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With the likelihood of sequestration bearing down on the aerospace industry, speculation is rampant about how big of an impact it will actually have on the defense industrial base. Most of the attention seems to be focused on the largest systems integrators—understandable, given their visibility and outspoken views on the practical implications of the looming train wreck Congress set into motion.
While growth among larger companies will suffer in the near- to mid-term, the major players will adapt the new business climate and go on to ride the next cyclical upturn. More worrisome are the consequences for lower-tier suppliers, many of whom do not have the resources or heft to manage through a prolonged period of business disruption and uncertainty. For them, the impact of sequestration almost certainly will accelerate the rate of consolidation, with many unable to survive the coming economic upheaval.
This does not bode well for R&D or innovation in the near- to mid-term. Bad enough that both company- and government-funded investment in technology is projected to decline substantially during the next few years as a direct result of sequestration. Exacerbating the situation will be the financial pressures that the smallest suppliers will come under—companies that are responsible for most of the innovation in aerospace and defense.
Whipsawed by customers adjusting to a prolonged period of reduced demand—essentially hunkering down—many small technology companies are likely to find themselves in a fight for survival. More risk-sharing partnerships and a good understanding what constitutes value creation will be the order of the day.
The question is not whether the defense industrial base will shrink, but by how much. The danger—indeed, the possibility—is that it could be hollowed out by end of the draconian process that already is underway. You would think the nation’s political leadership would be more sensitive to the prospect of such a dangerous outcome. Then, again, you would be expecting too much, since that is the same sorry crowd that put the country in this predicament to begin with.
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