C4ISR funding a bright spot in military electronics market
Market analysis in military electronics market
The President's Department of Defense (DoD) budget request for fiscal year 2016 saw an increase in overall funding over previous years that had seen reductions from sequestration and changing political priorities. The question is whether the current increase means more opportunities for electronics suppliers.
The last few years have made it tough to forecast, as the U.S. military is not certain on concept of operations going forward; in other words, how it is going to fight the next war. Market analysts say that while concept of operations is still uncertain, the funding for electronics in application areas such as command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR), unmanned aircraft, and even space looks steady and may even grow over the next five years.
For all things C4ISR in the Fiscal Year (FY) 2016 budget request, the total is about $39.54 billion, which is a $3.21 billion increase over last year’s request, says Brad Curran, Aerospace & Defense Industry Principal at industry analysts Frost & Sullivan. “The reason for the uptick is that we got a sharp procurement increase in ballistic missile defense (BMD) and unmanned vehicles. BMD is always a big item and work is being done on SLQ-32 upgrades to defend surface ships as the Russians and Chinese have good anti-ship missiles that are shore-based.”
On the U.S. side, procurement is the largest category as big funding is moving from research, development, test, and evaluation (RDT&E) and operations and maintenance (O&M) to procurement, he continues. “They can’t justify so much O&M due to the high operational tempo and are shifting to procurement to hurry up and buy stuff before it gets cut off. The FY 2016 request for the Air Force is $10.84 billion, the Army $10.08 billion, Joint Services $8.44 billion, and Navy/Marines $10.18 billion. Surveillance and reconnaissance is at $14.56 billion.”
In 2014, $54.13 billion was spent on C4ISR with 352 companies getting contracts. Lockheed Martin is on top at $6.71 billion, Curran says. For new contract awards in 2014, 40.9 percent of contracts were with the top-ten primes.
“The 2014 market saw current contracts continuing, while at the same time there were a lot of new companies getting awards,” Curran says. “The big top-ten primes are still really dominating things whether the awards are competitive or not competitive. In 2014, 39 percent of all noncompetitive contracts went to modified or existing contracts or sole-source selection. That’s dollar-wise, but if you look at the numbers 65 percent of them were sole source. Yes, there are new companies, but still 65 percent of volume is not competitive and going into sole source. Basically what is going on is the big ten or the opposite side of the spectrum – small, set-aside companies are getting the contracts, which means the midtier companies get squeezed as there is not much value or volume.”
“Basically, the story for global C4ISR is missile defense,” Curran says. “It is really important, as is border security, which is a concern of Greece and Italy. Those concerned with missile defense are Saudi Arabia/UAE/Israel/Turkey, Japan/South Korea, Poland/Romania/Ukraine, and Finland/Sweden/Norway.
Global C4ISR in 2014 saw $106 billion spent, with a CAGR of 2.9 percent. Hot countries for C4ISR spending are Saudi Arabia and Japan, he says. “The last few years, Japan has been allowing more defense contracts, enabling defense funding to increase. India is also a big importer, and Australia is a good market. On the downside are France, Italy, and the United Kingdom. Traditional big spenders are cutting budgets, while the U.S. is flat.”
Global defense budgets stand at about $1.74 trillion total, with money targeting procurement and O&M-related spending at about $647 billion, Curran says. “Most money spent on defense budgets worldwide does not go toward technology procurement, but to buy weapons and ammo, pay bills, etc.”
Radar and electronic warfare
Key ingredients to strong C4ISR are effective radar and electronic warfare (EW) systems. Both application areas are crucial to U.S. military initiatives worldwide as the world’s superpower pulls back its ground footprint globally.
“For radar in 2014, the CAGR was 1.4 percent, which is basically flat compared to the previous year,” Curran says. “There were 70 awards for $2.9 billion, with Lockheed Martin leading because they won the large Space Fence contract. In 2013 there were 79 radar contracts totaling $4.03 billion, with Raytheon leading again with 24 of the contracts for $2.09 billion. The drop happened because big programs such as JSTARS and Spy 1 – along with X-Band, which had more activity in 2013 – were completed. In 2013, Raytheon had a good chunk as they still had Spy 1, but going forward they will see more modest production.
“EW spending has not caught up with the acknowledgement that we need to upgrade sea-based EW,” Curran continues. “The other side of this is anti-submarine warfare with sonar and similar technology, as the Russians are increasing their submarine production. The EW budget for the 2016 budget is about $2.35 billion with 52 programs. On the contract side, looking back at all radio frequency (RF) and EW countermeasure totals in 2014, the EW segment was $2.75 billion for 67 contracts, with the leading contracts being for the Next Generation Jammer and large aircraft infrared countermeasures. The leading company was Northrop Grumman.”
Analysts at Markets and Markets in Dublin, Ireland, see similar strength in the EW market, estimating the global EW market at about $17.72 billion in 2014 and registering a CAGR of 5.37 percent to reach $24.25 billion by 2020 in their report, “Electronic Warfare Market by category … Forecast & Analysis 2014-2020.” Threats such as GPS-jamming stealth aircraft, and radio-controlled improvised explosive devices (RCIEDs) are driving EW system designs, according to a Markets and Markets release. Globally, Raytheon, Alliant Techsystems, BAE Systems, Rockwell Collins, IAI Elta, and L-3 Communications account for more than 40 percent of the total EW market share, the Markets and Markets analysts say.
Cyberdefense is a critical part of every military system as DoD systems add complexity and rely increasingly on software and wireless networks.
“Cyber never stopped being hot and now there are actual line items regarding cyberfunding,” Curran says. “However, most cyber you can’t see in the budget because it is cooked into an enterprise-wide program. That said, security for computer networks in general within the DoD – such as healthcare and payroll – are upgrading hardware and software technology with enhanced cybersecurity and cloud-computing capability. Cloud computing is booming! It is really doing well; even bigger than cloud computing is the drive toward big data. The latter is mostly still happening, but remains on the intelligence community side for now.
“My estimate for overall networks – enterprise and tactical – is $13.66 billion with 142 awards and Northrop Grumman as the leader by far,” he continues. “Total cyber within the FY 2016 budget I estimate at about $8 billion.”
COTS and C4ISR
The push toward better cyber technology and radar and electronic warfare requires the adaption of commercial processing and software technology and open architectures.
“We see the market for open architectures and commercial off-the-shelf (COTS) technology in the military C4ISR market only accelerating as the operational and cost-utility advantages of using COTS are so obvious,” Curran says. “As commercial networks and mobile devices accelerate like crazy, the DoD is looking to adapt this technology. The catch for them has always been security, but we may be seeing a paradigm shift in thinking now as they try to be smarter about what needs to be secured and – even more crucial – what does not. If we lose some stuff, the utility and cost of using commercial mobile technology will be worth it. They will maintain high-level security on the most important networks and data, saving money on protecting the more perishable data.
“Prior to this paradigm shift in thinking, tactical commanders would do whatever the NSA recommended, but now operational imperatives allow for more flexibility,” Curran notes. “The CNCs and tactical commanders and service chiefs have more say now than they did in the past.”
Military avionics often is the steadier part of the global avionics market, compared to that of commercial aviation. Companies that have stakes in both areas often weather economic ups and downs much more easily than those with all their revenue tied to one market segment.
“If you look at pure-play defense companies they saw two years’ worth of budgeted growth and are headed into perhaps a worse year this year,” says Wayne Plucker, Aerospace & Defense Director at Frost & Sullivan. “For companies that play in both aerospace and defense, such as Boeing and Finmeccanica, they are seeing at best modest growth. Pure-play aerospace companies are seeing more growth.
“For avionics upgrades there is not a lot of what I’d call flight system avionics upgrades happening aside from some minor tweaks as most militaries around the globe are global air-traffic management (GATM)-capable,” Plucker continues. “Where I do see growth is in mission avionics. While we are not replacing aircraft at the rate we used to, the C4ISR payloads these aircraft carry are getting funding as programs want mission-specific payloads for each platform. For mission avionics the leading companies are Northrop Grumman, Thales, and BAE Systems. A lot of the pure-play defense companies live in this space and really position themselves well, as opposed to the defense sides of Rockwell Collins and Honeywell, which focus more on flight avionics.”
Analysts at the Teal Group say they expect the global unmanned aircraft systems (UAS) market to triple over the next decade in military, commercial, and consumer markets. They estimate that UAS production will rise from the current worldwide UAS production of $4 billion annually to about $14 billion, totaling $93 billion over the next ten years. Military UAS research spending would add another $30 billion over the same decade. About 72 percent of the global market will be military, 23 percent consumer, and five percent civil cumulatively for the decade, according to Teal analysts.
Global military UAS spending should be a total of between $11 billion and $12 billion by 2020, says Mike Blades, Senior Industry Analyst for Aerospace & Defense at Frost & Sullivan. “From a military perspective, the U.S. and Israel are far ahead of anyone else in UAS production. They are maintaining and upgrading what they have now, while also planning for funding of the Unmanned Carrier-Launched Airborne Surveillance and Strike (UCLASS) and the optionally-manned Long Range Strike Bomber (LRSB). Procurement is winding down for the MQ-1 and MQ-9. Down the road there will be an increase in spending for the optionally manned portion of the LRSB, however. If you look at the budget, it peaks out in 2017-2018, and maintains about a billion dollars a year in procurement afterward. (Figure 1 on following page.)
“My assumption is that LRSB will be optionally manned,” Blades continues. “So that said, in 2013 the total spent on UAS was $3.9 billion, in 2014 $3.5 billion, in 2015 $3.9 billion; in 2016 we will see $4.7 billion, in 2017 $5.4 billion, in 2018 $5.6 billion, and in 2020 $5.5 billion. The long-term increase is due to LRSB funding. If you take that out, the funding is more flat at $3.5 billion.
Ron Stearns, Research Director at Aerospace Analytics, has a similar outlook. “For the major programs of record, production runs are coming to a close between 2017 and 2020,” he says. “Platforms such as the General Atomics MQ-9 will be running for a while and that will keep production moving in that regard. But absent on the DoD side are many new programs of record. It will be a sustainment market, by and large, through the forecast period. Total spend – if you look through 2014-2020 – in procurement and RDT&E will be constant, around $3 billion a year.
“If you look for growth in spending and programs of record, it is steady at $1.3 billion a year from 2016 onward, while UCLASS spending climbs from $400 million in 2016 to about $1 billion in 2020, as that system matures,” Stearns continues. This does not count O&M spending. Six or seven years from now on the DoD side, the unmanned outlook will be similar to what we have now with regard to total spend.
When unmanned aircraft first came on the scene, the buzz was about the aircraft themselves, but now it is all about the payloads they carry and how the payload sensors enable tactical advantages on the battlefield.
“From an overall sensor standpoint, procurement growth is in payload upgrades for full-motion video, data links, signal-processing technology, etc.,” Blades says. “There is a lot of information coming down the datalinks and they need to be made more robust so they don’t have to store so much on board.” Increased onboard processing is also a key trend, he adds.
“There is a demand for increased persistence and increased autonomy because you can reduce the number of personnel required,” Blades explains. “Modularity is in demand, as is open-source architecture, which makes upgrades more simple to execute and cheaper because more companies will have the capability to compete – over proprietary programming which has been the historic paradigm. This trend is geared toward small aircraft. They want multi-intel sensors to do many things at once. There is also a push toward more miniaturized sensors, as the aircraft themselves get smaller. An example would be the Prox Dynamics PD-100 Black Hornet helicopter, which is smaller than most toy helicopters you fly around your home.”
UAS payloads, such as electro-optic/infrared sensors (EO/IR), synthetic aperture radars (SARs), SIGINT, EW systems, and C4I systems, are forecast to double in value from $3.1 billion in FY 2015 to $6.4 billion in FY 2024, Teal analysts say. EO/IR remains the default sensor for the majority of UASs, but in recent years these have seen inconsistent funding and considerable uncertainty, they add.
New sensor markets will see significant increases as RF systems replace EO/IR capabilities, while next-generation UASs of all scales require much more sophisticated – and expensive – sensors. “Rapidly increasing capabilities for RF sensors will be funded, as potential conflicts shift from clear-skies Central Asia to the more restrictive geographies of Eastern Europe and the Pacific,” says Dr. David Rockwell, author of the electronics portion of the Teal Group study. “UASs will continue to provide the world’s fastest-growing aerospace payload market, but not through continued growth of the usual suspects from the past decade. Instead, new sensor programs for current and future air vehicles will result in more unexpected growth spurts and losses.”
Smaller UAS platforms are likely to increase as they offer more flexible solutions to ground units performing tactical reconnaissance.
“I see increased proliferation for smaller UAS in Special Operations for loitering munitions or lethal miniature aerial munition system (LMAMS) platforms such as Switchblade, Maveric, and Cutlass,” Blades says. “LMAMS allows the infantryman to fire a weapon and not have it strike right away. If the target moves or hides the weapon can loiter (30-45 minutes) until the target is reacquired. Not only does it allow flexibility, it allows for surprise.
“There will also be an increase in manned/unmanned teaming (MUM-T). For example, on an Apache AH-64 that is away from the action, the copilot/gunner (CPG) in the front seat would control a UAS for surveillance, launching loiter munitions while the munitions are sending video back to the Apache. The example of launching LMAMS from a MUM-T UAS has not been tested yet, but I predict it will be relatively soon. Currently, the MUM-T setup would allow an AH-64 to direct an attack using an MQ-C or RQ-7 once that platform is armed with precision-guided munitions.”
Military space market
C4ISR and unmanned systems often get more funding and more press than space programs, but shifts in procurement thinking and the vulnerability of U.S. military satellites to attack is forcing U.S. military leaders to revisit how they deploy mission-critical space systems.
“Some of our major high-volume DoD space programs are coming to a place where they will be reconstellated or recompeted, from the SBIRS High program to GPS III to Advanced EHF/MILSATCOM,” Stearns says. “All of those are looking different through the President’s budget request for FY 2016. From a program of record perspective GPS III is moving toward a full recompete award in 2017 or 2018.” (Figure 2.)
“The catch is these reconstellations will have to happen much more quickly than traditional space-program development cycles,” Stearns says. “For one thing, it is unlikely the DoD will have the appetite for another decade-long award-to-build-to-launch process. The other pillar of change coming is the disaggregated space architecture.
“We are moving into an area where space is not the sole uncontested domain of the U.S.,” Stearns notes. “Multiple countries have the ability to destroy satellites from ground-launched systems and the ability to perhaps dazzle and/or blind infrared sensors. We are moving into uncharted territory in this regard. In this environment, important space programs will need to be quickly reconstituted or gracefully degrade in the face of some kind of attack, whether kinetic, cyber, or otherwise. DoD is moving forward on this with analyses of alternatives. The question for industry is how to change programs of this velocity and size. It took a long time to get us to this place.”
“Small satellites are one alternative as they are less expensive and faster to deploy,” Stearns says. “They are real and capable within the parameters of their expected life. They offer the counterbalance to traditional DoD thinking, as we have a threat to our freedom of action in space. We also have budget pressures and acquisition timelines not fit for a decade-long RFP-to-award-to-build-to-launch-to-capability process.
“I think there is a line where the DoD can look at how much capability and survivability they need to build into the space segment,” he continues. “If we have ample satellite buses with modular payloads and a number of small commercial launchers that can be used to help reconstellate in weeks or even days, it could be one way to go. This type of commercial scenario is a real paradigm shift that will depend upon DoD’s willingness to accept a higher level of risk within this area.”