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Examining the Impact of Budget Constraints on Future Defense Technology Investment

June 14, 2011
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In this month’s issue we provide an overview of the defense-focused analysis presented recently at Strategy Analytics analyst forum at MTTS/IMS 2011 as well as summarizing some of the major events in the month May.

On the news side for May, events were dominated by the Indian $10.5 B deal for 126 Medium Multi Role-Combat Aircraft (MMRCA) – the country’s single largest Defense deal – next-generation fighter aircraft contest. One of the largest in value and scope in that country’s history and with great import for numerous main- and sub-contractors, the contest has seen the US and Russia platforms knocked out of the competition leaving the Rafale and the Typhoon as the primary contenders. No doubt, the role of ITAR in the final decision making process will be a talking point though Boeing remains in strong contention in other areas with a potential $ 4 B contract supplying the company’s C-17 transport aircraft.

On the systems front, Raytheon and Northrop Grumman were involved in radar and communications contracts. Raytheon received a contract from Boeing for the second procurement in the four-year Multi-Year III program to produce and deliver APG-79 AESA radars for the Super Hornet and also produced the first group of S-band transmit/receive (T/R) modules for the U.S. Navy's Air & Missile Defense Radar program. Northrop Grumman was awarded a $372 M contract by the US Air Force to begin designing the AESA antenna system as part of the B-2 EHF Satcoms program.

Merger and acquisition activity in the sector continued at the same pace with seven Defense-related mergers and acquisitions in the news over the past four weeks including Microsemi completing its acquisition of AML Communications and Kratos entering into a definitive agreement to acquire all of the outstanding stock of Integral Systems.

Defense budgets have gone through numerous cycles that can be characterised by specific periods. As an example, the “cold war” period saw strong support for Defense budgets driven by nationalism and a drive towards developing platforms that were “higher, faster, further” than the other guys. Following 9/11, the global war on terror signified a new era of conflict where the enemy was not necessarily clearly defined in terms of national borders and military branches. Budgets went through a growth phase as a new emphasis on ISR capabilities was coupled with urgent operational requirements, e.g. counter IED equipment, being defined by theatres such as Iraq and Afghanistan. The current situation sees multiple fronts with both asymmetric threats continuing as well as more conventional theatres in play such as Libya. This should ideally protect budgets but global economics have forced governments to rethink Defense priorities as part of their efforts to balance the books.

The US is the largest global spender as far as budgets are concerned and will continue to be so for the foreseeable future. However, based on current and projected budgetary requests, our analysis suggests that US Defense spending will see a decline over the next ten years with a negative CAGR (compound annual growth rate) of 1 percent through 2021 and the situation will be even worse in Europe.

On the other hand, capabilities and pressure from emerging national powers as well as ongoing threat scenarios will mean the spending slowdown will not be universal and across the board for all Defense platforms and systems. There is a balancing act being played out between conventional and asymmetric theatres and we are starting to see hybrid warfare scenarios where there are elements of both conflict types in play. Regardless of the type of conflict, technology is the differentiator which will allow allied forces to maintain an edge over the opposing forces and for Defense platforms, this means that while budgetary pressures remain, there is an opportunity for emerging platforms as well as a focus on upgrading existing capabilities.

If we take US expenditure on air platforms as an example (excluding RDT&E), Strategy Analytics estimates that US DoD budget expenditure on all major aircraft platforms exceeded $27 B in 2010 with UAS platforms accounting for 18 percent of expenditure in 2010. We see expenditure on conventional platforms remaining flat through 2021. On the other hand, UAS expenditure is expected to grow and account for 31 percent of expenditure by 2021. This translates to US military expenditure on UAS platforms growing at a CAGR of 3 percent through 2021 growing from an estimated $5 B in 2010 to over $6.5 B in 2021.

The other dynamic in this respect relates to the systems being implemented on these platforms as a result of expanding mission envelopes. The electronic content in a UAS platform depends on payload capacity, mission, degree of redundancy, number of sensors integration levels. The proportion attributable to electronics on a UAS platform will depend on the size of the system and mission objectives, which in turn determine the number of sensors and associated electronics required. As these systems and mission objectives become increasingly sophisticated, Strategy Analytics forecasts a 3% CAGR growth in the market for electronic systems from 2011 to 2021, resulting in an electronic systems market worth over $2.1 B. EW, radar and communications systems will account for around 64% of this demand.

Regardless of the platform, communications, EW and radar systems all have to work in the electromagnetic spectrum and the capabilities that these systems have to bring are expanding while at the same time converging around specific parameters such as broadband performance, power, linearity and digitization.

Looking at the communications systems in general, common trends across the board include a move towards higher frequencies, e.g. land radios moving through to 2.7 GHz, coupled with a need to have multi-mode, multi-band capabilities that will enable these radios to act as nodes in the total battle space. This is coupled with an emphasis on data and efficient spectrum use that will drive linearity requirements as well as the continued development of SDR and cognitive radio capabilities.

For RF-based EW systems, the trends point towards what may be described as a “no channel” concept in which the systems are tasked with looking at complete frequency range resulting in multiple channels being handled by one receiver. For jamming applications this has to be coupled with high power capabilities across the frequency range which could conceivably extend through to Ka-band.

Finally, the evolution of radar systems towards AESA (active electronically scanned array) is driving the use of compound semiconductors as thousands of T/R modules provide the basis for multi-role capabilities as well increasing reliability while the scalability enables the use of these advanced radars on an increasing numbers of platforms.

The next step in examining these systems is to look at the enabling RF technologies of which there is a wide range from Si, SiGe, GaAs, GaN as well as TWTs, with each technology offering specific advantages. While there is a temptation to target a specific technology as representing the panacea for all applications, the reality is that no one semiconductor technology solution that will singularly satisfy every system requirement. The result will be segmentation of functionality with different technologies used side-by-side depending on the requirements of the system.

Strategy Analytics’ analyst forum took place on Tuesday 7th June at MTT-S and examined the broad theme of “Commercial and Defense Market Opportunities for RF Semiconductors” and will be presenting a similar forum at EuMW in Oct. In conjunction with Microwave Journal, Strategy Analytics is presenting a webinar on June 28 on GaN Market Opportunities. Registration is free and available on the Resources page of Microwave Journal.

Recent Articles by Asif Anwar, Director, Strategy Analytics

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