Military unmanned systems, C4ISR, avionics, and vetronics markets are COTS markets

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September 04, 2012

The U.S. Department of Defense’s (DoD’s) budget has been hit with extensive cuts in recent times and more are around the corner if sequestration comes to pass and 10 percent cuts are made across the board. The industry has seen many layoffs, and sequestration would likely force military prime contractors to make even more workforce reductions. In terms of procurement, the DoD and industry will more and more embrace the 80 percent solution, acquiring enough technology to keep current platforms running and meet immediate needs as opposed to long-term research and development projects.

Under this scenario, “the COTS guys should do well because they are naturals at bringing to market low-risk, high-value solutions,” says Michel Merluzeau, Managing Partner of G2 Global Solutions (www.g2globalsolutions.com). “That is what military users are looking for – proven solutions, proven technology, and low risk as far as integration is concerned. It is about procuring systems that are low risk, low cost, and quick to market.”

COTS products are already prevalent in avionics, vetronics, and unmanned systems platforms, as well as Command, Control, Communications, Computer, Intelligence, Surveillance, and Reconnaissance (C4ISR) applications. Each of these markets will see slow growth or no growth, and some will shrink over the next five years; however, market analysts see COTS suppliers gaining a larger share of the shrinking market as the primes are forced to outsource for embedded electronics technology.

C4ISR outlook

“Overall C4ISR is still a good, strong market,” says Brad Curran, Industry Analyst at Frost & Sullivan (www.frost.com). “C4ISR spending is about 6.9 percent of the total DoD budget. However, overall numbers may be declining with all western nations cutting back on defense spending by trying to find efficiency. The U.S. C4ISR market – including electronic warfare – is about $43 billion, which is a decrease of 10 percent from last year. My estimate is that the U.S. is half the global market, so you will see a pretty good reduction in the United Kingdom and France as well. In Japan, South Korea, Taiwan, Turkey, UAE, and Australia, they are about even. They’re basically in the geographic influence of China and Iran, who are jacking up C4ISR significantly. India also has an increase.”

“The C4ISR Negative Compound Annual Growth Rate (CAGR) for Research, Development, Test & Evaluation (RDT&E) is 4.5 percent,” Curran continues. “For procurement overall, the CAGR is 3.9 percent. By 2017 the market will be $41 billion for the U.S. (Figure 1). Globally it is flat. The big western powers’ reductions will be offset by the countries that are running scared of Iran and China. None of these estimates include China. I think were going to see RDT&E go down still. The DoD will rely more and more on commercial technology, having industry pick up the RDT&E tab and then leverage the technology they develop. This can be risky for defense-focused firms because the government doesn’t always give firm plans or commitments. It will be tough for companies to spend billions of their own dollars for something the government might not use. They are basically letting small innovative companies do R and D, then applying it to military applications where it fits. The DoD will eschew high-end platforms in favor of proven and reliable designs that afford maximum flexibility.”

COTS and C4ISR

“Another factor driving down numbers is the increasing use of COTS and standards-based technology as much as possible,” Curran says. “This cuts down on spending because the technology is more affordable but just as effective. The trend is toward smaller and more responsive systems and away from large theater-level assets. The U.S. military will still maintain the big platforms to keep an eye on China and Russia, for counter-terrorism efforts, and helping western countries combat Al Qaida and other threats. I think sequestration will put even more opportunities in COTS suppliers’ hands. The financial imperative will guarantee more and more COTS as well as the fact that [the] military market is a niche market [for] computers and communication technology. As a result, more and more commercial technology will be adopted for military use.”

 

Figure 1: U.S. DoD C4ISR top line spending forecast for 2011 to 2017 with a CAGR of 3.9 percent. Chart courtesy of Frost & Sullivan

(Click graphic to zoom by 1.9x)

 

“Apple and Android products are already making headway into military applications,” he continues. “The Air Force and Marine Corps are using iPads for their electronic flight bags. Instead of having a big stack of maps and thick books for flight checklists, they have all that data on off-the-shelf iPads. Maintenance personnel are using iPads to house all their instruction manuals. These technologies matured in [the] commercial world, and now integrators and primes such as Lockheed Martin, Boeing, [and] ITT Exelis are integrating these products into military systems.”

The DoD is leaning toward multipurpose technologies that fuse different collection disciplines and standardize reporting, Curran says. Processing and dissemination of full-motion video also will continue to be a robust growth area, he adds. The adoption of practical, rapid, inexpensive platforms such as aerostats and COTS tools like Wireless Fidelity (Wi-Fi) is surging, Curran continues. “C4ISR services such as language and cultural skills, maintenance, engineering, integration, training, project management – especially for cloud computing and cyber security and applications – are growing in demand. What the military really needs the commercial world to develop are batteries that last a long time. If someone can make a battery that can last a week, they’re going to be quite wealthy.”

Unmanned systems will present a large growth area for C4ISR technology. Large platforms like Predators require good EO/IR targeting systems and laser designators. The Army also is making a big push for Unmanned Ground Vehicles (UGVs) for logistics functions such as unmanned vehicle convoys and to support troops on patrol. They also can detect Improvised Explosive Devices (IEDs) by carrying ground-penetrating radars to get a closer look at the ground for anomaly detection.

UAV market

“In the UAV industry I see (overall DoD Program of Record spending) being flat for a couple years and then anticipate it to grow to a certain extent by 2017 for Programs of Record,” says Ron Stearns, Research Director at G2 Solutions (Figure 2). “This is not a function of what the budget says; rather, it’s a function of maintaining Programs of Record. The MQ-1C Gray Eagle, MQ-8 Fire Scout, and MQ-9 Reaper will wind down production. GA-ASI will deliver 240 MQ-9s from 2011 to 2017. The U.S. Air Force already has a Predator C Avenger in theater.”

 

Figure 2: U.S. DoD Programs of Record spending for both procurement and RDT&E through 2017. The numbers are taken from the FY 2013 Budget Justification Documents (dollars in millions on the left axis). Chart courtesy of G2 Global Solutions

(Click graphic to zoom by 1.9x)

 

“FY 2013 procurement forecast dollars take us to 2017, and I see some erosion along the way. RDT&E dollars will make up for the procurement short fall,” Stearns continues. “The market will be steady through 2017 with a high of $4.5 billion Program of Record spending in 2011, dropping to $3.2 billion then getting back to around $4.4 billion in 2017, but a dip in the interim for Programs of Record. Year over year, the budget shows a steady market, but there are always special cases that do not fall into the budget cycle. Funding for other programs can occur that [is] not expected, such as that for Boeing’s re-usable space plane, the X-37B, or Special Operations programs. These programs add substantially to the Program of Record budget dollars, and should continue to do so through 2017.”

“The legacy decade of 2010 to 2020 will give way to an evolutionary leap, with a new generation of UAV combat systems owing advancements to 4.5- and 5th-generation fighter development,” he says. “Emerging RDT&E UAV programs between now and 2030 include the Next-Gen Bomber/Long-Range Strike concept. This optionally manned program is a must-have for a company desiring direct and indirect R&D outputs. It could be a $100 billion program through 2030. Another is the UCLASS, or Carrier Launched Surveillance and Strike, which could be a “Mini E-2” with missiles where the sensor is the shooter. It can bridge the gap between asymmetric and conventional conflict. CVN basing makes the capability more expeditionary. Initial operating capability is expected in the 2020 timeframe.”

Military avionics

“The avionics market is shaping up to be the most dynamic and strengthening market in probably in the next 20 to 30 years – especially with the F-35 Joint Strike Fighter (JSF) forward fit production ramping up,” Merluzeau says. “The market should be between $10 to more than $14 billion annually through 2017. We are looking at potentially $160 billion in avionics spending expected through 2020, [which] presents a good market. The industry will be pumping five to six thousand new aircraft, which is a huge number. Yes, these numbers could change if the JSF falls further behind or if the EF Typhoon and Rafale deals encounter more delays. There are a lot of what-ifs, and we could see an entirely different scenario. However, right now it is shaping up strongly and there are aircraft that will continue to get retrofits so they can fly a bit longer. Avionics retrofits for F-16 fighter aircraft in particular and KC-10/135 and C-130/C-17 cargo aircraft are on the way.”

“There is some activity in the U.S. and in other parts of world with most of the activity in [the] sensor domain being in radar and data-links upgrades,” Merluzeau continues. “In Europe they are doing more with what they have rather than procuring entirely new systems; budgets are a significant issue and will not get any better for at least five years. Most of the work being done is in upgrades to current solutions to keep older generation aircraft flying longer.”

“In terms of new aircraft production, the P-8A Poseidon maritime and patrol aircraft seems to have its own issues,” Merluzeau says. “We’re going to see the P-8 kind of be a high-end market solution only. Boeing’s proposing an intermediate market or entry-level market solution based on a business jet. P-8 is a lot of aircraft for an elite group of nations with unique maritime surveillance and antisubmarine warfare requirements. The low- to medium-end market is a highly fragmented segment; therefore, Boeing needs to be prepared to face-off on price, support, and technology solution[s] and value over time. We feel comfortable they can do all that really well, with perhaps the exception of pricing the aircraft right and getting past the Foggy Bottom red tape.”

Vetronics outlook

The vehicle electronics, or vetronics, market looks to be steady as the military will be maintaining current programs, while not rolling out any major new platforms except elements of the Stryker family.

“I set the value of the vetronics market at $900.3 million,” says Wayne Plucker, Industry Manager at Frost & Sullivan. “It is effectively a retrofit market with no new programs in the mix except Stryker. The Army is effectively done building new ground vehicle platforms. I don’t see this changing any time soon either. Regardless of sequestration, vetronics will likely be a retrofit market for the next few years. By 2017 the market will grow to $928.9 million,a small total uptake from the 2013 level of $900.3 million. There is small growth in between with a soft 2014 where it drops down to just below $700 million, $850 million for 2015, and more than $1 billion for 2016 (Figure 3). In 2016 there will be a slight uptick for Special Forces operations.”

 

Figure 3: U.S. DoD vetronics top line spending forecast for 2011 to 2017 with a CAGR of 7.8 percent. Chart courtesy of Frost & Sullivan

(Click graphic to zoom by 1.9x)

 

“We look for it to be a down market, but not appreciably down,” Plucker continues. “It really depends on what happens with sequestration and how aggressively individual programs will be pursued. If you talk with Tank and Automotive Command (TACOM) officials, it is a 2 to 3 percent up market, but if you speak with folks that drive the budget in the Pentagon, it is a 2 to 3 percent down market. TACOM is always asked to give their best shot if you will, but while they come up with all the plans, the Pentagon ultimately is going to face the budget reality.”

“The principal growth will be in the RDT&E budget, not in procurement. In 2013 RDT&E vetronics spending is just under $100 million,” he says. “In 2017 it will be $423 million. However, the RDT&E budget could decline as well. Spending in this area has been deferred before, based on mission priorities and it could very well happen again. There will be half a billion for the Stryker program over the period from 2011 to 2017. That’s far and away the biggest spending in vetronics circles. One funding area that will essentially remain fluid is Special Forces operations. The Special Operations Command (SOCOM) will still have the ability to buy what they want when they want. Their program spending is dynamic, while TACOM spending is more predictable.”

“Embedded COTS solutions are going to be the winners in vetronics,” Plucker says. “The 80 percent solution is probably going to be the model going forward because there is a lot of great stuff available through COTS. The technology works and plays well with military systems. Embedded computing makes a lot of sense for military vehicles because of the restrictive real estate. Displays and control boxes can be designed smarter and link to central computers for management services. The real question will be funding for UGVs, and this will be based on mission priorities. For instance, the unmanned convoy system could come about, but once we get out of Afghanistan, is there much of a need for it? Whether or not there is a strong impetus to fund it kind of depends on how much money it will cost and how much of it will be a science project.”