U.S. military market is a sustainment market
U.S. Department of Defense (DoD) budget cuts and sequestration combined with a shrinking U.S. military footprint abroad have created an uncertain marketplace, leaving many to wonder where the business opportunities will be. However, market analysts and distributors of electronic components don’t see it so much as a shrinking market, but rather one that is evolving and shifting toward sustainment.
“Overall spending is down because there is a smaller force and fewer platforms, but there are pockets of growth in signal processing for data exploitation and dissemination, helping analysts utilize all the data they are collecting from full motion video, etc.,” says Brad Curran, Industry Analyst at Frost & Sullivan (www.frost.com).
“Demand for electronics in the military is relevant to budget activity,” says Bryan Brady, Vice President/Director of Vertical Markets at Avnet (www.avnet.com). “We’ve assessed the President’s FY 2015 budget request and our bottom line conclusion is that dollar for dollar electronic component demand is increasing, while funding for personnel and infrastructure is decreasing. There are fewer new programs and existing programs are stretched out longer. However, those existing programs have design activity for sustainment purposes and upgrades to their electronics. We still see robust activity in this area. We also see design cycles shortening and more effort in our defense customer base to leverage products already designed in the marketplace.”
Sustainment and modifications are typically green lights to suppliers of commercial off-the-shelf (COTS) hardware and software as most upgrades want to leverage open architectures and open standards.
This “is absolutely an opportunity for COTS suppliers,” Curran says. “Proprietary is not what the government wants anymore. They want mature commercial stuff with open standards that can be easily integrated and refreshed when new stuff comes along. They also want price competition.”
To get that price they are letting more contracts. “Instead of giving a huge contract to one or two companies the military is dividing contracts among 20 or 25 companies with more of them IDIQ so there isn’t a single point of failure,” Curran says. “This forces companies to perform better, forces more competition so the government gets the best price and service. The government is definitely spreading out the wealth.”
“How hard a company is hit by the budget cuts depended on which program they are involved with,” Brady says. “One quote I remember summed up this situation best: ‘When boots withdraw, the eyes will remain.’ In other words, funding for intelligence, surveillance, and reconnaissance [ISR] technology should be steady even as the U.S. military draws back its global footprint.”
Radar and electronic warfare
Nothing is more important to keeping an eye on potential adversaries than radar and electronic warfare technology. “Radar is still hot because airborne surveillance and reconnaissance for manned and unmanned aircraft is still really important for military missions as well as for border security and counter narcotics applications,” Curran says. “Current events are also driving this need as China and Russia become more belligerent through Cold War-type confrontations. Improved missile defense is crucial for the U.S. and its allies such Saudi Arabia, United Arab Emirates, South Korea, and Japan.
“The other thing driving radar is the push for smaller form factor designs for fighters and UASs [unmanned aerial systems],” Curran notes. “To get radars on UASs there is still a lot of work to do to extend the range, improve accuracy, and lower power consumption. Everything in radar points to opportunities for embedded suppliers, but they still have to solve traditional problems, such as removing heat and cooling these high-performance signal processing systems.”
For radar/lidar there were 79 awards in 2013 totaling $4 billion with Raytheon leading the way, Curran says. “So far in this calendar year there have been 41 awards totaling $2 billion. This year is skewed with Lockheed Martin winning the $914 million Space Fence contract in June. The big money for radar is still in missile defense, which is proliferating. Secondly, funding for F-35 radar and upgrades to radars for other fighter jets – that cannot afford the F-35 radar – will be steady.” Total electronic warfare contracts in 2013 hit 64 at about $2.5 billion led by Northrop Grumman, who was very closely followed by Raytheon, he adds.
Radio and networking technology
COTS and open standards are also driving factors in military communications and networking applications. “The DoD is looking to leverage the use of commercial technology such as cloud computing, social media, and commercial mobile devices,” Curran says. “Companies that have those products will see a bump.
“The Army and Marine Corps are also shrinking, with only three quarters of the number of troops they had last year, which means the gear needs to be multi-functional,” he continues. “Commercial networking and communications technology is making that happen with the increased smartphone demonstrations for the warfighter and things like tactical app stores based on the iPhone model. They need devices that can do multiple things.”
For networking technology there were 246 awards in 2013 totaling about $17.6 billion for enterprise and tactical applications, Curran says. “General Dynamics was the leading provider. Tactical networks totaled 96 contracts for $20.8 billion in 2013. Harris was the leading company in tactical and enterprise applications. Harris is the leader in radio technology as well thanks to their whole family of Falcon radios. I’d say Harris has a lot of momentum going right now. For airborne radio applications Rockwell Collins is the leader while ViaSat is the front-runner for data link technology,” Curran adds.
The unmanned aircraft market has also become one of sustainment. “The build out of big programs of record in military unmanned aircraft has slowed,” says Ron Stearns, Research Director at G2 Solutions (www.g2globalsolutions.com). “Major DoD programs of record are nearing the end of their production runs such as the Air Force RQ-4 variants and the MQ-9. The MQ-1C will likely see the end of its run in 2015. This has been expected as the industry is becoming one geared toward sustainment and upgrades. DoD opportunities are now flowing back to the traditional primes and away from smaller niche UAS suppliers. It is a gradual shift to traditional acquisition and away from joint urgent operational needs [JUONS], services, and quick reaction capability [QRC]. So if you look at the DoD UAS market strictly with regard to program-of-record procurement and RDT&E, then yes it’s falling. However, if you look at it from an Operations & Maintenance [O&M], services, non-programs-of-record, and special access programs perspective it looks pretty steady.”
From a procurement and RDT&E standpoint the military unmanned systems market is stable at $2.5-3 billion a year through 2019, Stearn continues. “The FY 2015 budget request had fallen slightly but that did not show the O&M dollars, which would likely add about another billion on to that. Then you could add in services contracts – like Boeing Insitu has with their aircraft contracts – which is at least a couple hundred million dollars a year.
“So if I add up all program of record spending for RDT&E within FY 2015 it comes to about $17.8 billion,” he says. “Funding for new platforms such as the Unmanned Carrier-Launched Surveillance and Strike [UCLASS] is programmed, although changes in system requirements could shift progress to the right. The big question mark is the uncertainty as to whether the Long Range Strike program’s Next Generation Bomber will have an unmanned or optionally-manned component. If that decision is made in favor of unmanned capability it would add about $12 billion to the total spending through 2019, some of which would be directly attributable to UAS platforms. This is the type of large defense program that really moves the needle for the defense electronics industry.”
UCLASS will be another big needle mover for the U.S. military UAS fleet. “UCLASS is currently the largest new-build DoD UAS competition,” Stearn says. “Northrop Grumman, The Boeing Company, Lockheed Martin, and General Atomics-ASI are competing for it and is worth about $2.9 billion (2012-2019) as an acquisition piece with RDT&E funding included. Consistent messaging as of late indicates a Navy desire for UCLASS to perform surveillance first and strike second. It is perhaps the most visible of programs in a competition phase. It was originally scheduled to reach an initial-operational capability [IOC] by 2020, but it is now looking more like 2022. If the concept of operations proceeds as envisioned UCLASS could add unprecedented situational awareness capability to the carrier battle group.”
UAS commercial market opportunities
UAS defense suppliers are also keeping an eye on the burgeoning commercial market for unmanned aircraft. “The FAA’s notice of proposed rule making on unmanned aircraft is still on target to be posted or handed down late calendar or third quarter of this year,” Stearn says. That will start an 18-month clock of revisions and comments and “by 2016 or 2017 we should see commercial access for small UAVs in specific airspace and controller-radius paradigms become a reality, catering first and foremost to forestry, agriculture, oil & gas, and electrical infrastructure, where I believe there is demand for this technology.
“Companies who will have the biggest head start in this market will be defense avionics and electronics suppliers who have been there and done that with this technology,” he continues. “However, it is a very different operating space for them, akin to a purely commercial electronics company trying to sell in the military procurement realm. I see the commercial unmanned systems market being a more speculative venture for defense suppliers as they will have to use internal R&D dollars to create solutions that match commercial form factors. There is also no guarantee like what they’d get with a DoD program of record. There is no Office of Naval Research or Special Operations Command to incubate commercially configured sensors or electronics. Looking from the outside I can understand the difficulty business managers would have selling this opportunity up the food chain in their organizations. It would require taking some risk that could hurt them if the reward does not materialize during an anticipated timeframe.”
“[Unmanned technology] has enormous marketplace potential and we think that the traditional defense companies will take advantage of this,” Avnet’s Brady says. “Some unmanned aircraft military applications such as persistent stare will be applicable to commercial uses for combating forest fires and search and rescue operations. However, the cost of these will have to be reduced before this transition becomes commonplace.”
Manned aircraft and avionics
Sustainment means fewer new manned aircraft programs, but also means potential opportunities for avionics upgrades to aging aircraft platforms being forced to extend their operational life. “The overall U.S. military aircraft market and subsequently the avionics market is a bit flat,” says Wayne Plucker, Industry Manager at Frost & Sullivan. “The DoD is finishing a number of new aircraft builds and there is not a lot in the pipeline. [Despite the] sparse marketplace there will always be opportunities with modifications and we will see a continuing series of modifications and upgrades for the next several years. As the number of new aircraft programs dwindle, current fleets will still need to be sustained through avionics and other mission-related upgrades.” For avionics box and avionics solution providers it will be steady business, he says. “I think the solution providers that will thrive here are Rockwell Collins and Honeywell with Thales as a distant third – depending on where the aircraft is flying. The real growth in the avionics world will be with new boxes and integrating new mission hardware, in other words making sensors better and making weapons control better.
“We are seeing more of a push toward procuring COTS equipment for modifications and new designs,” Plucker continues. “Integrators want things that have already been engineered and are proven, that they can procure quickly. They also want open architecture products that can interface into an old architecture. I don’t see a strong demand for new flight management software and new basic flight hardware, but there is a need to thoroughly integrate mission stuff and continuing upgrades of mission technology that includes items such as data links, red force/blue force tracking, and other things connected to mission profiles.”
The F-35 and P-8A
“Two big ticket fixed wing aircraft programs – the F-35 Joint Strike Fighter (JSF) and the P-8A Poseidon – are still on track for more aircraft production. The P-8A [a replacement for the P-3 Maritime and Patrol aircraft] is coming along ok,” Plucker says. “I had expected some issues, but it seemed to perform well during the search for the missing Malaysian Airlines flight, staying on station for long periods to conduct high-level searches. The program looks like it is on track to hit its production number of 34 aircraft.
“In terms of production, the F-35 has dropped from its projected number of 120 down to about 80 aircraft between now and 2018,” Plucker adds. “Lockheed Martin is hoping for higher numbers, but that is where I think the U.S. is headed with the F-35.”
“The jury is still out with respect to the F-35. I like to think we’ve been good at understanding the aircraft’s role in future engagement and that those costs will turn out to have been good investments,” says Michel Merluzeau, Managing Partner of G2 Global Solutions. “To precisely forecast what U.S. military and NATO will face in the future is the refection of recent wars against enemies with limited capabilities. They feel it’s a poor return on investment based on the adversaries faced in recent Middle East wars. The F-35 was not created for those battles. Regarding F-35 development challenges, it was a complicated process trying to get an aircraft to do things that have never been done before. We will not be able to get a full verdict on the F-35 until it performs in combat.”
“The vetronics [vehicle electronics] market is worse than flat,” Frost’s Plucker says. “I see it having -3.5 CAGR over five years, which is flat to less than flat. Part of the problem is the same with avionics: there are no new platforms coming around. Production has essentially shut down with the last of the Strykers being built. There will be modifications and integration of mission systems hardware, etc. to existing vehicles, especially with vehicles returning from Middle East conflicts. When we bring back the junk from Afghanistan we will have to do some rethinking because a lot of those vehicles do not have a path forward. We will need to improve the architectures and remove the Band-Aid boxes that have been applied to many of them while they were in the field – to make them more of a system and less patchwork. I don’t see this happening within the next five years. I don’t think we have the taste for it or the planning for it. We still haven’t figured out what kind of war we want to fight next.”