Almost none of Nato's European members have met their commitment to spend 2% cent of GDP on defence; while the UK recently committed to maintaining defence spending at 2%, Germany and Italy continue to cutback, while France is on course for a flat defence budget. When many countries are grappling with budget constraints, defence is a hard sell to public opinion and extra defence spending is not seen as a high priority.
The UK and European defence markets have, in essence, been in decline for some time and, according to Paul Leys, Hi-Rel/Space Marketing Manager at Avnet Memec-Silica: "Because of that, and due to the fact that a large proportion of the market in these regions is dependent on the US, the smaller amount of money being spent on defence is having a profound impact on all European businesses working in this sector."
A number of big European programms have been cancelled, like the German Euro Hawk, while other big programmes like Eurofighter, have been disappointing in terms of international sales.
In the face of what is expected to be weak growth in the market over the next five years, customers are amending their cost structures.
"New cost structures will need to be based on a lower level of business and will need to become much more efficient," argues Leys. "One of the changes we have seen because of this trend is that a number of our traditional defence customers have been transferring their production to EMS contract manufacturing companies, resulting in a growing number of the EMS companies promoting themselves as specialists in the production of boards for defence customers."
Defence companies looking to reduce costs are being helped by a significant improvement in standards and the availability of high-reliability products. The use of commercial off-the-shelf (COTS) products, instead of custom designs each time, is helping distributors to create a role for themselves, which can make a real difference.
The defence industry has very specific requirements and distributors need to understand these, adapting supply chains and procurement channels to cater to them more effectively.
"Buyers within the defence industry typically want to purchase products in low quantities and are driven by quality and integrity, though that's not to say that speed of delivery and service aren't also of importance in their decision process," says Phil Gee, director corporate OEM/CEM at Farnell element14.
"It's this move to lower quantities and designs or jobs with a quick turnaround that presents a challenge – with many distributors and suppliers only shipping parts on full reels or in large batches, which goes against the need to reduce costs and focus purely on what's needed. At the same time, quick delivery and specific orders needs to be matched with high-reliability and traceability."
"Visibility to the end customer is something that most of our suppliers value," explains Leys. "The other thing that we do is to engage with the end customer, so that we can ensure we are offering technical advice, expertise and support throughout the process. So it isn't really about creating new processes, but adapting existing processes to ensure that the best level of service is still given."
Anticipating and responding to the complexity associated with the defence market with a comprehensive suite of solutions is seen as critical to success.
"Over the years, we've made significant changes in how we support customers in the defence and aerospace markets, some of which required the development of a number of peripheral services, designed to ensure CEMs, including the defence market, received the most relevant service possible. Of these services, ensuring we could provide full component traceability was the most important," says Gee.
Critically, anti-counterfeiting legislation, guaranteeing quality, related safety concerns and stricter government regulations have placed intense pressure on the distribution market.
According to Gee, as outsourcing increases, distributors will find that having the ability to provide comprehensive traceability information on request will play a vital role in the acquisition of defence customers and their retention.
"Legislation such as RoHS and WEEE and certificates such as ISO add to the importance of traceability, making it a legal requirement for manufacturers to self-declare compliance and to respond to traceability queries on demand. In fact, traceability of components is an essential requirement of any manufacturing business in the defence sector. Should an issue arise, traceability helps mitigate liability – giving greater insight into where the issue lies and which products have been impacted, greatly increasing safety," Gee says.
Leys says suppliers can be divided into a number of different groups.
"There are suppliers who are committed proactively to the defence industry, others that could be considered as a little bit more reluctant to supply the defence industry, and there are those that don't support it all.
"For a supplier who has to make its product obsolete, there are number of solutions. For example, there are companies who are specialised in storing dies and packaged components so those customers involved in long projects can still continue to produce products," he explains.
According to Leys, working effectively with the defence industry requires a real partnership between supplier and customer because of the nature of the business.
"There are companies which are committed to supporting the market for the long term – they are much easier to do business with for our customers."
The defence and aerospace markets have always been some of the most exciting for new technologies and challenges and, for those in the distribution business, a lot has changed in the last few years.
As an example, Leys highlights the fact that, with lower volumes, there is less need for ASICs, which means a greater demand for FPGAs. This has led, in turn, to security playing a more important role in order to prevent hackers gaining access to the content of the FPGA.
"There is also a huge need for the highest performing data processing equipment to process the massive amounts of data are continuously being gathered through surveillance. So optics is also a key trend and one of the core markets," he suggests.
Customers are moving away from custom designs and obsolete products and need to be able to guarantee the reliability and traceability of every part of their design. They also need to be able to buy exactly what's required to minimise spare stock and to ensure that they meet all of the latest legislation and standards.
"That is the challenge for distributors," Leys concludes. "It means that we need to adjust our offering away from the 'one size fits all' approach while, at the same time, offering the high-service and support that the market demands, without forcing customers to spend more than they need."
