Frost & Sullivan Market Insight: Global C4ISR: The Growth of "Transitioning Markets"


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Rapid technological developments are breeding disruptive technologies in the defence industry more than ever. Traditional defence markets no longer offer strong and reliable growth opportunities and suppliers are being forced to develop business in adjacent markets including new geographies, industries and end-users.

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Frost & Sullivan Market Insight: Global C4ISR: The Growth of "Transitioning Markets"

  1. 1. September 2012 Global C4ISR: The Growth of “Transitioning Markets”Steven Webb, Vice President and Sabbir Ahmed, Consultant, Aerospace & Defence Practice “We Accelerate Growth”
  2. 2. Global C4ISR: The Growth of “Transitioning Markets” Market Insight Introduction Rapid technological developments are breeding disruptive technologies in the defence industry more than ever. It is not only impacting defence majors’ portfolio capabilities but also creating unexpected competition, particularly in niche areas. This is particularly the case for C4ISR, which is a complex web of sub-systems. It is difficult for organisations to keep up with breakthrough technologies at each segment level due to the significant investment involved. This puts organisations at risk of being reduced to a “me-too” company with an ordinary product portfolio generating sub-optimal growth performance. The correct application of new technologies to products and systems goes a long way in differentiating a winner from a loser in C4ISR contracts. A further complication for suppliers is the current government austerity measures that are impacting defence budgets in Western markets. Traditional defence markets no longer offer strong and reliable growth opportunities, and suppliers are being forced to develop business in adjacent markets, including new geographies, industries and end users. Key Transitioning Market Dynamics Frost & Sullivan research indicates that countries across the globe can be broadly categorised into three types of C4ISR capability: Advanced, Transitioning and Limited Capability. The parameters considered are as follows: Country Scenario Capability *Market Size Sign Remarks Tier 1 A Advanced >=$500M +Ve, +Ve * Total C4ISR Tier2 B Advanced <$500M +Ve, -Ve Or, Tier2 B Transitioning >=$500M -Ve, +Ve - Limited Tier3 C <$500M -Ve, -Ve - Capability While traditional Western defence markets, including the U.S., major European nations as well as Canada, Australia and Japan, make up the Advanced Markets (considering two major criteria: C4ISR capability level being advanced, and aggregate C4ISR spend over 2012-2021 exceeding $500 million) the Transitioning Markets include most of the major emerging countries with a maturing or transitioning C4ISR capability and anticipated aggregate spend greater than $500 million. Transitioning Markets will eventually have intercept-resistant networked forces and significant budgets, so they are markets that defence majors should be pursuing. This group of countries includes BRIC (Brazil, Russia, India and China), plus a handful of other growing economies (Mexico, Turkey, Indonesia, South Korea and Saudi Arabia). Goldman Sachs calls this group Growth Markets (sans Saudi Arabia) and has suggested global blue-chip organisations should focus on winning business in these countries. However, from a C4ISR perspective, we have termed these countries Transitioning Markets, as they evolve their C4ISR eco-system from limited/disparate/legacy systems to a networked/advanced system similar to what we now see in Advanced Markets. The remaining countries are grouped as Limited Capability Markets, as they are not yet focused on developing networked capability and do not present the required scale of revenue opportunity.© 2012 Frost & Sullivan Page 2
  3. 3. Global C4ISR: The Growth of “Transitioning Markets” Market Insight C4ISR Market: Revenue Trends by Region (Global), 2012-2021 60 50 40 Spending ($Billion) 30 20 10 0 Africa Asia Pacific Europe Latin America Middle East North America Note: All figures are rounded. The base Year is 2012 Source: Frost & Sullivan analysis On the subject of C4ISR Transitioning Markets, Goldman Sachs has proposed that these Growth Markets will have a combined share of global GDP of 46 per cent by 2050, whilst Mature Markets (U.S. and Europe) will witness a decline in global GDP share to 31 per cent. Frost & Sullivan analysis suggests that this will almost certainly not be the case for defence expenditure. Though there seems to be a strong positive correlation between a country’s GDP and defence spend, the U.S. still constitutes approximately 41 per cent of global defence expenditure, while representing about 24 per cent of global GDP in 2012. North America (the U.S. has 95.1 per cent of C4ISR spend in 2012, with Canada and Mexico being the other two constituents) and Europe’s contribution to global C4ISR expenditure is significantly higher at 46.1 per cent and 21.1 per cent, respectively. This jigsaw of complex technology and skill sets still remains the preserve of Western defence forces. However, notwithstanding current dominance, Frost & Sullivan research indicates that by 2021, North America’s share of global C4ISR expenditure will notably diminish, while that of Europe’s will hold steady, underpinned by countries such as Russia, Turkey and a few of the Eastern European markets. This is represented in the graph below: C4ISR Market: Spend Pattern Changes Over 2021 1.1% 1.3% 21.1% 26.1% 38.5% 46.1% 21.6% 21.7% 3.7% 7.9% 6.5% 4.4% Africa Asia Pacific Europe Africa Asia Pacific Europe Latin America Middle East North America Latin America Middle East North America Note: All figures are rounded. The base Year is 2011 Source: Frost & Sullivan analysis© 2012 Frost & Sullivan Page 3
  4. 4. Global C4ISR: The Growth of “Transitioning Markets” Market Insight This decline in the C4ISR global share of Advanced Markets is not so much attributed to a reduction in Western market expenditure, but rather significant investment growth in most Transitioning Markets. Key Opportunities and Entry Strategies One of the three growth strategies that defence majors are currently pursuing is expanding their respective geographic footprint. This is a sound strategy given that defence budgets in the Transitioning Markets are on the rise due to economic growth. The second strategy available to organisations is expansion into adjacent commercial markets, where skills and capabilities can be applied. The final strategy is providing improved value for money through efficiency savings in both project and support, and increasing the use of Commercial Off the Shelf (COTS) technologies/products. These three approaches should be seen as complementary. There is a strong trend toward governments identifying common threats across multiple security agencies. Countries such as Mexico and Brazil are likely to present the defence majors with economies of scale and the end users the required efficiency. This can be achieved through increasing the commonality of systems used by different end-user groups. Frost & Sullivan anticipates that common products, systems, and services will increasingly fulfil the requirements of multiple agencies in a country, under a unified command. This has also triggered programmes in most of these countries to integrate C2, communications, IT, surveillance (including UAS ground stations and radars), C-IED and detection assets under a scalable C4ISR architecture. Transitioning Markets also present opportunities in Land C4ISR systems; military vehicles are being turned into a small situational awareness hub with multi-role functionality. Most wheeled/armoured fighting or C2 vehicles that have recently been contracted by MoDs in countries such as Brazil, Turkey, India, South Africa and Saudi Arabia have computing systems on board an advanced open Vehicle Electronic Architecture (VEA). This enables integration of all elements of total situational awareness (communications, surveillance, navigation, detection, force tracking (blue/red), fire control, and survivability/protection systems (i.e., Counter-IED)) into a common display with the aim of providing comprehensive force protection on the frontline. On the airborne side, the demand for airborne C2, Electronic Support/Counter Measures (ESM/ECM) and surveillance/Maritime Patrol Aircraft (MPA) is expected to grow steadily due to the increasing need for total situational awareness, survivability and qualitative air superiority. This is driven by the requirement of these countries to control the technologies that run those mission-critical assets. Aside from projected upgrade opportunities, particularly C2 integration and AMD projects, defence integrators are advised to consider what is not available in the current inventory of a particular service. On top of selling special-mission air platforms and land vehicles, self-protective suites, electronic warfare systems and simulation equipment are some of the most promising segments. The market is starting to adopt outsourcing of C4ISR as a service, primarily to satisfy immediate mission needs, and necessitates that defence majors develop a strong proposition related to managed solutions for existing or anticipated capability gaps. They need to find a business model that allows them to eventually hand those managed assets back to the end user over a good period of time through a systematic training and support program. This will help suppliers influence future demand and requirements for both adjacent and scalable missions. Defence majors, however, need to understand that defence cooperation and economic transactions go hand in hand, which is deeply tied with regional geo-politics. In the present environment, most major defence acquisitions, particularly in the Transitioning Markets, come through state-sponsored deals under a greater framework of strategic cooperation. The U.S.-Brazil Defence Strategic Dialog (DSD), agreed upon following the U.S. president’s visit in April 2012, is a case in point, whereby the U.S. seeks to keep Brazil, the leading regional power, under its sphere of influence and Brazil seeks to benefit from technology transfer toward a stronger defence industrial© 2012 Frost & Sullivan Page 4
  5. 5. Global C4ISR: The Growth of “Transitioning Markets” Market Insight base. Similar agreements, often in different contexts, exist between U.S.-India, U.S.-Indonesia, U.S.-South Korea and U.S.-Turkey relationships. Further, if we take the case of Saudi Arabia, agreements are mostly characterised by government-sponsored procurement, mostly from the U.S. These agreements have become a higher priority due to China’s increasing influence in these countries, resulting in a thriving Foreign Military Sales (FMS) market. Defence companies, including those with compelling niche capabilities, should consider significant presence in the U.S. and endeavour to become part of the FMS deals through maintaining relationships with the Pentagon, services and defence prime contractors. C4ISR Market: Country Attractiveness Grid (Global), 2012-2021 Sector with most attractive market in the High world over 2012-2021 High India 10% Saudi Arabia Brazil 7.5% Growth Rate South Koria Medium Medium 5% US ($437.39B) UK 2.5% France Germany Low High $30B Medium $10B Low Low High (>$40B) Level of C4ISR spending Australia Medium ($20bn-$40B) Turkey Low (<$20B) Source: Frost & Sullivan analysis The U.S., including its prime contractors, needs to keep in mind that countries such as France and Russia are also increasing their focus on pursuing a share of lucrative government-sponsored deals. Increasingly, they appear willing to share critical technologies and become a real defence trade partner through not just exporting, but also importing defence articles from the partner countries. France’s defence deals with Brazil and, of late, with India are cases in point. Whilst Saudi Arabia remains a strong market for U.S. primes, Turkey is trying to entice major countries such as, Italy, South Korea and the U.K., along with the U.S., through partnerships with local prime contractors under government direction and incentives. Indonesia’s defence spending has only recently started to increase and, in the absence of significant government-sponsored campaigns from Western suppliers, South Korean companies are filling the void through programme-based cooperation. It is essential that defence contractors focussed on Transitioning Markets are sensitive to end users’ requirements and to focus on their ability to procure increasingly sophisticated C4ISR systems as economies continue to strengthen. Defence primes need to work with end users, decision-makers and influencers to shape demand for less complex and less expensive C4ISR capabilities for land-based applications, and more complex systems for predominantly airborne/ship-board/space-based applications at the mature stage of development. For countries with a significant maritime presence, including Brazil, India, Indonesia and Turkey, they should equally push for Naval C4ISR systems.© 2012 Frost & Sullivan Page 5
  6. 6. Global C4ISR: The Growth of “Transitioning Markets” Market Insight Last but not least, a key consideration of any country-based strategy is the development of local industrial assets, and consideration of offsets is vital. The defence market has always been one of strong consolidation and partnerships, and for defence primes to sufficiently exploit the opportunities presented in the Transitioning Markets, the approach should be no different. Those companies willing to transfer and license technologies, and form joint ventures, will be well-positioned for success. Frost & Sullivan’s new report on Global C4ISR is available now. To learn more about this report, please contact or Frost & SullivanFrost & Sullivan, the Growth Partnership Company, works in collaboration with clients to leverage visionary innovationthat addresses the global challenges and related growth opportunities that will make or break today’s market participants.Our “Growth Partnership” supports clients by addressing these opportunities and incorporating two key elements drivingvisionary innovation: The Integrated Value Proposition and The Partnership Infrastructure.• The Integrated Value Proposition provides support to our clients throughout all phases of their journey to visionaryinnovation including: research, analysis, strategy, vision, innovation and implementation.• The Partnership Infrastructure is entirely unique as it constructs the foundation upon which visionary innovationbecomes possible. This includes our 360 degree research, comprehensive industry coverage, career best practices as wellas our global footprint of more than 40 offices.For more than 50 years, we have been developing growth strategies for the global 1000, emerging businesses, the publicsector and the investment community. Is your organization prepared for the next profound wave of industry convergence,disruptive technologies, increasing competitive intensity, Mega Trends, breakthrough best practices, changing customerdynamics and emerging economies?Contact Us: Start the DiscussionJoin Us: Join our communitySubscribe: Newsletter on “the next big thing”Register: Gain access to visionary innovationwww.aerospace.frost.comCONTACT US 877.GoFrost (877.463.7678) • •