COTS CONFIDENTIAL. Every month the McHale Report will host an online roundtable with experts from the defense electronics industry – from major prime contractors to defense-component suppliers. Each roundtable will explore topics important to the military embedded electronics market. This month we discuss how the Department of Defense’s (DoD’s) FY 2016 budget request affects embedded COTS electronics providers.
This month’s panelists are Ray Alderman, Chairman of the Board for VITA – known for standards such as VPX and VME; Todd Stiefler, Business Development Manager at GE Intelligent Platforms; Robert Day, Vice President of Sales & Marketing at Lynx Software Technologies; and Gregory Powers, Business Development Manager for Aerospace, Defense, & Marine at TE Connectivity.
MCHALE REPORT: The DoD released its FY 2016 budget request last month with an increase in overall funding. Does this help quell some of the defense market’s uncertainty? Please explain why or why not.
ALDERMAN: Yes and no. When you look at the budget, while it has increased, the DoD is still underfunded when it comes to fulfilling its mission. They will also have to reduce their mission goals to match their budget. As such they will continue cutting personnel, performing troop drawdowns, and reducing overtime. This saves a lot of money in benefits and pensions. It costs too much to put boots on the ground, as you have to also factor in the logistics support for each warfighter, costs go up exponentially. The only troops that will be going are highly trained Special Forces operators.
They will now do more with less people, automating as much as possible, which means more electronics to get people out of the loop. This also means more opportunities for companies that can provide technology to enable that automation.
So yes, in some areas the increases help to quell it. The Air Force is looking good with the increased investment in the F-35 and Long Range Strike programs, but the Army not so much with the overall troop reductions. It really depends on the program, so uncertainty remains.
STIEFLER: I don’t think the budget top-line number has reduced the uncertainty for the industry at all, unfortunately. Sequestration is still the law of the land and what the President has done is punt the tough choices to Congress, which, in turn, has three broad options:
- They can alter the sequestration legislation (the Budget Control Act [BCA]) through revision, repeal, or deferred implementation. The latter option is the easiest one politically for Congress and the worst for the military and industry because it just kicks the uncertainty can down the road. Oh … and next year’s a presidential election year so good luck getting anything done then … better kick the can into 2017.
- They can write a Defense Appropriations Act that implements the sequestration cuts in specific detail, exercising Congress’ constitutional power of the purse to decide which programs are impacted and how. This would require a Congress with courage and the willingness to take the political hit for making unpopular choices.
- They can slash the number back to sequestration levels (around $499 billion if memory serves) and tell the Pentagon to figure out where the $30 billion should come from.
The most likely option is a combination of options 1 and 3 whereby, as in the most recent can-kicking exercise, Congress enacts much smaller cuts than initially envisioned by sequestration and tells the Pentagon to figure out how to implement them. The cynic in me says that we should assume this will be the new normal … sequestration politics causing massive uncertainty every year as both the legislative and executive branch try to force the other to live with the political consequences of the law (the BCA) that both supported. Regardless of who gets stuck with the “blame” in any individual year it will be the warfighters and the industry that supports them which will lose.
DAY: I think it will help a bit, as it’s a push in the right direction, but one of the issues in the past has been the delay or cancellation of funded programs, so even if there is an increase in spending, the confidence will only return when major programs run to completion, which is likely to be years out.
POWERS: There has been an underlying uneasiness in the defense market globally since the concept of sequestration was introduced and this was exacerbated by the planned exits from Iraq and Afghanistan. These events certainly impacted the U.S. mindset, but also caused the balance of the world to take pause to see how the world leader would react. Global unrest, natural disasters, and other events that might engage a country’s security forces have not subsided. The inflection point does represent resumed stability in U.S. defense spending and this is not lost on the international community, but the lesson learned remains. The mindset now is cautious optimism, with many countries looking to electronics, system upgrades, and next-generation technology to act as a force multiplier.
MCHALE REPORT: What areas are the best bets for technology funding going forward, unmanned systems? Avionics? Cyber defense? Radar and electronic warfare (EW)? Other?
POWERS: The [command, control, communications, computers, intelligence, surveillance, and reconnaissance] C4ISR market has traditionally been well funded due to the diversity of applications, the fact that most systems have lasting value, are not expendable, and in many situations can be retrofitted to an existing platform. C4ISR can include avionics and EW systems as subsets, and often does not carry the “large target” stigma of major new platforms.
Recently, technologies involving communications and phased array antennas have been particularly active, evolving very rapidly and taking advantage of the latest in high data-rate connectivity. These form the foundation of C4ISR, are technology-hungry, and look to be consistently strong funding candidates going forward.
ALDERMAN: The best bets are with unmanned systems such as the Reaper, avionics to a degree, cyber – but that requires mostly commercial-grade servers and peripherals that work in air-conditioned rooms, not rugged harsh environment technology. The bulk of funding relevant for rugged COTS suppliers is in radar, EW, signals intelligence (SIGINT), and communications intelligence. Those are areas with new design cycles that leverage VPX systems. Radar applications are the biggest users of VPX technology, followed by SIGINT and EW.
From a macro perspective I see 3U VPX taking about 65 percent of the market today, falling into many unmanned applications, while 6U VPX makes up about 35 percent, focused heavily in radar and sonar applications.
STIEFLER: This is a tough one. The Pentagon and the President have been pushing for an Asia-Pacific pivot that would have seemed to suggest increased emphasis on blue-water naval forces and long-range air power – but ISIS didn’t get the memo. Continued volatility in the ”arc of instability” from Afghanistan to North Central Africa, combined with a U.S. public that I don’t think is going to want to put boots on the ground anywhere for a while, means that airpower (particularly unmanned airpower) is going to be the tool of choice for deterring, punishing, and persuading adversaries.
A second area of likely continued investment is in ballistic missile defense (BMD) capabilities, both ground- and sea-based, to defend the U.S. and its Gulf allies from the Iranian threat. All theatre BMD systems rely heavily on forward-deployed radars and I’d expect that market to be healthy in the years ahead.
DAY: Cyberdefense and unmanned vehicles seem to be the best bets right now, as they are both very instrumental in winning the war on terror. They are especially crucial to helping reduce cyberattacks (cyberdefense) and reducing human casualties in high-threat environments (unmanned vehicles).
MCHALE REPORT: Where are the best opportunities for embedded COTS hardware and software suppliers … upgrades? New designs? Sustainment?
DAY: New designs in unmanned vehicles, technology refreshes in avionics and vehicles, and also hardware consolidation using modern COTS multicore hardware and virtualized software systems. Also, increased security requirements are often a good opportunity for design refreshes.
We do see more military avionics programs now specifying Future Airborne Capability Environment (FACE). As our customers refresh their software platforms they are building FACE support into it to give a nice future-proofing. They will be able to use these systems in programs that specify FACE as a requirement. We have seen an uptick in military avionics programs and refreshes over the last six to nine months, some driven by FACE and some not, and many of them have wanted an open standards real-time operating system (RTOS) API (like FACE or POSIX).
POWERS: During the height of action in Iraq and Afghanistan, rapid deployment and sustaining fielded equipment were the focus. As action has lessened in these theaters, attention has turned to upgrading a wide variety of systems, ranging from Stryker vehicles to F-16s and Eurofighters, and also in deploying next-generation platforms, including the F-35 production ramp, Joint Light Tactical Vehicle (JLTV) and Scout launch, and development of the next U.S. helicopter platform, the JMR (Joint Multi-Role).
All services have their key C4ISR programs, exemplified by the U.S. Navy’s CANES and AMDR efforts, and most recently the SEWIP 3 award. Each of these programs have varying elements of COTS planned for implementation, but all present very large opportunities for next-generation rugged computing in the military embedded systems world.
ALDERMAN: There will be upgrades and new system designs, but the biggest opportunities for COTS suppliers of VPX systems will be in new designs. Upgrades will see a mix of VME and VPX designs.
STIEFLER: Beyond the new bomber or Long-Range Strike platform I don’t see much in the way of completely new starts across the services. I’d think that upgrades are really the place to focus, particularly with both ground vehicles and aircraft looking to get architecture upgrades based on the Vehicular Integration for C4ISR/EW (VICTORY) and FACE standards, respectively. The new focus on data and analytics to facilitate condition-based maintenance is also encouraging program managers to look at adding new onboard health-monitoring systems on older platforms that didn’t have them initially … Bradley and Abrams, for example, are both headed in that direction in the next few years. Even systems with first-generation health and usage monitoring systems (HUMS) may be looking to upgrade as the power of data analytics for increasing platform efficiency gets proved out fully.
Sustainment is still an opportunity to be sure, but I can’t come up with a reason why it is going to grow significantly vis-à-vis its current baseline.
MCHALE REPORT: Where will the biggest challenges be for embedded suppliers in the defense market?
STIEFLER: Aside from the budget, which I discussed above, I think the biggest challenge is going to be government policies with respect to commerciality and cybersecurity. On the commerciality front, we have Pentagon leadership that I believe understands and appreciates the value of COTS but a working bureaucracy that is forcing Tier 1 prime contractors to extraordinary lengths to justify using truly COTS components. The philosophical position of senior officials is going to have to be translated at the ground level into a more welcoming environment for COTS vendors. This should, in theory, be part and parcel of the recently announced Defense Innovation Initiative, which is specifically designed to make it easier for non-traditional defense players to serve the market. We’ll see…
And on the cybersecurity front, I just worry that the government, responding to completely rational fears, may implement cybersecurity policies so broad and inflexible that they have the unintended consequences of making COTS development difficult. I haven’t seen anything specific yet on the hardware side but in the area of data analytics I have seen individual customers vacillate significantly over weeks and months between a “risk management” mindset, which could allow for COTS, and a “risk elimination” mindset, which may not.
DAY: Really the biggest challenges are becoming the length of time from initial program inquiries to award of program and procurement. This length of time appears to be growing each year, and then often, as it gets close to award time, it either gets postponed or cancelled. It makes it very difficult for embedded companies to plan their business, and is forcing defense-centric companies to look for more predictable markets and opportunities.
POWERS: Rugged embedded technology has evolved very rapidly over the past 10-15 years, making high-tech solutions readily accessible and leaving today’s system designers hungry for much more. As a result, embedded suppliers are pushing the envelope in system innovation, data rates, and flexibility. Agencies are sculpting the competitive landscape by consistently driving open-architecture philosophy, modularity, and scalability, while maintaining a focus on budget scrutiny. For the embedded suppliers, differentiation through innovation is a hotly pursued attribute to win the sale and deliver value to both customer and supplier. Connectivity plays a vital role in the packaging and performance of these highly evolved systems, and is in lockstep with escalating expectations. By providing a comprehensive set of high-performance building blocks, companies such as ours (TE) can enable embedded designers to arrive at an optimized system configuration, whether it is managing power, fast copper, or fiber optic connectivity.
ALDERMAN: The problem for any companies doing business in this market is the small volumes. The margins are great, but the volumes will never compare to commercial technology markets.
The supply chain will also be a challenge as companies merge and key product lines go obsolete. The acquisition of Freescale by NXP will have folks in the DoD worried about the long-term support for PowerPC-based systems that are in avionics, radar, and EW applications. It’s still too early to tell, but it must be watched.
Suppliers also need to keep up with the new technology development coming out of hot markets such as the Internet of Things (IoT). They need to keep an eye on what will make sense for military applications and see if it can be adapted for mission-critical applications.