Changing Market Forces Send The Military/Aerospace Sector Marching

F-35 fighters

Falcon 9 rocket

Take even a cursory look at the military/aerospace market and you would think business is pretty good, with almost a daily sprinkling of announcements of contract awards for mostly system upgrades, but also new-start programs. Yet that may be about to change.

The Pentagon announced in early January that it plans to cut $78 billion in defense spending over the next five years. And this doesn’t include the $100 billion in proposed cost savings the Department of Defense (DoD) began working on last year to cut poorly performing weapons programs.

Business has been particularly tough for the leading major defense companies, making last year a challenge for the sector. “2010 was a year of adjustment for the industry overall,” says Eric Higham, North American director of the Strategy Analytics Advanced Defense Systems market research group.

But even with new cuts in the U.S. defense budget, some analysts are projecting procurement opportunities in a number of areas, particularly in upgrades and modernization programs. “Defense companies with advanced electronic technology capabilities will see returning growth,” Higham notes. “Demand will return with a particular emphasis on implementing advanced technologies for existing programs.”

“There’s continued interest in innovation, particularly as it relates to improvements on already-proven technologies,” says Steve Pudles, CEO of API Defense USA, a prime contractor in engineered systems, components, and secure communications. Pudles says that the DoD, like private companies, is under pressure to spend wisely. “There’s keen interest in ensuring the programs in which the DoD chooses to invest are completed on time and on budget.”

The Pentagon will submit its annual budget request to Congress on February 14. Industry analysts anticipate the DoD will ask for $554 billion in fiscal 2012, not counting what it spends on current war-fighting efforts in Afghanistan, Iraq, and Pakistan. Defense Secretary Robert Gates, in a Pentagon briefing in early January, also called for freezing civilian pay and reducing troops by up to 47,000 starting in 2015.

Some Room For Optimism
While some defense programs are expected to take a hit with budget cuts, several companies are experiencing growth in the mil/aerospace sector.

The Pentagon has already delayed acquisition of Lockheed Martin-built F-35 Strike Fighters (Fig. 1)—the plan called for delivery of 325 F-35s through fiscal 2016, instead of the 449 that were originally planned—and additional cuts are likely. But the DoD says it will buy 41 Boeing F/A-18 aircraft over the next three years to help offset the slow production of the F-35.

Honeywell International Corp. reported “double digit” increases in late 2010 and said that its sales in 2011 may climb as much as 9% from 2010, mostly from commercial aircraft parts orders.

Aerojet, a GenCorp company, said that it would expand its presence in the Huntsville, Ala., community over the next few months as part of a business development outreach plan to its government and prime customers that are located in the Huntsville area. The plan includes hiring 25 local engineers.

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“Growing Aerojet’s technical capabilities in Huntsville will allow us to better serve our customers and expand Aerojet’s business base,” says Scott Seymour, Aerojet’s president and GenCorp’s president and CEO. Seymour also said the expansion will enable Aerojet to examine new product opportunities related to the company’s current business base.

Multilayer printed-circuit board (PCB) contract manufacturer Hunter Technology Corp. also expects growth in 2011.

“We’re headed into the first half of 2011 with a record backlog,” says Joseph F. O’Neill, Hunter’s president. “We don’t have macroeconomic data that supports this level of business. We may just be seeing a larger share of a shrinking market, or just an increased market share. But we feel strongly that if we understand the objectives of our customers and work tirelessly to help our customers meet their objectives, then they will succeed and in turn we will succeed.”

O’Neill sees a couple of market forces at work in his business. One is heavy activity in unmanned aerial vehicles (UAVs) and related programs. Also, he says, “Man-portable systems are driving a lot of engineering support for us in thermal management, weight reduction, and engineering for reliability.”

One of the items on O’Neill’s electronics manufacturing watch list is anti-counterfeiting. “As markets heat up, supply chains will be stretched and counterfeiting activity will shift into high gear,” he says.

Another issue is the shift from lead in PCBs to tin whiskers for certain applications under the European Union’s Restrictions on Hazardous Substances (RoHS) regulations. “Reliability and life-cycle require mitigation of all sorts of risks, so tin whiskers remain a threat,” O’Neill says.

Then, there’s the International Traffic in Arms Regulations (ITAR), which control the export and import of defense-related products on the U.S. Munitions List. “As the regulations get updated, there will undoubtedly be a new set of flow downs and business considerations to be understood and managed,” O’Neill says.

Most of the growth in the mil/aero sector is in communications, command and control, data collection, and intelligence gathering, including surveillance and reconnaissance, says David Johnson, a systems and technology analyst for Bourns Inc. “A lot of our opportunities are coming out of that sector,” Johnson says.

“These are the areas where we see the bulk of activity and where we see the growth,” says Jackie Mancini, Bourns market director.

Bourns has organized its business into two major divisions, one for circuit protection and one for resistive products. “We see the opportunities split about 70/30 between the two divisions, with circuit protection being the higher number,” notes Johnson.

Emerging Markets
Most major defense/aerospace companies are also taking advantage of their expertise in information technology to improve their position in the fast-growing cyber security market. Analysts are projecting federal government spending in this area could reach $12 billion by 2014. That’s a 48% jump over the almost $8 billion budgeted in 2009.

Raytheon, Lockheed Martin, Northrop Grumman, and Boeing have all initiated cyber security business units in the last two years. Additionally, Northrop Grumman very recently formed a partnership with the University of Maryland Baltimore County Research Park Corp. aimed at developing technologies covering a range of cyber threats.

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The Northrop Grumman Cync Program is accepting applications from high-potential, early-stage companies from across the country looking to commercialize and develop their technologies. Participants will be provided with office space, business support services, and academic resources as part of the development program.

Raytheon recently acquired Trusted Computer Solutions—its seventh cyber security market acquisition since 2007—to bolster its cyber defense capabilities. The new company will be known as Raytheon Trusted Computer Solutions and will be integrated into Raytheon’s Intelligence and Information Systems business.

Boeing’s Cyber and Information Solutions group now has major operations in the U.S. and Australia. And, Harris Corp. has formed its Harris Cyber Integrated Solutions unit.

The UAV Market
The UAV market also continues to be one of the most dynamic growth sectors in the aerospace industry, according to Teal Group analysts. Teal Group’s 2010 market study estimates that UAV spending will more than double over the next decade from current worldwide UAV expenditures of $4.9 billion annually to $11.5 billion, totaling just over $80 billion in the next 10 years.

The study suggests that the U.S. will account for 76% of the worldwide R&D spending on UAV technology over the next decade and about 58% of the procurement. “We expect that the sales of UAVs will follow recent patterns of high-tech arms procurement worldwide, with Europe representing the second largest market, followed very closely by Asia-Pacific,” says Steve Zaloga, a Teal senior analyst.

The Teal study also suggests that smaller companies can compete successfully in the UAV market as AAI Corp., Insitu, General Atomics, and AeroVironment have demonstrated. Prime contractors are buying the smaller companies, with Advanced Ceramics, AAI, Insitu, and Athena Technologies all acquired within the past few years. Swift Engineering also sold its BAT UAV line to Northrop Grumman.

In December, the U.S. Naval Air Systems Command awarded Lockheed Martin and Kaman Aerospace a $45.8 million contract for UAV systems for a U.S. Marine Corps evaluation of unmanned cargo resupply in an operational forward deployed environment.

NASA: New Course?
NASA, meanwhile, is significantly changing how it does business, launching the first of what could be an entire fleet of manned space exploration systems that were outsourced to private industry. It’s part of a five-year, $6 billion program, but it has already run into political flak.

Space Exploration Technologies Corp. built a Falcon 9 rocket (Fig. 2) that launched a capsule designed to carry cargo and eventually astronauts from Cape Canaveral in early December. The space vehicle, designed to circle the earth twice before landing in the Pacific, was part of a new space initiative signed into law in October that involves sending astronauts into orbit on commercially owned and operated spacecraft. Several members of Congress have questioned the plan and have approved legislation that would prohibit NASA from cancelling or starting any major programs without first getting legislative approval.

Meanwhile, NASA has been negotiating contracts with 350 small businesses the agency deemed had the best proposals to address critical research and technology needs for its programs and projects. The programs address specific technology gaps in NASA missions, but complement other agency research investments. The proposals are part of NASA’s Small Business Innovation Research Program (SBIR) and the Small Business Technology Transfer program. NASA has received 1876 Phase 1 SBIR proposals.

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The Defense Advanced Research Projects Agency (DARPA) may also have some work cut out for industry vendors. DARPA solicitations at FedBiz Opps recently listed 88 DARPA contract opportunities.

Global Competition
There’s no shortage of competition globally. The European Aeronautic Defense and Space Co. (EADS) has been pursuing lucrative deals wherever it can find them outside of Europe, including the United States. Hoping to enhance its activities in the U.S. and strengthen its relationships with U.S. suppliers, EADS North America and its Airbus Americas operation recently set up a joint U.S. sourcing office based at the Airbus Americas headquarters in Herndon, Va.

EADS spends more than $11 billion annually to support its supplier base in the U.S. The new procurement office plans to facilitate closer contact with the group’s existing suppliers as well as facilitate new opportunities for additional procurement in the U.S.

“This is a major step forward to enhance our procurement activities in the U.S. and be closer to the different players in the supply chain that form a critical part of our product process,” says Klaus Richter, executive vice president for EADS Group Procurement.

At the same time, EADS says that shrinking military budgets are pushing it into regions where it sees growing opportunities for its defense systems. Brazil, India, Qatar, and Saudi Arabia are on their short list for fighter jets, helicopters, and surveillance systems.