The growing national commercial aerospace market will help offset $450 billion in federal defense spending reductions over the next 10 years, shielding the manufacturing sector from drastic problems, a new study concludes.
And, its authors conclude, the damage in Connecticut from defense cutbacks likely could be even less thanks to major project awards.
Private equity firms are catching onto this latest trend in manufacturing and will start investing more in aerospace component manufacturers, according to a report by Boston financial firm Grant Thornton LLP.
"They have a big interest in aerospace component manufacturing," said Ian Cookson, director of investment banking for Grant Thornton. "It is a reasonably good growth industry."
In the aerospace and defense manufacturing subsectors, the commercial and the defense sides typically move in opposite directions; when business ticks up on one side, the other ticks down, Cookson said. From 2008 to 2011, the defense sector led the way while commercial aviation trended down.
Now, as the federal government looks to slash defense spending from its all-time high of nearly $700 billion annually, new breakthroughs in commercial aerospace will keep the industry on an even keel, Cookson said.
Commercial manufacturing will grow 5 percent annually for the foreseeable future, driven by emerging markets, Cookson said. Demand for new airplanes and new engines across the globe will keep the industry thriving.
For Connecticut component makers that supply the original equipment manufacturers, the industry trends mean they need to start diversifying their customer base and suite of products, particularly if they rely heavily on defense contracts, Cookson said.
"A lot of these shops have customer concentration and platform concentration," Cookson said.
OEMs like Hartford conglomerate United Technologies Corp. still demand lower prices and outsource much of their component work, leaving room for the parts makers to step in.
"The smaller shops with cheaper labor can make the parts cheaper," Cookson said.
UTC remains committed to Connecticut, too, said Jerry Clupper, executive director of the New Haven Manufacturers Association. UTC representatives attended the 2011 NHMA annual meeting to tell attendees they planned for a long future in Connecticut.
Even though the defense spending is downsizing and work for OEMs like Groton submarine maker Electric Boat and Stratford helicopter maker Sikorsky Aircraft Corp. might decline, the Connecticut component makers have a positive outlook for the future, Clupper said.
"They are not getting those negative signs," Clupper said. "There are things coming in that will replace the business that might be leaving."
Connecticut has 2,845 businesses providing goods and services to the defense industry, according to the Washington, D.C. think tank Center for Security Policy, which advocates for greater defense spending.
According to the Center for Security Policy, Connecticut companies receive $12.6 billion annually in defense contracts. If the defense cuts are spread evenly throughout all the states and all the contractors, Connecticut could lose up to $1.1 billion in defense contracts annually as the cuts are realized.
However, the defense reductions won't be spread evenly throughout all the states and all the contractors.
Connecticut might be better off because of major projects like the joint strike fighter, said Gary Greenberg, president of Bloomfield military and commercial parts maker Birken Manufacturing.
The joint strike fighter is the U.S. military's next generation of fighter jet, and East Hartford aerospace manufacturer Pratt & Whitney won the contract to make the engines. As Pratt shops out the work to its suppliers — which number more than 250 in Central Connecticut — the entire industry will remain busy.
"The next five to 10 years look solid," Greenberg said. "It is very positive for Connecticut that we all ended up in the same area serving the same basic customer."
Even delays in rollouts of major programs like the joint strike fighter could benefit Connecticut, said Cookson.
While the new programs are put on hold, the legacy programs last longer; and Connecticut component manufacturers will benefit from the work they already have in place, Cookson said.
No matter how the defense side plays out for the state, Connecticut manufacturers need to make sure they are part of the growing commercial aviation side of the industry, Cookson said.
Both Pratt & Whitney and Fairfield conglomerate GE are working on the next generation of commercial jet engine, poised to help the industry make flying more fuel-efficient as energy prices climb.
This growth in the industry already attracted private equity firms to invest in aerospace component manufacturers nationally. These firms accounted for 38 percent of merger and acquisition activity in the component sector in 2011, up from 25 percent in 2010, according to the Grant Thornton report.
"Aerospace and defense is an area where they would like to get more exposure to," Cookson said.