The Aerospace & Defense (A&D) industry is contending with fresh volatility in an already complex supply chain environment. Recent policy shifts, such as removing long-standing duty-free provisions for aerospace goods, add layers of cost, delay, and uncertainty. These developments are not just short-term disruptions; they are forcing A&D enterprises to reconsider how and where they source, manufacture, and deliver.
Tariff Impacts and Input Volatility: Pressures Mount Across the Value Chain
The introduction of new tariffs has inflated the costs of key materials and components. Aluminum tariffs alone could add a $500 million burden on US aerospace firms annually. While steel tariffs are comparatively smaller at $50 million, they could further tighten margins. Due to revised trade terms, cross-border supply flows, especially from Mexico and Canada, face potential penalties of $2 billion and $2.5 billion, respectively. These changes are not just financial; they complicate procurement strategies and contract delivery timelines, especially for US defense programs like the F-35.
Concurrently, China’s increased duties and export restrictions are introducing volatility into critical material flows, especially rare earth elements and other strategic inputs essential for A&D technologies.
Adaptive Supply Strategies: OEMs Shift from Response to Readiness
Amid rising material costs and shifting policies, A&D manufacturers are making moves to shore up supply chain stability. Rolls-Royce is expanding its production footprint in the US to reduce exposure to tariffs. Through its “FLIGHT DECK” initiative, GE Aerospace deployed over 550 engineers across its supplier network to address bottlenecks, resulting in a 26% increase in throughput within a year. These proactive interventions underscore a broader industry push to localize production and strengthen operational control.
Even financially stable firms such as Bombardier are rethinking forecasts, delaying outlooks until the tariff picture becomes clearer. Others, like Dassault Aviation, while posting strong numbers, remain wary of potential shifts in US–EU aerospace relations and their impact on defense deals.
Strategic Resources at Risk: Reassessing Rare Earth Dependencies
China’s decision to suspend exports of rare earth materials to the US has underscored a long-standing vulnerability in defense manufacturing. Aircraft engines, radars, and communications platforms use these minerals to power critical systems. With no short-term substitutes in place, pressure is mounting on US firms to secure diversified, non-Chinese sources—a process that could take years to fully mature.
This move aligns with a broader decoupling trend, where strategic autonomy in material sourcing is becoming a national priority. The industry is now exploring everything from recycling and reprocessing domestic scrap to deeper cooperation with allies for mineral access.
Commercial Supply Chain Sensitivities: Tariff Tensions Reach the Civil Aviation Segment
Recent developments show that the ripple effects of tariffs go beyond raw materials. In response to new US duties, Chinese authorities reportedly instructed domestic airlines to halt new Boeing aircraft orders. This move affects at least 29 planned deliveries in 2025, with potential implications for additional orders in subsequent years. Boeing’s stock reflected this disruption, declining nearly 4% following the announcement.
While Boeing continues to support its installed base in China, this shift will likely impact its forward order book and broader supply chain, which includes thousands of global vendors and sub-tier suppliers.
Evolving Demand Patterns: New Growth Frontiers in Civil Aerospace
With Chinese orders on pause, attention is turning to other high-growth regions. Indian carriers, including Air India, Indigo, and Akasa Air, are expanding aggressively and could absorb redirected capacity. But India is not alone. Vietnam and Indonesia are amplifying their aviation ambitions, supported by rising passenger traffic and growing maintenance, repair, and overhaul (MRO) capabilities. Mexico is also becoming more prominent as a delivery destination and a nearshore hub for North American aerospace manufacturing.
These developments point to a more diversified demand environment globally. OEMs and suppliers are reevaluating their footprint strategies, recognizing that risk mitigation now includes geographic flexibility and adaptive manufacturing partnerships.
Innovation Resilience: Startups Redefine Agility in Defense
The tariff environment is accelerating a structural shift in defense innovation. In 2024, US-based defense startups raised over $3 billion in venture capital, indicating strong investor confidence in agile, tech-forward players. Epirus secured $250 million to scale production of its counter-drone technologies, while Anduril expanded its portfolio by taking over Numerica, enhancing its radar and missile defense capabilities.
Europe is also mirroring this momentum. Defense tech funding has grown nearly fivefold since 2021, surpassing $2 billion. German startup Helsing closed a €450 million round to produce 6,000 AI-enabled strike drones for Ukraine, reinforcing the strategic importance of localized, sovereign production.
This wave of innovation is not happening in isolation. These startups are becoming integral to national defense strategies, complementing traditional OEMs and accelerating the integration of next-gen technologies into allied defense ecosystems. The shift signals a broader decentralization of R&D in the A&D sector, where speed, flexibility, and digital capabilities take precedence.
Forward-Looking Supply Chains: Designing for Disruption and Continuity
As global trade conditions remain in flux, resilience has become a defining metric for A&D success. More firms are adopting advanced supply chain technologies such as real-time visibility platforms, simulation-based planning systems, and AI-enabled sourcing models into their operational strategies. Countries such as India, Mexico, and Vietnam are becoming key to this recalibration as buyers and integral partners in co-production and component manufacturing.
While only a few A&D firms report being fully prepared for systemic shocks, the leaders are moving fast. They are combining predictive tools with tactical execution, enabling faster adjustments when disruptions occur. The priority has shifted from cost efficiency to continuity.
Going forward, A&D enterprises that invest in operational visibility, diversified sourcing, and ecosystem-level partnerships will be better positioned to navigate tariffs and lead in an increasingly fragmented trade environment.
By Jyotika Jain, Lead Analyst, Avasant, and Naresh Lachmandas, Partner, Avasant