New Delhi: Geopolitical tensions will likely continue to create challenges impacting industrial, defence and foreign policies and the main ring will be the US and China who will continue to aggressively compete, predominantly in sectors that both deem strategically important for national security — defence, space and aerospace, for example, as well as AI, quantum computing technology, says a report.
According to the report by KPMG, at the same time, a group of middle powers are expected to grow their geopolitical influence over the next decade, largely using pragmatic diplomatic approaches and preferring transactional stances based on fostering their economic and social development.
The report says that geopolitical tensions will likely continue to create challenges impacting industrial, defence and foreign policies. Even if geopolitics causes a decline in global trade, companies still have options to form new alliances and partnerships, new sourcing options, and innovative business and operating models.
KPMG report predicts growing conflict as geopolitical rivalries, competition for resources, cyberattacks and climate change disrupt supply chains and threaten assets and infrastructure.
As industries strengthen their supply chains, the A&D sector faces increased scrutiny on sourcing due to government regulation, including measures to promote domestic production and increased demand for thorough tracing of parts. Increasingly, governments view supply chains as tools for economic and political stability.
“We are now seeing significant improvements in our supply chain. We have adopted new digital and AI-enabled tools to help us better assess the market, not only across our tier 1 suppliers, but also our tier 2 and tier 3 suppliers,” said Francisco Gomes Neto, CEO of Embraer.
“In recent years, the trend towards multidimensional supply chain resilience has become increasingly crucial, allowing A&D players to identify vulnerabilities like limited supplier diversification and geographic constraints,” adds Amie Ahanchian, Principal, Trade and Customs, KPMG in the US. “This shift highlights the market‘s pivot towards more diversified, resilient supply chains and the careful adoption of advanced technologies to enhance sustainability and risk management.”
The industry ecosystem that comprises the A&D supply chain is changing shape, with a proliferation of Small-to-Medium Enterprises (SMEs) delivering high quality technologies at speed to industrial and government clients. The surge in private capital being deployed into the industry to supplement public spending, bridging the short and long term, is also scaling companies at pace.
This is spawning a new cohort competing with the traditional players for government contracts. Some SMEs are offering turnkey capability solutions that utilise software-enabled operational processes and advanced manufacturing, thus lowering the cost and accelerating speed of delivery,
Geopolitical rivalries, demand for sovereign supply chains and rapid innovation are changing the competitive nature of the A&D sector. Barriers to entry are falling away as value shifts from hardware to software. New additive manufacturing techniques are creating significant opportunities. And fast new startups are bringing new ideas and products to market at a rapid pace.
“In this world of heightened geopolitical tensions, we are seeing a greater emphasis on building alliances consistent with key sovereign capabilities,” notes Peter Griffiths, Global Leader, Defence and National Security, KPMG International. “In the next 10 years, I think we are likely to see allied nations foster multiple medium-sized enterprises that are quite agile, clever and rooted in next-generation thinking, building the capabilities that A&D organisations need going forward.”
The challenge of identifying and adopting new technologies in defence is not new. In fact, there has always been a significant gap between the rapid pace of technological innovation in the private sector and the often slower acquisition process in most defence departments, meaning cutting-edge technologies may not be readily available for military use when needed.
Given demand expectations, the real challenge is to identify new innovations and ideas and then scale them up in production as quickly as possible using secure supply lines. With new ideas and private capital flowing into the sector, many in the industry would argue that the problem is less about innovation and more about the speed of government procurement.
For defence organisations, this gap may create an inherent risk. Recent conflicts have demonstrated that innovation (and counter innovation) must be rapidly commercialized and adopted to maintain force superiority. The wider the gap between innovation and implementation, the greater the risk.
In a rapidly changing geopolitical environment, the advantage goes to those who can make informed decisions the fastest. That has put significant pressure on Aerospace and Defence (A&D) organisations to accelerate their digitalisation efforts.
To date, however, much of the focus in the A&D sector has been on digitalising existing processes, often within siloed platforms and systems. In some cases, progress has been slow, and A&D organizsations have struggled to overcome barriers related to safety, compliance and complexity.
Now, however, the need to digitalise has become a matter of urgency. In today’s rapidly changing geopolitical environment, what A&D customers really want is speed. They want faster decision-making for users and leaders. They are looking for solutions that can be rapidly integrated into their existing systems and platforms. They want information to flow freely from the product to the user. They want to deploy their new kit into the field as quickly as possible. And digitalisation is the key.
Aerospace and Defence (A&D) leaders recognise that changing business strategies and challenging labour market conditions require a bold workforce strategy to reduce material risks to their organisation. Expect to see significant effort and investment flow into transforming A&D workforce strategies and talent pools.
The shape of the A&D workforce is changing. All at once, three factors are having a serious impact on the sector. The first is the next wave of digitalisation, embodied in the introduction and rapid adoption of AI. The second is the competition in attracting and retaining skills and talent.
Finally, the third key factor — rising demand for sovereign capabilities — is creating additional complexity.
In many ways, elevating the A&D workforce strategy may require leaders to take a different view of the relationship between the workforce and the business strategy. The reality is that talent scarcity could soon represent a material risk to A&D organisations that should be included in business strategy scenario planning. A recent report by the World Economic Forum finds that 42 percent of aerospace executives are facing challenges attracting talent to the industry.
“We are seeing A&D organisations start to really integrate strategic workforce planning with business strategy and planning as part of the upfront decision-making process around what capabilities they are going to be able to achieve in a certain timeframe,” adds Megha Darcy, Partner, Workforce and HR Advisory, KPMG in Australia.
“That is helping A&D leaders make more confident decisions about the future of their organisations.”
The A&D industry is in a period of transition, with companies seeking new opportunities for growth while overcoming numerous challenges to achieve their objectives. This report has outlined the key industry trends that A&D executives and stakeholders should focus on to succeed in these turbulent times. Several of the trends create uncertainty, in particular the current geopolitical environment and ever-changing supply chain issues. Others offer opportunities for growth, whether from M&A, collaborating with the next generation of startups or expanding into new markets such as space. And several trends encourage industry players to direct their attention to critical success factors such as sustainability, innovation, digitalisation and an enhanced workforce strategy.
As Grant McDonald, Global Sector Leader, Aerospace and Defence, KPMG International notes, “We believe that the A&D industry will continue its growth trajectory because experienced leaders are focusing their efforts on those areas they can control, while ensuring they are aware of and adapting to external forces outside of their control. Stakeholder management, value creation and industry collaboration remain key success factors.”
