DoD budget increases impact on defense electronics suppliers

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 we cover the Trump Administration’s Department of Defense () Fiscal Year (FY) 2019 budget request. The DoD overall requests totals 686.1 billion, up almost seven percent over the FY 2018 request. The panelists discuss the budget’s potential impact on defense electronics suppliers, which applications are the winners in the budget such as , the Joint Light Tactical Vehicle, fighter aircraft, and more.

This month’s panelists are: Sean D’Arcy, Director – Aerospace and Defense – Analog Devices, Inc.; Doug Patterson, Vice President, Military & Aerospace Business Sector at Aitech Defense Systems; and Manuel Uhm, Director of Marketing, Ettus Research, a National Instruments company and Chief Marketing Officer of the Innovation Forum (formerly the SDR Forum).

MCHALE REPORT: The DoD released its FY 2019 budget request this month and once again it is an increase over the previous year, growing about seven percent to $686.1 billion. How have the recent increases in defense spending impacted the defense electronic industry? Is it getting easier to forecast sales with this consistent growth??

D’ARCY: The majority of newer weapons systems contain significantly more electronic content than previous generations. Aside from , radar, and military communications systems, we are seeing electronics becoming the key technology in small missiles, guided projectiles, and soldier systems. This is driving greater miniaturization and integration in packages that can survive extreme environments and mechanical shock. The ease of forecasting may be more difficult, as adoption depends on success in addressing the previously mentioned mechanical and environmental challenges.

PATTERSON: This proposed budget, funds Defense Secretary James N. Mattis’ three lines of effort:

  1. Build a more lethal, resilient, agile, and ready joint force
  2. Strengthen alliances and attracting new partners
  3. Reform the department’s business practices for greater performance and affordability

If the budget is passed, the defense electronics sector will benefit from not only the increased DoD spending in programs such as the Joint Light Tactical Vehicle (JLTV), M-1 Abrams modernization program, as well as new AH-64 Apache helicopters, 15 new KC-46 Pegasus tanker aircraft, and 10 new P-8 Poseidon aircraft as well as significant funding increases for the B-21 Bomber and to the Columbia-class submarine. But, this sector also will benefit from the increased industry-base and consumer confidence that has been present since the November 2016 election and what we experienced throughout 2017.

As the Research, Development, Test and Evaluation (RDT&E) budget increases, available funding to the defense electronics sector – and the military embedded computing market – increases, but the effects are not immediately reflected in the bottom line of any company. There is a long process, and a natural lag time, from the President’s budget request, through the varied Congressional Budget hearings then to budget resolutions, to the Defense Appropriations Bill, which is voted into law. From there, the various defense armed-services have to produce approved program spending budget increases for this to then flow down to the various prime contractors and, in turn, to their subcontractors.

Regarding forecasting: From my perspective, time and again, accurately forecasting sales has proven to be part experience, part customer feedback, part DoD program funding tracking and, part black magic. And if anyone comes up with a better than 50 percent forecasting model, I want to see it! What has been getting easier over the last year, though, is predicting the effects of program funding uncertainty and risks, i.e. with market and consumer confidence increases, the risks of program cancellation are lower – for now anyway, as this can change in a heartbeat if you’re not watching closely.

UHM: The increase is certainly good news for the defense industry and its suppliers. That being said, it takes a while for the money to get distributed and trickle down. So trying to apply that to a specific forecast for a company or product portfolio would be premature. However, it gives suppliers some optimism going into FY 2018. Given the yearly DoD budgeting process, it is generally difficult to reliably forecast sales more than a couple years in advance. Unless the process changes, which is unlikely in the foreseeable future, forecasting will remain a challenge. Regardless, the defense electronics industry will certainly benefit from the increased funding which should enable the warfighter to have greater access to the state of the art in systems for electronic warfare, SIGINT [signals intelligence], and radar.

MCHALE REPORT: What applications are the best opportunities for embedded COTS hardware and software suppliers...electronic warfare? ? Unmanned Systems? Radar? Other? And why?

D’ARCY: Related to my previous answer, embedded COTS systems will achieve significant growth in meeting the needs of guided pyrotechnically launched munitions (aka smart bullets). The miniaturization and environmental survivability from adjacent industries should provide a strong fabric to address the challenges unique to these munitions. In electronic warfare, radar, and military communications, a synergy is emerging between developments in the 5G and commercial spaces and the complex requirements of U.S. and allied militaries.

PATTERSON: Nearly every aspect and application of the military/defense embedded COTS computing market could benefit, including C4ISR for the ground vehicle market (both manned and autonomous), naval (above and below water, manned and unmanned), the avionics market (UAS and manned platforms), etc. The “why” is a much easier proposition to quantify. With program upgrades and the potential for new program starts looming on the horizon, the need to replace aging and obsolete electronics is a current mandate for increased platform lethality to lessen the possibility of potential collateral damage and enhanced troop survivability.

UHM: There are quite a lot of good opportunities right now, but the fastest growth at a market segment level is in electronic warfare, systems and [unmanned aerial vehicles]. While electronic warfare has been in growth mode for several years now due to the increasing need for spectrum dominance over enemy forces, the proliferation of drones and UAVs have also resulted in new means for guerilla warfare, which necessitate ways to counter them. In addition to that, there are plenty of civilian reasons for being able to control drones in airspace around airports, prisons, and stadiums during high profile events, for example. COTS hardware and software are being used by a number of companies, from start-ups to defense primes, to rapidly develop, prototype and field anti-drone systems. At some point, the number of companies in this area will start to consolidate as winners separate from losers, but in the meantime, there is a tremendous amount of activity in this area.

Other emerging areas of opportunity for COTS vendors include and ()/ (ML). Cybersecurity continues to be a hot topic as more hacks and security vulnerabilities become known. ML is a very hot emerging technology to address many issues related to autonomous systems and big data, among others, but it is still early days and the industry will benefit in coming years from more standards, tools and application software being available as the ecosystem develops and grows. For both of these areas of opportunity, it will be critical for suppliers to work with the ecosystem to address the software development tool flows and application software needed to enable customer success. As an example, both areas typically require support for and/or GPUs with non-trivial tool flows and IP.

MCHALE REPORT: Will these applications be more around upgrades? New designs/platforms? Sustainment? And why?

D’ARCY: Small-diameter guided munitions will be new developments supporting existing and in-development launch platforms. Though the expansion of phased array systems will drive the replacement of disparate mechanically scanned systems, they will be closer to new development than retrofit, modification, and update (RMU) programs. With appropriate security, we will also see a migration of existing health and well-being systems from the consumer to embedded military soldier systems.

PATTERSON: At the moment, there is a great deal of effort around updating existing platforms due to the semiconductor industry’s self-imposed penchant of obsolescing components, with no regard whatsoever for the affects upon our national security and warfighter support. Next are new designs and new programs, then sustainment efforts. New efforts of providing vehicle or platform diagnostics and prognostics – or predicting when routine or emergency maintenance is required – are making some significant advances in intelligent electronic and electro-mechanical subsystems.

UHM: Due to the length of time it takes to kick off and fund new programs, I would expect most of the additional funding to go towards existing programs of record. That being said, there is always room for innovation, which can be driven by organizations like [Defense Advanced Research Projects Agency] and the National Spectrum Consortium, both of which benefit from DoD funding. However, this is honestly a relatively small drop in the bucket of all the DoD spending, but one that is important in keeping innovation at the forefront of new defense electronic systems.

MCHALE REPORT: Where will the biggest challenges be for embedded suppliers in this growing defense market?

D’ARCY: The greatest challenge may well be keeping up with the demand. Embedded COTS systems provide a strong baseline but will require customization for survivability, security, and military integration, which will tax resources across the industry.

PATTERSON: Keeping up with the advances in technology, the early adoption of companies driving those technologies as well as their competition playing catch up will keep the product marketing managers on their toes. It’s one thing to wait for “Market Pull,” but growth will favor those who also embrace “technology push.” Maintaining that precarious balance will be critical.

UHM: Keeping up with all the latest standards, trends, and enabling technologies is always a challenge. Those can range from supporting the latest backplane standards, such as , to new connector standards, like Thunderbolt, to new processors and tools, like the RFSoC family from Xilinx. Most suppliers will not be able to support all of these, so they will have to pick and choose depending on the specific demands from their customer base.

In addition, the technology trends make it increasingly difficult to meet industry needs and requirements. For example, 5G is driving towards lower latency communications, MIMO (higher antenna count), and higher frequencies, all of which are significant challenges in their own right. Trying to anticipate and address defense industry requirements related to 5G is non-trivial as it also adds on top the challenges related to as low SWaP (size, weight, and power) as possible, multiple mission profiles and even managing the supply chain for lengthy 15-20 year defense programs with commercial components that often go end-of-life within five years of launch.

With all that being said, I anticipate 2018 to be another great year for the defense industry, filled with new innovations to meet the ever-increasing number of challenges and threats.