Deutsche Bank: “A Wake-Up Call For Sixth Gen” 

Following the release of footage last week showcasing China’s next-generation fighter-bomber on social media platforms like X, Deutsche Bank analyst Scott Deuschle issued a stark warning to clients.

In his note, “A Wake-Up Call for Sixth Gen,” Deuschle characterized China’s rapid advancements in sixth-generation combat aircraft as a serious “wake-up call” for the United States Air Force. This development comes amid a race between the US, China, and Russia to produce fifth—and sixth-generation fighters, bombers, and hypersonic weapons. 

Zoomed in. 

“Emergence of this video and imagery follows several years of USAF inaction with respect to procuring sixth-generation aircraft other than B-21,” Deuschle said. 

The analyst outlined the impacts on his defense coverage following China’s big reveal of the next-gen stealth tactical fighter bomber with a “diamond-shaped wing design.” He also noted a potential risk for commercial aerospace:

1. There’s still a big future for advanced aircraft: There’s been a tremendous amount of handwringing in the investment community over the last year that the future of warfare may not require the types of sophisticated and highly-engineered platforms that have traditionally been procured by DoD, with low cost drones instead being debated as being better aligned with the trajectory of the DoD’s future needs. We think this unveiling throws cold water on that debate, as the capabilities procured by the US are necessarily linked to the capabilities that its peers can field or plan to field. And China is now showing that it is focused on procuring a combination of capabilities—one that continues to include highly capable platforms. More generally, we’d also note that low cost drones are generally only low cost because they don’t have modern jet engines, and an aircraft without modern jet engines is an aircraft that doesn’t offer much in terms of flying range or long-range sensing capacity. And an aircraft without those types of capabilities isn’t likely to be very effective in the Pacific, in our view. To be clear, we think there’s a role for low cost drones, but we think it’s more likely to be a complementary role rather than one that substitutes completely for the status quo.

2. …but that future looks more challenging for F-35: We think this revealing adds some additional challenge to the future of the F-35 program. If China is flying demonstrators today for aircraft with capabilities potentially superior to the F-35, then it seems plausible to think that China may be able to industrialize production and field that capability potentially before F-35 Block IV is even completed; the Power & Thermal Management System (PTMS) capability isn’t likely to hit production until 2032 according to GAO. That China could potentially field 6th generation capabilities before F-35 achieves full Block IV capability is an unfortunate state of affairs, and would be a blow to the longer-term credibility of the platform if it happens. For Lockheed, winning a position on a 6th gen platform is now more important than ever, in our view.

3. Capability gap potentially emerging…supports increased defense spending: One of the drivers of increased defense spending during the Cold War was the idea that a “bomber gap” and then that a “missile gap” existed between the US and the Soviet Union. These perceived capability deficits were used to justify increased defense spending at the time. We think that this reveal could drive increased alarm within Congress that the US military is falling behind, which may in turn drive improved Congressional support for increased defense spending.

4. SAF’s budget outlook stronger: In addition to supporting increased defense spending generally, capability gaps of the past ultimately drove large procurement quantities for the platforms where the perceived deficit was focused—e.g. the US ultimately bought nearly 750 B-52s during its production run to address the bomber gap. With China now demonstrating a potential sixth generation aircraft capability, we think there will be more money directed to the USAF to procure additional quantities of aircraft tied to that gap—whether that’s B-21, NGAD, or otherwise.

On a stock-specific level, Deuschle said, “Increased focus on US development and procurement of 6th gen capabilities would be most positive for NOC and BA at the level of the defense primes, GE for engine suppliers (given NGAP lead, no F-35 exposure), and CW, HXL, and CR for SMID cap suppliers. We see LMT and RTX as potentially having more to lose than to win here, given their relative positions to the F-35. We think the read for HWM is net positive, albeit with some potential long-term downside risk for its F-35 business.” 

He noted that Trump 2.0 will likely scrutinize how China rapidly advanced its aerospace manufacturing capabilities, potentially surpassing the US in the next decade, 

“If there is another supply chain shock that could hit commercial aerospace at some point in the coming years, it is within the context of this discussion where we’d be most concerned,” the analyst warned.