Increased DoD budget good news for COTS suppliers
The latest Department of Defense (DoD) fiscal year (FY) 2019 budget request is $686.1 billion, an increase of about five percent over the FY 2018 request. This is outstanding news for the warfighters, as they will get more support from a technology standpoint than during recent years where budget cuts and sequestration were the rule. Embedded commercial off-the-shelf (COTS) electronics suppliers will find it pleasing too, as the budget request provides funding for avionics; intelligence, surveillance, and reconnaissance (ISR); electronic warfare (EW); and radar applications.
I talked with three COTS suppliers about the DoD budget and its effect on their businesses, which applications are the best bets for COTS procurement, and the return of predictability to the market in the COTS Confidential roundtable in February’s McHale Report, readable here: http://bit.ly/2tlqPXt.
“The majority of newer weapons systems contain significantly more electronic content than previous generations,” says Sean D’Arcy, Director – Aerospace and Defense – Analog Devices, Inc. “Aside from electronic warfare, 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.”
Another bellwether showing the strength of the COTS market is the size of the DoD’s Research, Development, Test, and Evaluation (RDT&E) budget, as that funds much of the technology development the electronics sector provides. For FY 2019 the requested funding is $90.6 billion, an increase of $18.8 billion over the FY 2018 enacted budget.
“As the 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,” explains Doug Patterson, Vice President, Military & Aerospace Business Sector at Aitech Defense Systems. “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, and on to the Defense Appropriations Bill, which is voted into law. From there, the various 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.”
The best bets for embedded electronics procurement continue to be those that require intense signal-processing capability, such as radar, EW, and persistent surveillance applications.
“There are quite a lot of good opportunities right now, but the fastest growth at a market segment level is in EW, antidrone systems, and UAVs [unmanned aerial vehicles],” says Manuel Uhm, Director of Marketing, Ettus Research, a National Instruments company. “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 has also resulted in new means for guerilla warfare, which necessitate ways to counter them.
“Other emerging areas of opportunity for COTS vendors include cybersecurity and artificial intelligence (AI)/machine learning (ML),” he continues. “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.”
Commercial parts obsolescence drives many of these opportunities as the military needs to constantly refresh electronic systems to continually counter ever more complex threats.
“At the moment, there is a great deal of effort around updating existing platforms due to the semiconductor industry’s self-imposed penchant of obsoleting components, with no regard whatsoever for the affects upon our national security and warfighter support,” Patterson notes. “Next are new designs and new programs, then sustainment efforts.”
For now, the increased funding for RDT&E, new programs, and sustainment efforts is bringing some certainty back to what has been an uncertain market.
“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,” Patterson notes. “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.”
The Trump administration’s hawkish approach to defense spending should continue for the remainder of his first term, ensuring predictability till at least 2020.
The challenge for COTS suppliers face now “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,” D’Arcy says.