Covid-19 and the two waves the defence industry will need to weather

GlobalData 24 April 2020 (Last Updated April 24th, 2020 15:06)

With the Covid-19 crisis impacting the defense industry in a number of ways, the vulnerabilities in the supply chain are being exposed.

Covid-19 and the two waves the defence industry will need to weather
Credit: Ryan Fletcher / Shutterstock.

With the Covid-19 crisis impacting the defense industry in a number of ways, the vulnerabilities in the supply chain are being exposed. Beyond the varying degrees of exposure and the differing levels of cash-flow vulnerability, the longer-term impact of the economic fallout will be the primary consequence of the crisis, in defence industry terms.

Ellen M. Lord, Undersecretary Of Defense For Acquisition And Sustainment, provided some useful data on US defense suppliers on 20/04/2020, pointing to the limited number of facility closures and the limited duration of the closures, represented in the charts at the end.

The clear conclusion is that closures are the exception by a significant margin, and that closures thus far are of very limited duration. The data in the second chart will of greater interest, given this is where companies further down the value chain are represented and these companies are the most vulnerable to liquidity limitations. The speed with which Spirit AeroSystems experienced severe economic difficulties, despite being a leading aerostructures supplier, points to the disproportionate impact these shorter work freezes or closures can have.

The greatest impact on the industry will however remain the economic fallout of the crisis, which will hit defense budgets in the longer term. The key takeaway from analysis of the data shared in the briefing must be the importance of separating the statistics on prime contractors with actual impact through the supply chain, well demonstrated by the Department of Defense expediting changes to payments to push cash through the system. The 22/03/04  action  changed the progress payment rate that contracts can get paid for as it  increased from 80% of cost to 90% for large businesses and from 90% to 95% for small businesses. In addition, the Department said it was accelerating payments through several means to prime contracts and directing prime contracts to expedite payments to subcontractors.

The longer-term economic fallout’s impact will be harder to predict, but it will also change the landscape of the market for a number of years.  Once the supply chain survives the initial hits, we can expect a number of major programs to experience painful re-assessments. The latter will be where primes feel the pain.