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Amid Defense Downturn, Tech Startups Turn to Private Sector
By Sandra I. Erwin



U.S. government technology incubators such as DARPA and NASA have seen their budgets fall fast, and the end of the downturn is nowhere in sight. High-tech firms, especially cash-strapped startups, instinctively would go to these federal agencies for seed funding, but they are now turning to the private sector, where investors are hungry for products to fill a booming demand in commercial aerospace.

Just in the past several months, 67 tech companies have applied for entry to "Lab IX," a venture-capital program funded by electronics giant Flextronics.

Flextronics, a $30 billion electronics manufacturer based in Singapore, has opened five "product innovation centers" around the world, including one in Milpitas, Calif., where Lab IX is located.

An explosion of low-cost manufacturing technology, such as additive manufacturing and 3D printing, has opened the door to startups that have "game changing" products but no cash to get them off the ground, said Gregory Horton, vice president of business development at Flextronics International Ltd.

Eight companies so far — a mix of U.S. and Israeli firms — have been selected for Lab IX, Horton said in an interview. Flextronics will invest about $500,000 in each company, provide shop and office space, as well as engineering support and advice on how to protect intellectual property. Flextronics sees this as a winning strategy because many of the products in which it is investing are projected to have a lucrative market in commercial aviation and space, Horton said.

Satellite manufacturers are replacing aging spacecraft, Boeing and Airbus have a trillion-dollar backlog, and airlines are upgrading planes with Wi-Fi and other entertainment technology. All this is spawning development of new hardware and software, said Horton.

A consumer product like an iPad app can have a major market impact in aerospace, he said. In avionics, iPad technology can be used to control panels in the cockpits. Manufacturers are looking to transition to touch-screen controls instead of dials, knobs, switches and analog devices. Wireless systems can be used to upload flight plan data and maps in minutes, compared to hours through a manual process.

Innovation is happening in the commercial sector at a rate that would be unthinkable in the government, Horton said.

How to manufacture products quickly and at low cost is the focus of Flextronics' innovation centers, said Horton. Additive technology and 3D printing, for instance, simplify the fabrication of complex circuit boards that are used in aerospace and defense, he said.

Additive manufacturing and 3D printing are techniques to make products from a digital model. In an additive process, successive layers of material are laid down in different shapes. The Department of Defense envisions using this technology to make parts on site for military systems that would otherwise be expensive to make or ship. The Department of Energy anticipates that additive processes would be able to save more than 50 percent of energy use compared to traditional manufacturing processes.

The Obama administration launched an ambitious plan in May to invest $1 billion to create 15 manufacturing innovation centers in the United States, although only $30 million has been approved so far. The funds would come from five agencies: Defense, Energy, Commerce, NASA, and the National Science Foundation. A year ago, after a competitive process, the administration announced the selection of a new consortium led by the National Center for Defense Manufacturing and Machining to establish the National Additive Manufacturing Innovation Institute.

With the federal government facing sweeping budget cuts over the coming decade, it is still unclear how these initiatives will be affected. Under any budget scenario, defense spending will be falling, and industry must look elsewhere for growth, said Tom Captain, aerospace and defense sector leader at Deloitte.

The global aerospace and defense industry’s revenue grew overall by 5.9 percent in 2012, and helped to offset defense cutbacks, a Deloitte study estimated. Defense industry revenues fell 1.3 percent in 2012, principally due to reductions in the U.S. defense budget, which accounts for 39 percent of global defense spending.

The picture is much rosier in commercial aviation, Captain said. Over the next 20 years, passenger travel demand growth is expected to continue to increase, especially in Asia and the Middle East markets. Boeing forecasts 35,280 new aircraft will be produced from 2013 through 2032. “Clearly the commercial aerospace business is experiencing nothing short of astonishing growth,” said Captain. “At some point, in the next year or two, we could see the commercial side of the aerospace business surpass the defense side for the first time in recent memory.”

Photo Credit: Thinkstock

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