A New Year and A New Administration:
What will it mean for the U.S. Defense and Security
                      Markets?


...
Focus Points

                                                                  Economic Impact on Defense and Security
  ...
Economic Impact on Defense and Security
                                                                                  ...
Key Defense Issues for the New Administration
Reequipping the Ground Forces and National
                                 ...
Defense Budget Forecast
               U.S. Defense Budget Growth                                                         ...
Defense Budget Breakdown
                                   U.S. Budget Breakdown by Service                              ...
Growth Areas in Defense
                           Focus on Integration, Training and Services                            ...
Key Defense Industry Trends and Challenges

             • Despite being on the chopping block for the last two years, pro...
Security Budget Forecast
                                                                                                 ...
U.S. Security Market
                                          Homeland Security Market Revenues by Segment
              ...
Key Security Industry Trends and Challenges
                   • COTS solutions to improve situational awareness are likel...
Hot Spots in Security
        Integration of COTS Solutions                Understand and Meet the Needs of the End-User

...
New Administration Policies and Challenges

              Stated Policy Goals                                     Challeng...
Conclusions



Defense and Security Funding will be stable through 2010



Top Factors Driving Growth in the Defense Marke...
Next Steps

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A New Year and A New Administration: What will it mean for the U.S. Defense and Security Markets?

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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.

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A New Year and A New Administration: What will it mean for the U.S. Defense and Security Markets?

  1. 1. 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. 2. Focus Points Economic Impact on Defense and Security Finding opportunity in 2009 and Beyond Key Defense Issues for the New Administration Defense and Security Defense Budget Forecasts and Breakdown Trends, Challenges, and Growth Areas for Defense Security Budget Forecasts and Breakdown Trends, Challenges, and Growth Areas for Security New Security Administration Policies and Changes Conclusions 2
  3. 3. Economic Impact on Defense and Security Historical Defense Spending, 1960-2008 900.0 Defense Spending Supplemental Spending 800.0 700.0 600.0 Spending ($ Billion) 500.0 400.0 300.0 200.0 100.0 0.0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 Source: Frost & Sullivan Defense/Security Budget 2001-2008 GDP Growth 2001-2007 GDP Real Growth Rate 2001-2007 Defense Security 6.0 800.0 16,000.0 700.0 14,000.0 5.0 12,000.0 600.0 4.0 500.0 10,000.0 Percent (%) $ Billion $ Billion 3.0 400.0 8,000.0 6,000.0 300.0 2.0 4,000.0 200.0 1.0 2,000.0 100.0 0.0 0.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2001 2002 2003 2004 2005 2006 2007 2008 2001 2002 2003 2004 2005 2006 2007 2008 Source: Frost & Sullivan Source: Frost & Sullivan Source: Frost & Sullivan <GPS> 3
  4. 4. Key Defense Issues for the New Administration Reequipping the Ground Forces and National New Focus in Afghanistan Guard Expanding Intelligence Capabilities While ISR on the Pakistan Border Improving Oversight Building Secure Relationships with Allies Acquisition Reform Determining the Appropriate Course for Soldier Continuation of Supplemental Funding Modernization Build the Non-Military Aspect of National Formation of More Joint Programs Security Stabilizing Operations in Iraq Expanding the SOF <GPS> 4
  5. 5. Defense Budget Forecast U.S. Defense Budget Growth U.S. O&M Budget Projection Funding Growth • The overall U.S. Defense budget is expected to increase slowly over the next three years with a CAGR of 1.1 195.0 6.0 percent 190.0 5.0 185.0 • O&M will increase with a 2.9% CAGR Funding ($ Billion) 180.0 4.0 Growth (%) • RDT&E will face notable reductions with a (4.9%) CAGR 175.0 3.0 170.0 • Procurement will increase overall with a 1.8% CAGR 165.0 2.0 • Increases in procurement are expected due to efforts to 160.0 1.0 reequip the ground forces 155.0 • RDT&E will be reduced as several major aircraft programs 150.0 0.0 2008 2009 2010 2011 2012 transition to procurement, and other large and immature R&D programs are cutback Source: Frost & Sullivan U.S. RDT&E Budget Projection U.S. Procurement Budget Projection Funding Growth 78.0 1.0 Funding Growth 116.0 7.0 76.0 0.0 114.0 74.0 -1.0 6.0 Funding ($ Billion) 112.0 Funding ($ Billion) 72.0 -2.0 110.0 5.0 Growth (%) 70.0 -3.0 Growth (%) 108.0 4.0 68.0 -4.0 106.0 104.0 66.0 -5.0 3.0 102.0 64.0 -6.0 2.0 100.0 62.0 -7.0 98.0 1.0 60.0 -8.0 96.0 94.0 0.0 58.0 -9.0 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Source: Frost & Sullivan Source: Frost & Sullivan <GPS> 5
  6. 6. Defense Budget Breakdown U.S. Budget Breakdown by Service U.S. Army Procurement Breakdown (2008) Navy/USMC Air Force Army Joint 600.0 Aircraft Missiles Weapons & Vehicles Ammunition Other Procurement JIEDDO 500.0 2.1% Funding ($ Billion) 17.2% 400.0 300.0 6.8% 200.0 52.1% 100.0 12.7% 0.0 2007 2008 2009 2010 2011 2012 9.1% Source: Frost & Sullivan Source: Frost & Sullivan U.S. Navy/USMC Procurement Breakdown (2008) U.S. Air Force Procurement Breakdown (2008) Aircraft Weapons Ships Aircraft Missiles Other Procurement Ammunition Other Procurement Ammunition USMC 2.6% 7.7% 2.0% 32.9% 14.1% 36.7% 45.6% 8.0% 35.3% Source: Frost & Sullivan Source: Frost & Sullivan 15.2% <GPS> 6
  7. 7. Growth Areas in Defense Focus on Integration, Training and Services Provide End-Users Practical Solutions Spending Grow th Rate 500.0 12.0 Spending ($ Million) 10.0 400.0 Growth Rate (%) 8.0 300.0 6.0 4.0 200.0 2.0 100.0 0.0 0.0 -2.0 2007 2008 2009 2010 2011 2012 2013 UAS Services are an expanding market Segment Defense Technologies Meeting the Need Source: Frost & Sullivan Look to Defense’s Top Growth Areas for Opportunities Participate in the HOT C4ISR Programs Commercial SATCOM Near Space AEHF DTN WGS Hawkeye WIN-T/JBC-P AESA TACSAT Targeting Pods Commercial Imagery SIAP Reset and new manufacture SINCGARS SDR Interim sets UAVs & S&R: Top Defense Growth Areas NextGen/CANES Radar Wideband Comms Foreign Government and Commercial Space Radar
  8. 8. Key Defense Industry Trends and Challenges • 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 Ships but other naval acquisitions programs as well Unmanned • 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 Systems companies Weapons • 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 Systems Ground • 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 Vehicles HMMWVs • Parts Manufacturing Authority (PMA) parts manufacturers are increasingly be challenged by original equipment manufacturers in Military 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 MRO Training • 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 Simulation • 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 C4ISR • Programs facing cutbacks in 2009 and beyond: FCS, TSAT, JTRS, and Manned Airborne ISR
  9. 9. Security Budget Forecast DHS Budget Forecast, FY 2007-2012 The DHS budget is expected to be up about 5% Total Budget Authority Growth from last year (the budget is still pending and 60 16 DHS is operating under a CFR) 14 50 12 Growth in the budget is expected to have a Funding ($ Million) 40 10 Growth (%) CAGR of 4.5% between FY 2008-2012 30 8 6 Despite economic uncertainties and the Obama 20 4 Administration’s understatement of HLS thus 10 2 far, Frost & Sullivan sees very little change in 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 the trends of DHS budget authority Fiscal Year Source: Frost & Sullivan DHS Budget Breakdown by Agencies and Offices, FY 2009 DHS Budget Breakdown by Category, FY 2009 0.7% 4.8% Dept. Ops. A&O USCIS FLETC Managem ent and NPPD 1.0% 1.0% 5.1% 13.3% 1.0% S&T 3.0% Operations USSS 2.0% 3.0% DNDO Research and 1.0% Developm ent, Training, USCG FEMA and Services 19.0% 12.9% Protection, Preparedness, Response, and Recovery FEMA Grants 4.0% Security, Enforcem ent, 81.2% TSA and Investigations CBP 13.9% ICE 22.0% 10.9% Source: Frost & Sullivan Source: Frost & Sullivan 9
  10. 10. U.S. Security Market Homeland Security Market Revenues by Segment (U.S.), 2007-2012 $15.5 Billion $11.0 Billion 18,000.0 18.6% 15,000.0 18.2% 12,000.0 Million USD 3.8% 9,000.0 11.6% 4.5% 6,000.0 7.1% 10.0% 3,000.0 9.1% 0.0 2007 2008 2009 2010 2011 2012 38.6% Emerg. Mass Land CIP Maritime Seaport Aviation 36.4% Resp. Trans. Border 10% 18% 11% 10.4% 11.8% 4% 9.9% 10.0% 2012 2007 11% Source: Frost & Sullivan 8% 38% 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 10
  11. 11. Key Security Industry Trends and Challenges • COTS solutions to improve situational awareness are likely to replace the SBInet concept in the near-term Border • 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 Aviation • 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 Critical a segment that is extremely dependent on the occurrence of events Infrastructure • 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 Maritime • 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 Seaport • 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. Mass • Emphasis on low TCO, self-diagnosing CCTV systems, automatic wireless image downloads and innovative passenger screening Transport 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 despite the availability of solutions. CBRNE detection technology is facing major challenges in the absence of a major CBRNE event Emergency • At the strategic level, emergency managers are demanding integrated C3 systems to improve situational awareness and response Response • The emergence of USNORTHCOM and its three incident response units could make it a key influencer, despite its support only role © 2008 Frost & Sullivan 11 www.frost.com
  12. 12. Hot Spots in Security Integration of COTS Solutions Understand and Meet the Needs of the End-User Systems Sensors System of Systems Provide Solutions for Today’s Security Problems Tap Into the Global HLS Market Communications Cyber Security Critical Infrastructure Protection
  13. 13. New Administration Policies and Challenges Stated Policy Goals Challenges • Defeat Terrorism Worldwide • Maintaining Focus and Execution Through the Transition Process • Prevent Nuclear Terrorism • Developing a More Mature Acquisition • Strengthen American Biosecurity Process to help increase the Likelihood of • Improve Intelligence Capacity and Protect Civil Success Liberties • Supporting R&D Activities for Innovative • Protect Critical Infrastructure Technologies and Small Businesses • Modernize America’s Aging Infrastructure • Strengthening the Public-Private Partnership • Securing the Border and Overhauling the Likely DHS Focus Under Napolitano Immigration System • Developing CONOPS for the National Guard • Creating Interoperability of C4ISR Systems and NORTHCOM across the Federal State and Local Agencies • Redeveloping and Executing the Virtual Fence • Fulfilling Mandates for 100 percent scanning of Concept on the Border air and sea cargo • Enhancing Federal, State and Local • Understanding and Defining the role of the Cooperation Military in Homeland Security
  14. 14. 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
  15. 15. Next Steps Register for Frost & Sullivan’s Growth Opportunity Newsletter and keep abreast of innovative growth opportunities (www.frost.com/news) Register for the next Chairman’s Series on Growth: The CEO's Growth Team™: Research & Development Driving Growth and Innovation (April 7th) (http://www.frost.com/growth) Join us at our 5th Annual Customer Contact Executive MindXchange April 19-22 2009, Bonita Springs, FL (www.frost.com/ccs) Request a proposal for a Growth Partnership Service to support you and your team to accelerate the growth of your company. (myfrost@frost.com) 1-877-GoFrost (1-877-463-7678) Follow Frost & Sullivan on-line at: http://twitter.com/Frost_Sullivan http://www.facebook.com/people/Frost-Sullivan/1131686497
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  17. 17. For Additional Information To leave a comment, ask the analyst a question, download a • copy, or receive the free audio segment that accompanies this presentation, please contact Stephanie Ochoa, Analyst Briefing Coordinator, at (210) 247-2421 or via email, analystbriefings@frost.com. 17

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