DoD budget impact on COTS
Every month the McHale Report will host an online roundtable with experts from the defense electronics industry – from major prime contractors to defense component suppliers. Each roundtable will explore topics important to the military embedded electronics market. This month our roundtable of industry experts discuss how the slight increase in the Department of Defense’s (DoD’s) overall Fiscal Year (FY) 2017 budget request affects embedded commercial-off-the-shelf (COTS) electronics providers. Also discussed are which applications are best bets for COTS, market fluctuations, risk management, and predictions for potential defense budgets under a Clinton or Trump administration.
This month’s panelists are: Robert Day, Vice President, Sales & Marketing, Lynx Software Technologies; Jerry Gipper, Executive Director, VITA; Doug Patterson, Vice President, Military & Aerospace Business Sector, Aitech Defense Systems; Gregory Powers, Global Market Leader, W. L. Gore & Associates; and Ben Sharfi, President and CEO of General Micro Systems.
MCHALE REPORT: The DoD released its FY 2017 budget request last month with an increase in overall funding to $582.7 billion, up $2.4 billion from FY 2016. Does this help quell some of the defense market uncertainty? Please explain why or why not.
POWERS: There are numerous changes afoot driving global defense budgets. Whether it is global warming, contested territory, border security or counter-terrorism; the theme of security through strength has been adopted by the world’s leading economic and political powers. As a result, the defense market is receiving widespread support.
The U.S. DoD budget request speaks to the fact that the drawdown beginning in 2010 is the fifth since the end of World War II (WWII), with previous occurrences coinciding with the ends of WWII, the Korean conflict, Vietnam, and the Cold War. When observing the historical cycle and the present state of global affairs, it would certainly appear that the inflection point in U.S. spending does mark the end of reduction for the foreseeable future, that a resumption of modest growth will follow and in fact is necessary for national security and global stability.
GIPPER: I’m not hearing any uncertainty. Everybody I speak with is pretty comfortable as they are doing more and more long-term business. Some even saying they are getting more business than they can handle.
PATTERSON: Research, Development, Test, & Evaluation (RDT&E) funding decreases this year while procurement increases, probably washing each other out in the end, which means another flat year or some mild growth overall. It seems that NASA and commercial space business is growing and outpacing the defense business, which goes against traditional thinking. We’ll have to see what happens when Congress and the House and Senate Defense Appropriations Committees sink their teeth into the President’s budget and what programs are funded, and which aren’t.
Today it’s all about risk management and right now the prime contractors are adverse to risk. No CEO of a large prime will canvas, push, and press for investment money if a major program has even the slightest possibility of being cancelled by partisanship within a presidential administration or Congress. We’ve had seven years of it. Basically, all the primes leadership are playing it safe, consolidating facilities, scaling back and cutting costs – waiting it out. Some primes are only now starting to ramp up hiring, betting that the defense market will turn upwards if a new president cares about national defense, rather than throwing money at entitlements.
DAY: Not really. At less than half percent growth, this doesn’t represent a change in the current defense market, and probably doesn’t facilitate many new programs that really help create opportunity in the defense market. Compared to the projected overall government budget growth of closer to six percent, this does seem to pale in comparison. Also, looking at the estimated defense budget of $564 billion for FY 2018, this isn’t a great sign of defense market growth.
SHARFI: The fact that we HAVE a budget helps! It removes the month-to-month paranoia caused by sequestration. The defense industry has been forced to work on a short month-to-month and program-to-program basis, which creates uncertainty and is counter productive for long-running defense programs. So having a stable budget helps, regardless.
As to where it’s going and which programs are getting the additional funding, that’s where we all line up for a piece of it. A couple of examples include the Army’s WIN-T [Warfighter Information Network-Tactical], which did get its funding, and the Navy’s Aegis, which is going to get additional funding.
MCHALE REPORT: What areas are the best bets for technology funding going forward? Radar? Electronic warfare (EW)? Cyber? Unmanned systems? Avionics? Other?
DAY: Certainly cyber, electronic warfare, and unmanned systems appear to have a better growth potential than the overall figure. These areas still have a lot of program funding and research and development budget going into them.
POWERS: With regard to technology funding of military embedded systems, the answer is “all of the above.” Modern platforms have become significantly more sophisticated, with high performance avionics/vetronics, networking, and things like hybrid drives and high voltage power distribution. Platforms perform as fielded sensor nodes, with various payload systems such as electro-optical/infrared (EO/IR), radar, and SIGINT/ELINT communicating within and external to the vehicle. However, in today’s electro-magnetic spectrum centric climate, situational awareness and electronic warfare have received elevated attention, with cyber almost always mentioned in the same phrase.
The building blocks associated with modern military embedded systems, many of them now open architecture components capable of air, sea, land, and space deployment, are experiencing a broad application space and high degree of re-use. Beyond open architecture, most of the data related building blocks have been honed for reduced size, weight, and power (SWaP), maximized bandwidth, and multi-platform environmental performance. Case in point, in February 2016, SAE released a rugged CAT 6a Ethernet standard AS6070/6. This rugged industry standard is a primary open architecture solution and it finds itself as suited to networking in a Joint Light Tactical Vehicle (JLTV) as an F-16. Other examples linked and leveraging the Ethernet standard would include architectures such as OpenVPX, VICTORY, and FACE [Future Airborne Capability Environment].
SHARFI: For a number of years the DoD has been migrating programs over to Intel architectures and often using Windows or Linux in lieu of what used to be RTOS-based platforms. For us: any Intel-based program is a “best bet.” The Navy’s Aegis upgrade is a good example, along with communications like WIN-T and the Tomahawk Weapons Integration Control System (TWICS), and Tactical TWICS (TTWICS), along with several helicopter programs. The helos are mature platforms that are ready for tech refresh. The engineering is done; they’re just waiting for money. Another example is the twin-rotor Chinook.
PATTERSON: The best bet today is C4ISR on mobile, remotely piloted platforms (ground, naval, air, space). Rumors are the F-35 will be scaled down, as well as “heavy iron” platforms for all the U.S. armed force services. The money today seems to be following the “lighter, better, faster, and lower cost” platform developments where more troops can be taken out of the life-threatening, front lines action.
GIPPER: All the C4ISR stuff such as radar and EW are the sweet spot for embedded computing suppliers especially those that demand intensive signal processing and fast data analysis.
MCHALE REPORT: Where are the best opportunities for embedded COTS hardware and software suppliers’ upgrades? New designs? Sustainment?
PATTERSON: Sustainment and upgrades will always be funded, just to lesser degrees. Right now, comparatively speaking to 2008 and earlier, new designs have suffering due to the lack of confidence that the upfront investment the primes need to make will ever pan out.
SHARFI: They’re all great opportunities! Upgrades and new designs have been very successful for us. An example of the type of technology we see most is the demand for high-density/performance conduction-cooled small form factors for new designs, upgrades, and many programs of record.
In many of these cases, as I mentioned above, the program upgrades have been around for eight to nine years but the industry has been waiting for the funding. Recall that the country has been at war on several fronts for many years, and upgrades for Navy platforms and helicopters like the Army’s Apache and Blackhawk have been just waiting. Because of our war footing, spending during “conventional” wars gets channeled into spending (operations & maintenance (O&M), beans/boots/bullets) and not systems upgrades. Of course, this is only right as the sailor, soldier, airman, and marine need their materiel. Deployment programs have been cut 40 percent, 50 percent, or more. Rightfully so, of course—the warfighter gets first priority.
GIPPER: New designs, actually. When you hear about a $2 million contract win for an upgrade many of these upgrades include whole new system designs. And VPX is becoming a bigger part of those announcements, not just lifetime buys of VME boards.
POWERS: The agencies have groomed the supply base for years to support open architecture approaches, which now extend from new designs through many upgrade programs and into sustainment. The beauty of embedded COTS is the diversity of the ecosystem and ubiquitous nature of the solutions. Most suppliers would very much like to be on a new platform. However, if a company does not win that position, there are many upgrade and sustainment programs in motion that may actually be suited better to the supplier’s business model, as well as may provide a quicker revenue stream and may in reality be a stepping stone to winning that next new program by providing solution pedigree. The reality of the situation is that a new platform is only new once, and then moves into years of tech refresh, upgrades and sustaining activities, allowing for many opportunities and business models.
DAY: Upgrades and retrofits of existing programs appear to give the greatest number of opportunities for COTS systems. These are often replacing proprietary systems for more open standards that are ultimately easier and cheaper to maintain going forward.
MCHALE REPORT: Where will the biggest challenges be for embedded suppliers in the defense market?
GIPPER: It’s expensive to start up with just a board solution. You have to be of a mindset like that of Mercury Systems or Curtiss-Wright and be a system-level thinker. Money is the real barrier to entry in this market. You can’t just kick start a VPX company in your garage. You need serious venture capital money.
PATTERSON: Frankly, being able to ride the ebb and flow of contract dollars funding and waiting it out for the new presidential election. We’ve all been seeing this scaling back now with the larger embedded military and aerospace companies and with the consolidations. Commercial investment companies with a few extra dollars in the bank seem to be busy buying up the smaller mil & aero market players anticipating the return of the defense side of the mil & aero market.
SHARFI: The biggest challenge we face as an industry is to provide best-cost solutions and ease of upgradability, while keeping within the existing infrastructure.
POWERS: As agencies continue to stress open architecture for commonality and cost reduction, the biggest challenge for suppliers will be differentiation. Technology companies need to establish a winning value proposition within the common space of open architecture based upon their strategic technologies. The technology could be one of superior material science, signal integrity, longevity, or installed performance, but it needs to make their solution the best value choice in the competition.
DAY: The lack of new programs and small growth really takes the excitement out of the defense market, and that makes it more difficult for suppliers to justify focusing on defense needs rather than other high growth markets, which, in turn stifles innovation for defense.
MCHALE REPORT: Do you think the positive developments in the FY 2017 request will continue in the next presidential administration, whether it is Trump, Clinton, or someone else?
SHARFI: Frankly, politics scare me, especially if Cruz, Trump, or Sanders get elected. These guys are all over the place and it’s hard to know what they will really do. Not even party members have a clue. However, Clinton and Kasich are the stable candidates because the industry considers them “known quantities.” Their politics actually matter less; it’s the unpredictability that creates business risk.
We are better and stronger and have better armed forces than ever before! Just ask any commander out there. I’m not saying we are where we need to be with weapons and programs, but we are for sure not weaker than eight years ago. When we have warfighters on the ground and much of our budget goes for operational type support as I mentioned above, programs suffer.
POWERS: Said with cautious optimism, yes. Each presidential candidate has acknowledged the need for a recovered defense posture. It appears the U.S. defense budget has an appropriate trajectory to stabilize near term, although it will take some time for the funds to fully penetrate the ecosystem. Looking out toward FY 2021, the budget is pretty much flat relative to inflation, but provides a stabile platform from which to exercise cost reduction and offers an opportunity for future administrations to revisit as global events dictate.
DAY: I suspect that an increased growth in the defense spending is less based on who is in office and more on what happens in the world around us. The more that high profile terrorism and cyber terrorism (and potential nation-state terror activities) increase, the more the U.S. will be forced to invest in new technologies to combat them – and (unfortunately) that is more likely to fuel defense spending.
PATTERSON: There potentially will be even more uncertainty as one is traditionally not strong on national defense and the Republican front-runner has no track record in government to be certain how he will govern. We’ll see what happens and who steps up to the bar to lead the country and NATO.
GIPPER: Nobody has a real clue what will happen with the presidential election. It promises to be a fun summer if you love politics.