Despite Budget Cuts, There’s Still Hope for Defense Electronics Suppliers

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Despite the doom and gloom associated with the U.S. Department of Defense (DoD) budget cuts, market analysts see silver linings for defense electronics suppliers in the radar and unmanned aircraft segments, as well as in avionics retrofits.

According to Brad Curran, industry analyst at Frost and Sullivan, there have been plenty of contracts let, more spending each month than was budgeted, and more market participants than ever. “In 2011 the top 10 prime contractors had about 60 percent of the prime contracts, but in 2012 they only took 41 percent of the prime contracts let. In 2011 there were 290 companies getting prime contracts, but in 2012 that leapt to 435. Now contracts are more spread out, involving more companies and reducing not only cost but risk as well.”

According to military embedded systems one area where Commercial off the shelf (COTS) suppliers are thriving is in Intelligence, Surveillance, and Reconnaissance (ISR) applications. “The big contracts in 2012 in surveillance and reconnaissance were focused on radar, unmanned vehicles, Electro-Optical/Infrared (EO/IR), and night vision technology. Networking technology is also playing a role in this space,” Curran says.

“Radar is a hot growth area for military technology,” Curran notes. “Radar applications range from large missile defense systems to small radars that find incoming artillery and mortar rounds. On the Navy side there’s been a lot of radar contracts for applications such as surface Ship Self-Defense Systems (SSDSs) to deter incoming anti-ship missiles from potential adversaries in the Western Pacific. In 2011 there were 79 radar contracts totaling $3.27 billion, with Raytheon as the leading producer. In 2012 the total contracts increased to 88, worth $4.26 billion, with Raytheon again as the leader.

“Night vision is also hot – everything from the traditional night vision goggles to weapon sights to cueing systems to helmet displays for helicopter pilots,” Curran says. “In 2011 there were 12 night vision contracts for about $2 billion with the average contract being about $173 million. The leading companies are Lockheed Martin, L-3, and FLIR Systems. In 2012 there were 12 night vision contracts totaling $2.08 billion led by EOIR Technologies. Yet, there will be a washout next year as Army and Marine Corps deployments are getting smaller, and therefore do not need larger volumes of night vision devices. However, these devices are lower cost and more sophisticated than earlier models, so going forward there will be more use for helicopter pilots and airborne and naval ISR platforms and weapon systems.

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Opportunities also remain in the Unmanned Aircraft System (UAS) market. “I guess if I wanted to label the next 10 years, I’d call it the ‘sustainment decade,’” says Ron Stearns, Research Director at G2 Solutions. “We are filling out our unmanned aircraft fleets from large to small, High Altitude Long Endurance (HALE) to Medium Altitude Long Endurance (MALE). We can have platforms for 10 to 15 years and upgrade the sensors, communications, and weapons systems to meet the standoff detection and ISR requirements and then focus on meantime between replacement for system elements such as communications, EO/IR, and others. There will be incremental upgrades to defense fleets, as some programs transition to programs of record such as K-MAX helicopter or the next iteration of MQ-9 Reaper or MQ-1 Predator replacements or when the Unmanned Carrier-Launched Surveillance and Strike (UCLASS) program is awarded.”

“Funding for DoD programs of record, if you include money for the Long Range Strike program, which includes the Next-Gen Bomber – that may or may not have an unmanned component – the dollar amount will be much higher,” Stearns continues. “Essentially you’re going from $4.4 billion in spending on procurement and RDT&E, but not operations and maintenance, in 2013 to about $5.9 billion by 2018 when you include the Long Range Strike Bomber. If you take that out, it’s $4.2 billion in 2013 and $3 billion by 2018. Things like the K-MAX rotary wing aircraft and the Air Force X-37B Unmanned Space Vehicle (USV) are not in there, as they are not programs of record yet and might not be released anyway.”

In 2011 the total DoD funding of unmanned aircraft was $4.5 billion, Stearns says. “The decrease was anticipated as production numbers fell. It is a flat market and if flat is the new up, then there is sustainability from a DoD perspective. If you bend metal and make airplanes, it is going to be a tough road; but if you make command and control technology, flight controls, communication technology, and sensors, and the business model continues to open up, it could be a time of opportunity for you. The need for ISR is not going away. Even as CENTCOM winds down, ISR missions will be needed in AFRICOM and USPACOM after that.”

“What I hear and what I’m taking from the 2014 budget request is that there are a number of enhancements of the MQ-9 Reaper fleet happening in conjunction with fielding,” Stearns says. “They are still building 401 of them with 65 to be built after 2018. Only 12 will be built in fiscal 2014. There are upgrades and enhancements that will continue to be performed, such as Lynx Synthetic Aperture Radar (SAR) upgrades, communication enhancements, anti-icing, etc.”

“In rotary-wing applications, the MQ-8B Fire Scout will eventually be replaced by the next variant, the MQ-8C, which is based on a Bell 407 helicopter frame. As I understand it, the government will transition the C variant into the program of record. As of the fiscal 2014 request, the Navy will procure 202 of the B variant and 28 or 36 of the C variant, which came from a rapid fielding request. Those numbers will transition as MQ-8B and C. How many they will build of a mixed fleet could change,” Stearns says.