Despite tightening budgets, contract activity maintains momentum
There's a common misconception in the public sector that U.S. Defense Secretary Robert Gates' plan to cut military spending by $553 billion in 2012 is a decrease in the Pentagon budget. Instead, the U.S. Department of Defense will actually see an increase albeit of less than 1 percent. This is however the smallest increase the Pentagon has received over the last 15 years and the plan calls for smaller increases to its rate of growth in 2013 and 2014 and then no growth whatsoever in 2015 and 2016.
The most high profile cuts include terminating the Marine Corps' Expeditionary Fighting Vehicle and placing the Marine Corps' short take-off and vertical landing (STOVL) variant of the JSF on the equivalent of a two-year probation because of significant testing problems. As a result, the development of the Marine variant will be moved to the back of the overall JSF production sequence.
However, to fill the gap created from the slip in the JSF production schedule, the Department of the Navy will buy more Navy F/A-18s. The proposed Pentagon budget for 2012 also calls for funding for a new long-range nuclear bomber, electronic jamming devices for the Navy, improvements to radar for F-15 fighters, a satellite launch vehicle and an unmanned naval 'strike-and-surveillance aircraft'.
While there is a focus on eliminating wasteful, excessive and unneeded spending to make every Defense dollar count, there is also recognition that the mistakes of the past should not be repeated by making drastic and ill-conceived cuts to the overall defense budget. In this respect, the continued advances being made by China and Russia will be of particular concern. The recent introduction of the JF-20 appears to show that the Chinese have made more progress in building their first stealth fighter jet than previously thought. Coupled with potential threats posed by Chinese missiles and other hardware, the proposed Defence budget maintains a priority on technology designed to counter "anti-access" weapons.
With this in mind, the Defense industry is looking with as positive a frame of mind as it can as 2011 unfolds and this appeared to be supported by a strong start to the year as evidenced by both M&A and contract activity.
Merger & Acquisition activity in the sector maintained momentum as cash rich larger firms look to secure market share, key technologies or market entry. There were no less than a dozen Defense-oriented mergers, acquisitions and partnerships in the past six weeks including:
- Summit Partners making an equity investment In M/A-Com Technology Solutions
- Elbit Systems acquiring companies in Brazil
- BAE Systems acquiring Fairchild Imaging
- Raytheon completing its acquisition Of Applied Signal Technology
As well as a plethora of M&A activity, total contract orders also maintained momentum and January again saw contracts comfortably in excess of a billion dollars with strong demand for radar technologies in particular evidence;
- Navy news included success for Lockheed Martin for production and development contracts totalling $360 m for the MH-60R Seahawk helicopter fleet
- Naval Air Systems Command awarded a $52 m contract to Raytheon to produce APG-79 AESA radars for F/A-18 Super Hornet aircraft
- Raytheon scored two major weapons systems contracts $475 m for Paveway with Kingdom Of Saudi Arabia and $145 m For Patriot GEM-T Missiles For State Of Kuwait
- The UK MoD’s Defence Equipment & Support organization signed a contract with BAE Systems and Thales Nederland for the maintenance and support of the seven S1850M volume search radars that were sold to the Royal Navy
- Saab received another order for its ‘ARTHUR’ weapon locating system from LIG Nex1, the prime contractor towards the Defence Acquisition Program Administration, Republic of Korea. Worth SEK 450 m ($69.4 m)
- Finally, in the 'Space Fence' project Raytheon and Lockheed Martin won $107 m deals to provide preliminary designs for a radar system to detect objects passing over Earth
There were also a number of notable announcements on the system and component front with UK-based Amplifier Technology introducing a number of GaN-based amplifier products targeting EW applications such as IED jamming. On the semiconductor front, Hittite launched a series of products while TriQuint announced a foundry agreement and separately, a contract with AFRL focused on GaN device development.
Looking ahead, DARPA has requested industry to find ways of combining DAC and high-power amplifier technology in a single device for electronic warfare, radar, and military communications systems. The emphasis appears to be focused on using the inherent integration capabilities offered by Si and SiGe technologies, but Strategy Analytics sees no reason why GaAs technologies could not be considered also, especially given the recent advances shown with BiHEMT process technologies.
Strategy Analytics analysis of the US DoD budget and examination of overall trends suggest that the overall Defense semiconductor market will maintain a growth trajectory over 2010 - 2015 with CAGR (compound annual growth rate) of just 6.1% versus previously projected 6.6% growth over 2009 - 2014. For more on this topic, see the Strategy Analytics report, US DOD Budget Cuts will Place Emphasis on Advanced Electronics Capabilities.