ZintisVandelis_IndustryAnalysisFinal

Author: Zintis Vandelis-Muir
Student #: 050991959
Compiled for Dr. Ken Grant
Submitted December 6, 2015
UAVs Take Flight
Analysis of the U.S. Unmanned Aerial Vehicle Market

UAVs Take Flight | Analysis of the U.S. Unmanned Aerial Vehicle Market | Page 1
Executive Summary
This analysis of the Unmanned Aerial Vehicle (‘UAV’ or ‘drone’) market seeks to analyze the top
domestic drone manufacturers in the United States, their unique capabilities and challenges, and
finally analyze the key trends driving this regional market. With the U.S. Federal Aviation
Administration beginning to advance long-awaited regulations for UAV use in commercial
applications, the American market seems poised to catch up with international competitors like
France, China, and Japan. Globally the UAV market is currently valued at $7.2 billion. A small figure
relative to the 435 listed firms competing in just the civilian and commercial segments. The U.S. is
estimated to possess $4.3 billion of this market (roughly 60%), with the primary customers being
the various branches of the U.S. armed forces.
Incumbency in the global aerospace market confers limited advantages to U.S. firms. Nearly half
of the UAV market can be considered fairly low-tech, a consumer with moderate technical
knowledge could follow instructions to assemble and launch a 5kg drone from his or her garage
over a weekend. U.S. and Israeli expertise in producing military hardware, guidance systems and
communications systems has cornered the mature military-UAV market, but the $500 million
civilian market with its 19% CAGR remains up for grabs. Several strong commercial challengers
have emerged; China’s DJI innovations, and France’s Parrot SA being early innovators and
cost-leaders.
Several factors are at play in the U.S. market: The U.S. GDP has a positive forecast, while
declining defense budgets exert pressure to substitute conventional aircraft for unmanned
systems. An aging population and negative attitudes towards immigration are driving a future
labour shortage, thus increasing the demand for research in automation. A boom in venture
capital expenditure has fuelled many aggressive start-ups in the UAV field; and with precision
agriculture being one of the top future applications for UAVs, the US and it’s landmass of 51%
farmland has much to gain from the growing technology.
Perplexing UAV flight regulations still exist in the U.S., causing unrest among potential
investors. In Europe and Asia, pioneering firms are unhindered by the same level of legal
challenge. Firms like Google Inc. have already moved their drone-research overseas. U.S.
awareness that billions are being lost to regulatory stupor is pressuring a speedy resolution
to the issue, but privacy and safety concerns remain.
This paper compares the company structures and competencies of four top U.S. firms;
Northrop Grumman Corporation, General Atomics Aeronautical Systems Inc., Textron Inc.,
and AeroVironment Inc.
The conclusion of the analysis is that further entry of major firms into the emerging
commercial market will likely cause market consolidation around whichever firms can secure
a dominant position at this immature stage. Furthermore, this consolidation is likely to be
one-directional, occurring either from new innovators or established aerospace firms. 1
Cover Photo sourced from Ehang Inc.

Table of Contents
Executive Summary............................................................................................................................................... 1
Table of Figures..................................................................................................................................................... 3
Glossary of Terms.................................................................................................................................................. 4
Introduction .......................................................................................................................................................... 5
1. Position of the UAV Industry............................................................................................................................. 5
1.1. Global Aerospace Sector............................................................................................................................ 5
1.2. UAV Definition and Market Segmentation ................................................................................................ 6
1.3. Size and Focus of Regional Markets........................................................................................................... 8
1. North American Market............................................................................................................................ 9
2. Asia-Pacific Market ................................................................................................................................... 9
3. European Market.................................................................................................................................... 10
4. Other Markets - Middle-East, Africa, South America ............................................................................. 10
2. Global UAV Regulatory Overview.................................................................................................................... 10
2.1. North America - Regulatory Overview ..................................................................................................... 11
2.2. Asia-Pacific - Regulatory Overview........................................................................................................... 12
2.3. Europe - Regulatory Overview ................................................................................................................. 12
Summary of Regulatory Challenge.................................................................................................................. 13
3. U.S. Competitive Context................................................................................................................................ 13
3.1. Background .............................................................................................................................................. 13
3.2. Analysis of External Environment ............................................................................................................ 13
Geo-Political................................................................................................................................................ 14
Economic..................................................................................................................................................... 14
Social........................................................................................................................................................... 14
Technological.............................................................................................................................................. 15
3.3. Analysis of U.S. Drone Market ................................................................................................................. 16
Threat of new entrants............................................................................................................................... 16
Threat of substitute products or services................................................................................................... 17
Bargaining power of buyers........................................................................................................................ 18
Bargaining power of suppliers.................................................................................................................... 18
Intensity of competitive rivalry................................................................................................................... 18
3.4. Analysis of U.S. Drone Market – Factors for Success............................................................................... 19
3.5. Key Trends in the UAV market ................................................................................................................. 20
4. Summary of Industry Challenges..................................................................................................................... 21
4.1. Limitations of Company Analysis ............................................................................................................. 21
5. Competitive Overview..................................................................................................................................... 22
5.1. Northrop Grumman Corporation (NGC)....................................................................................................... 24
Background ..................................................................................................................................................... 24
Strategic Posture............................................................................................................................................. 24
External Environment...................................................................................................................................... 24
Internal Environment...................................................................................................................................... 25
Strengths and Weaknesses......................................................................................................................... 25
Core competencies..................................................................................................................................... 25
Financial Analysis & Future Challenges ...................................................................................................... 25

5.2. General Atomics, Aerospace Systems Inc. (GA-ASI)..................................................................................... 26
Background ..................................................................................................................................................... 26
5.3. Analysis of Textron Inc. ................................................................................................................................ 29
Background ..................................................................................................................................................... 29
5.4. Analysis of AeroVironment Inc..................................................................................................................... 31
Background ..................................................................................................................................................... 31
6. Final Overview................................................................................................................................................. 33
7. References....................................................................................................................................................... 35
6. Appendix ......................................................................................................................................................... 37
Table of Figures
Figure 1. Global Aerospace Sector Segmentation................................................................................................. 6
Figure 2. UAV Market Segmentation – region, country and market segments.................................................... 7
Figure 3. Global UAV and UACV market growth projections ................................................................................ 7
Figure 4. Nations Invested in Armed-Drone (UACV) Manufacturing .................................................................... 8
Figure 5. DJI's best-selling 'Phantom' drone ......................................................................................................... 9
Figure 6. FAA permits 2009 – 2014 ..................................................................................................................... 11
Figure 7. Areas of instability to U.S. political interests ....................................................................................... 14
Figure 8. U.S. GDP and Defense Expenditure (in billions $) ................................................................................ 14
Figure 9. Porter's 5 forces analysis of U.S. UAV market...................................................................................... 16
Figure 10. Growth in U.S. VC $............................................................................................................................ 19
Figure 11. Analysis of Key success factors in the American UAV market............................................................ 20
Figure 12. Top Industry Players by Market Share ............................................................................................... 22
Figure 13. Revenue share of top-4 U.S. UAV Manufacturers.............................................................................. 23
Figure 14. Porter's generic strategies of the U.S. UAV market ........................................................................... 23

Figure 15. Northrop Grumman financials, sourced from 10K annual reports, (IBISWorld, 2015)...................... 26
Figure 16. General Atomics financials, sourced from (IBISWorld, 2015)............................................................ 29
Figure 17. Textron Inc. financials, sourced from 10K annual reports, (IBISWorld, 2015)................................... 31
Figure 18. AeroVironment Inc. financials, sourced from 10K annual reports..................................................... 33
Figure 19. Cross-firm consolidated ratio analysis ............................................................................................... 33
Figure 20. UAV and UACV market forecast......................................................................................................... 37
Figure 21. Recent FAA-Approved U.S. drone-fliers............................................................................................. 37
Figure 22. AeroVironment revenue shares from UAS, source: 10K reports ....................................................... 38
Figure 23. Top-4 U.S. UAV producers, 5 year revenues, source: (IBISWorld, 2015), 10K reports ...................... 38
Glossary of Terms
UAV ‘Unmanned Aerial Vehicle’ – An aircraft designed to be flown without an on-board
pilot.
Commercial UAV A UAV designed for purposes of agriculture, civilian use, or other
UACV ‘Unmanned Aerial Combat Vehicle’ – a UAV outfitted with weapons or military-
surveillance systems
RPA ‘Remote-Piloted Aircraft’ – UAVs with on-board cameras
FAA U.S. ‘Federal Aviation Administration’ , aviation regulatory body
EASA Europe - ‘European Aviation Safety Agency’, aviation regulatory body
Transport Canada Canada - aviation/transportation regulatory body
ICAO U.N. - ‘International Civil Aviation Organization’, aviation regulatory body
JCAB Japan - ‘Japan Civil Aviation Bureau’, aviation regulatory body
CAA UK - ‘Civil Aviation Authority’, aviation regulatory body
RTF ‘Ready-to-Fly’ – UAV kits which can be flown without initial assembly
AUVSI ‘Association for Unmanned Vehicles International’ – International lobbyist
DOD U.S. - Department of Defense
HALE High Altitude, Long Endurance (Type of UAV)
* All graphical representations, tables and figures contained within this report are original compositions.
Source materials (where not cited directly below the figure) are either original or cited in-text.

Introduction
t is difficult to survey a business journal or a scientific magazine today without seeing some mention of
‘drones’ or ‘UAVs’ in a new and innovative application. To many people, the prospect of small planes
without pilots hovering above our homes, toiling in our farms, and patrolling the world’s battlefields is
not without controversy. While some are rightly concerned with moral hazard, business-minded individuals
may question whether UAVs are truly as disruptive an innovation as they purport to be - are the dreams of
mass-commercialization merely dreams and clever marketing? A ploy on the part of Jeff Bezos. If the market
is authentic, which companies are likely to dominate it in the future?
With these lofty questions in tow; this analysis will attempt to predict some of the market forces at play in the
American UAV market, by locating the key competitors and drivers of this emergent industry and
understanding the broad implications to the aerospace industry, some of these questions might be answered.
1. Position of the UAV Industry
This analysis will seek to analyze and understand the United States’ UAV manufacturing market.
Locating this market in the global UAV industry is achieved in sequence by; (1) production class;
(2) aircraft-type; (3) region; and finally examine (4) consumer-groups.
1.1. Global Aerospace Sector
According to the NAICS, the entire global aerospace sector (NAICS #336411) is defined and
divided into four sub-segments by production class, which include:
1. Manufacturing or assembling complete aircraft
2. Developing and making aircraft prototypes
3. Aircraft conversion (i.e., major modifications to systems)
4. Complete aircraft overhaul and rebuilding
Within the manufacturing (1.) sub-segment, it is further divided by aircraft type (Deloitte &
Touche LLP, 2010):
a) Rotorcraft (e.g. Helicopters; a type of aircraft which derives both lift and propulsion from one or
more sets of horizontally revolving overhead rotors2
).
b) Commercial Aircraft (twin-aisle ‘wide-body’ fuselages, as well single-aisle ’narrow-body’
fuselages3
).
c) Propeller Aircraft (with one or more vertical rotors, often providing shorter-range regional
service).
d) Military Craft (non-civilian fighter/bomber aircraft, or those designed for heavy transport).
e) Spacecraft (Aircraft designed to reach an altitude exceeding 100km above sea-level4
).
f) Unmanned Aerial Vehicles (“UAV”, aircraft without an on-board pilot).
2
Oxford English Dictionary
3
Airbus Industry Classification Guideline
4
Fédération Aéronautique Internationale
I
t

The global aerospace industry as a whole was valued at $706 billion in 20135
(Deloitte, 2014).
Leading up to 2014, aerospace defense spending grew by 3.6%, and commercial aerospace
spending grew by 15.7%. The 4-firm concentration rate for this market was 28% in 2010; with
Airbus, Boeing, Northrop Grumman, and Lockheed Martin controlling similar market shares
between 5% and 9% (Deloitte & Touche LLP, 2010).
The industry for manufacturing unmanned aircraft (1.f) is composed of the manufacture of
hobbyist model aircraft (with line-of-sight piloting), RPAs (“remotely-piloted aircraft” with
camera-based piloting) and aerial drones or UAVs (auto-pilot capable RPAs). For the purposes of
this analysis, the use of the terms “UAV” and “drone” will be used to denote any aircraft
designed to be operated remotely, and capable of auto-piloting without persistent ‘stick-and-
rudder’ pilot feedback. ‘Figure 1’ illustrates the position of the UAV manufacturing industry in
the context of the global aeronautics industry.
Figure 1. Global Aerospace Sector Segmentation
1.2. UAV Definition and Market Segmentation
According to the ICAO6
, a UAV is an aircraft without a human pilot aboard. “Its flight is controlled
either autonomously by onboard computers or by the remote control of a pilot […]. A UAV is
capable of controlled, sustained level flight and is powered by a jet, reciprocating, or electric
engine.” (INEA, 2014).
Put simply, a UAV is an aircraft platform weighing from as little as 5kg to over 5000kg, and
capable of either fully-autonomous, semi-autonomous, or manual ‘stick and rudder’ control by a
pilot. These platforms serve a variety of purposes in defense applications, as well as optical
reconnaissance and data-feedback, precision agriculture, and other commercial/civilian uses. As
will be discussed, UAVs increasingly rely on autonomous systems, and the industry’s historical
need for remote-piloting is steadily declining with greater on-board tracking and detection
systems. Pricing for UAVs ranges
The global UAV market is divided into 4 critical regions based on manufacturing and sales
volume. These are 1. North America, 2. Europe, 3. Asia Pacific, and 4. All other regions (including
5
All values henceforth in nominal USD $
6
International Civil Aviation Organization - http://www.icao.int/Pages/default.aspx
Global Aerospace Sector
Valued at $706 billion
Manufacturing
and Assembling
Rotorcraft
Commercial
Aircraft
UAVs
Propellor
Aircraft
Military
Aircraft
Spacecraft
Developing
Prototypes
Aircraft
Conversion
Aircraft
overhaul

the Middle East, Africa, South America, etc.). All other regions are grouped due to their
fragmentation and/or comparatively small role in the UAV market by manufacturing volume.
‘Figure 2’ shown below illustrates how the global UAV market is divided into regional markets,
these were chosen based on export and manufacturing volume. Each regional market is further
divided into its major national economies, and again by market segments; these include civilian
use, defense, precision agriculture, and other applications - these will be discussed further in the
industry overview. This analysis will henceforth designate UAVs designed for military/defense
applications as Unmanned Aerial Combat Vehicles (UACVs) and those designed for all other
purposes; civilian, agriculture, and other as ‘non-military UAVs’. This analysis will consider all 4
market segments of the U.S. UAV market.
Figure 2. UAV Market Segmentation – region, country and market segments
As shown in figure 2, the global UAV market is currently valued at approximately $7.2 billion, up
from (Teal, 2014), while North America is currently the largest market for UAVs, with the U.S.
alone valued at $4.3 billion, and growing at a rate of approximately 6% annually (IBISWorld,
2015). Figure 3 below illustrates the relative importance of the defense market for UACVs and
the non-military market for UAVs. The comparatively small role of non-military UAVs at this
point in time is largely a factor of the pace of research and integration, and more importantly
the pace of regulatory change across all identified regions (as discussed in Section 2).
Figure 3. Global UAV and UACV market growth projections
Sources: BI Intelligence, Michael Toscano (Teal, 2014)
Market Segments
Countries
Regions
Global Industry -
$7.2 billion
UAVs
North
America
Canada
U.S.
$4.3 bn
Civilian Defense
Agri-
culture
Other
Mexico
Europe
Asia
Pacific
Other
$0
$5
$10
$15
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
BillionsGlobal UAV and UACV Market
Civilian
Defense

This analysis proceeds to divide the global market into its component regions for further scrutiny. For brevity,
only nations with substantial UAV markets are mentioned in the analysis.
1.3. Size and Focus of Regional Markets
As of April 2015, there were 18 nations known to be producing military-capable UACVs: USA,
China, Russia, United Kingdom, India, Israel, Germany, Italy, Spain, Greece, France, Sweden,
Bulgaria, Turkey, Pakistan, Iran, and South Africa. This is up from just 11 nations only 2 years
prior (Joshi & Stein, 2013). A map is provided in figure 4 of the nations known to be engaged in
UACV manufacturing. There are a further 11 countries known to possess UACVs created by a 3rd
party manufacturer outside their own borders.
While there are numerous other UAV functions outside of defense (as will be explored further in
the analysis), currently the defense sector composes the overwhelming majority of the UAV
market at the global level; estimated at 93%, of a global market valued at $7.2 billion in 2015
(Teal, 2014). Defense-spending on UACVs forms a valuable proxy (lacking other figures) for
global and regional UAV sales as a whole. ‘Figure 4’ below illustrates the concentration of
armed-drone manufacturers across the globe.
Figure 4. Nations Invested in Armed-Drone (UACV) Manufacturing
Source: International Institute for Strategic Studies, (Joshi & Stein, 2013)
 U.S. (Market Leader of UACVs)  Known to produce UACVs  Not known to produce UACVs
This analysis will now broadly examine the market position of the 4 regions; North America,
Europe, Asia Pacific, and all other regions (including the Middle East, Africa, South America, etc.).
This will provide greater competitive context for the North American market.

1. North American Market
North America made up the majority of the non-military UAV market in 2014, at 61% (INEA,
2014). The three major economies of North America by GDP7 are Mexico ($1.2 trillion), Canada
($1.8 trillion), and the United States ($17.5 trillion). Mexico has a minor UAV market, but a
receptive regulatory environment spurring greater investment - Mexico imports UAVs for use in
drug-surveillance activities and for use in farming and research projects (Garcia, 2013). Both
Canada and the United States have made significant investments into UAV technology. Canada
has focused almost entirely on the civilian, agricultural, and mining/gas exploration segments (El
Akkad & Cryderman, 2014), whereas the U.S. dominates the defense sector (and total UAV
sales). Numerous U.S.-based corporations like Google, and Amazon as well as leading U.S.
aerospace manufacturers have made speculative investments in the hundreds of millions for
non-military UAV research pending expected regulatory changes.
The U.S. market is currently the largest, accounting for $4.3 billion of a global $7.2 billion
industry, however the U.S. market faces regulatory challenges impeding its growth significantly
(as outlined in the section ‘3.0 Global Regulatory Overview’).
Note: This analysis focuses primarily on the U.S. based manufacturing of UAV and UACV
technology. However, large American aerospace manufacturing firms like Lockheed Martin
traditionally derive as much as 30% of total revenues from international sales (Reuters, 2015). As
such; the export markets for U.S.-based manufacturers will also be considered in brief:
2. Asia-Pacific Market
The Asia-Pacific region held 20% of the non-military UAV global market in 2014, but this has
already changed substantially (INEA, 2014), explosive growth is occurring as important players in
China, Japan and India invest in UAV development.
Japan has developed plans to expand their military UACV program by roughly 600% in the next
10 years as the tensions in the South China Sea increase. Key Japanese firm Yamaha Inc. has
been utilizing UAVs in agricultural applications since 1988,
though their usage has only recently begun to scale dramatically.
Japan also makes routine use of UAVs in a variety of civil
applications (Stevenson, 2015).
China meanwhile is the key question. A Chinese firm founded by
a Shenzhen-born entrepreneur now dominates the non-military
UAV market by unit sales; ‘DJI Innovations’ grew from revenues
of just $500 thousand in 2010, to $129 million in 2013 (Dawei,
2015). This year sales are projected to hit $998 million. DJI sells
comparatively inexpensive (sub - $1000 each) units. At such a
low cost; DJI is expected to compose a whopping 70% of all the
commercial UAVs sold globally in 2015 (Dawei, 2015). Other
major Chinese competitors include XAircraft, and Ehang
Technology Company.
7
World Bank, 2014 - http://data.worldbank.org/indicator/NY.GDP.MKTP.CD
Photo Courtesy of DJI Inc.
Figure 5. DJI's best-selling 'Phantom' drone

India currently lags behind China and Japan in investment, but the national emphasis on degrees
in electrical engineering has spurred a number of youthful start-ups; no clear market leaders
exist as yet.
3. European Market
The European market held 17% of the non-military UAV global market in 2014 (INEA, 2014). The
commercial portion of the European market is dominated by French company Parrot Inc. which
manufactures large volumes of mid-priced, high-quality civilian drones. The UAVC market has
numerous competitors; among them the Thales Group (France), Safran S.A. (France), SAAB Inc.
(Sweden), and BAE Systems PLC (U.K.). Europe’s engineering and aerospace advantages should
allow these firms to maintain a significant market presence through incumbency and import
restrictions on foreign-produced drones.
4. Other Markets - Middle-East, Africa, South America
This region is thought to hold only 2% of the non-military UAV global market (INEA, 2014).
However, Israel is a top military-UACV manufacturer and exporter, with two companies; Elbit
Systems Ltd. and IAI Ltd. emerging as leaders in the export market. In 2013, U.S. consulting firm
Frost & Sullivan determined that Israel had surpassed the U.S. in total UACV exports. While the
Israeli government does not disclose precise figures, it is estimated that from 2005 to 2012,
Israel’s exports totalled $4.6 billion, by contrast U.S. exports for the same period were between
$2 and $3 billion. (Frost & Sullivan, 2013). Israel is greatly aided by the lack of ‘red-tape’ which
affects U.S. makers through their State Department. Israeli firms sell without discrimination,
once even selling to both sides of a conflict (Russia & Georgia).
Also in the Middle-East, the easing of U.S. State Department export restrictions have caused a
surge in sales to Middle-Eastern countries. The U.S. firm ‘General Atomics’ secured a $200
million contract in 2013 from the United Arab Emirates for supply of an unspecified number of
predator drones (Carvalho, 2015). Middle-Eastern countries Jordan, Iraq, Pakistan, and
particularly Saudi Arabia are also being courted by U.S. companies General Atomics and
Lockheed Martin. Demand for UACVs may increase with time as neighboring countries clamor to
maintain defensive posture.
2. Global UAV Regulatory Overview
Note: The current state of regulations is of singular importance to the UAV industry. As a nascent
technology, most governments have yet to implement full legal frameworks to accommodate
UAV manufacturing and usage. The murky regulatory climate affects domestic markets, but also
critically impacts the export market. Due to its importance in the competitive context, this legal
impediment will herein be fully examined at the global level.
The global regulatory framework for UAVs remains highly-fragmented. The United Nations
aviation arm; named the International Civil Aviation Organization (ICAO), is a body which
suggests standards and recommended practices (“SARPS”) to form regulatory frameworks
among U.N. member nations with respect to all aircraft. SARPs for UAVs are still being
determined as the ICAO and national governments move to resolve key legal, privacy, and
safety-related issues.

This analysis examines the regulatory climate on just 3 of the 4 competitive regions as previously
outlined; North America, Europe, and Asia-Pacific. The UAV regulations among the Middle-East,
Africa, and South America are far too fragmented to yield meaningful analysis. In brief, the vast
majority of aviation regulators all across the world currently forbid the usage of UAVs (Song,
2014).
2.1. North America - Regulatory Overview
Canada has seen explosive growth in its drone manufacturing industry due to regulatory
advantages. Established U.S. manufacturers have been hindered by a lack of concrete regulation
and enormous political risk from future regulatory change. In Canada, regulations are already in
place. The Canadian government’s aviation regulatory body (Transport Canada) allows that “Any
person or company looking to operate UAVs for commercial
purposes can do so by filling out a Special Flight Operations
Certificate”. Once the paperwork outlining flight area and flight
duration have been submitted to Transport Canada, the UAVs are
free to fly.
By some estimates, Canada’s existing regulatory framework has
given Canadian commercial UAV manufacturers as much as a 5-
year head-start on the U.S. market (El Akkad & Cryderman, 2014).
In 2014, Transport Canada issued 1,672 permits, the U.S.
government by contrast issued only 268.
According to the Federal Aviation Administration’s (or FAA’s)
public statements; “Unmanned aircraft systems (UAS) are
inherently different from manned aircraft. Introducing UAS into
the nation's airspace is challenging for both the FAA and aviation
community, because the U.S. has the busiest, most complex
airspace in the world. The FAA is taking an incremental
approach.”8
8
https://www.faa.gov/uas/ (2015)
Photo sourced from AeroVironment Inc.
146
298
313
257
373
268
2009 2010 2011 2012 2013* 2014**
FAA Permits Issued For Civilian Aerial
Drones In U.S. Airspace
Figure 6. FAA permits 2009 – 2014
Source: FAA *As of Oct, 2013 **As of Dec, 2014.

The FAA faces challenges related to the poorly-defined laws of ownership of the skies. When the
FAA was first formed in 1924, U.S. Congress declared that the skies above 500 feet would belong
to the public domain. A further law was instituted following an appeal to the Supreme Court by
an irate chicken farmer; this stated that all landowners would henceforth own the sky up to 83
feet above their homes. Therefore, a wide-band of officially-unregulated airspace remains
between 83 and 500 ft., which many entrepreneurs wish to convert to drone airspace. Despite
the lack of laws, in 2014 the FAA began sending out cease-and-desist notices to commercial
drone operators threatening heavy fines if they did not ground their fleets pending regulation.
Numerous appeals are in progress and the FAA is widely-expected to draft new regulations in
the 6 to 18 months.
2.2. Asia-Pacific - Regulatory Overview
Two of the most important markets in the Asia-Pacific region are Japan and China. The Japanese
regulatory environment was altered in April of 2015 due to a Japanese protestor landing a UAV
carrying radioactive matter on the roof of Prime Minister Shinzo Abe’s house, (a similar event
occurred at the White House on May 15, 2015). Until then no formal regulations had existed.
The Japanese Civil Aviation Bureau (JCAB) maintains a relatively UAV-friendly regulatory
environment to spur greater investment.
As of September 2014, China’s regulations were significantly modernized; the new rules allow
for persons to operate UAVs by applying for a special pilot’s license and submitting flight zones
for approval. UAVs weighing less than 7kg are not subject to these constraints.
2.3. Europe - Regulatory Overview
The European regulatory environment faces many of the same challenges as the U.S., with the
added difficulty of the pre-eminence of national laws above European Union resolutions.
According to the European Aviation Safety Agency (EASA)9
commercial and civilian UAVs are
currently used “under a fragmented regulatory framework. Basic national safety rules apply, but
the rules differ across the EU and a number of key safeguards are not addressed in a coherent
way”. In most European nations, UAVs weighing less than 150 kg are governed by regulation of
the ‘National Aviation Authority’. However, in the U.K. that national aviation authority is the Civil
Aviation Authority (CAA)10, an organization which stymies UAV adoption by their treatment of all
aircraft (regardless of mass) as subject to a litany of safety-certifications, pilot qualifications, and
official approvals.
By contrast, UAV-friendly Switzerland has been paving the regulatory path domestically, and in
July of 2015 had already begun integrating drone-use into their national parcel and mail delivery
service ‘Swiss Post’ for use in remote regions. (Agence France-Presse, 2015)
Broadly-speaking the EASA is currently pursuing a more robust and unified regulatory
environment for all EU member states, changes may be expected after the expiration of
comments on current regulations in September of 2015.
9
https://easa.europa.eu/easa-and-you/civil-drones-rpas (2015)
10
https://www.uavs.org/regulation (2015)

Summary of Regulatory Challenge
In the U.S. as well as international markets, the chief challenge is not regulation per se, but
rather the lack of acting regulations – this creates immense regulatory risk for UAV firms
interested in investing in an industry which might suddenly become banned domestically.
3. U.S. Competitive Context
3.1. Background
The U.S. has been a pioneer of military-drones use since as early as 1946, when the U.S. Air
Force established a special division named the “Pilotless Aircraft Branch”. Contracting with U.S.
firm ‘Ryan Aeronautical Company’ (now part of Teledyne Inc.), several models of primitive
drones were developed for use in target-training fighter pilots. By 1960 Ryan Aeronautical had
suggested refitting training drones for use in surveillance missions. By the mid-70s, several major
U.S. aerospace firms had invested in drone R&D and a model known as the “Lightning Bug”
would see extensive use during the Vietnam War for reconnaissance. Early versions of the
infamous ‘Predator’ drone were used in the Balkans in 1994. By 2001, tests were underway in
Indian Springs, Nevada to transform the surveillance drone into a weapons platform. This year,
despite flattening budgets, the Department of Defense increased investment in UACVs to an all-
time high of $2.5 billion11
, with even greater investment expected in their future ‘Global Hawk
program’.
Commercial UAVs have been extremely slow to materialize in the U.S. due in large part to the
difficulties surrounding FAA regulations. For context; UAVs account for over 90% of crop-dusters
in Japan (with regular usage dating to the 1980s), the first legal usage of an agricultural-UAV in
the U.S. followed a permit in January of 2015.12
Despite the largely-military applications, many analysts anticipate far-reaching commercial and
civilian applications, some include; agriculture, aerial photography, border patrol, police
monitoring, emergency response, infrastructure monitoring, mail and parcel delivery,
multimedia, oil/gas exploration, meteorological research, and environmental monitoring. At a
CAGR of roughly 20% (Teal, 2014), the U.S. commercial and civil market is set to outgrow the
defense market within the next 10-15 years. With greater economies of scale, UAVs may be a
commonplace of civilian-life in the very near-future.
3.2. Analysis of External Environment
This analysis will consider the external environment for U.S. firms operating within the UAV
market. The geo-political, economic, social and technological factors affecting the United States
are evaluated individually.
11
U.S. Department of Defense fiscal Budget 2015
12
Mary Cummings, Duke University Human and Autonomy Lab.

Geo-Political
According to the Council on Foreign Relations, there are currently 5
global military/political issues with a high impact on U.S. interests.
These include the armed confrontations in the South China Sea and
the East China Sea, the North Korean crisis, Iran’s Nuclear Crisis, and
the state of civil war and sectarian violence in Iraq (Council on Foreign
Relations, 2015). The CFR also deems Syria, East Ukraine, Yemen and
Pakistan of political importance to U.S. interests.
U.S. armed confrontations have altered considerably in military
doctrine; recent military conflicts have tended towards suppressing
insurgencies and engaging in urban warfare rather than field combat.
Other political factors include the criticism from the interventionist
policies used in persecuting the ‘war on terror’ in several of the listed
regions in figure 7. The U.S. State Department manages sales of
military-capable technologies to foreign states, barring certain
markets.
Economic
As shown in figure 8, the U.S. GDP is expected to continue to rise despite the threat of global
recession. Analysts Bain & Co are projecting a contraction in the world’s luxury goods market
overall for 2015, in the U.S. however, the number of ‘high net worth’ individuals (possessing
more than $ 50 million in assets) is set to continue to rise. In 2014 luxury spending rose
approximately 5 percent to about $73 billion. With high rates of disposable income among
this demographic, there is a healthy market for expensive toys. (Tabuchi, 2015)
After significant budget cuts from 2010 through 2014 as a factor of GDP (World Bank, 2015),
U.S. defense expenditure rose temporarily (see Fig. 8) this year. Greater cutbacks are
expected within the defense industry as the U.S. withdraws more fully from the conflict in
Afghanistan and reduces presence in the Gulf region.
Military contractors are requested to deliver more
cost-effective systems to the U.S. Defense Department
than previously required.
Social
Privacy issues have developed greater cultural
significance following the wiretapping revelations
made by Edward Snowden (formerly of the National
Security Agency) in 2013. While ‘big data’ and
snooping technologies cause concern for digital
privacy, many Americans are also concerned about
their direct physical privacy (e.g. the debate on police
‘body cameras’).
Immigration is emerging as a pivotal issue in the 2016
presidential election; heavily-trumpeted by RNC
Figure 8. U.S. GDP and Defense Expenditure (in billions $)
4.7%
4.6%
4.2%
3.8%
3.5%
3.6%
3.4%
14,500
15,500
16,500
17,500
18,500
19,500
2010 2011 2012 2013 2014 2015
(est.)
2016
(est.)
U.S. GDP % of GDP spent on Defense
 High Importance  Medium Importance
Figure 7. Areas of instability to U.S. political interests

primary-candidate Donald Trump and others. The Department of Homeland security estimated
in 2014 that 11.4 million13
unauthorized immigrants were living in the United States. There is
pressure on policy makers to somehow address this issue.
Despite having the most expensive healthcare system in the world, the commonwealth fund
ranks the U.S. last among 11 wealthy nations for quality of care14. This system will face greater
pressure as the median U.S. population ages. According to U.S. census data, by 2050 the
population aged 65 and over is projected to be 83.7 million, almost double its estimated
population of 43.1 million in 201215
. This ‘greying’ population may cause labour shortages and
increased tax burdens on income-earners.
Technological
Numerous labour-supplanting technologies have begun to materialize of late in the U.S. market.
Self-driving cars are expected to be widely-available in the next 5-10 years16
. A major limiting
factor of these technologies lies in the strength of their artificial intelligence enabled through
software. If resolved, this and similar robotic innovations may partially address labour shortages
caused by aging populations.
Despite regulatory roadblocks, the so-called ‘sharing economy’ (as enabled by technology) has
experienced tremendous growth. Firms like Airbnb, Uber, Lyft, and RelayRides have emerged as
market leaders, dozens of start-ups have been founded in the past several years exploring other
sharing opportunities. (The Economist, 2013)
Computer chip technologies continue to decline in cost and increase in computational speed
over time. According to ‘Moore’s Law’17
the speed of a chip doubles every 2 years (and the cost
also decreases by half). This effect is expected to slow as certain theoretical limitations on
semiconductors are confronted (as Intel’s CEO Brian Krzanich confirmed in 2015).
13
http://www.dhs.gov/publications (2015)
14
http://www.commonwealthfund.org/~/media/files/publications/fund-
report/2014/jun/1755_davis_mirror_mirror_2014.pdf (2014)
15
https://www.census.gov/prod/2014pubs/p25-1140.pdf
16
https://www.google.com/selfdrivingcar/faq/
17
http://www.mooreslaw.org/
Photo sourced from General Atomics

There has also been a mass-commodification of electronic components, many small technology
and manufacturing firms in developed markets face amplifying competition brought on by
improved global shipping-efficiency, a general decrease in tariffs, and the rise of import/export
brokering firms such as Alibaba (Dawei, 2015). Mass-commodification and simpler logistical
processes has also allowed ample growing space for a rampant tech start-up industry.
3.3. Analysis of U.S. Drone Market
Having established the market context, this analysis proceeds to investigate the American UAV
industry in isolation. The analysis is conducted on both the UAV and UACV market in the United
States. Michael Porter’s 5 forces framework was used to analyse the relevant market forces; the
summary diagram is provided immediately below in figure 9.
Threat of new entrants
There is a very high threat of new entrants in the UAV industry. In the commercial and civilian
UAV market, this is due to low barriers to entry. An individual with a small amount of capital can
purchase microcontrollers and components online from wholesale distributors like Alibaba.com,
assemble the hardware, and interface the UAVs with open-source software systems readily
available online. Two of the largest civilian firms; 3D robotics, and DJI Innovations were originally
founded in exactly this manner. The barrier of technological know-how is still high but seems to
• Few viable technology alternatives
• High degree of political risk with UACV usage
• Civilian market has numerous substitutes
• Commercial market overlaps with satellite
technology, related to costs
• Medium switching costs to UAV systems
RIVALRY OF EXISTING
COMPETITORS
VERY HIGH
BARGAINING POWER OF
BUYERS
MEDIUM
BARGAINING POWER OF
SUPPLIERS
LOW
THREAT OF SUBSTITUTES
MEDIUM
THREAT OF NEW ENTRANTS
HIGH
 Diversified market segments
 Low switching costs between UAVs
 Low cost commercial and civilian
alternatives
 Many non-defense alternatives
 Relatively few defense alternatives
 Low buyer concentration
• Commodity components for non-
defense UAVs
• Medium supplier concentration
• Medium threat of forward vertical
integration
• Low switching costs between
suppliers
 Numerous, closely-balanced
commercial UAV firms
 Increasing price-competition
 High exit barriers for UACV makers
 Low differentiation in non-defense
UAVs
 High lobbying expenditures to secure UACV
contracts
 Low capital requirements for commercial UAVs
 Diminishing technological barriers
 Open-Source systems allow speedy integration
 High-growth market attracts competitors
Figure 9. Porter's 5 forces analysis of U.S. UAV market

be in decline as more documentation and ready-to-fly (“RTF”) UAV kits become available
globally.
The UACV market is entirely different from the non-defense UAV market. Lobbying and ties to
State-officials play an important role in garnering contracts. According to the Center for Public
Integrity, top-contractors employ over 400 lobbyists at the Pentagon. Increased market pressure
from defense budget-caps have pushed lobbying expenditures up by 25% to $59 million in 2015
(Cohen, 2015). There are also very high-levels of industry secrecy and prohibitive capital-costs;
to field a $64 million18
drone like General Atomics’ MQ-9 Reaper would undoubtedly require
exponentially more initial capital spent in R&D.
One of the most significant barriers to entry at this time comes from the slow pace of FAA
approvals; a new manufacturer’s drones must follow a lengthy approval process. The
manufacturer bears a significant risk if the permit is not initially granted or is significantly
delayed (refer to Figure 6. FAA permits 2009 – 2014).
Threat of substitute products or services
The threat of substitutes is medium. UAVs have emerged as a disruptive technology to a number
of existing commercial industries. As such, there are few substitutes available which supersede
drones through technological sophistication. Rather, it is the low-tech original methods which
compose the primary alternative. In the case of the UACV defense segment, drones are being
used to phase out existing and rapidly aging technologies, like the U-2 program.
There is however significant risk of substitution in the defense sector brought on by swaying
public opinion. Only 3 days before the publishing of this analysis, an unknown whistleblower
leaked critical classified documents concerning U.S. drone warfare to news sources. As The
Guardian reports; these documents implicate the Air Force, CIA, and president Obama himself in
large-scale drone assassination programs, this information seriously contravenes earlier
statements on official U.S. drone policy (McCarthy, 2015). Political pressure brought on by
domestic outrage and international criticism may pose a threat to UACV markets.
In the commercial segment, UAVs are used to lower costs and improve efficiency. In the
critically-important precision agriculture market, UAVs are a means of reducing fertilizer and
pesticide usage. If farming input-costs decrease dramatically, it may exert downward-pressure
on commercial UAV demand. Satellite data-relaying and imaging technologies form a direct
substitute for some commercial UAV usages (albeit far more expensive). The cost to launch a
single satellite (not including the actual hardware) commonly ranges between $50 and $500
million depending on payload19
- far more than the equivalent hardware cost for a single drone.
If this cost-ratio changes substantially it will undoubtedly have an impact on drone usage.
A wide range of civilian-use substitutes exist, as UAVs in this segment are essentially expensive
toys. Multimedia entertainment, luxury vehicles and other high-end gadgets are strong
substitutes for demand in this market segment.
18
http://www.af.mil/AboutUs/FactSheets/Display/tabid/224/Article/104470/mq-9-reaper.aspx, (USAF)
19
http://www.globalcomsatphone.com/hughesnet/satellite/costs.html (2015)

Bargaining power of buyers
UAV buyers are heavily segmented by product-type, with an overall ‘medium’ degree of market
power. Commercial UAVs are being purchased by universities, the film industry, researchers,
police departments, border guards, and especially for use in agriculture. The relative ease of
swapping instruments (sensors, cameras, payloads) between UAVs from different manufacturers
makes for very low switching costs. Similarly, most UAVs are operated on open-source software
utilizing non-proprietary programming languages, this allows for systems developed on one
commercial UAV platform to be portable to a competing platform.
The emergence of low-cost ($1000 and less) commercial alternatives from DJI Innovations and
other Chinese makers has also depressed prices in the industry and increased the consumer’s
bargaining power.
The U.S. UACV market differs in the concentration of manufacturers, the high R&D costs
translated into price, and the limited number of viable models available for purchase.
Bargaining power of suppliers
The bargaining power of suppliers is generally low. Depending on build-type, UAVs are
commonly constructed with some or all of these components; global positioning system (GPS),
air frame, electronic speed controllers and gyroscopes, motors, battery, flight controller, radio
and receiver, and either propellers or a jet propulsion system.
For simpler UAVs; these components can be treated like commodities available for purchase
from a variety of sources, whereas for military UACVs; components like Rockwell Collins Inc.’s
flight controllers are protected and controlled by the State Department (not unlike missile
guidance chips). The limited number of suppliers for these components, as well as the extreme
difficulty of vertically-integrating component production privately, gives these niche suppliers a
high degree of bargaining power.
The bargaining power of UACV component suppliers is expected to decrease in tandem with the
number of nations which are UACV-capable.20
Intensity of competitive rivalry
The intensity of competitive rivalry is extremely high. According to listing service ‘UAV Global’,
there are currently 435 firms in the UAV industry globally. Of those; 91 firms (or 21%) are
founded in the U.S. (UAVGlobal, 2015). The top 3 players in the U.S. with their market shares are
currently Northrop Grumman (37.7%), General Atomics Aeronautical Systems (25.2%) and
Textron Inc. (20.6%), these 3 companies compete aggressively for bids on U.S. Department of
Defence contracts. The remaining 16.5% of the market is fragmented among medium-size U.S.
players such as AeroVironment Inc., foreign competitors such as Parrot (France) and DJI (China),
and finally hundreds if not thousands of unlisted micro-manufacturers operating from their
homes and garages.
20
See Figure 4. Nations Invested in Armed-Drone (UACV) Manufacturing

The entrepreneurial climate of this market has a strong correlation with the amount of
start-up investment available in the U.S. economy. Most of the 91 UAV makers in the list
are small and aggressive companies built on outside capital. In Figure 9 the number of
venture capital funds (“VCs”), as well as their total capital is pictured. Note the
enormous 74% growth in VC funding from 2013 to 2014, as well as the 28% growth in
the number of VC firms. If the years after the 2008 recession are a reliable indicator,
future economic downturns may cull the field of start-up firms through contractions in
venture capital.
Investors perceive that there are billions in unallocated future revenues over the next
decade as the market doubles from $6.4 billion in 2014 to $12.7 billion in 2024. UAV
makers are thus scrambling to establish their positions in the growing market to develop
early advantages. Established U.S. aerospace firms Northrup Grumman, Boeing,
Lockheed Martin, and General Atomics face escalating global competition from French,
Swiss, Israeli, and Chinese manufacturers in the UACV market.
3.4. Analysis of U.S. Drone Market – Factors for Success
The factors for success in the UAV industry depend upon the major market segment being
targeted. In September of 2015, the U.S. Congressional Research Office (“CRO”) compiled a
report for legislators voting on FAA regulations. Within their report, they identified the following
consumer groups:
Entry-level consumers (commonly hobbyists) paying up to $500 for a kit which includes the
drone, rotors, batteries, a charging unit, and GPS. These units typically are able to fly for 10
minutes on one charge, at a speed of 22mph, and with a range of 150-200 feet. These are
usually designed to be operated using an iOS or android smartphone application.
Mid-level consumer may be willing to pay $750-$2,000 for a UAV kit similar to the entry-level
model but with flight times approaching a half hour and greater range and speed. These
commonly ship with a dedicated controller unit.
Commercial consumers willing to pay $10,000 or more. These UAVs have longer flight times,
and are able to carry more significant payloads. (Canis, 2015)
Military consumers (not mentioned in the report) make up the U.S. Department of Defense, and
the military-procurement branches of U.S. strategic allies. These UACVs are highly variable in
cost, from the thousands to the tens of millions for a single drone.
Having determined these core consumer groups, they will be analysed according to the
consumer’s demands, and competition to determine the relevant key success factors.
Figure 10. Growth in U.S. VC $
Source: Reuters, NVCA 2015
Year
Number of
Funds
Venture
Capital ($M)
2006 236 $31,107.60
2007 235 $29,993.70
2008 214 $25,054.90
2009 162 $16,103.80
2010 176 $13,283.60
2011 192 $19,080.50
2012 218 $19,904.90
2013 208 $17,702.00
2014 267 $30,883.20

Figure 11. Analysis of Key success factors in the American UAV market
What do Consumers Want?
(drivers of demand)
How do firms survive
competition? Key Success Factors
Entry-Level Consumers Low-Cost
Ease of use
Reasonable battery life
Attractive design
Shrinking margins require
minimum costs, effective
marketing, and small points of
differentiation.
Costs must be controlled
through greater economies of
scale, cheap labour, and
relationships with low-cost
suppliers. Effective marketing.
Mid-Level Consumers Good value
Customization options
Long battery life
Quality customer support
High-quality construction and
good consumer value,
platforms with upgrades and
customizable functions.
Knowledgeable support staff,
purchasing cutting-edge
generational hardware in
volume to maintain price-
targets.
Commercial Consumer Multifunctional
Maximum payload capacity
Customer support
Strategic partnerships with
non-aerospace firms, scalable
production volume, proprietary
technology.
Knowledge of commercial
market needs, tailored support
systems for major clients, large
factories and economies of
scale.
Military Consumers High reliability
Maximum flight time
Multifunctional
Maximum payload capacity
Maneuverable / Stealthy
High fixed costs, exit barriers,
effectively identifying military
niches and exploiting them
with purpose-built hardware,
Proprietary technology.
Large amounts of capital,
Relationships with military
purchasers, industry-leading
research and development.
Figure 11 displays the key success factors for each market segment. Entry-level consumers exist
as an isolated market where cost-leadership is the dominant competitive strategy. Commercial
and military consumers share many similarities in their need for niche market focus and highly
differentiated products. Whereas mid-level consumers prefer low-cost, differentiated UAVs. The
final phase of this industry analysis will examine the key trends affecting the UAV industry:
3.5. Key Trends in the UAV market
1. The UACV market is expected to continue to drive the UAV market as a whole for the
foreseeable future, with UAV innovations ‘trickling down’ into civilian use. The UACV
market is in turn driven by the rise of asymmetric warfare, and the need for situational
awareness and integrated solutions. Declining defense budgets21
in the U.S. and the EU
are creating a greater demand for automated defense systems. The UACV market is
projecting a 5% CAGR from 2015-2025.22
2. Innovation in the UAV industry will continue to outpace U.S. regulators for the near
future. Firms like Google Inc. have adjusted by relocating drone testing centers to
Switzerland and Europe. Pressure is mounting on the FAA to adopt comprehensive
rules; the Association for Unmanned Vehicles International (“AUVSI”) estimates that
each year of delay has a $10 billion economic impact for the U.S.
21
See Figure 8. U.S. GDP and Defense Expenditure (in billions $)
22
See Figure 20. UAV and UACV market forecast (Appendix)

3. One of the most important projected applications for UAVs is thought to be in precision
agriculture. It is anticipated this could account for roughly 80% of commercial drone use
over the next 5-10 years. Through efficient crop spraying, mapping and imaging
systems, these UAVs could improve farm yields by as much as 15%, while reducing
pesticide and fertilizer use by as much as 40%. Advances in software may also make
them viable for the collection of produce. (AUVSI, 2014) The Bureau of Labor Statistics
anticipates an 8% drop in farmer employment between 2010 and 2020. The USDA
estimates 51% of the U.S. land-base is used for agriculture.
The next phase of the analysis will investigate the strategies which individual firms are
employing to achieve competitive advantage in their respective markets.
4. Summary of Industry Challenges
The UAV market is still highly-immature. As such; the market leaders for this industry have yet to
be clearly defined. Current leaders are divided into broad and opposing markets; capital-
intensive UACV production and low-margin UAV production. With the exception of Boeing, the
established aerospace firms have yet to significantly cross-over and enter the commercial
market. Analyst’s growth predictions are highly-variable - intimating the level of volatility in the
industry, yet the overall growth opportunities for the UAV market are generally thought to be
vast. Several factors have been discussed; escalating labour costs, a graying population, a shift
towards asymmetric warfare, and a boom in venture capital.
The factors impeding drones in the U.S. market are foremost the chilly regulatory climate,
privacy concerns, public disapproval of UACV use in overseas military theatres, and air safety
issues. Despite these factors, the U.S. maintains the world’s largest market for UAVs at $4.3
billion of a global $7.2 billion, and also holds a disproportionately large number of the world’s
UAV manufacturers at 21%. If regulations are resolved and public opinion embraces drone-use,
the U.S. UAV market may emerge as strongly as the aerospace industry did post-WW2.
Otherwise, Chinese and French firms may be the early market leaders.
4.1. Limitations of Company Analysis
This analysis is limited by the level of government and corporate secrecy involved. Large
publicly-traded aerospace firms do not typically isolate their UAV production in any financial
statements. As such, proxy-measurements were used to determine market sizes and areas of
focus. Furthermore, nearly all of the small competitors in the U.S. industry (91 listed) are
privately-held, this impedes cross-firm ratio comparisons.
The final challenge of this analysis lies in the immaturity of the market and its relative lack of
financial stability. Some figures dating back more than three or four years hold extremely limited
value in the present market, and were only implemented in the analysis where none other could
be determined.

5. Competitive Overview
As previously stated; the U.S. UAV market is currently valued at approximately $4.3 billion. Of
that 4.3 billion, approximately 90% (IBISWorld, 2015) of American UAV revenues are related to
Department of Defence (DOD) expenditures. The remaining 10% is divided across civilian-use,
agricultural-use, and other applications. Figures on these tertiary markets are highly speculative,
and are drawn primarily from the ratio of drone certifications by intended use, as obtained
through the FAA (see Figure 21 in appendix), and an AUVSI report predicting expenditures for
2015 (AUVSI, 2014). It is worth noting that the AUVSI report further predicts that spending on
agricultural uses are likely to overtake DoD spending by 2025, creating an estimated $80 billion
in economic impact over the 10-year period (AUVSI, 2014).
This analysis will directly compare the four largest known manufacturers of UAVs/UACVs. These
four firms collectively comprise 88.4% of the US-based market by sales; Northrop Grumman
Corporation (37.7%), General Atomics Aeronautical Systems (25.2%), Textron Inc. (20.6%), and
AeroVironment Inc. (4.9%), with the remaining 11.6% distributed among a broad field of smaller
players, mostly producing civilian and commercial-use drones. The relative market shares are
illustrated in figure 12.
Figure 12. Top Industry Players by Market Share
Source: original graphic, data derived from (IBISWorld, 2015), annual Reports, *estimates
Note: A time-horizon of 5 years was employed for the analysis of financial data. This period was selected due
to the extreme volatility of the UAV market, and the need for meaningful comparison with the (recent advent
of) civilian and commercial drone-use. One of the largest such firms from California - the Richard Branson-
backed 3D Robotics with over 30,000 customers (CNBC, 2015) - was only founded and incorporated in 2009.
Dozens of smaller firms have been founded in the 6 years afterwards, summing to a total of 91 incorporated
UAV manufacturing companies in the United States.
Manufacturing Sectors
Region
U.S.
$3.3 billion
Civilian
~2%
Defense
90%
Agriculture
~6%
Other
~2%
Northrop Grumman
Corporation, 37.7%
General Atomics
Aeronautical
Systems, 25.2%
Textron Inc, 20.6%
AeroVironment, 4.9%
Other, 11.6%
Top Industry Players
Measured by 2015 market share*

T
Textron
These competitive pressures, and particularly huge year
over year declines in DOD budgets (see Figure 8) have
led to an overall contraction in revenues for the U.S.
UACV manufacturing market. This is despite the fact
that UAV revenues globally have been steadily
increasing, and are projected to continue to grow (see
Figure 3).
A key competitive concern which will be addressed
with each firm in the analysis, is how to seamlessly
transition between:
(1) Majority-revenues from UACV production for
U.S. Department of Defence, and;
(2) Capitalizing on the explosive growth which is
predicted in agricultural and commercial-use
UAVs (AUVSI, 2014).
While some firms like Northrop Grumman may opt to
remain a niche high-level player dominating the
defence industry (1). The smaller firms are better
positioned through their resources, capabilities, and core
competencies to consolidate and acquire competitors
operating below their tier in regards to net capital
and technological sophistication. This analysis
considers a refocusing on lower-level markets to be
highly-probable.
Error! Reference source not found. shows the
positions of the top-4 firms with regards to their
generic strategies, as measured by an emphasis on
cost or differentiation focus (x-axis), and the breadth
of the target market; from a niche product to a more
versatile mass-market one (y-axis).
* These conclusions will be elucidated on in the
proceeding section (5.1 to 5.4), wherein each
competitor will be evaluated in isolation.
CompetitiveScope
BroadTargetNarrowTarget
Lower Cost Differentiation
Competitive Advantage
Figure 13. Revenue share of top-4 U.S. UAV Manufacturers
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
3500.0
4000.0
4500.0
2010 2011 2012 2013 2014 2015
Top-4 U.S. Annual UAV Revenues
($ million)
Northrop Grumman General Atomics
Textron Inc. AeroVironment Inc.
T
Northrop
Grumman
T
General
Atomics
T
AeroVironment
Figure 14. Porter's generic strategies of the U.S. UAV market

5.1. Northrop Grumman Corporation (NGC)
Background
According to Northrop Grumman’s internal history (Norththrop Grumman, 2015) the
company was a merger of two aircraft corporations in 1994 (Northrop Corp. and Grumman
Corp.) as well as several other notable corporations including Westinghouse Electric. The
parent corporation of Northrop was first founded in Hawthorne, California in 1939 as a small
airplane manufacturer. By the mid-1940s the company was producing and exporting small
fighter aircraft and bombers to the United States’ DOD and Western-European defence
forces. By the mid-70s, the company was manufacturing supersonic fighters, and later
producing successful models like the B-2 Stealth Bomber and the F/A 18 Hornet. Grumman is
notable for having manufactured many of the components for the NASA lunar modules of the
Apollo program.
Northrop Grumman Corporation (or NGC) is primarily a U.S. military-contractor, providing all
manner of defence products; including but not limited to aircraft carriers, military aircraft,
missile defence systems, satellites, information technology, and UAVs. In 2014, 84% of NGC’s
total revenues ($24.0 billion) were derived from U.S. government contracts. NGC has a high-
degree of related-diversification in their products (primarily smart-weapons systems), and
compete on bid and no-bid contracts providing military systems to the U.S. Air Force, Army,
Coast Guard, Marine Corps, and Navy. (Norththrop Grumman, 2014).
Strategic Posture
Northrop Grumman’s mission statement is to “be the most trusted provider of systems and
technologies that ensure the security and freedom of our nation and its allies. As the
technology leader, we will define the future of defense […]” NGC’s competitive positioning is
concerned with differentiation through technological advantage. Many of their UAVs are the
most expensive in their class. The primary UAV products they currently produce include:
 Global Hawk – A High Altitude, Long Endurance (HALE) super drone
 Triton – Naval version of the Global Hawk
According to the U.S. Government Accountability Office, the price of a single Global Hawk drone
has inflated from $61 million in 2001, to $223 million by 2013 (roughly 10 times the cost of a
Predator drone). The Global Hawk is known to be the most expensive drone currently in
production (United States GAO, 2013). While NGC was granted contracts for the Global Hawk to
replace the U-2 program in 2015, fulfillment has been stalled by cost-overruns causing congress
to delay full adoption.
NGC’s UAV business strategy is generally consistent with the parent corporation’s mission of
emphasizing quality and technological supremacy above costs-leadership.
External Environment
The external opportunities available to NGC lie primarily in the opening of new export markets
with NATO and regional allies through geo-politics shifts and changes in U.S. government policy;
KEY FIGURES
UAV REVENUES IN 2015
$1.237B
PERCENTAGE OF TOTAL
REVENUES FROM UAVS
5.1%
% REVENUES FROM U.S.
DEFENCE CONTRACTS
84
DEBT/EQUITY RATIO
2.67
RETURN ON EQUITY
0.29
CURRENT RATIO
1.39
Source: Annual 10K reports;
(Northrop Grumman, 2015)

the U.S. market (for the type of UAVs which NGC produces) is currently saturated. The top
external threat to NGC is a wind-down in global conflicts; NGC’s enormous, high-altitude systems
are among the most difficult to adapt to civilian application.
Internal Environment
Strengths and Weaknesses
Using insights drawn from cross-comparison with the other 3 firms in the analysis, and an assessment of
resources & capabilities; the following observations are made of NGC’s strengths and weaknesses:
Strengths Weaknesses
 Strong ties to U.S. Pentagon and State
Department through legacy relationships23
 Able to deliver superior-quality products
 Wealth of human capital invested in skilled
engineers and scientists
 Fairly strong brand equity/awareness within
intended customer-base23
 Accrued customer insights & trade secrets
 Distribution and marketing costs are negligible
as factors of overall unit costs24
 Political affiliations and U.S. gov. regulations
limit potential customer base25
 Environmental criticisms by EPA25
 Lack of pricing management due to GAO and
DoD transparent bidding processes
 Lack of significant commercial-entry limits
brand exposure primarily to defence markets
 High debt to equity ratio (2.7), moderately-low
current ratio (1.4); NGC has high leverage and
only moderate liquidity
 Highly-bureaucratic organizational structure
Core competencies
NGC’s core competencies are continuous learning and a commitment to quality. NGC structures
their human resources practices to promote training and personal development as well as
fostering an innovative culture within their engineering units. Their commitment to quality is
evidenced in their ‘premium’ positioning within the UAV market, and the strength of their
relationships and reputation with the DOD. This quality is difficult to imitate due to the
organizational resources required to produce their top-tier products, and the high capital costs
of effective lobbying.
NGC uses their competencies in quality and an iterative approach to design to produce the most
cutting-edge UAVs currently on the market. This methodology tends to incur much greater
expense than competitor’s methods, as shown in the financial analysis.
Financial Analysis & Future Challenges
From 2012 to 2014, NGC has increased their dividends on common stock 3 times for a net
increase of 36%. They have also made 3 common stock share repurchases since 2010 totalling
over $12.3 billion in regained equity. From 2013 to 2014, their investment in depreciable assets
(including machinery, buildings, and other capital investments) increased by 6.4%. Finally,
company-sponsored R&D expenses increased from $520 million to $569 million between 2012
23
Source: (IBISWorld, 2015)
24
Source: Northrop Grumman Annual Report, 2014
25
Source: (United States GAO, 2013)

and 2014. These indicators together reflect a confident financial outlook on the part of NGC’s
senior management group. This comes despite a decrease in operating income of about 7.8% for
NGC in the most recent annual report. It may be the case that share repurchases were
undertaken to inflate the ROE in a period of declining revenues (see Figure 15, year 2014).
Figure 15. Northrop Grumman financials, sourced from 10K annual reports, (IBISWorld, 2015)
NGC (UAV-related) Consolidated Financials
Revenue
($ million) (% change)
Op. Income
2010 1841.5 NA 212.0 NA
2011 1736.3 -5.7 212.1 0
2012 1758.7 1.3 214.7 1.2
2013 1430.6 -18.7 173.6 -19.1
2014 878.4 -38.6 115.5 -33.5
2015 1236.5 40.8 162.6 40.8
Over the five years to 2015, NGC’s UAV-specific revenue declined an annualized 7.7% to $1.2
billion (IBISWorld, 2015). This decline was caused primarily by a reduction in Global Hawk sales
as contracts were fulfilled. However as export-contracts are secured for U.S. Pacific allies,
Canada, Australia, and other NATO countries, revenues are expected to grow by 41% by year-
end 2015 (IBISWorld, 2015).
One of NGC’s future revenue streams may lie in adapting their high-altitude, long endurance
(HALE) systems to civilian applications - e.g. mapping, non-military surveillance, communication
and control systems.
5.2. General Atomics, Aerospace Systems Inc. (GA-ASI)
Background
General Atomics Aerospace Systems Inc. (or GA-ASI) is a subsidiary of General Atomics Inc., a
privately-held corporation founded in 1955 (itself originally a subsidiary of General Dynamics).
General Atomics’ original mandate was researching peaceful uses of atomic energy (GA,
2015). The scope of GA’s research broadened thereafter to include synthetic materials,
medicine, and aeronautics. By 1994, GA-ASI rolled out their ‘Predator’ class UACV, gaining
Pentagon testing contracts within just 6 months (GA, 2015). By the late 2000s, drone
production became one of General Atomics’ largest businesses, with a bevy of new models
(including the Reaper and Avenger) suiting various military and policing applications.
Because General Atomics is a privately-held corporation, ratio analysis is not possible with the
available information. Using publicly-available data in the form of revenue statements, and an
IBISWorld report (IBISWorld, 2015), it is shown that UAV systems compose approximately 63%
of overall revenues for parent corporation General Atomics Inc.
KEY FIGURES
$824M
PERCENTAGE OF TOTAL
REVENUES FROM UAVS
63%
# OF NATIONS WITH GA
DRONE SYSTEMS
4
TOTAL EMPLOYEES
5,000+
(IBISWorld, 2015), Linkedin28

Strategic Posture
GA-ASI’s internal press explains the business unit’s core objective; to provide “an ever-growing
line of versatile, reliable, cost-effective, and combat-proven aircraft”26
. In the context of
declining DOD budgets, GA-ASI seems better positioned than its rivals to exploit cost-
effectiveness in a customer’s purchase decision criterion. This is because their flagship UAVs are
significantly less expensive than some competitor’s offerings (such as NGC’s $223 million Global
Hawk) at just $17 million per unit (United States GAO, 2013).
The versatility of the ‘Predator B’ platform is evident in its adoption by both NASA and the
Department of Homeland Security as a scientific research vessel and a border surveillance
vehicle27
, respectively.
GA-ASI is a very lean and aggressive business unit compared to NGC and others, employing just
over 5,000 full-time staff according to LinkedIn28, NGC aeronautics is quoted to employ over
10,000.
Much like Northrop Grumman, General Atomics relies to a significant (though lesser) degree on
government contracts. General Atomics has been less hindered by the State Department than
NGC has with exporting their (cheaper, less sophisticated) Predator and Reaper drones to
European markets; including Italy, Turkey, and the U.K. (United States GAO, 2013). To wit;
General Atomics publishes their campaign and super-PAC donations to the FEC, these amounts
fluctuate around $0.5 million annually29
- a non-trivial amount based on current revenues – this
indicates the importance of regulatory support and congressional-backing to General Atomics.
One of the major external challenges GA-ASI faces is foreign competition from Swiss, Israeli,
Chinese, and French firms (see sections 1.3.2., 1.3.3.) for the growing export market. None of
these nations are saddled with the same arms-export scrutiny as is levied by the U.S. State
Department (IBISWorld, 2015). General Atomics cannot simultaneously serve both the DOD and
the international market without significant competitive obstacles.
In terms of competitive positioning; as a mid to high-tier firm, GA-ASI faces pressure both from
top-tier firms (NGC) and lower-tier firms (AeroVironment) simultaneously. This middle-ground
positioning may pose an existential threat for GA-ASI as industry consolidations inevitably occur.
Finally, societal pressure (see section 3.2) is an emergent threat to GA-ASI. Their top brand-
names (Predator and Reaper) have become synonymous with U.S. military-imperialism among
many regular people. While other UAVs exist on the world’s battlefields the ‘Predator’ name is
perhaps the most ubiquitous due to its targeted-bombing role in Afghanistan and Iraq.
26
GA-ASI Site - http://www.ga-asi.com/aircraft-platforms
27
GA-ASI Site - http://www.ga-asi.com/aircraft-platforms
28
GA-ASI Staffing - https://www.linkedin.com/company/general-atomics-aeronautical-systems
29
FEC disclosures - http://docquery.fec.gov/cgi-bin/fecimg/?C00215285

Using insights drawn from cross-comparison with the other 3 firms in the analysis, and an
assessment of resources & capabilities; the following observations are made of GA-ASI’s
strengths and weaknesses.
 Potential synergies with General Atomics
fusion/fission future technologies
 Some versatility of product platforms
(military/commercial)
 Competitively-priced systems, effective pricing
management capability31
 Middle-East and North-African expansion; Abu
Dhabi office opened in November of 201530
 Strong customer-relationship management
capability (DOD and State Department)
 Like NGC; heavy reliance on U.S. DOD
spending and contracts.31
 Middling presence in export markets
(only 4 nations with GA drone systems)
 Some constraint from organizational &
financial Resources, declining revenues in their
UAV division (see Error! Reference source not
found., year 2015)
 Highly-bureaucratic organizational structure
Core competencies
One of GA-ASI’s core challenges may be the gradual erosion of its twin core competencies of
innovation and product quality which were its founding focus. While the ‘Predator’ drone
originally emerged as a disruptive innovation in the 1990s, GA-ASI has made incremental rather
than transformational improvements since then. The company has allowed their products to
mature along the product ‘S-curve’ to a point of transition, and requires a significant reinvention
of their core competencies (perhaps focusing on cost-efficiency) to stave-off escalating losses in
the long-term. Both competencies have become highly-imitated within the market.
Because of GA-ASI’s status as a privately-held corporation, financial analysis is largely
speculative. Using the UAV-specific financial data from the IBISWorld report shown in Figure 16,
some conclusions may be drawn: First, GA-ASI suffered following U.S. defence-budget
reductions32 in concert with their direct competitors (see Figure 13). However, while all 3
competitors in the analysis saw some rise in revenue for 2015, GA-ASI’s revenues reduced by a
further 11%, roughly matching reductions to operating income.
There are numerous possible explanations for this effect; government bid and contract-based
revenues are highly uneven from period to period, and this may merely be an accounting
anomaly. The other possibility is that GA-ASI UAV models have already fully-capitalized on the
U.S. market. A substantial contract announced by GA-ASI33
on October 14th
, 2015 to deliver “full-
30
MENA expansion plan - http://www.ga-asi.com/ga-asi-expands-presence-in-middle-east-and-north-africa
31
Source: (United States GAO, 2013)
32
Refer to Figure 8. U.S. GDP and Defense Expenditure (in billions $)
33
U.S. Army Contract - http://www.ga-asi.com/ga-asi-awarded-major-us-army-contract-for-improved-gray-eagle

rate production” of ‘Gray Eagle’ model UAVs to the U.S. Army seems to contradict the market
saturation hypothesis.
Figure 16. General Atomics financials, sourced from (IBISWorld, 2015)
GA - ASI (UAV-related) Consolidated Financials
Revenue
Op. Income
2010 1193.4 NA 142.6 NA
2011 1328.9 11.4 163.2 14.4
2012 1644.2 23.7 199.4 22.2
2013 1417.2 -13.8 174.3 -12.6
2014 927.5 -34.6 114.9 -34.1
2015 824.1 -11.1 102.9 -10.4
GA-ASI key challenge lies in substantially diversify their UAV offerings into the commercial sector
to avoid enormous revenue fluctuations, as observed in their 5-year financials. Their current
move to supply non-combat UAVs (Altair, Mariner) to other U.S. government agencies may be
an incremental step towards such a goal.
5.3. Analysis of Textron Inc.
Background
Textron Inc. was originally founded as a textile company in 1923, its primary business-focus
today is aviation. Textron notably owns the ‘Cessna’ ‘Bell Helicopter’ and ‘Hawker’ brands. It
is a publicly-traded company listed on the NYSE, and based out of Providence, Rhode Island.
Textron’s UAV division operates under Textron Systems, accounting for 11.7% of total
revenue (IBISWorld, 2015). Textron’s major UAV client is the U.S. Army and Marines, who
require small ground-launch reconnaissance crafts for supporting land-based military
operations. They also export these craft to the Swedish and Australian militaries.
Strategic Posture
Textron’s overall position in this market is similar to NGC’s in that both companies derive very
similar proportions of their total revenues from UAVs (5.1% for NGC, 4.8% for Textron34
).
Textron’s mission seemingly is to become ubiquitous as the cost-conscious UAV of militaries
and high-end commercial users. Many of Textron’s statements on their company website
emphasize low-cost and convenience of transportation.35
An outline of Textron Inc.’s three key UAV products is provided below.
 Aerosonde – legacy system; low speed and payload capabilities
 Shadow – small (6-10m wing span) relatively inexpensive reconnaissance craft
34
Source: 10K reports and (IBISWorld, 2015)
35
Textron website - http://www.textronsystems.com/products/unmanned/shadow_m2
KEY FIGURES
$673M
PERCENTAGE OF TOTAL
REVENUES FROM UAVS
4.8%
DEBT/EQUITY RATIO
2.42
RETURN ON EQUITY
0.14
CURRENT RATIO
1.72
Source: Annual 10K report;
(Textron Inc., 2015)

 Shadow M2 - mid-size, HALE-capable, emphasizes low cost and weight
Textron relies on foreign exports to bolster their U.S. revenues. As an American firm, Textron is
subject to additional regulations and shipping costs on these exports. Their competitive pricing
position is therefore highly vulnerable to geo-political pressures, unfavorable exchange rates,
and a greater intensity of competitive rivalry. The latter is particularly true as their export
markets of Australia and Sweden are in close proximity to Switzerland and China, respectively
(both which are major low-cost producers).
assessment of resources & capabilities; the following observations are made of Textron’s
 Competitively-priced products (original
‘Shadow’ model cost only $750k)36
 Moderately diversified customer-base
(Sweden, Australia, and U.S.)
 Established-relationships as a purveyor of
small aircrafts and military/civilian helicopters
 In a volatile industry, exceptionally stable YOY
revenue and operating income (Figure 17)
 Reductions in fixed costs, rising rates of capital
spending indicating investment36
 UAVs are not a core focus of the business
 Deferred pension and retirement benefit
costs, (40% of net income in 2014)36
 70% of workforce is unionized, current labour
issues, low employee engagement36
 Stagnant R&D, current products may become
rapidly outdated36
 Rising long-term debt, fairly high D/E ratio36
Core competencies
Textron’s core competencies in their UAV division are flexibility, cost-effectiveness and customer
service. Textron has an established reputation with the U.S. Government as a reliable, low-cost
supplier. Their systems are known for simplicity in swapping between ‘payloads’, offering
greater flexibility. For customer service the company offers a significant amount of product
training and support through their ‘TRU Simulation’ brand name. Broadly, Textron appears to
prefer to follow the market trends, and offer greater efficiencies of production and improved
customer support. Customer service effectiveness is relevant to the market now, but likely to
diminish in importance as UAVs become more common and standardized.
Textron’s 5-year financials are significantly more stable than those of NGC and GA-ASI, the
company’s bottom-line on UAV sales does not appear to have been significantly impacted by
reductions in defence spending. The operating income has increased year-over-year since 2012
36
Source: 10K report and (IBISWorld, 2015)

(see Figure 17), indicating greater sales efficiency of its existing systems. However, Textron has
made limited investment in their UAV lines, and have no projects currently announced to be in
development. These revenue streams are therefore probable to decline as existing systems
become obsolete.
Figure 17. Textron Inc. financials, sourced from 10K annual reports, (IBISWorld, 2015)
Textron Inc. (UAV-related) Consolidated Financials
Revenue
Op. Income
2010 580.5 NA 67.5 NA
2011 518.3 -10.7 39.0 -42.2
2012 513.2 -1.0 39.0 0.0
2013 492.5 -4 43.5 11.5
2014 589.3 19.7 54.4 25.1
2015 673.3 14.3 61.1 12.3
One of Textron largest challenges in their UAV division is ensuring its relevance in the face of
amplifying competition. The current rate of investment is quite low. This analysis deems that it is
likely not sustainable to remain in the industry without greater research investment and
management backing once government-relationships and goodwill are fully expended.
5.4. Analysis of AeroVironment Inc.
Background
Monrovia, California based AeroVironment Inc. is a publicly-traded company founded in
1971. Originally known for developing a series of human-powered airplanes and solar
vehicles, today the company’s $304 million in total revenues are divided into two major
product categories: UAVs (85% of total revenue) and electric vehicle charging systems (15%
of total revenue) (AV, 2015).
Strategic Posture
AeroVironment has the largest number of models (13 unique airfoils) on the market of the
four companies in this analysis. Their 13 models are designed for a broad range of military,
commercial and civilian applications. Paradoxically, this is despite their tiny UAV budget (just
over 1/5th
of NGC’s). AeroVironment’s strategic posture seems to be achieving mass-market
dominance through highly-specialized niche productions, suiting individual needs and
designations. They are also cost-effective, with their mid-sized military drone; the ‘Raven’
being one of the least-expensive of its type, at just $35,000 (United States GAO, 2013). Other
significant models include;
 Nano Hummingbird – palm-sized surveillance UAV, capable of multi-directional travel
 Global Observer - enormous 53m wingspan, potentially unlimited flight times
 Puma – Hand-launched, autonomous flight, advanced propulsion systems in design
KEY FIGURES
$259M
PERCENTAGE OF TOTAL
REVENUES FROM UAVS
85%
DEBT/EQUITY RATIO
0.14
RETURN ON EQUITY
0.01
CURRENT RATIO
7.04
Source: Annual 10K reports

The company might be classified as pursuing a ‘blue-ocean’ strategy in their simultaneous pursuit of cost-
effectiveness and highly-diverse product offerings.
The top external threat to AeroVironment is the regulatory concern through the FAA and other
regional regulators (see section 2.1). Because AeroVironment lacks the lobbying power of firms
like NGC and GA-ASI, they face greater regulatory risk. New limits imposed on applications for
cutting-edge UAVs in scientific and civilian roles (e.g. utilizing the Global Observer for
earthquake, flood and storm observation) may be devastating to selected markets.
AeroVironment is generally well-positioned within the external market due to the diversification
of its product offerings, offering a hedge against future DOD budget contractions. Furthermore,
their military systems are almost entirely reconnaissance-based, minimizing the geo-political and
social risks of manufacturing offensive-drones.
assessment of resources & capabilities; the following observations are made of AeroVironment’s
 Priority of R&D budget – rising from $25.5m in
2014 to $46.5m in 201537
 5-year IDIQ (indefinite delivery, indefinite
quantity) contract with U.S. Air Force for
advanced propulsion systems37
 Innovative culture; structured through SBUs,
high-degree of employee engagement
 Flattened organizational structure
 Retained shares with voting privileges,
reducing top managerial focus on near-term37
 Declining profits, very thin operating margin37
 Moderate increase to cost of sales from 2014
to 2015 of 7%37
 Low economies of scale, increased production
costs (11%) due to fluctuating sales volumes37
 Small market capitalization exposes
AeroVironment to take-over attempts by
larger competitors
Core competencies
AeroVironment’s core competencies are in the flexibility of their product offerings, their highly
innovative company culture, and their operating-efficiency. AeroVironment is able to adapt their
products efficiently to suit a variety of different niche markets, this competency is highly
relevant to their market, as it offers a breadth of applications for AeroVironment products. Their
innovative culture is of value but not unique to the market (as evidenced by NGC).
37
Source: 10K report - http://investor.avinc.com/annuals.cfm

AeroVironment operates on a razor-thin margin (see Figure 18; Operating Income), investing
heavily in research and new prototypes in nearly every quarter. Their financial statements
suggest that net income/operating income is kept to a minimum through end-year allocations to
R&D budgets, possibly to mitigate income taxes.
AeroVironment has extremely low leverage as evidenced through their debt/equity ratio of just
0.14 (NGC and Textron average close to 2.5). Their current ratio is also quite healthy (7.04),
exceeding their 3 competitors’ and indicating AeroVironment has good liquidity.
Figure 18. AeroVironment Inc. financials, sourced from 10K annual reports
AeroVironment Inc. (UAV-related) Consolidated Financials
Revenue
Op. Income
2010 249.5 NA 29.9 NA
2011 292.5 0.2 34.0 0.1
2012 325.0 0.1 43.1 0.3
2013 240.2 -0.3 3.8 -0.9
2014 251.7 0.0 12.4 2.3
2015 259.4 0.0 2.0 -0.8
AeroVironment’s key challenge is to maintain their core competencies and aggressive start-up
culture as the company continues to reinvest in itself and grow. AeroVironment attempts to
avoid complacency in the diversity of their product offerings, but risks overextending thin
research and production capabilities - thus losing their lean operating efficiency.
6. Final Overview
For a direct comparison of previously discussed statistics, a cross-firm financial ratio analysis is
provided (Figure 19):
Figure 19. Cross-firm consolidated ratio analysis
Net Income
($ millions) ROE D/E
Current
Ratio
NGC 2,069 0.29 2.67 1.39
General Atomics *900 NA NA NA
Textron 600 0.14 2.42 1.72
AeroVironment 2.9 0.01 0.14 7.04
*estimate based on listed revenues and industry-benchmark costs
The peculiar economics of the UAV market render direct firm-to-firm comparisons tenuous;
product positioning, company structure, and the variable importance of UAV revenues for each
of the 4 listed company’s imposes challenges on the analysis. However, several conclusions
seem to have basis:

Firstly, DOD budget drawbacks seem to have significantly shocked the two major players in the
industry (NGC and GA-ASI), this has opened room for more diversified and smaller players like
Textron and AeroVironment. One of the key questions of the UAV industry will be the response
of entirely other players heretofore experimenting with prototypes. Boeing is in development of
UAV products under their ScanEagle and Hummingbird38
brands. Amazon and Google have both
invested undisclosed sums in acquiring firms and producing early prototypes, but regulatory
restrictions still choke the civilian and commercial markets.
Secondly, the international market may soon threaten the supremacy of North American UAV
firms within the domestic U.S. market. French, Israeli and Swiss firms currently dominate
Europe, where they are able to grow and innovate with far fewer regulatory hurdles. One of the
largest commercial and civilian firms is Shenzhen-based DJI Innovations. Founded only 8 years
ago by an entrepreneur who home-innovated a better stabilization system, the company now
grosses close to a billion dollars annually in the global market.
Thirdly and finally, with hundreds of players in the global UAV industry, further consolidations
seem imminent. The significant question concerns the wide contested ground between high-
level UACV manufacturers and small hobbyist UAV manufacturers. Will the billions in predicted
commercial applications be absorbed from the bottom-up, or from the top-down? It may be
years before the question is fully answered.
38
Not to be confused with the ‘Nano Hummingbird‘ produced by AeroVironment

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