In defence, the US asset base is heavily depleted, requiring immediate recapitalisation spend outside of major development programmes. In Europe, there will be further reductions and delays in development projects and lower build rates, putting severe strain on suppliers. Expect an acceleration of the migration of component manufacture and MRO to the new low-cost economies of CEE, Middle East and Asia.
The strain will be felt most acutely by suppliers who will see rapid changes in order books as any downward effects will be communicated much closer to scheduled build/delivery dates. Expect capacity adjustments to follow. Expect an increase in smaller component and subsystem businesses in distress as a result of rapidly falling orders from Primes and Tier 1s. The immediate focus will be on cash generation – cutting or deferring capital spending, non-essential maintenance and working capital reduction.
The economic downturn has significantly impacted the large deal market, but the small to mid-sized deal market continues to have relatively strong activity as both trade and private equity companies look for bolt-on acquisitions to strengthen their existing positions. The large deal activity seen so recently has been driven by a few well-positioned companies focused on step-change acquisitions. We expect to see additional deal activity driven by distressed companies requiring capital in order to restructure or continue to operate during the bankruptcy process.
PwC can support you in the downturn by providing you with a supply chain “health review” looking at the financial and operating health of the entire supply chain – not just the immediate suppliers. We also have a diagnostic tool – Programme Management Effectiveness – which can help you in managing your long-term programmes more effectively in the current downturn. For those looking to “do deals”, our M&A and Strategy teams are well placed to support you, and our debt management and business recovery experts can help when the going gets really tough.