The relatively long lead times of major A&D programs mean that any substantial changes in demand levels or supply costs due to Brexit will take months, if not longer, to emerge and directly affect corporate performance.
However, the A&D sector will have to assess and address a number of potential risks to business:
- As the pound loses ground to the euro and dollar, materials and supply chain costs may rise, causing margins to fall.
- Small to midsized companies that account for the less visible parts of the A&D supply chain might struggle and even fail in the transformed UK economy.
- Reduced access to research- and technology-sharing programs—such as Horizon 2020—could limit UK involvement in early-stage R&D connected to digital and other technologies essential to A&D.
- International trade will become more costly and more difficult to manage, particularly since specific trade and compliance agreements often govern defense exports.
- Foreign investment may slow down or dry up. There are already signs that international companies with UK operations are beginning to take a more cautious view of current and future UK investments.
Each segment of the A&D industry faces unique concerns as well. The greatest threat for the UK aerospace industry is that a small adverse change in the UK’s export performance could significantly cut revenues.
For the UK defense industry, medium-term pressures on overall government spending, high costs for international procurement, and reduced UK influence over the standards that govern multinational defense ventures could have an adverse impact.
The near-term challenges of Brexit for the sector don’t appear to be unmanageable. However, companies should assess the long-term risks they could face—and formulate strategies or contingency plans to mitigate those risks. In particular, A&D companies should take these steps:
- Anticipate any softening of future demand or possible changes to procurement or sourcing strategies.
- Determine which, if any, principal export markets will become less attractive.
- Limit any possible loss that parties in joint ventures or partnerships might incur.
- Monitor potential changes to cost structures and the vulnerabilities of key suppliers in the supply chain.
- Consider how sensitive to future Brexit scenarios (for example, Scotland’s next steps) planned UK investments will be.
- Understand which international programs for sharing research and development are tied to essential core capabilities, now and in the future.
- Take a scenario-based approach to understand and plan for the significant uncertainties that surround the sector.
- Create and join partnerships or cross-industry working groups with government to address issues of common strategic concern.
