United States: Driving Growth and Innovation in Challenging MarketsBy Jon BarneyPartner, Avascent

May 31, 2012

Prepared for:

Aerospace Forum

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Avascent is the leading strategy and management consulting firm advising clients globally in government-driven markets

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• 25 years experience and over 3000 assignments

• Core Capabilities: Strategy and growth M&A Avascent International 050 Data Product Organizational Capture Support

• Global network in Asia, MENA, LatAm

Representative corporate and financial clients

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A new reality…broader fiscal challenges, political gridlock, and drawdown of forces in Iraq and Afghanistan lead to a declining defense budget going forward

$200

$300

$400

$500

$600

$700

$800

Actual

FY11 President's Budget

FY12 President's Budget

FY13 President's Budget

BCA Sequestration Reductions

U.S. Defense Budget Forecast through 2017

Source: Avascent Analysis

Conclusions: New period of uncertainty caused by: 2012 elections,

sequestration, political gridlock, geopolitical events Budget declines, but is above early 2000s levels There will be segments of growth

Source: Avascent Analysis

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In response to this changing environment, five key drivers of the U.S. defense market have emerged with important implications for future investments and technologies

Globalization• U.S. companies seeking more growth abroad; new competitors from outside U.S.• Implication: More complex operating environment presents large opportunities but risks

Cost Focus• Due to budget, under-performing and/or high cost programs cancelled, delayed, reduced• Implication: Focus on effeciencies, cost savings, and low cost solutions

Changing Force Structure• Terrorist and irregular threats remain – but will be addressed by a smaller and more agile

force with reduction in Army and Marine Corps - Force 2020• Implication: Investment in Special Operations, unmanned systems, and ISR

Asia Pivot• As Iraq and Afghanistan wind down, shift of resources from Middle East & Europe to Asia• Implication: Shift $$$ away from ground forces to maritime, bombers, missiles, and ISR

(Intelligence, Surveillance, Reconaissance)

Cyber Priorities• Elevation of cyber by White House, Defense, Space, and Intelligence community• Implication: a significant area of growth, commercial/govt approaches, big data analysis

U.S. Defense Market Drivers

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Innovation case study #1 – Cyber: U.S. spending on cyber will reach about $25B by 2015, growing at nearly 10 percent annually with some sub-segments growing much faster

Federal Cyber Market Overview

Analysis• Includes: Internet, telecom networks,

computer systems, and embedded controllers in critical industries

• DoD: 15K networks; 7M computing devices

• Commercial market > $200B in 2010

• White House , DoD and Intel: cyber is priority

• Large area for M&A – 70 deals in 5 years

$ Bi

llion

s

Cyber Market Budget Overview

2010 2011 2012 2013 2014 20150

5,000

10,000

15,000

20,000

25,000

Company Type

Market Approach

Leading Firms

Services Firms IT Service Providers

Commercial and government leaders

Large Systems Integrators

Leverage broader relationships with

government

COTS Providers that Offer Services

IT focused trying to expand into government

Pure-play Security Product Companies

Focus on high volume IT security products; prefer sales through

primes

Source: Avascent Analysis

Thought leaders with trusted brands –

analytical services

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Innovation case study #2 – Unmanned Vehicles and ISR: Due to operational effectiveness, cost savings, and Asia pivot, investment in UAV/UAS and ISR capabilities will continue

Unmanned Systems and ISR Market Overview

Market Trends• Has been dominated by platform manufacturers…

• …but new opportunities in multiple mission areas: cargo, longer endurance, ISR, training, payloads, civil

• Growth despite cancellation of Global Hawk Block 30

• 50% lifecycle cost savings for unmanned airborne ISR missions (aircraft, personnel, training) - CSBA study

Service Trends

Market Segment

Trends

Leading Firms

Air Platforms Flight Control Systems

Strong platform presence; important if migration to civil

space

Ground Control Systems

Push for standardization

across platforms and services

Payloads

DoD demand for more capable ISR

systems

Communications

Crowded market with sophisticated

technology and high barriers

High altitude/long endurance (HALE), cargo, combat are

areas of innovation

• Army – #1 small UAV user; Op-tempo impact

• Navy – expanding requirements; larger ISR missions and Broad Area Maritime Surveillance

• Air Force – largest UAV customer and will continue to drive broad innovation

• Marines – modest users of UAV; Army model

Small UAV - Raven

Tactical- Shadow

Tactical - Predator

HALE – Global Hawk

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How to move forward – a rapidly changing landscape requires a new approach

Operating Environment Heavy ground footprint with emphasis

on Army and Marine Corps Middle East – Iraq, Afghanistan, GWOT Buy new, don’t re-use Deliver whatever the customer wants

strategy

Operating Environment Lighter ground footprint with more

emphasis on maritime and unmanned Asia pivot

Extend service life where possible Identify the most efficient solution to

the customer’s needs

2001 - 2011 2012 and going forward

The era we are leaving: “The last ten percent performance generates one third of the cost and two thirds of the problems.” – Norm Augustine, former CEO, Lockheed

Strategic Implications A&D Sector – everyone is a winner No underperforming markets – limited

need to identify new growth markets as growth was universal

Follow the herd as most companies succeed

Company portfolios expand beyond core

Strategic Implications A&D sector – winners but also losers Underperforming markets but also

growth markets – cyber, ISR, missiles, missile defense, low cost solutions

Differentiate and innovate in a more competitive market

Company portfolios evaluated for best fit

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Avascent1615 L Street, NWTwelfth FloorWashington, DC 20036tel: (202) 452-6990www.avascent.com

Jon BarneyPartnerjbarney@avascent.com1 (202) 280-6812 (office)1 (202) 615-2497 (mobile)