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Simulator Market Growth Tied To Upgrades, Interoperability 

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by Sandra I. Erwin 

The demand for military simulation-based training and distance learning products is expected to rise, according to a recent industry study.

Those industries generated revenues totaling $3.51 billion in 2001. That amount could grow to $4.78 billion by 2008, said a report by Frost & Sullivan, a business intelligence firm based in San Jose, Calif.

The study, titled, “U.S. Military Training and Simulation Markets,” noted that, to remain viable, simulation and training providers need to develop products that are easy to upgrade.

“Military customers require systems in which they can make long-term investments,” said the report. “They realize that upgradeable products will stay in service longer and offer greater continuing value.”

Supplying products that can be upgraded “cheaply and easily will be crucial to maintaining customer satisfaction,” said Frost & Sullivan analyst Jerry Weltsch.

“At the same time, interoperability has become a key market issue,” he said. “As more and more manufacturers develop training and simulation systems that are application specific, interoperability with other products in the market will be essential for success.”

Cost-cutting efforts by the Defense Department, additionally, will force simulator providers to adjust the manner in which they offer products and services, he said.

“The Defense Department has been opting to buy time on simulation systems rather than acquire hardware,” says Weltsch. “In the case of flight simulation training, the military issued contracts for fee-for-service programs wherein the contractor builds, operates and maintains the training facility and systems, and the military pays by the hour.”

Companies that do not diversify their training and simulation competencies into “system operation and maintenance will automatically lose out on potential market share,” said Weltsch.

Nevertheless, spending on simulators will go up, because the technology increasingly has become critical to military training, he said. “Simulation training is a proven, cost-effective way of doing training. Despite the high cost of simulators, in the long term, it’s more cost effective than live training,” Weltsch added.

Advances in information and telecommunications technology, meanwhile, are boosting distance-learning applications.

Doctrine shifts, as a result of the war on terrorism and modernization efforts, will lead to changes in training priorities. The need for rapid-reaction capabilities around the globe, said Weltsch, means that “new training methodologies and equipment are needed to match the new doctrine.”

Market growth, however, could be curtailed in light of big-ticket program cuts. The cancellation of the Army’s Crusader howitzer and cutbacks to the Air Force F-22 fighter program will drive down spending on trainers, he added. Further, “the cost of current operations may take away money from training,” said Weltsch. “Training spending has not increased in the same proportions as the overall Defense Department budget.”

In broad terms, the U.S. market for military simulation and training grew about 12.3 percent in 2001.

The long-term outlook is “relatively rosy,” he said. The market has averaged 1 to 2 percent growth per year. It is expected to grow at a compound annual rate of 3.5 percent between now and 2008, accounting for $4.78 billion in revenues.

Procurement contracts in U.S. military simulation and training in 2001 amounted to $1.8 billion. That is more than 50 percent of the market’s total revenues.

The outsourcing of operations and maintenance (O&M) programs popularized in 1990s has helped sustain a steady growth in the O&M simulation market, which grew about 2 percent in 2001 ($582 million in revenue).

By 2008, U.S. military training and simulation procurement is expected to be at about $2.3 billion, or about 48 percent of the market. O&M projects could reach $920 million in 2008, or less than 20 percent of the market.

Flight simulation accounts for one third of the total market revenues in 2001. It’s expected to drop below 30 percent in 2008, said Weltsch.

According to Frost & Sullivan, the market share figures in this study are based upon revenues derived only from primary contracts with the U.S. military. The bulk of such companies’ revenues comes from subcontracts.

Consistently, the training and simulation share of the annual Department of Defense budget has been about 1 percent.

The Defense Department will increase its use of training ranges for urban warfare. The market will expand in 2003.

Education programs will grow from 7.2 percent of the market in 2001 to 7.8 percent in 2008.

Among the largest competitors in this market are Lockheed Martin Corporation and L-3 Communications, said the report. The two can claim about 17.1 and 11.4 percent market shares, respectively. CAE follows as a distant third with about a 4.1 percent market share. CAE differs from Lockheed Martin and L-3 Communications, in that it has traditionally focused on the air-systems market segment (the largest segment, accounting for about one-third of the total market).

In recent years, CAE has expanded into other segments of the market as well. One strategy that has proven successful for all three firms is that over the past five to 10 years they have grown rapidly within the market through the acquisition of companies.

L-3 Communications, for example, has made a series of acquisitions of leading market and niche market companies to enhance its competitiveness in a number of market segments. In another case, Canada’s CAE made a strategic acquisition of a U.S. based competitor—BAE Systems’ simulation and training division. That gives it a U.S. presence, so that it can no longer be characterized as a foreign contractor.

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