Stealth Attack on EMS Industry
No matter who wins the election, it’s very likely military spending will be drastically cut as Americans pressure Congress to fix the domestic economy and explore energy initiatives. Charlie Barnhart & Associates (CBA) research reveals a disturbing consequence of lower defense spending on the domestic EMS industry that could put further pressure on manufacturers. While defense contracts are a fairly low percentage of the overall TAM in the North American region for electronics, these higher margin contracts contribute disproportionately to the bottom line of many US manufacturers. That’s why so many CMs have been chasing these projects with such enthusiasm for the past decade. As high volume, low mix business moves offshore, the conventional wisdom held that defense projects were far more stable and profitable as they were bound to stay onshore because of government regulations. Furthermore, the volumes, though low, were steady, because the end products were getting blown up and needed to be replaced.
The point is, if that business dries up suddenly, it will be a jolt to budgets because there really isn’t any foreseeable business waiting in the wings to replace it.
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Charlie,
I’m not sure you’re right about military spending. We’re entering a significant recession, and certainly there will be lots of pressure to reduce federal budgets, including military budgets. But it’s clear that monetary policy (easing interest rates) is not enough to solve this crisis. The Bush admin is already committed to recapitalizing banks, and will go farther than the $250B earmarked to do this, because the big banks will burn though that number quickly, and the little banks also need capital injections.
Whatever else you might want to call that (e.g. creeping socialism) it’s also a fiscal stimulus — and that’s the wave of the immediate future. With consumer demand down and export demand down, the classic Keynsian (and only practical) response is for government spending to increase enough to jump into the breach. Obama will tend toward this, but if McCain wins he’ll hold his nose and do the same thing: stimulate the economy through drastically increased gov’t spending and/or tax reductions.
Sure it’s going to damage our current account balance, and probably lead to higher interest rates down the road, but it’s gotta happen. In that environment, the government might make a few high profile military spending cuts, but in sum, I expect the gov’t to spend hand over fist until we’re well out of this thing. For the next 2-3 years, military contracts are safer than usual.
Matt
Matt/Charlie,
Without question, military spending is historically Administration-dependent. That said, would you have any sense of how long the typical military program lasts? For that would certainly influence what we can predict insofar as military spend over the next 2-3 years.
Something to watch, should Obama be elected, is what type of government investment is made in alternate fuels, and how much (in any) a boost that gives to electronics controls and instrumentation for those emerging markets.
Mike