According to the 2024 Aerospace and Defense Industry outlook, from Deloitte United States, the Aerospace and Defense (A&D) sector witnessed a revival in product demand in 2023—with the increase in defense spending across the globe being a leading factor. And as continued geopolitical uncertainty means governments are likely to continue focusing on military readiness for the foreseeable future, the demand for A&D products and services is expected to continue well into 2024.
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Meeting that demand, however, may mean A&D companies have to address one of the more intractable challenges discussed in the outlook—supply chain disruption. But there is a way the sector can attempt to get ahead of the demand by speeding up digitalization programs and the uptake of advanced technologies.
Defense spending on the rise
The recent geopolitical instability has undoubtedly spurred an increase in defense spending in 2023—and thus demand within the A&D sector. Defense expenditures globally surpassed US$2.24 trillion in 2022. The US Department of Defense alone recently received approval for a US$886 billion budget for fiscal year 2024, representing a 3% increase compared to 2023.
In the United States, much of these increases are expected to be spent primarily on emerging technology applications that enhance capabilities and improve readiness. Outside of the United States, militaries are also embracing emerging tech—emphasizing artificial intelligence (AI) in particular to create autonomous weaponry, battlefield analytics systems, and other AI-based tools.
But while the rise in military spending can often drive innovation, supply chain challenges continue to be an issue for A&D companies as they try to meet defense demands. Key parts and materials used in emerging technology applications are still experiencing shortages. To counter this, many governments are investing in defense supply chain resiliency to help ensure stability of their industrial bases and meet future demand.
Supply chains remain a concern
Of all the challenges the 2024 A&D outlook discusses, supply chains remain one of the most persistent, with average lead times still yet to return to pre-pandemic levels. A&D companies should expect to see continued disruption in the global supply chain in 2024, leading to both production and delivery delays. From raw materials and suppliers to original equipment manufacturers and maintenance, repair, and overhaul providers, supply chains continue to be constrained by a lack of skilled labor, labor attrition, and unavailability of materials and parts.
Supply chains pose a unique challenge not only for militaries but across all A&D businesses—and much of the problem lays with limited or sole sourcing. For example, China leads in the export of a majority of critical minerals used in defense applications. And as geopolitical tensions can often lead to increasing trade barriers, affecting both raw materials and advanced technologies, A&D companies can potentially see increased restrictions on the availability of key imports.
Reliance on these minerals may be a complicating factor for A&D companies and replacing them is arguably unrealistic in the short term. Unfortunately, the industry has been slow in developing alternate supply sources. As such, companies often must rely on current production for the supply of both new and aftermarket parts. And A&D companies that are reliant on the most advanced material technologies will likely find it necessary to monitor geopolitical events closely in the coming year and consider maintaining strategic reserves of critical minerals.
Digital transformation is key
To meet increasing demand and mitigate supply chain upheaval, A&D companies should accelerate their digital transformation journeys in 2024. Digitalization can enhance product development, improve operational efficiencies, and help develop new production options.
Modernizing and integrating processes and enabling technologies are significant steps the A&D industry can take to help reduce cycle times, improve efficiencies, increase production yield, and elevate quality standards. For example, employing Industrial Internet of Things technologies and integrating both operational and information technology systems can help generate better insights in the manufacturing environment and help improve production yield.
The demand generated by militaries should prompt not only this type of digital transformation but also a more rapid technological evolution, specifically the use of AI. AI can help A&D companies meet increased demand—as well as help overcome some of the challenges within and caused by supply chain disruption—by streamlining operations and enhancing productivity. AI solutions have already helped improve A&D applications, from avionics technology for surveillance to decision-making that further optimizes monitoring for manufacturers. And generative AI–enabled virtual field assistants can improve worker productivity to help ease talent shortages.
A strong offense
Increased demand from defense spending and continued supply chain upheaval are two of the key trends that are likely to characterize the A&D sector in the coming year. As such, A&D companies should continue exploring digital transformation, viewing it as a requirement—rather than an option—for achieving long-term success. By prioritizing the digitalization of their entire supply chains and using advanced technology to improve production, A&D companies can work to overcome sourcing challenges to meet rising demand before it overcomes them.
To learn more about A&D trends, please see the 2024 Aerospace and Defense Industry outlook on Deloitte.com.
