a new year and a new administration:what will it mean for the u.s. defense and security markets?
DESCRIPTION
With President-Elect Obama slated to take office on Jan. 20, 2009, questions are looming as to the direction the new President and his staff are prepared to take U.S. defense and homeland security. Under the Bush Administration, defense spending reached unprecedented levels due in part to wartime supplemental spending. Both the defense and security industries have grown accustomed to these high spending levels and are now concerned about the potential for significant changes in defense and security policies and spending. Moving forward into 2009 and beyond, it will be imperative for prime defense and security contractors and their suppliers to have a thorough understanding of the next administration’s plans for securing the U.S. both domestically and abroad. This will include having insight into future defense and security spending trends and understanding which programs will be top priorities and which ones will be cutback in the next four years. Industry Analysts, David Fishering and Lindsay Voss will discuss DHS and defense budget forecasts, key industry trends, policies to be implemented by the new administration and challenges it will face, as well as strategic recommendations for industry.TRANSCRIPT
A New Year and A New Administration:What will it mean for the U.S. Defense and Security
Markets?
David Fishering, Industry Analyst
Lindsay Voss, Industry Analyst
Aerospace and Defense
January 15, 2009
2
Focus Points
Economic Impact on Defense and Security
Key Defense Issues for the New Administration
Defense Budget Forecasts and Breakdown
Trends, Challenges, and Growth Areas for Defense
Security Budget Forecasts and Breakdown
Trends, Challenges, and Growth Areas for Security
Defe
nse a
nd
Secu
rity
Fin
din
g o
pp
ort
un
ity i
n 2
009
an
d B
eyo
nd
New Security Administration Policies and Changes
Conclusions
3<GPS>
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2001 2002 2003 2004 2005 2006 2007 2008P
erc
en
t (%
)
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
2001 2002 2003 2004 2005 2006 2007 2008
$ B
illio
n
Economic Impact on Defense and Security
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Spendin
g (
$ B
illio
n)
Defense Spending Supplemental Spending
0.0
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
12,000.0
14,000.0
16,000.0
2001 2002 2003 2004 2005 2006 2007 2008
$ B
illio
n
GDP Growth 2001-2007Defense/Security Budget 2001-2008 GDP Real Growth Rate 2001-2007
Defense Security
Historical Defense Spending, 1960-2008
Source: Frost & Sullivan
Source: Frost & SullivanSource: Frost & SullivanSource: Frost & Sullivan
4<GPS>
Key Defense Issues for the New Administration
Reequipping the Ground Forces and National Guard
Expanding Intelligence Capabilities While Improving Oversight
Building Secure Relationships with Allies
Determining the Appropriate Course for Soldier Modernization
Build the Non-Military Aspect of National Security
Stabilizing Operations in Iraq
New Focus in Afghanistan
ISR on the Pakistan Border
Acquisition Reform
Continuation of Supplemental Funding
Formation of More Joint Programs
Expanding the SOF
5<GPS>
94.0
96.0
98.0
100.0
102.0
104.0
106.0
108.0
110.0
112.0
114.0
116.0
2008 2009 2010 2011 2012
Fu
nd
ing (
$ B
illion
)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Gro
wth
(%
)
Funding Growth
58.0
60.0
62.0
64.0
66.0
68.0
70.0
72.0
74.0
76.0
78.0
2008 2009 2010 2011 2012
Fu
nd
ing
($
Billio
n)
-9.0
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0G
row
th (
%)
Funding Growth
150.0
155.0
160.0
165.0
170.0
175.0
180.0
185.0
190.0
195.0
2008 2009 2010 2011 2012
Fu
nd
ing (
$ B
illion
)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Gro
wth
(%
)
Funding Growth
U.S. RDT&E Budget Projection
U.S. O&M Budget ProjectionU.S. Defense Budget Growth
U.S. Procurement Budget Projection
Defense Budget Forecast
• The overall U.S. Defense budget is expected to increase slowly over the next three years with a CAGR of 1.1 percent
• O&M will increase with a 2.9% CAGR
• RDT&E will face notable reductions with a (4.9%) CAGR
• Procurement will increase overall with a 1.8% CAGR
• Increases in procurement are expected due to efforts to reequip the ground forces
• RDT&E will be reduced as several major aircraft programs transition to procurement, and other large and immature R&D programs are cutback
Source: Frost & Sullivan
Source: Frost & Sullivan Source: Frost & Sullivan
6<GPS>
32.9%
8.0%
35.3%
14.1%
2.0%7.7%
Aircraft Weapons Ships
Other Procurement Ammunition USMC
17.2%
6.8%
12.7%
9.1%
52.1%
2.1%
Aircraft Missiles Weapons & Vehicles
Ammunition Other Procurement JIEDDO
U.S. Navy/USMC Procurement Breakdown (2008)
U.S. Army Procurement Breakdown (2008)
U.S. Air Force Procurement Breakdown (2008)
Defense Budget Breakdown
36.7%
15.2%
45.6%
2.6%
Aircraft Missiles Other Procurement Ammunition
0.0
100.0
200.0
300.0
400.0
500.0
600.0
2007 2008 2009 2010 2011 2012
Fun
din
g (
$ B
illio
n)
Navy/USMC Air Force Army Joint
U.S. Budget Breakdown by Service
Source: Frost & Sullivan
Source: Frost & Sullivan Source: Frost & Sullivan
Source: Frost & Sullivan
0.0
100.0
200.0
300.0
400.0
500.0
2007 2008 2009 2010 2011 2012 2013
Spendin
g (
$ M
illio
n)
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Gro
wth
Rate
(%
)
Spending Grow th Rate
Look to Defense’s Top Growth Areas for Opportunities
Provide End-Users Practical Solutions Focus on Integration, Training and Services
Participate in the HOT C4ISR Programs
Source: Frost & Sullivan
Growth Areas in Defense
UAVs & S&R: Top Defense Growth Areas UAVs & S&R: Top Defense Growth Areas
Commercial SATCOM Near SpaceAEHF DTNWGS HawkeyeWIN-T/JBC-P AESATACSAT Targeting PodsCommercial Imagery SIAPReset and new manufacture SINCGARS SDR Interim setsNextGen/CANESRadar Wideband CommsForeign Government and Commercial Space Radar
UAS Services are an expanding market Segment Defense Technologies Meeting the Need
Unmanned
Systems
Unmanned
Systems
Weapons
Systems
Key Defense Industry Trends and Challenges
Ground
Vehicles
Military
MRO
Ships
Training
Simulation
• Increased focus on unmanned systems capabilities and less focus on the platform (Sensors, Data Links, Navigation, GCSs) • Companies are looking to expand their Unmanned Systems product offerings through partnering and acquisition • The UAS industry in the U.S. is increasingly becoming consolidated with approximately 80 percent of the market held by four
companies
• Significant budget resources will be allocated to upgrade programs for fire control systems• Missiles will have improvements to the seeker and control technology and will have “re-pours” or new propulsion packages
procured
• Army vehicle reset is having a profound impact on the U.S. Defense vehicle industry for both manufacturers and suppliers • Reset and refurbishment will positively impact vehicle procurement for the next 3-5 years • The Joint Light Tactical Vehicle program could face setbacks however since the U.S. Army is consistently placing orders for new
HMMWVs
• Parts Manufacturing Authority (PMA) parts manufacturers are increasingly be challenged by original equipment manufacturers in the military aircraft MRO space
• High aircraft engine cost in an emerging challenge for the military aircraft MRO market • The aging military aircraft fleet however is increasing the potential for MRO revenue over the next 5-10 years
• Budget constraints and an inability to sustain funding sources for T&S programs has been restraining the market• As resources are pulled to support ongoing conflicts in Iraq and Afghanistan, training and simulation has become less of a priority• The growth in popularity of unmanned systems is helping to spur T&S for this market area, particularly in the UAS market segment
• Despite being on the chopping block for the last two years, programs such as the Navy’s Littoral Combat Ship (LCS) will have some support from President elect Obama in 2009 and beyond
• It is expected however that the U.S. Navy’s acquisition system will change and this will have an impact on not only ship programs but other naval acquisitions programs as well
C4ISR
• Reequipping and expanding the ground forces and SOF will be key in 2009• Technology focuses will be on communications, Intelligence, and Surveillance • Possible funding shifts from the AF and the Navy to help rebuild the Army and the USMC • Programs facing cutbacks in 2009 and beyond: FCS, TSAT, JTRS, and Manned Airborne ISR
9
Security Budget Forecast
The DHS budget is expected to be up about 5%
from last year (the budget is still pending and
DHS is operating under a CFR)
Growth in the budget is expected to have a
CAGR of 4.5% between FY 2008-2012
Despite economic uncertainties and the Obama
Administration’s understatement of HLS thus
far, Frost & Sullivan sees very little change in
the trends of DHS budget authority
0
10
20
30
40
50
60
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Fiscal Year
Fundin
g (
$ M
illio
n)
0
2
4
6
8
10
12
14
16
Gro
wth
(%
)
Total Budget Authority Growth
CBP
22.0%
TSA
13.9%
A&O
1.0%
USCG
19.0%
NPPD
3.0%
Dept. Ops.
1.0%
ICE
10.9%
DNDO
1.0%
S&T
2.0%
FLETC
1.0%
USCIS
5.1%USSS
3.0%
FEMA
12.9%
FEMA Grants
4.0%
Source: Frost & Sullivan
Source: Frost & Sullivan
0.7% 4.8%
13.3%
81.2%
Management and
Operations
Research and
Development, Training,
and Services
Protection, Preparedness,
Response, and Recovery
Security, Enforcement,
and Investigations
Source: Frost & Sullivan
DHS Budget Breakdown by Category, FY 2009 DHS Budget Breakdown by Agencies and Offices, FY 2009
DHS Budget Forecast, FY 2007-2012
10
U.S. Security Market
Homeland Security Market Revenues by Segment
(U.S.), 2007-2012
0.0
3,000.0
6,000.0
9,000.0
12,000.0
15,000.0
18,000.0
2007 2008 2009 2010 2011 2012
Mill
ion
US
D
$11.0 Billion $15.5 Billion
2007 2012
10%
11%
38%8%
11%
4%
18%
The U.S. homeland security market is expected to witness modest growth over the next five years. High growth segments include CIP, Seaport, and Emergency Response
18.2%
4.5%
10.0%
9.1%
36.4%
11.8%
10.0%
18.6%
3.8%
11.6%
7.1%
38.6%
10.4%
9.9%
Land Border
Aviation CIP Maritime Seaport Mass Trans.
Emerg. Resp.
Source: Frost & Sullivan
11© 2008 Frost & Sullivan
www.frost.com
Key Security Industry Trends and Challenges
Border
Aviation
Critical Infrastructure
Maritime
Seaport
Emergency Response
Mass Transport
• COTS solutions to improve situational awareness are likely to replace the SBInet concept in the near-term• Immigration policy will be a major focus in the next administration, this may take away from a focus on technology deployment• Deadlines for programs such as US-VISIT are expected to be extended again in the future, despite large-scale rollout of biometric
passports and other identification methods
• Global development of small to mid- size airports (over 400 by 2028) is expected to increase demand for security measures• An average passenger growth of over 5 percent per year through 2012 will necessitate the deployment of more security technology• The potential increases in baseline international airport security standards could create growth opportunities• TSA procurement can lead to “false hope”, only a few technology deployments have led to sustainable business
• Mandates for increased security in the chemical industry along with infrastructure security grant programs have created demand in a segment that is extremely dependent on the occurrence of events
• Infrastructure is expected to be a focus of the next administration but spending could be targeted at improving rather than securing• DHS has nearly $300 million that has been marked for cyber security; potentially lucrative this segment still has many uncertainties
• Having taken control of the Deepwater program Congress has now stripped the Coast Guard of its management rights, setting the program even further behind schedule
• Maritime Domain Awareness remains a top priority and there is a major push to deploy integrated C4ISR systems to fill this gap
• Mandates for 100 percent scanning and screening of cargo have necessitated the development of this market.• Advanced technologies are meeting staunch resistance by government, putting deployment opportunities in question• Supply chain security, trusted shipper and verification programs have become a favorite of lawmakers over inspection technology• Shipping container traffic is expected to grow about 9 percent year over year by 2015 creating a need for more security systems
• Mass transport systems are increasingly being seen as “soft” targets for both criminal and terrorist activity. Intelligent & durable surveillance systems within “rolling stock” are key revenue generators.
• Emphasis on low TCO, self-diagnosing CCTV systems, automatic wireless image downloads and innovative passenger screening technologies will push R&D efforts within this threat domain.
• Interoperability remains an issue at the state and local level. Governance and budgets have become the biggest restraint despitethe availability of solutions. CBRNE detection technology is facing major challenges in the absence of a major CBRNE event
• At the strategic level, emergency managers are demanding integrated C3 systems to improve situational awareness and response• The emergence of USNORTHCOM and its three incident response units could make it a key influencer, despite its support only role
Provide Solutions for Today’s Security Problems
Understand and Meet the Needs of the End-UserIntegration of COTS Solutions
Tap Into the Global HLS Market
Hot Spots in Security
Sensors System of Systems
Systems
Communications
Cyber Security
Critical Infrastructure Protection
New Administration Policies and Challenges
Stated Policy Goals
• Defeat Terrorism Worldwide
• Prevent Nuclear Terrorism
• Strengthen American Biosecurity
• Improve Intelligence Capacity and Protect Civil
Liberties
• Protect Critical Infrastructure
• Modernize America’s Aging Infrastructure
Likely DHS Focus Under Napolitano
• Developing CONOPS for the National Guard
and NORTHCOM
• Redeveloping and Executing the Virtual Fence
Concept on the Border
• Enhancing Federal, State and Local
Cooperation
Challenges
• Maintaining Focus and Execution Through the
Transition Process
• Developing a More Mature Acquisition
Process to help increase the Likelihood of
Success
• Supporting R&D Activities for Innovative
Technologies and Small Businesses
• Strengthening the Public-Private Partnership
• Securing the Border and Overhauling the
Immigration System
• Creating Interoperability of C4ISR Systems
across the Federal State and Local Agencies
• Fulfilling Mandates for 100 percent scanning of
air and sea cargo
• Understanding and Defining the role of the
Military in Homeland Security
Conclusions
Defense and Security Funding will be stable through 2010
Top Factors Driving Growth in the Defense Market will be Reequipping the troops and Ongoing Wartime Operations
Top Factors Driving Growth in the Security Market will be the fulfillment of unmet needs from the last administration and the ever present demands for security in times of uncertainty
The Downturn in the Global Economy is expected to have a minimal Impact on the U.S. Defense and Security Markets
Any major changes in Defense and Security policy or spending are unlikely in the near-term: Technologies and Programs that are getting the job done will be well positioned under the new administration
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