Defense budgets are not declining and will remain stable through 2015. Defense spending will remain at about 21 percent of total federal outlays, or around 4.7 percent of GDP, according to an analysis of the 2011 defense budget by business consulting firm Frost & Sullivan.
However, in a big change to business as usual, the defense budget will no longer be evenly divided between the three services as it has for around the past forty years. The ground forces will be the big winners in future years; the Army’s slice of the budget pie will grow as mountains of equipment in need of repair and upgrades return from Iraq. Cuts will be made in Air Force, Navy and space platforms to fund Army growth; both services will see slight declines in annual budgets while the Army’s will grow 11 percent through 2015.
In DOD’s funding forecasts, future costs to fight the wars in Iraq and Afghanistan are vastly understated as are personnel and healthcare costs. “Reset” costs for Army and Marine equipment returning from Iraq are also vastly understated, as all are new aircraft programs, e.g. F-35, tanker. The shipbuilding plan is also underfunded. Cost overruns in the F-35 and satellites continue due to immature technologies, the analysis says, and risks shifts to existing platforms.
The biggest future growth areas will be in networked communications and overhead surveillance, followed by repair, maintenance and training. The future requirements process will be driven more by combatant commanders than service bureaucracy, more joint and fewer overall contracts and programs. There will be further monopolization of large platform primes, e.g. one tank builder, one aircraft tanker builder and one shipbuilder.
Research and development funding will decline as will programs based on immature technologies and “exquisite” capabilities. Program growth areas include: low-cost precision strike; area-denial countermeasures; counterinsurgency (including Mexican COIN support); anti-pirate, narcotics and counterterror. The trend toward commercial-off-the-shelf (COTS) buying with accelerate across the board.
Basic ground forces equipment must be reset leading to lots of opportunities for lots of contractors. For example, the Army plans to buy 40,000 trucks through 2013. Engineering, maintenance, repair and sustainment services of all types are in demand. Continued emphasis on irregular warfare will demand many more contractors and trainers with language and cultural expertise. Be relevant to ground and special ops forces, Frost & Sullivan advises. The operational border between DOD and other federal agencies will continue to blur.
Flexible tools, platforms and weapons that are easily configured to fight at both the high and low end and everything in between will be at a premium. Increased program scrutiny will kill those programs not relevant to current battles or go over budget.
“With the exception subs, big deck amphibs, helicopters, and transport planes “big ticket" weapons programs are irrelevant to where war is going. That is not what much of the DoD’s and industry’s leadership want to hear. Cheap effective weapons along with leveraged commercial networking like that being used by insurgents and terrorists will expand, forcing nation states to reemphasize inexpensive aircraft, presence and “numbers.” At the other end of the spectrum tools to cope with high end asymmetric threats such as anti-satellite missiles and jamming along with space situational awareness and control are growth industries.”
Frost & Sullivan see business opportunities in the Air Force and Navy’s joint AirSea Battle doctrine as the Navy develops tactics, techniques and procedures to pass targeting data to the Air Force for anti-surface ship and coastal missile site attack.
Looking out to the 2015-2020 time frame, the analysis says favored aviation technologies will include linked aerial drones, every aircraft a sensor and a jammer and inexpensive prop ISR and ground attack will be revived. In shipbuilding, the focus will shift to subs, versatile big deck amphibs, mine warfare vessels and littoral ships. For ground vehicles, the future will be V-shaped hulls on everything, enhanced targeting and networking and active protection systems.
Lockheed Martin continues as the top defense firm with $31.3 billion in business, Boeing was second with $20 billion and Northrop Grumman third with $16 billion. The top 10 firms had 35 percent of the contract value. The defense market will continue to be dominated by a few firms. European firms will increasingly try to penetrate the U.S. market as European defense spending drops.
Frost & Sullivan warn of growing DOD and lawmaker impatience with contractor protests to awards; serial protestors and “bad actors” must realize there are costs to such actions.