Aerospace & Defense Companies View Their Business Through Ukraine-Colored Lenses Deloitte Says

Aerospace & Defense Aerospace & Defense Companies View Their Business Through Ukraine-Colored Lenses Deloitte Says Eric Tegler Contributor Opinions expressed by Forbes Contributors are their own. New! Follow this author to improve your content experience. Got it! Jun 28, 2022, 08:00am EDT | Share to Facebook Share to Twitter Share to Linkedin MARIUPOL, UKRAINE – MAY 22: Metinvest employees work at the Ilyich Iron and Steel Works on May 22, .

. . [+] 2014 in Mariupol, Ukraine.

(Photo by John Moore/Getty Images) Getty Images A report released today by Deloitte confirms that Russia’s invasion of Ukraine is causing additional stress on an already weakened global aerospace supply chain, limiting the industry’s ability to meet demand. It has likewise forced western aerospace and defense (A&D) firms to ask hard questions about the suppliers they rely on and the places they source materials and components from. Supply chain disruption, critical minerals sourcing and resilience have been topics of discussion among A&D companies for years John Coykendall, Deloitte’s U.

S. and global Aerospace & Defense leader, observes. But the invasion, the report he co-authored concludes, has exposed an industry that may be too dependent on particular countries or regions.

“You see it more broadly than just aerospace and defense,” Coykendall says. “Looking at the energy markets, countries realize they may be dependent on sources that aren’t as reliable as they used to be. ” Vladimir Putin understood the prize that is eastern Ukraine and the rest of the country long ago.

That appreciation was not matched by western A&D firms who now daily feel the loss of over 50% of global aerospace titanium which comes from the Ukraine -Russia region. They also recognize impact of the loss of over 50% of the world’s supply of neon gas, critical to the production of semiconductors they use. “The concentration of rare earth elements, critical minerals in that region is something [industry] hadn’t really looked at before,” Coykendall affirms.

Indeed, Russia’s stature as the 14th largest economy by goods exports ($337 billion) is outweighed by its competitive advantage in supplying several crucial commodities. While its control of neon gas represents half the total, it accounts for nearly 90% of neon (used for etching circuits on silicon wafers) consumed by US companies. Russia also supplies other essential A&D materials such as aluminum, nickel, cobalt, and vanadium.

MORE FOR YOU American Airlines Pilots Say Operations Managers Must Go After Summer Breakdowns The U. S. Air Force Is Gradually Rebuilding Its B-52 Bombers From The Rivets Out An American Bomber Visited Malaysia.

A Bizarre Mix Of Local Jets Rose To Meet It. The hole in critical minerals supplies and the components that cannot consequently be produced without them has western A&D firms scrambling to better comprehend the web of interconnected supply chains that allow them to provide goods and services. Supply chain risks were rising before Covid-19 Deloitte’s analysts maintain, part of the increased volatility that has accompanied globalization and a pace of unexpected geopolitical events that is accelerating.

“I think that addition of geopolitical risk drives home the importance of companies understanding multiple layers in the supply chain all the way to the mining and processing of the critical minerals they use,” Coykendall says. Disruption from the Ukrainian conflict and tension in the South China Sea could impact the A&D supply chain in three key ways Deloitte predicts. The authors point to forced decoupling of critical minerals supply chains from anywhere, any time sourcing to regionally-focused “friend-shoring” arrangements for critical minerals and manufacturing output from a group of friendly nations in the West and other global pockets.

A U. S. Marine with Battery I, 3rd Battalion, 12th Marine Regiment stands ready to load an M795 High .

. . [+] Explosive round into an M777 Lightweight 155mm Howitzer.

U. S. Marine Corps photo – Lance Cpl.

Sean Searfus “Each nation contributes to a certain step along the value chain that best fits their capabilities so there is assurance of some supply,” Coykendall explains. A recent example of the trend comes from mineral-rich Australia whose local division of munitions-producer, Thales , ramped up production of 155mm M795 artillery ammunition for the U. S.

Army after the Pentagon certified Australian-made TNT for its use in December. Supply chain disruption from the Ukraine conflict is a factor in whether Western OEMs can meet what the report claims is increasing demand for commercial aircraft and defense. “I’ve been doing a lot of traveling,” Coykendall says.

“It sure feels like demand is back with a vengeance. ” He adds that U. S.

data indicates air travel demand now rebounding 90% of its pre-Covid levels. Despite smaller airline fleets with fewer wide-body aircraft, passenger numbers have increased and international travel has seen a significant bump in the last two months as countries have removed Covid testing requirements (the US recently dropped requirement to covid test before flying into America). The order books for narrow-body airliners are strong Coykendall asserts with concomitant demand for MRO (maintenance/repair/overhaul) existing fleets.

The ability of companies like Boeing BA and Airbus to meet demand is in question however. Russia’s VSMPO-AVIS VIS MA supplies Boeing with 35 percent of its titanium. According to the Wall Street Journal, the company had to suspend manufacturing of narrow-body planes (including the 737 MAX) for 10 days in May owing to titanium-related supply-chain issues.

Demand for defense-aerospace systems is expected to be strong with increased efforts to localize production and sourcing Deloitte’s report maintains. That jives with the Senate’s annual defense policy bill, which the Armed Services Committee advanced Thursday, authorizing $1 billion in funding for the National Defense Stockpile in fiscal 2023 to “acquire strategic and critical minerals currently in shortfall. ” Congress has also earmarked $600 million for the Biden administration to invoke the Defense Production Act to deal with industrial base constraints for faster missile production and expanded domestic capacity of strategic and critical minerals.

And yet, the Administration’s overall defense budget failed to keep pace with inflation. Proposed Air Force and Navy cuts to aircraft and ship fleets, and a 12,000 man reduction in Army end-strength point to military leadership sending a diminishing demand signal. The war in Ukraine may be a factor in what the Pentagon perceives it can do.

Deborah Rosenblum, a Pentagon official performing the duties of assistant secretary of defense for industrial base policy, told Defense News earlier this month, “With the invasion of Ukraine, there are certain materials that come out of both Russia and Ukraine that are critical to our munitions [where] the market has become disrupted, and it’s just not functioning. ” Deloitte’s report places emphasis on demand for defense procurement in Europe in reaction to the Ukraine situation which “has prompted many countries to raise their defense budgets”. The conflict is driving European/NATO countries appetites for unmanned strike drones, digitally integrated air defense systems and military cybersecurity systems.

“I think we’ll see how [defense procurement] that plays out here,” Coykendall says. “I think where you’re going to see more growth is with European and NATO countries which have historically spent less than the 2% of GDP they’re supposed to spend. The result of the war in Ukraine is a level of attention on defense spending that has been absent in many European countries for quite a while.

” While attention may amount to bumps in European defense spending, it will take time for funding to flow through the system Coykendall acknowledges. That could give American vendors and European defense companies time to get their ducks in a row in a constrained supply environment. Most A&D companies are not publicly discussing their efforts to improve resiliency and secure the inputs they need Deloitte’s Aerospace & Defense leader says.

“I do think companies are going to their suppliers and talking about dedicated [part/material] production lines within a facility to which they commit to buying from in volume. Those types of strategies, of dedicated commitments have been around for a while but the Ukraine [war] has re-energized them. ” Follow me on Twitter .

Eric Tegler Editorial Standards Print Reprints & Permissions.