This post is also available in: heעברית (Hebrew)

Aerospace and defense companies must focus on innovation in order to keep pace with new entrants. This is the recommendation of the Aerospace and Defense Trends 2018–19 report recently published by PwC.  As in 2017, this year’s report reiterates the need for global companies to focus on building relationships with defense agencies around the world, entering into new markets.

In absolute numbers, the global aerospace and defense industry spends much less on research and development than other critical sectors. In terms of innovation intensity (the percentage of sales earmarked for R&D), its spending is also comparatively low — just 4.1 percent. (In Europe, it’s a bit higher, at 5.1 percent; in the U.S., it’s 3.6 percent.)

Slow-walking R&D efforts has never been a recipe for long-term success, according to the report, and some of the significant threats confronting the A&D industry show why that’s even more true in 2018. Commercial technology entrants have large and growing workforces dedicated to developing new technologies and can innovate rapidly.

Speaking about the potential technology-deficit that defense companies must address, U.S. Deputy Secretary of Defense Pat Shanahan, a 30-year veteran of Boeing, said they may have once ruled the military equipment landscape and even led in innovation but that doesn’t insulate them from hungrier, more determined competitors. One example is as Elon Musk’s SpaceX, which develops advanced rockets, covering a range of activities that in the past could have been shared by a variety of defense contractors.

Recent reports indicate that China is making a big push to develop military artificial intelligence technologies, and China and Russia are developing sophisticated air-to-air missile systems that use advanced imagery and sensors to thwart enemy intrusions before they pierce the skies.

As a result of these pressures, executives at large A&D companies must confront a critical imperative: adopt a more rigorous and less risk-averse approach to evaluating and making strategic investment choices (for example, product development, technology innovation, and R&D) that yield long-term value. Accept uncertainty as part of the normal course of business; view it as an opportunity, not a danger. At the same time, collaborate with defense customers to tap into technology innovation outside the A&D industry and adapt it to future platforms rather than developing bespoke solutions.

As the report sums up, the A&D sector is clearly at a crossroads. And it is an especially challenging juncture because in recent years the industry has tended to pull in its horns rather than be bold and daring. Companies can choose either road, but only one — the one that requires companies to be less risk-averse — leads to a lucrative future.