Deloitte predicts Pentagon research, purchases of new weapons to drop

The Pentagon is likely to invest less money for research and procurement of new weapons systems as a portion of its budget over the new decade, according to a report released Monday by Deloitte.

The move could stunt innovation within the aerospace and defense industry, the report concluded.

Deloitte based its analysis in part on projections made by the Congressional Research Service (CRS). CRS projects that if there is no real growth in the defense budget, the Pentagon’s acquisition accounts could slide from 35 percent of the total budget in 2010 to 24 percent by 2020.

“If this were to occur, likely outcomes could be the underutilization of the industrial base, cost cuts and rationalization to preserve profitability and most importantly reduced investment,” Deloitte analysts pointed out in the report, titled “Aerospace and Defense 2010 U.S. Outlook.”

The end result would be a “lower capability to innovate and create technical breakthroughs that have been the hallmark of the industry,” the report said.

Merger and acquisition activity in the aerospace and defense sector will likely accelerate in 2010, the report said. The large prime contractors will be unlikely to merge with one another due to anti-competition laws, concentration of technology and other antitrust matters.

However, Deloitte projects that the large equipment manufacturers may continue to acquire smaller companies to fill gaps in homeland security, defense electronics, intelligence, IT services, command and control, alternative energy and cyber-security.

“This past year [2009] was certainly a challenging year for many companies. For 2010, we have muted optimism for the A&D [aerospace and defense] industry,” said Tom Captain, vice chairman and Deloitte’s A&D sector leader. “We are upbeat about the A&D industry in the long term, despite the challenges that we are all well-acquainted with.”

President Barack Obama’s decision to send an additional 30,000 U.S. troops to Afghanistan will also have an impact on the aerospace and defense industry, according to the Deloitte report. The boost in troops likely will allow companies to supply 30,000 to 40,000 contractors to support the military campaign in Afghanistan.

Those that may see an uptick in revenue are companies that specialize in logistics, transportation, civilian police training, camp building, translation services, border surveillance and other non-military capabilities.

Others likely to be industry winners in 2010 and beyond are companies that can quickly deliver vehicles, generators, transport aircraft and helicopters, as well as those that can develop “innovative new solutions to key problems, such as improvised explosive devices (IEDs) and energy use,” said retired Air Force Gen. Charles Wald, director and senior adviser in Deloitte’s aerospace and defense sector. “Companies that can rapidly develop, test and deploy new technologies will likely be winners in 2010.”

Although the traditional defense markets “might be moderating,” Deloitte projects opportunities for business growth in the security arena, in sectors such as shipping and transportation, infrastructure, energy grid cyberspace and borders. Defense firms also have growth prospects in local and regional government police forces, according to Deloitte.