Budgetary & Strategic Shifts - Creating Opportunities for Merchant Embedded COTS Systems in Mil/Aero
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VDC believes that the ecosystem for all of Mil/Aero and particularly merchant COTS is unique as compared to other markets in that relationships can be very complicated with respect to customers and competitors. In many cases, the customer can be a competitor to a COTS systems supplier by the result of the make versus buy decision. During this QuickCast, VDC's David Laing discusses Embedded COTS.
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Budgetary & Strategic Shifts - Creating Opportunities for Merchant Embedded COTS Systems in Mil/Aero
- 1. Embedded Hardware & Systems Practice QuickCast Budgetary & Strategic Shifts – Creating June 2012 Opportunities for Merchant Embedded COTS Systems in Mil/Aero By: David Laing – Senior Analyst/Program Manager © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 2. Recording Available A full audio recording is available for download at: http://vdcresearch.com/market_research/embedded_hardware/freeresearch.aspx © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 3. About Us Market Intelligence for Technology Vendors & Investors Direct-Contact Primary Market Research Deeply Segmented Data Expert Insights Validated Results Custom Consulting Services for Your Most Critical Business Decisions Research-Based Consulting Transparent Tools & Methodology o Highly Customized Survey Guides & Output Templates o Sophisticated Market Estimate & Forecast Models o Detailed, Flexible Stakeholder Maps & Profiles o Industry Development Scenarios o Market Opportunity Fit Screening, Rating & Ranking © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 4. Our Core Coverage Areas AutoID Embedded Hardware & Systems Embedded Software & Tools Mobile & Wireless © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 5. Ways to Work With Us Our market research is the basis for the many other ways that VDC can help you to grow your business. Our clients rely on us to provide actionable insights that support their most important strategic initiatives including: corporate development projects, opportunity assessments and lead generation programs. © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 6. Today’s Speaker David A. B. Laing Senior Analyst/Program Manager, Embedded Hardware & Systems David has joined VDC’s Embedded Hardware Practice after serving for the last two years as a Senior Analyst / Program Manager in the firm’s Industrial Automation and Controls research practice. David is now responsible for supporting VDC’s market research and custom consulting initiatives relative to emerging global opportunities, regional growth strategies, and market intelligence for embedded hardware, systems components, technologies, services, and related applications across multiple vertical markets. Prior to joining VDC Research, David accumulated over 30 years of Semiconductor industry experience working at Teradyne Inc. and its worldwide customers. David held multiple positions in support, engineering, IT and management including project and support product management. David earned an MBA degree (Summa cum Laude) from the F. W. Olin Graduate School of Business at Babson College and BS in Electronic Systems Engineering Technology from Wentworth Institute. For complimentary insights and marketing data: http://blog.vdcresearch.com/embedded_hw/ © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 7. The Mil/Aero COTS Ecosystem Roles – Merchant Systems The market for “Merchant” Embedded COTS systems has many layers of participation with some customers’ “Captive” COTS systems competing with merchant systems suppliers as part of the build versus buy equation Prime Contractors / HW Suppliers Lead Systems Embedded Integrators COTS Board Suppliers SW Suppliers Dist/Sales Channels Defense Mil, Aero, D efense, Subcontractors Service Equipment Branch OEMs End Users Processor Suppliers Independent Embedded COTS Systems Systems Suppliers Integrators Distributors, VAR s and other Other Suppliers Channels © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 8. The Mil/Aero COTS Market – Merchant Systems have Growth Opportunity Total Global Market, COTS Systems, Global Mil/Aero Merchant Merchant & Captive COTS Market Revenue (US Dollars in Millions) (US Dollars in Millions) $2,000 $40,000 $1,905.7 $1,780.0 $1,674.5 $1,584.0 $1,500 $1,435.6 $1,906 $1,780 $1,675 $35,000 $1,325.1 $1,584 $1,436 $1,325 $34,054 $1,000 $33,871 Merchant $33,673 $33,422 Captive $33,124 $32,764 $30,000 $500 $25,000 $0 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 9. Platform Shifts as Military Strategies Change – Creating COTS Opportunities Littoral Combat Ship (LCS) USS Gerald R. Ford Unit Cost $8B - $9B Unit Cost $600M - $700M High Speed Vessel (HSV) Ticonderoga Class Aegis Cruiser Unit Cost ~ $1B Unit Cost ~ $200M © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 10. Platform Shifts as Military Strategies Change – Creating COTS Opportunities RQ-170 F-22 Raptor Unit Cost ~$6M Predator Program Cost $2.4B Unit Cost ~$4M Program Cost ~$66B Boeing – “Phantom Eye” Unit Cost ~ $150M Program Cost Funded by Boeing Unit Cost - TBD © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 11. Platform Shifts as Military Strategies Change – Creating COTS Opportunities M1 Abrams Stryker ~$8.5M Humvee $1.5M $3M $70K $220K © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 12. Summary The US Military budget will be under increasing pressure but there will be balancing political forces at work. Expenditures for big ticket items will be reduced and delayed. The merchant COTS market will still grow at a ~ 7.6% CAGR with some architectures being as high as 20%. SWaP initiatives, refurbishments and upgrades will offset COTS revenue lost to cancellations and delays. © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
- 13. Thank You for Attending this VDC QuickCast For more information please contact: Mike Collette – VP, Sales & Enterprise Accounts info@vdcresearch.com | 508.653.9000 x112 Chris Rommel – Vice President, Embedded Hardware & Software David Laing – Senior Analyst/Program Manager, Embedded Hardware & Systems J. Eric Gulliksen – Senior Analyst, Embedded Hardware & Systems Jonathan Hastings – Analyst, Embedded Hardware & Systems For complimentary insights and marketing data: http://blog.vdcresearch.com/embedded_hw/ © 2012 VDC Research QuickCast Embedded Hardware & Systems vdcresearch.com
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- I want to thank you all for watching this quickcast today. I also want to thank those of you who participated during the research phase in support of our Mil/Aero COTS report that published this month. We have learned a lot of things that are going on in the market and, in the next few minutes I will give a few highlights about what we have learned.For this years coverage of the Mil/Aero COTS market we chose to focus on Merchant systems. We chose this segment because it is one of the most interesting segments for COTS suppliers as it is a growing market even in the face of defense spending cutbacks. This is one area where a COTS board supplier can gain revenue from the added value created when the components are integrated into systems. VDC also believes that the ecosystem for all of Mil/Aero and particularly merchant COTS is unique as compared to other markets in that relationships can be very complicated with respect to customers and competitors. To explain this, it is important that we highlight the difference between a captive and a merchant system. A typical captive system is integrated by the defense contractor and installed in the military system they are building. It is never sold on the open market. A merchant system is sold by the COTS supplier to the defense contractor or, in some cases to the government who then provides it to the defense contractor. So, in one aspect, the customer can be a competitor to a COTS systems supplier by the result of the make versus buy decision. It can also happen if the government decides to standardize weapons systems units between platforms. In cases like this, a formerly captive COTS system becomes a merchant COTS system and you might for example see a General Dynamics COTS unit being installed in a Lockheed Martin product.
- VDC expects Merchant COTS market expansion at a 7.5% CAGR. NA represents ~77% of the global market for merchant COTS systems.US’ share of total global military spending is slightly less than 50% (a small decline from previous years). The dominance of NA in the COTS market may largely be because much of the rest of the world still prefers military specification over COTSThe VDC COTS system report has a breakdown of these merchant revenues by architectures such as ATCA, VME/VPX and CompactPCI.One of the big questions posed by this slide is why are merchant systems winning share over the captive systems market? The second question is why are COTS systems in general still projected to grow when defense budgets will shrink? In VDC’s opinion, we think that the answer to both questions is a natural result of tighter government spending and oversight. Part of this shift is caused when the government wants to reduce costs through increased standardization between platforms and captive systems become merchant as we discussed in the previous slide. The biggest driver however is the cost reductions and firm fixed price contracts. This in some cases is changing the defense contractor’s make versus buy equation in the favor of the merchant COTS systems supplier. We must remember that the main attraction to COTS in general is that they are less expensive than alternatives.We do believe that there are still some concerns for merchant systems suppliers as the defense contractors will make sure that all costs for re-work and repairs of the COTS systems will be borne by the supplier. This has been a big concern particularly with respect to products that are discovered to have counterfeit and/or substandard components.In the next 3 slides, we will look at sea, air and land based platforms where, in each case we see interesting shifts in the COTS market.
- In Mil/Aero with a building cost that often exceeds $8 billion per unit there is no bigger ticket unit than an aircraft carrier. Aircraft carriers are generally projected to have an operational life of 40 – 50 years but VDC expects that the US congress will procrastinate on some of the planned new replacement units. This will likely drive the market for systems upgrades and systems replacements and will have a significant COTS systems presence. Aircraft carriers will remain important politically even though they have high operational costs and require an entire task force to protect and support them when deployed. Building an aircraft carrier generates a lot of employment and deploying one projects an image of power. For these reasons alone, VDC believes that the US will continue to build new aircraft carriers but the pace will be much slower than what was projected in 2007/8. To reduce operational costs in the units that are built, there will be increased automation of systems and this will be a prime driver of COTS activities.The exciting COTS market in sea based platforms is moving from the aforementioned Aircraft Carriers and the bigger ticket Aegis Cruisers toward smaller, swifter, littoral and High Speed Vessels (HSV). These new platforms are increasingly automated and are much more able to operate in shallow waters where it is believed that many future conflicts could take place. One important trend that we begin to see here that we will discuss in the next two slides will be Size, Weight & Power (SWaP) as the smaller naval platforms will require smaller COTS systems profiles.
- If there is a place whereSWaP is a market driver for COTS, it is in aerial platforms. It is here that we are seeing a transformation of epic proportions. Platforms such as the F-22 Raptor typically have projects that can last decades and, even after long development timelines can still have issues such as the recently announced pilot oxygen supply problem. It is also worthy of noting that a 1999 GAO report estimated that pilot training expenses could run over from $1 - $9 Million and this is not likely to have decreased over the last decade because of fuel costs and VDC believes that fighter jet pilots probably run at the top of the spending spectrum.As a result of this and the recent successes being seen by Unmanned Aerial Vehicles, we see a big and growing market for COTS systems that have SWaP as a design priority. One interesting development is Boeing’s release of the “Phantom Eye” that is powered by liquid hydrogen and can stay on station for up to 4-days. VDC believes that Boeing pro-active approach where they have speculatively invested in this TRUE COTS platform outside of an existing government contract will win them new business if the platform shows its capabilities. It is far more likely for a project to get approval if the proposed product meets a need and there is certainty that it will work as designed.VDC’s research shows that UAVs by the concept itself present significant opportunities for COTS systems both on the aircraft as well as on the ground. Some UAVs are virtually autonomous and therefore require significant on-board processing power to gather information and act on it. Other UAVs are controlled from the ground and need secure communications capability and the supporting ground stations need significant computing power to process the data that is generated from the arrays of advanced sensor systems.
- In ground based platforms there are also shifts to smaller more agile platforms. In this case it is difficult to strike a balance between occupant safety (meaning armored) and mobility. VDC believes that there will be a gradual trend toward platforms such as the Stryker that can be transported by C130 aircraft but also protect the crews much better against IEDs as compared to most Humvees. The mobility advantage of Humvees and similar vehicles is negated with the addition of significant armor.There is still a priority for COTS systems that are SWaP optimized. With the winding down of the US actions in Iraq and Afghanistan there will be a significant market for refurbishment and upgrades of the ground based platforms that were deployed there. These programs will be looking for newer COTS systems that help with the fuel economy of the platform while, at the same time, increase the available processing power.
- In closing I wanted to again thank everyone that has taken the time to see this presentation.The 2012 VDC report on North American COTS systems published this month. We will also be posting a supporting research note for this quickcast.Lastly, we will be making it a point to continually highlight interesting Mil/Aero and COTS developments as they happen in the VDC Embedded Hardware blog.
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