Market Conditions May Cause Military Contractors To Diversify (From AOL Defense)

The pattern of postwar military spending has led many in the defense industry to believe that demand follows a wave-like pattern similar to the commercial business cycle. That is an illusion. Military demand is driven mainly by threats, which appear with little warning and cannot be modeled in advance. The difficulty of anticipating future demand levels is made worse by the fiscal crisis the government is currently facing. Thus, the prevailing view within the sector that diversification out of defense does not make sense is subject to change as market conditions evolve. Furthermore, there is evidence that defense companies can learn to thrive in commercial markets. General Dynamics is the leading producer of high-end business jets, and Boeing’s surging commercial-transport business is run largely by alumni of its defense unit. I have written an analysis this week of how the defense sector might react to waning military demand for AOL Defense, which you can read here.