -1.01%. Operating profit growth was -1.92% and operating margin growth was -0.92%, all pointing to flat financial performance for the first quarter of 2010.

    “Despite these growth challenges, the industry remains resilient and performing better than many other sectors hit hard by the recession. The imperative now will be to cut costs and grow top line revenue in new areas to demonstrate to global markets the ability to grow profits again,” said Tom Captain, Global Aerospace & Defense Sector Leader, Deloitte Touche Tohmatsu Global Manufacturing Industry Group.

    According to the outlook, defense spending, which is led by the United States (U.S.) Department of Defense, is decreasing, with a 5% drop in research and development spend expected into fiscal year 2011, and a base budget increase of only 1.8% that barely keeps pace with inflation. The United Kingdom (UK) is expected to have a steeper decline in defense spending. However, the study also states that defense expenditure in India is expected to increase to US$32 billion and spending in the Gulf Coast countries is expected to rise dramatically.

    “Decreasing defense spend by developed countries will require smarter use of the remaining funds in order to develop and deploy the technologies needed to counter more sophisticated adversaries,” added General Charles Wald (United States Air Force retired), Director and Senior Advisor to the A&D sector, Deloitte LLP in the United States.

    On the other side, spending in India and the Middle East is expected to rise dramatically. The Indian defense procurement for the year 2010-11 is budgeted at US$32 billion (including US$13 billion for acquisitions for new weapon systems, equipments and services). India is likely to spend nearly US$80 billion over next five years (2010-15) on new capital acquisitions.

    Kumar Kandaswami, Leader Manufacturing Industry for Deloitte in India said “The sheer volume of planned expenditure is expected to create new opportunities for global A&D companies, as total spending will grow in absolute terms. Further, having a burgeoning spending on A&D and significant offset requirements, India is also looking for necessary technologies from these companies.”

    “India is building a mature manufacturing sector which enables it to offer more cost-competitive terms for foreign platforms builds. While global companies are looking for cost-saving programs while increasing revenue, India as a critical market and potential engineering and manufacturing partner that A&D companies can leverage for future opportunities,” he further added.

    Other key findings from the study include
    • Commercial aircraft sales are rebounding, albeit from a low base, with a 127% annual increase through to May 2010.
    • Commercial aircraft backlog as of May 2010 stands at 6,600 units, representing six years of guaranteed work, and provides some comfort to suppliers going forward.
    • For defense companies, key areas generating new revenue sources include mission capability software integration, battle space simulation, directed energy, precision engagement, threat identification, and energy and infrastructure security.
    • The number of merger and acquisition deals is up 10% over last year with more than a 300% increase in the value of deals completed or in process.

    “We expect to see more deals by private equity and strategic buyers alike as competition for desirable assets heats up over the next several months,” explains Pauline Biddle, Aerospace & Defense Sector Leader, Deloitte UK & Switzerland Manufacturing Group.

    To access Holding steady: 2010 Midyear outlook for the global aerospace and defense sector, please visit: www.deloitte.com/manufacturing.

    *As used in this press release “Deloitte” means Deloitte Touche Tohmatsu, a Swiss Verein.

    Deloitte Touche Tohmatsu (DTT) Global Manufacturing Industry
    The DTT Global Manufacturing Industry group is comprised of more than 750 partners and 12,000 industry professionals in Deloitte member firms in over 45 countries. The group’s deep industry knowledge, service line expertise, and thought leadership allows them to solve complex business issues with member firm clients in every corner of the globe. Deloitte member firms attract, develop, and retain top professionals and instill a set of shared values centered on integrity, value to clients, and commitment to each other and strength from diversity. Deloitte member firms provide professional services to 80% of the manufacturing industry companies on the Fortune Global 500®. For more information about the DTT Global Manufacturing Industry group, please visit www.deloitte.com/manufacturing.