The U.S. DoD 2012 Budget:What are the Spending Priorities?

Brad Curran, Industry Analyst

Aerospace and DefenseAerospace and Defense

21 April, 2011

Today’s Presenter

Brad Curran

Industry Analyst

Frost & Sullivan

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Focus Points

Key Defense Budget Issues, Economic Impact

Drivers and Restraints, Requirements and Purchasing Trends

Funding by Category and Military Component

2012 U

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OCO Funding

Industry Challenges, Market Attractiveness

2012 U

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Competitive Overview

Conclusions and Recommendations

Key Defense Budget Issues, Economic Impact

• 6.6% decrease from 2011 request, but projected OCO requirements are overly optimistic

• Base budget request maintain stability, 0.2% growth projected by DoD

• Future Army and Marine Corps personnel reduction; expansion of Special Operations Forces

• Need to repair, upgrade, replace worn out equipment understated

• Ensuring medical care

Building alliances

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• Building alliances

• Expanding C4ISR capabilities-emphasis shift to HUMINT and EO/IR/MS collection to PED

• Reform acquisition business operations, use savings to reinvest

• Economic Challenges, Federal Budget $3.7T, record deficits

• Defense Budget is $670.90B or about 16.2% of the total

• About 4.6% of GDP

Market Drivers and RestraintsD

rivers

High

MedContinuing combat

operations and

nation building,

SOF increases

Worn out equipment

and expanded ground

force TO/TE’s drive

growth

Increasing use of

COTS in all segments,

More European and

APAC competitors

Both major political

parties seek continued

high levels of defense

spending

U.S. DoD 2012 Budget: Market Drivers and Restraints (U.S.), 2011-2016

5

Restr

ain

ts

Low

Low

Med

High

Economic Challenges.

Defense must be on

the table for major

decreases according

to the Bipartisan Debt

Panel

Force structure

reductions planned.

Reprogramming, and

current equipment

requirements are all

negatively impacted

Immature

technologies and

cost/schedule

overruns. DoD

acquisition reform

may delay

implementation of

large projects

APAC competitorsspending

Note: Length of arrow indicates relative impact. Source: Frost & Sullivan

Requirements and Purchasing Trends

Low Medium High

Re

qu

ire

me

nts

All types of Human Intelligence capabilities, especially language and cultural expertise and training. Helicopters and pilots. Improved ground and sea mine detection and neutralization techniques and equipment including hand held devices

Length of arrows indicate impact of the challenge

Smaller, lighter, and lower power equipment of all types. Long lasting and reliable batteries. Lighter and stronger armor, hull and blast dispersion designs, and shock mitigation seats for vehicles of all types

U.S. DoD 2012 Budget: Trends and Opportunities (U.S.), 2011-2016

6

To control costs due to expanding program requirements, engineering change orders to come from the highest DoD levels only. New Boeing KC-46A tanker will be the first test. Effort to balance costs with the danger of obsolescence if designs are frozen over the life-time of a programT

ren

ds

“Instilling a culture of savings,” at the Pentagon. Price matters now. The goal is to save at least $13.60 billion between 2012 and 2016 by cutting contractors, senior officials, and staffs. Save $178.00 billion through other “efficiencies” Consolidation of the defense intelligence community, and some logistics, maintenance, and public affairs organizations is expected. For serious future cuts RDT&E is the easiest politically and operationally

Note: Length of arrow indicates relative impact. Source: Frost & Sullivan

U.S. O&M BudgetU.S. Defense Budget Projection

Funding by Category

O&M 2010 2011 2012

Admin & Srvwd Activities 60,706.4 56,973.3 62,178.4

Concept Obligations 30.5 181.3 19.2

Environmental Rst. 1.0 1,505.4 1,467.3

Foreign Security Support 10,491.5 10,194.4 13,263.4

Defense Health Program 1,968.3 964.1 1,296.2

Humanitarian Assistance 884.7 109.7 107.6

Mobilization 9,374.2 9,754.6 10,084.9

Operating Forces 166,702.9 172,098.5 162,317.9

Operation & Maintenance 28,720.7 29,866.1 32,428.8

Training and Recruiting 12,913.8 12,961.8 12,448.8

Total 291,794.0 294,609.2 295,612.5

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U.S. RDT&E Budget U.S. Procurement Budget

Source: Frost & Sullivan

Source: Frost & Sullivan Source: Frost & Sullivan

CAGR -0.7%

The total procurement request for 2012 is

$128.05 billion. The programmed procurement priorities are: Classified Programs, Virginia Class Submarines, F-35 JSF, MRAP Vehicles, F/A-18E/F Fighters, V-22 Osprey Aircraft, P8A Poseidon Aircraft, LPD-17/DDG-51/LHA Replacement, and LCS Ships, Evolved Expendable Launch Vehicles, UH-60M Blackhawk Helicopters, Aircraft Spares and Repair Parts, and Electronic Warfare Equipment

U.S. Air Force Budget

Funding by Military ComponentU.S. Army Budget

8

U.S. Navy/Marines Budget U.S. Joint Services Budget

Source: Frost & Sullivan

Source: Frost & Sullivan Source: Frost & Sullivan

Source: Frost & Sullivan

DoD OCO Request - Program Funding

The $117.84 Billion OCO request remains flexible with more of the funding included in the base budget. The emphasis is on:

Personnel

• Iraq-transition from military to civilian mission

• 98,250 troops on average in Afghanistan

Operations & Maintenance

• Cost of operations and consumables

• Reset damaged and destroyed equipment• Reset damaged and destroyed equipment

Procurement

• Continue to train/equip Iraqi and Afghan troops

• Temporary Army end strength equipment

RDT&E

• Counter IED/Force Protection

Revolving Funds

• Commanders Emergency Response Fund

• Afghan Infrastructure Fund

• Iraq Transition Assistance

Note: $ Billion. All figures are rounded; the base year is 2011. Source: Frost & Sullivan

Industry Challenges

Low Medium High

Ch

alle

ng

es

Changes to DoD auditing agency roles. Defense Contract Management Agency and Defense Contract Audit Agency have reduced staff and capability due to budget constraints. Some functions have become blurred, leading to late reports and and late contract awards

DoD plans to eliminate more than 1,000 contractor jobs from 2012 to 2016, saving $6.0 billion. The Missile Defense Agency will have the most reductions in the near term

Length of arrows indicate impact of the challengeU.S. DoD 2011 Budget: Impact of Top Industry Challenges (U.S.), 2010-2015

Ch

alle

ng

es

Pressures and debate on the defense budget and operational capabilities. Congress and planners are starting to make difficult choices. DoD internal steps to streamline acquisition policy and procedures to save money. Realistic set requirements and shorter schedules to shorten development and field weapons faster

Pentagon’s “Better Buying Power Initiative” puts greater emphasis on price. Price is now a priority in product and services negotiations. The impact of non traditional COTS suppliers is growing on both ad hoc and program of record applications

Note: Length of arrow indicates relative impact Source: Frost & Sullivan

Poll Question

• What technology or service will be most in demand by DoD in 2012?

• Missile Defense

• Software Defined Radio

• Engineering Services

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Engineering Services

• Tactical Ground Vehicles

• Video processing, exploitation, and dissemination tools

• *Turn off your pop-up blocker, so you can respond to the next polling question

Poll Question

• Will Congress and DoD make significant acquisition prioritization decisions in 2012?

• Yes

• No

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• *Turn off your pop-up blocker, so you can respond to the next polling question

Reven

ue

Att

racti

ven

ess

Aircraft

Ships

Most Attractive SegmentsAttractiveness: High Medium Low

Market Attractiveness Grid

HealthcareC4ISREW/IO

Reven

ue

Att

racti

ven

ess

Market Openness

Admin & Logistics

EngineeringServices

Weapons & AmmoTraining & Simulation

Ground Vehicles

DoD Competitive Overview

2010 $371.99 Billion in contracts

• 1,563,216 transactions with 134,737 contractors

• The top 10 had $119.1 billion or 32.0 percent of the awarded contract value in 2010

• Lockheed Martin is the market leader with a variety of products and services such as aircraft, radars, simulation, integration services, missiles, and satellites

U.S. DoD 2012 Budget: Top 10 Contractors (U.S.), 2010

Lockheed Martin $26.95

Boeing $17.95

Northrop Grumman $14.30

Raytheon $14.26U.S. DoD 2012 Budget: Top 5 Products or

Services Sold (U.S.), 2010

Note: $ Billion. All figures are rounded; the base year is 2010. Source: Frost & Sullivan

General Dynamics $14.26

Oshkosh $7.20

L-3 Communications $6.90

United Technologies $6.50

BAE Systems $6.20

SAIC $4.80

Aircraft, Fixed Wing $15.16

Engineering and Technical

Services

$12.80

Logistics Support Services $11.66

Fuels and Petroleum $11.28

Health Care Services $10.32

Note: $ Billion. All figures are rounded; the base year is 2010. Source: Frost & Sullivan

Services Sold (U.S.), 2010

Conclusions and Recommendations

U.S. defense procurement and services in areas such as medical services, helicopters, missile defense, training, logistics, maintenance and C4ISR will expand through 2016. Army requirements for equipment reset are extremely underestimated

U.S. Defense budgets will remain stable through 2016. Worn out equipment will continue to support acquisition and services spending, but expect fewer air and naval platforms. DoD is underestimating the continued need for OCO funding that will be required

The trend towards “80%” COTS technology and service support solutions will accelerate along with price sensitivity. This will allow more market participants, but there will be fewer “joint” contracts overall; resulting in further consolidation by and among the large prime contractors and systems Integratorsfurther consolidation by and among the large prime contractors and systems Integrators

The dominant defense firms will remain, though with increasing foreign competition and acquisition of mid-tier technology and service firms. European based companies will increasingly look to compete in the U.S. as their defense budgets shrink at a relatively fast rate. Global contractors will compete for partnerships and acquisitions of small innovative firms that can quickly translate commercial success into military applications and market share

Be relevant to ground and special operations forces. Products and services must meet stated operational requirements and enhance the counter insurgent/terror and nation building missions.

Partner with established prime contractors. They are always on the look-out for innovative technologies and services that can save them internal development and management costs and help them meet contract requirements on schedule and budget.

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