COTS use growing despite flat military electronics market

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August 24, 2016

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 cover the military electronics market from the perspective of commercial-off-the-shelf (COTS) embedded computing suppliers.

This month’s panelists include: Doug Patterson, VP Military and Aerospace Business at Aitech Defense Systems; Roy Keeler, President for North America, MilDef; Steve Motter, Vice President of Business Development at IEE; and Wayne McGee, Vice President of Sales and General Manager, North America, Creative Electronic Systems (CES).

MCHALE REPORT: How is the military electronics market performing today? Is it flat, slightly growing? Or shrinking?

PATTERSON: Overall on average, the military and aerospace market’s been fairly flat and has been so for several years. This is mostly due to the uncertainty at the Department of Defense (DoD) and political leadership level when it comes to procurement strategy. Programs are getting pushed off or delayed and when funding does come through it typically is not for the original full order, but often for significantly less product. This environment also makes it hard to forecast at all levels of the procurement chain -- from the component supplier to the embedded computing vendor to the prime contractor.

KEELER: It’s strong in certain areas, but it depends on the application area and which country you are looking at globally. The market is growing slightly in the U.S. where we are starting to see little bit of an upturn. In the Middle East it is on an upswing as it is in the Nordic countries. However, we are starting to see a fall off in the United Kingdom and other European nations.

MOTTER: The budget cuts of recent times have actually created an opportunity in the sustainment of existing platforms. The DoD needs to extend the lives of existing air, ground, and sea platforms, which has created a demand for more tech insertion at the LRU level and major system component level. This is an opportunity for small businesses that can leverage COTS and provide quick turn-arounds to customers for small orders to replace avionics displays or upgrade rugged laptops. In many cases end-users just want to replace a component, board, or display and they find it easier and quicker to go around the integrator and right to the component subject matter expert.

MCGEE: With the advent of sequestration we have seen delays in multiple programs, effectively shrinking the market.

MCHALE REPORT: Where is COTS playing in this market? Has the use of COTS and open architectures increased or do custom designs still rule the market?

MOTTER: I think COTS is still strong. We see it a lot as we are a display company and need to be compatible with many open standards and form factors. As programs become more and more based on open architectures, the door opens for even more COTS usage.

PATTERSON: Yes, COTS has pretty much sewn up the military and aerospace market and driven down the heavy customization work. The caveat here is that every VPX system backplane today is in a sense a custom job, so you have to be careful how you define COTS vs. custom. Often boards are ordered right off-the-shelf, but just as often customers want a specific COTS board, but want it customized slightly to fit their program requirements.

Increased use of open architecture designs in military systems has also contributed to the growth of COTS procurement. Twenty years ago when COTS was first mandated, many in the industry shunned it, but today it’s now generally required in military systems.

KEELER: People often do not really understand COTS. We sell COTS, but usually most of what we sell is not a standard product right off-the-shelf, but rather a standard product with a bit of customization thrown in. It is more modified COTS with tweaks to connectors or switches or different types of display screens.

MCGEE: We have seen an increased willingness to use COTS or modified COTS from players that previously were full proprietar.

MCHALE REPORT: Sequestration and budget cuts have been the rule for most of the last few years when it comes to U.S. defense spending. Who has been hurt more by sequestration -- the primes and integrators or the embedded COTS suppliers? Who found new opportunities?

KEELER: Both have been hurt by sequestration, but one side effect of all this that definitely hurts the primes is the government labs going around the primes and acting as prime integrators themselves. They are managing programs to have more control and are outsourcing directly to embedded suppliers who in the past would have sold to prime contractors. They want more control over the product and don’t want to be held hostage later to expensive upgrades that are ten times the initial price of the product. It’s about managing long-term lifecycle costs and the labs feel the best way to do this in some cases is to cut out the middleman, meaning the primes. Now, whether the labs can continue to do this or not is another story.

MOTTER: I think sequestration has been a bit more of a problem for our customers and for the larger primes. The budget cuts after the wartime expenditures have created an environment where the government agencies are often going right to the third party embedded suppliers like ourselves and others for quick a turn-around on low volume upgrades or refreshes. As I mentioned, sustainment of current systems is actually a market opportunity for embedded computing suppliers.

PATTERSON: Sequestration has hurt everyone, some deeper than others but overall pretty equally. The U.S. DoD Research Development Test & Evaluation (RDT&E) and production program budgets just haven’t been there to support the 2015/2016 defense industry and the existing defense infrastructure. This is exactly what many in the current administration wanted – to cut deeply into the defense primes so that pain was felt. And that pain has been real as many have had layoffs or furloughs – hoping things will get better after the presidential election. As a result programs are being delayed, again and again, month by month. This will definitely affect mission effectiveness if it continues, severely degrading the U.S. defense capability.

MCGEE: Budget cuts may be the reason that previously closed doors are now somewhat open to COTS solutions. Suppliers up the chain are focusing on designing the items that they can’t purchase and looking to COTS for the items they can purchase.

MCHALE REPORT: Uncertain is the word most often applied to the defense market outlook in recent years, what with the budget cuts and sequestration and the doubts, as to how the current crop of presidential candidates will deal with defense spending. That said, is there anything in your mind that is a certainty when it comes to defense spending? Are there application areas like radar or electronic warfare that will get attention regardless of what happens in Washington?

PATTERSON: Uncertainty rules the roost these days especially with the two leading candidates running for president and what they might do regarding defense spending if elected. The primes and integrators are concerned what another four years of the current administration’s approach to defense spending would do to the market. But they are not stupid and are taking precautions, such as investing their own internal research and development (IRAD) dollars (admittedly sparingly) right now to hold onto their core engineering teams to tweak, enhance, and upgrade their products and core competencies. They have been doing this over the past year to stay “fresh” and technology relevant so that when the market does come back, they are ready to not only compete for their key programs, but win.

KEELER: Absolutely, intelligence, surveillance, and reconnaissance (ISR) platforms are pretty hot and the unmanned market is still very strong. Spectrum awareness and spectrum management applications are also getting a lot of funding. Spectrum dominance is quite important to the DoD, even more so than boots on the ground. Network security and cyber applications are similar in that regard as well.

MOTTER: As I’ve said, we have to keep the existing equipment running and that’s a challenge in itself. The military in an environment without new programs is saddled with more aging technology, much more than they intended. That means more opportunities for computing, displays, connectors, processors, etc., that are used to refresh areas such as cockpits and unmanned aerial vehicle (UAV) control stations. Software assurance and protection against cyber attacks will also become a requirement in this sustainment environment.

MCGEE: A number of critical programs have been delayed too long and must be funded. Technology refreshes to stay ahead on the battlefield will have to be incorporated into the weapon systems already in place. Improvements in secure communications to prevent hacking will be mandatory as our adversaries have become much more sophisticated in hacking. The use of drones is increasing and the need for improved collision avoidance and secure unjammable geo-location systems is needed. Pilots need better systems when flying in degraded visual environments. All of these areas need attention to protect our warfighters.