The market for an IR&D 127 mm PGM


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An independent study from 2008 of the possible worldwide market for a independently-financed, precision-guided 127 mm naval gun round

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The market for an IR&D 127 mm PGM

  1. 1. James Hasik The marketability of an IR&D 127 mm naval PGM 26 June 2008 Summary At a business planning meeting in November 2006, we were asked to consider the pos- sibility of marketing an export-oriented, precision-guided munition for 127 mm naval guns designed with independent research and development (IR&D) funds. The broad request assumed GPS/INS guidance, a unitary explosive payload, and no rocket booster. Four recent developments led us to take up this question again: ✦ The recent demise of Raytheon’s Extended Range Guided Munition (ERGM) and Alliant Techsystems’ Ballistic Trajectory Extended Range Munition (BTERM) pro- grams, which failed to produce reliable test articles ✦ Funding difficulties for the Zumwalt-class destroyers, which could lower expectations of sales of the 155 mm Advanced Gun System (AGS) and its Long-Range Land At- tack Projectile (LRLAP) ✦ Finmeccanica’s reported test successes with the 127 mm version of its Vulcano GPS/INS-guided round ✦ The general trend towards precision guidance in cannon and missile artillery Our quick review suggests that marketing a round worldwide could be modestly profit- able (in the tens of millions of dollars) even without the US Navy’s involvement. Landing the US Navy as a client could increase profits into the low hundreds of millions of dol- lars, and in any case, greatly increases the overall likelihood that the project would be profitable. We must note that this is a preliminary opinion that would require further re- search before we could express greater confidence about the initiative. Whoever the customers, however, Finmeccanica has a considerable headstart with its Vulcano round, so any competitive effort must consider its established marketing posi- tion. Potential customers include eight modern navies with expeditionary ambitions. As shown in the chart below, almost half of all 127 mm naval guns in service worldwide are with the US Navy, and on two classes of ships: the Ticonderoga-class cruisers and
  2. 2. the Arleigh Burke-class destroyers. All 44 guns on the remaining Ticonderogas, and 31 of the 62 guns on the Arleigh Burkes, will eventually be Mod 4 guns with the digital fire control assumed necessary for firing PGMs. Assuming for the moment, however, that all the guns will eventually be modified for PGMs, the total installed base of BAE Systems and Finmeccanica’s mounts worldwide consists of approximately 222 guns. From this number, we tentatively consider the ad- dressable market to include 161 guns: ✦ Italy and the Netherlands are jointly funding Finmeccanica’s development of the 127 mm version of its Vulcano subcaliber GPS/INS PGM. The Vulcano is being designed for compatibility with not just Finmeccanica guns, but BAE Systems’ Mark 45 Mod 4 guns as well. Germany seems to be a further launch customer with its four planned F-125 frigates. Amongst them, the navies of these three countries have or are plan- ning to have twenty-eight (Finmeccanica-built) 127 mm guns. [222 – 28 = 194] ✦ As Finmeccanica is designing the Vulcano for compatibility with BAE Systems’ Mod 4 guns, we are assuming that navies operating guns built by Finmeccanica are part of the addressible market, unless they have already signed up to purchase the Ital- ian round. 0 20 40 60 80 100 120 USA Italy SouthKorea Australia Japan Taiwan Peru Turkey Venezuela Spain Netherlands Germany Greece Argentina NewZealand Denmark Thailand Nigeria Current and planned installations of 127 mm naval guns worldwide 2 | IR&D and a 127 mm PGM • 26 June 2008! James Hasik Marketing targets include the USA, South Korea, Australia, Japan, Taiwan, Spain, Denmark, and New Zealand. All own at least some guns made by BAE Systems. BAE Systems guns are shown in red. Finmeccanica guns are shown in green.
  3. 3. ✦ Peru, Greece, Turkey, Nigeria, Thailand, and Argentina do not seem likely customers in the next ten years or so for PGMs. While this could change, we are conservatively excluding them from consideration of the targeted market. [194 – 27 = 167] ✦ The six guns on board the Marescal Sucre (Lupo)-class frigates of the Venezuelan Navy are probably off-limits, even if the proposed PGM is developed outside the United States, regardless of any other military spending underway, simply so as not to irritate the US government. [167 – 6 = 161] Of course, this would change with a meaningful change of government in Caracas. Thus, the probable market for the proposed PGM includes the following navies: country planned # of 127 mm guns ship classes United States 106 Ticonderoga, Arleigh Burke South Korea 15 KDX-I, KDX-II, KDX-III Australia 11 Hobart (AWD), Anzac Japan 11 Kongo, Takanami, Atagi Taiwan 8 Keehung (Kidd) Spain 6 Àlvaro de Bazàn Denmark 2 Absalon New Zealand 2 Anzac Total 161 Outside the US 55 The split between 106 guns in the US and 55 guns outside the US is particularly impor- tant for the economic prospects of the project, as is the take-up rate for PGMs in these guns. Sales targets could start with a modest package of approximate sixty rounds. The next question is how many rounds each of these eight navies might buy. Even without analyzing actual warfighting requirements, we can draw parametrically on a few analogs: ✦ The US Army and USMC’s procurement objective for the Excalibur program is 61,483 rounds. If there are roughly 50 battalions of 155 mm howitzers in the Army, Marine Corps, and National Guard, with 18 guns each, then the Defense Depart- ment is buying about 68 rounds per gun. 3 | IR&D and a 127 mm PGM • 26 June 2008! James Hasik
  4. 4. ✦ The Navy’s last procurement objective for the ERGM was 3,135 rounds. Counting only the 54 Mod 4 guns on the Ticonderogas and the later flights of Arleigh Burkes (the ones with digital fire control), the Navy was planning to buy 58 rounds per gun. ✦ The most recent naval fire support mission was “Five Inch Friday,” the bombardment of the Al Faw peninsula on 20 March 2003, in which HMAS Anzac fired just over 70 rounds to support the advance of 40 Commando, Royal Marines. While this might suggest a higher desired loadout, it is important to note the Anzac was firing un- guided rounds.1 A comparable load of PGMs could have lasted the ship much longer. ✦ According to the modeling conducted by the Excalibur program office, somewhat fewer than half as many PGMs should be required to destroy the same targets.2 Ac- tual mileage may vary, but this can be a conservative assumption. We may thus for the moment estimate a sales target of roughly sixty rounds per gun. This may seem laughably small when considering the criticism that the Zumwalts are only supposed to carry 900 LRLAPs for their two guns, but this complaint is based on the expectation that the Zumwalts support a division-sized amphibious assault. Cus- tomers other than the United States do not launch those very often (though for that mat- ter, neither does the United States). Rather, most other customers’ requirements will be based on fire support missions at the periphery of a campaign, such as Five Inch Friday in 2003, or the advance on Goose Green in 1982. Most navies’ expeditionary ambitions end at peace-enforcement, and at this level of intensity, sixty rounds is probably plenty. Product development could cost between $100 million and $300 million. Four broadly comparable munitions have already undergone development: ✦ BAE and Lockheed Martin’s 155 mm Long-Range Land Attack Projectile (LRLAP) ✦ BAE and Raytheon’s 155 mm Excalibur round ✦ Raytheon’s 127 mm Extended Range Guided Munition (ERGM) ✦ Alliant Techsystems’ 127 mm Ballistic Trajectory Extended Range Munition (BTERM) So far, the LRLAP has met its technical objectives, and the Excalibur has been a great technical, operational, and commercial success. As noted above, the ERGM and BTERM programs have been shut down as failing to produce test articles that would 4 | IR&D and a 127 mm PGM • 26 June 2008! James Hasik 1 Australian Defence Department press release, “Five Inch Friday,” 7 April 2003. The US Navy’s expendi- ture of over 1,000 127 mm shells against the Iranian National Oil Company’s Sirri platform in 1987, during Operation Nimble Archer, should probably be seen as an attempt at a Sicilian message. The Navy was not merely trying to wreck the platform, but to cause its collapse. A few 1,000-lb bombs probably would have been more suitable for the task. Eventually, the platform was completely burned by explosives hand- placed by SEALs, as its companion Sassan platform was done in by Marines earlier in the day. 2 Richard Hansen and John Halvey, “Excalibur: XM982 Program,” briefing to the 6th International Cannon Artillery Firepower Symposium, 21 June 2000.
  5. 5. function reliably. With the smaller rounds, the designers seem to have attempted to stuff too much functionality into too small a package. This suggests that the removing the option for a rocket booster, as recommended dur- ing our discussion in November 2006, could be the single most risk-reducing choice that a developer could make. This also reduces the range to less than that of a comparable unguided round (because the round needs to bleed energy aerodynamically as it ma- neuvers towards the target). This, in turn, puts the firing ships firmly within the range of coastal missile batteries, and avoiding these was what drove the US Navy to insist on rocket boosters for its ERGMs and LRLAPs. The development (or more accurately, RDT&E) costs of weapons of this type have var- ied considerably. Since the BTERM was terminated too soon for its costs to be accu- rately estimated, we can draw on a fifth round, Raytheon’s infrared-seeking Mid-Range (tank) Munition, for another analog. As shown in the table below, developing any of these product lines is projected to cost something in the low nine figures:3 munition developers boosted? estimated RDT&E cost LRLAP Lockheed Martin, BAE yes $150 million Excalibur Raytheon, BAE no $396 million ERGM Raytheon yes $323 million BTERM Alliant Techsystems yes terminated too soon Mid-Ranged Munition Raytheon no $232 million Since the company has some experience in developing GPS/INS-guided rounds al- ready, we could estimate that developing the basic 127 mm PGM would cost some- where between $100 million and $300 million. We are offering no engineering insight into the question—just a parametric estimate based on comparable efforts. Positioning means picking the right niche for competing with the Vulcano Finmeccanica has addressed this problem by making the Vulcano a subcaliber round; while this extends the range of the round, it also moderately decreases accuracy (by decreasing somewhat the round’s ability to bleed energy as it approaches its target) and 5 | IR&D and a 127 mm PGM • 26 June 2008! James Hasik 3 US GAO, Defense Acquisitions: Assessments of Major Weapon Programs, March 2004, pp. 57–8; Ray- theon company press release, 2 January 2008; “Lockheed Martin win LRLAP development contract,” Mili- tary Technology, April 2003; “Lockheed Martin receives $120M contract for Navy's LRLA Projectile,” Lockheed Martin press release, 18 July 2005; Army RDT&E budget item justification 0604814A of Febru- ary 2007
  6. 6. significantly decreases the available explosive fill. According to its website, the company is planning three versions of the 127 mm Vulcano: ✦ an unguided multipurpose round with a range of 70 kilometers, ✦ an infrared-seeking, antiship round with a range of 70 kilometers, and ✦ a GPS/INS round for shore bombardment with a range of 100 kilometers. Since the unguided rounds should physically travel further than the guided ones, we are assuming that the first two figures are effective ranges, and that the unguided Vulcano’s accuracy at that range is, at best, ship-sized. A maximum effective range of 100 kilome- ters, if the lower payload can be tolerated, does put the firing ships over the horizon from the shore, and provide a more comfortable margin of time for tracking and target- ing incoming missiles. Finmeccanica has the first-mover’s advantage in this segment, and thus any develop- ment of a similar product should consider, early in the process, whether to compete di- rectly with the Vulcano, or to target a slightly different niche of applications. The design choices may include ✦ whether subcaliber or full-caliber, ✦ whether or not to base bleed (if full-caliber), ✦ whether to provide terminal guidance (such as infrared-homing) as an option, ✦ whether to provide other payload options than high-explosive fragmenting (such as the semi-armor-piercing antiship version of the Vulcano), and ✦ whether to tailor the round for just Mark 45 Mod 4 guns, for Finmeccanica guns as well, or even for Mark 45 Mod 2 guns, as Alliant Techsystems had for the BTERM. The Vulcano may be positioned lower in perceived value than the ERGM and LRLAP, but there is value in that segment. As Aviation Week put it, “the advantage of [Finmec- canica’s] approach appears to be less lofty goals, possibly yielding a better chance of success, and the fact that it is compatible with a wide range of future guns.”4 However, competing against the Vulcano without development funding from the US Navy means that the new round could very well lack a launch customer. Admiralties tend to be con- servative institutions that respect the buying habits of other navies they respect. This suggests that the new round should be meaningfully differentiated from the Vulcano, but not too differentiated, with a set of parameters that would induce some opinion-shaping customer to buy early. Pricing can be premium, at least for customers outside the United States. If launched as an IR&D project, particularly one based outside the United States, the company would have considerable latitude in pricing the munition. Customers’ total will- 6 | IR&D and a 127 mm PGM • 26 June 2008! James Hasik 4 Bill Sweetman, “Long Shots,” Aviation Week & Space Technology, 7 September 2007
  7. 7. ingness to pay for a naval PGM may vary greatly with their expeditionary ambitions, their alternatives for land attack and antiship fires, their commitment to amphibious shipping, and their relative preference for interoperability with US forces. That willingness to pay is difficult to estimate, and even just within the United States. All the same, we again have some analogs on which to draw: ✦ For the US Army and the USMC, in full-scale production, the Excalibur round is ex- pected to cost $39,000.5 ✦ For the US Navy, Lockheed Martin was early on forecasting a unit price of $35,000 per LRLAP 6 ✦ Raytheon had initially forecast a unit price of $50,000 per ERGM.7 However, when the Navy terminated the ERGM program, the expected unit price had risen to $162,000, yet the termination was at least as greatly a matter of technical failures. ✦ From 1998 through 2002, the Navy was contracting with Raytheon for the develop- ment of the RGM-165 Land Attack Standard Missile. The Navy seemed willing to pay the projected $400,000 per missile conversion for 800 rounds, though in the end, its long flight time and vertical attack profile would prove to limit its usefulness against relocatable targets.8 Navies, we expect, should be able to tolerate a higher unit price than armies for PGMs, because their options for fire support are relatively limited, and their overall require- ments for quantities of rounds are lower. The navies of smaller-yet-wealthy countries may also tolerate a higher price, because their land attack ambitions (even if only for peace enforcement) may today considerably outstrip their planned capacities. For the break-even analysis below, we will use a target price of $80,000 in sales outside the United States. This figure may seem high, but we should not dismiss it as unattainable. When the M712 Copperhead laser-guided 155 mm round entered production in 1983, the unit price was $45,000—approximately $100,000 in 2008 terms.9 Even at that price, we suspect that the business case for purchasing a modest number of naval PGMs can be made. 7 | IR&D and a 127 mm PGM • 26 June 2008! James Hasik 5 Tony Capaccio, “High-tech shell from Raytheon likely to be sent to Iraq in May,” Bloomberg News, 19 April 2007 6 Patricia Kime, “LRLAP Will Boost Fire-Support Range,” Sea Power, July 2004 7 Ibid. 8 US GAO, Improved Littoral Warfighting Capabilities Needed, May 2001, p. 22 9 “155 mm M712 Copperhead HEAT CLGP projectile,” Jane’s Ammunition Handbook, 5 April 2007; Steven J. Zaloga, M109 155mm Self-propelled Howitzer 1960-2005 (Osprey Publishing, 2005), p. 20
  8. 8. Promotion can emphasize the essentiality of PGMs in modern conflict. Indeed, no one wants to shoot dumb rounds anymore, at least not if a PGM is available. GPS/INS-guidance is not yet a requirement for every munition meant for indirect fire, but the trend is hard to miss, with Defense News recently even calling for the eventual abolition of unguided bombs and shells.10 As approximately 50 percent of the world’s population lives within 100 kilometers of the sea, naval gunfire can put unintended peo- ple at risk with greater frequency than land-based fires.11 For many if not all customers, committing to provide naval forces for expeditionary operations—whether for the sup- pression of piracy, peacekeeping, peace enforcement, or a full-blown amphibious as- sault—may come with an obligation to use the technical means available to limit the likelihood of casualties amongst noncombatants. The promotion strategy and sales methods need not threaten customers, but quietly inducing a little healthy guilt could be helpful.12 For all these reasons, as we suggest below in the break-even analysis, an eventual take-up rate amongst our targeted customers of 75 percent seems reasonable. Yet today, with the demise of the ERGM, the US Navy has no plans for a ship-launched PGM for land attack other than its Tomahawk missiles and the LRLAPs that will be available for the few Zumwalts that it intends to buy. The Navy’s commitment to the ERGM—long after it was clear that the program was failing—suggests strongly that promoting the idea of a PGM for the Mark 45 gun should not affect the Navy’s commit- ment to the AGS. More so, if the Italian, German, and Royal Netherlands Navies are to have PGMs for their 127 mm guns, the US admiralty may feel a strong compunction to get its own guided rounds. Otherwise, on some future Five Inch Friday, the Americans could get pulled off the gunline for stocking only unguided shells. Our break-even analysis conveys the importance of the US customer. Sales need not start with the US Navy, but with approximately two-thirds of the guns in the addressable market, the US Navy is the customer that cannot be ignored. Without sales to the US Navy, breaking-even on the project is considerably more challenging. Ignoring for the moment the time value of money, break-even is almost attained with ✦ a modest proposed sales package of 60 rounds ✦ a unit price of $80,000 ✦ near-term take-up of naval PGMs by 75 percent of the targeted navies ✦ a market share of 50 percent (seemingly reasonable in a duopoly) ✦ IR&D costs of $100 million 8 | IR&D and a 127 mm PGM • 26 June 2008! James Hasik 10 "Banning Dumb Bombs", Defense News, 2 June 2008, p. 28. 11 Andrew D. Mellinger, Jeffrey D. Sachs, and John L. Gallup, “Climate, Coastal Proximity, and Develop- ment,” p. 182; in Gordon L. Clark, Maryann P. Feldman, and Meric S. Gertler, The Oxford Handbook of Economic Geography (Oxford University Press, 2002) 12 Joseph C. Anselmo, “Build It and They Will Come,” Aviation Week & Space Technology, 29 May 2005.
  9. 9. As shown in the table below, reasonably greater success with any one of these factors improves the profits of the project into the low tens of millions of dollars. Greater suc- cess across the board could put the profits into the low hundreds of millions of dollars. Address- able guns outside the US Sales tar- get per gun Price per round (US $ MM) Address- able mar- ket (US $ MM) Take-up rate with navies (Pgo) Market share Total revenues (US $ MM) Develop- ment cost (US $ MM) Profit outside the US 55 60 0.080 264 75% 50% 99 100 (1) 55 90 0.080 396 75% 50% 149 100 49 55 60 0.100 330 75% 50% 124 100 24 55 60 0.080 264 100% 50% 132 100 32 55 60 0.080 264 75% 70% 139 100 39 55 60 0.080 264 75% 50% 99 75 24 55 90 0.100 495 100% 70% 347 75 272 Adding the US Navy to this line as a customer greatly improves the attractiveness of the project, even at half the price: Address- able guns in the US Sales tar- get per gun Price per round (US $ MM) Address- able mar- ket (US $ MM) Take-up by the US Navy Contract win Total revenues (US $ MM) Additional develop- ment cost (US $ MM) Incre- mental profit from US 106 60 0.040 254 ✓ ✓ 254 0 254 The next steps in the study would take us through engineering assessments, de- cision trees, and cash flow analyses. The first step would be circulating this concept paper throughout interested parties in the company, and soliciting comments on the reasonableness of the assumptions. Should it raise enough interest, the next step could be assembling a project team that would further develop the analysis through tasks such as the following: ✦ identifying which guns around the world would be capable of digitally setting the fuze on the proposed PGM ✦ exploring the technical and operational feasibility, for customers with older model guns, of manually setting a GPS/INS fuse ✦ assessing the likelihood of gun upgrades to digital fire control by country over time 9 | IR&D and a 127 mm PGM • 26 June 2008! James Hasik
  10. 10. ✦ uncovering (if possible) the prices at which the Vulcano is being sold to Germany and the Netherlands ✦ replace the very broad estimate of development costs with a more detailed assess- ment by the company’s munitions designers ✦ refining the sales target per gun based on a multi-factor model with both expert and observable inputs ✦ determining how serious the US Navy could get about putting the AGS, albeit with a reduced magazine, on its Arleigh Burke-class destroyers ✦ estimating the adverse financial impact of the International Traffic in Armaments Regulations (ITARs) on the program if the weapon is developed in the US ✦ assessing what capabilities would be lost if the US operating companies were thus excluded from the work ✦ selecting development and program management sites for the munitions ✦ determining who will produce the munitions, whether BAE Land Systems UK, Ray- theon, Lockheed Martin, NAMMO, General Dynamics Ordnance Systems, or some other firm ✦ refining the positioning, pricing, and promotion strategies, and then better assessing the feasibility of cost-effectively developing the product ✦ developing a decision-tree analysis that considers how the probability of any one customer adopting a 127 mm PGM, depends on earlier adoptions ✦ developing a free cash flow analysis which specifically values the option of develop- ing follow-on variants of the proposed munition (such as infrared or millimeter wave homing) based on the success of an initial GPS/INS-guided variant ✦ proposing an allocation of marketing resources to particular customers based on the results of the decision-tree analysis and the free cash flow analysis 10 | IR&D and a 127 mm PGM • 26 June 2008! James Hasik
  11. 11. Appendix: current and planned installations of 127 mm naval guns worldwide Proposed targeted customers are shown in blue. Please note that this list is unaudited: its accuracy could benefit from an internal review. customer Company ship class # of ships guns/ship # of guns USA BAE Systems Arleigh Burke 62 1 62 USA BAE Systems Ticonderoga 22 2 44 Taiwan BAE Systems Keehung (Kidd) 4 2 8 Australia BAE Systems Anzac 8 1 8 Turkey BAE Systems Yavuz/Barbaros 8 1 8 Spain BAE Systems Àlvaro de Bazàn 6 1 6 South Korea BAE Systems Sejong the Great (KDX-III) 6 1 6 Greece BAE Systems Hydra 4 1 4 Australia BAE Systems Hobart (AWD) 3 1 3 New Zealand BAE Systems Anzac 2 1 2 Denmark BAE Systems Absalon 2 1 2 Japan BAE Systems Atago (Burke flight IIA) 2 1 2 Thailand BAE Systems Naresuan 2 1 2 Total for BAE 131 157 Peru Finmeccanica Carvajal (Lupo) 8 1 8 Italy Finmeccanica Maestrale 8 1 8 Venezuela Finmeccanica Marescal Sucre (Lupo) 6 1 6 Italy Finmeccanica FREMM GP 6 1 6 South Korea Finmeccanica Chungmugong Yi S. (KDX-II) 6 1 6 Japan Finmeccanica Takanami 5 1 5 Japan Finmeccanica Kongo (Burke flight I) 4 1 4 Netherlands Finmeccanica De Zeven Provinciën 4 1 4 Germany Finmeccanica F-125 4 1 4 Italy Finmeccanica Lupo 4 1 4 Argentina Finmeccanica Almirante Brown (MEKO 360) 4 1 4 South Korea Finmeccanica Gwanggaeto the Great (KDX-I) 3 1 3 Italy Finmeccanica De la Penne 2 1 2 Nigeria Finmeccanica Aradu (MEKO 360) 1 1 1 Total for Finmecc. 65 65 11 | IR&D and a 127 mm PGM • 26 June 2008! James Hasik