Unmanned Aircraft Makers Look Overseas for New Markets
Unmanned aerial vehicles have unquestionably been one of the biggest success stories for the U.S. military on battlefields over the past decade.
Predators, Scan Eagles, Global Hawks and Ravens are brand names as recognizable in the defense world as Corollas, Mustangs and Corvettes are in the automotive world.
The question is now whether U.S. manufacturers can capitalize on the game-changing technology and expand their customer base internationally.
There is a huge pie to be divvied up, according to one industry watcher.
Derrick Maple, principal analyst at IHS Industry Research & Analysis, forecasts $81.3 billion in worldwide UAV business from 2012 to 2021. That includes new builds, research and development, and services, he said.
“We are still very much at the early stages of the lifecycle of this market,” he said at the Association for Unmanned Vehicles Systems International conference in Las Vegas. It will grow despite budget constraints in the United States and Western Europe, he added.
U.S. customers — primarily the military — currently comprise two-thirds of the global UAV market. The last five years have seen double-digit growth in sales, but this is “not sustainable” in light of the military spending downturn in the United States and Western Europe, Maple said.
Looking beyond U.S. shores for new markets is crucial, Maple and other analysts said. There are factors that will fuel the global growth in UAV technology and give U.S. builders a leg up over their competitors. But there are some potential roadblocks, too, they said.
On the plus side, many of these aircraft have flown hundreds of thousands of hours in combat, and have the cachet of being in the Defense Department’s inventory.
“Foreign buyers like manufacturers that are selling to the U.S. military. They have an advantage,” said Philip Finnegan, director of corporate analysis at the Teal Group.
While U.S. and Western European companies will take budget hits, defense spending accounts will “flow freely” in China, Russia, South East Asia, Australia and India, Maple said. Social unrest and instability in the Middle East and Latin America will increase demand for the intelligence, reconnaissance and surveillance capabilities these platforms provide, Maple said. More than 50 militaries are currently flying unmanned systems, and it is only a matter of time before the rest of the world adopts them, he added.
Christopher Ames, director of international strategic development at General Atomics, said there is an increasing awareness within the militaries of the world of what UAVs bring to the table.
“If you have scarce dollars, what is your best return on investment? And I think most would say that it is in persistent situational awareness. That is the key denominator to success in almost every endeavor — both military and civil,” he told National Defense.
The anticipated global demand for unmanned aerial systems coupled with the brand-name recognition U.S. manufacturers enjoy, should put them ahead of their competitors. But that is not a given.
“You would expect U.S. manufacturers to be in a very strong position,” Finnegan said. They have robust research-and-development accounts, have benefitted from large defense budgets, and do big production runs, “but it really hasn’t translated into a windfall of exports.” Only about 5 to 7 percent of their products have been shipped overseas, he noted.
Regulations, both abroad and in the United States, could hamper the market, the experts noted.
The United States, for example, is on a path to integrate remotely piloted aircraft into the national airspace. Until Congress recently passed a law requiring that the Federal Aviation Administration expedite the process, the agency was going at a deliberate pace. It now has a mandate to allow UAVs to fly in the same skies as regular aircraft by 2015 without needing special certification.
Other nations are facing the same dilemma: How to safely use the technology without causing accidents. The lack of rules and regulations may slow down the adoption of UAVs globally, Ames said.
Bill Daly, business development manager for UAS at Lockheed Martin, said once U.S skies open up, so too will foreign markets. When it comes to finding applications for unmanned systems, the United States is an early adopter. “Once we start flying more UAS with first responders here in the U.S., then internationally I think they will follow,” Daly said.
Lockheed Martin has been selling its Desert Hawk 3, and the first two iterations of the small, hand-launched drone, to the United Kingdom’s armed forces since 2002. It signed a $4.5 million support contract in July.
The U.S. export control regime and an international agreement to curtail the spread of missile technology are other hindrances.
Flory Ellis, sector director of export compliance at Northrop Grumman, said typically defense companies look at two factors when it comes to tackling an overseas market: Does the country have money? And does it have a need?
“Well, you also have to look at: can I export it to them?” she said at the conference. And when it comes to unmanned aerial systems in many cases, the answer is “no.”
The Obama administration has been attempting to reform the complex systems that determine what defense related technology can or cannot be exported, and to whom. Reform proponents want to have fewer restrictions, especially on dual use items, and technologies that are now ubiquitous throughout the world and can no longer give an enemy an advantage if its falls into one’s hands.
The bad news is that except for some components and subsystems, UAVs are not expected to benefit from the revamped regulations. They are still on the munitions list, which requires approval from the State and Defense departments.
“Military UAVs and certain components will remain on the munitions list,” predicted Eric McClafferty, partner in the law firm of Kelley, Dry and Warren LLP. This assumes President Obama is re-elected and export reform continues, but there is no guarantee of that, he noted.
“There is … more complexity headed people’s way,” McClafferty said. “Reform is not the panacea that some people hoped it might be.”
To add to the complexity, medium and large UAVs, which the United States is known for, fall under the Missile Technology Control Regime. This is not a treaty, and not part of the export control regulations, Ellis said. But it has a huge impact on which unmanned aircraft can be sold to overseas markets. It is a multi-lateral agreement between 34 countries, which have agreed not to spread ballistic missile know-how and components.
“It is a very very restrictive regime,” Ellis said.
The problem is that anything that can fly unmanned for hundreds of miles on a one-way trip, and carry a payload the size of a bomb, is considered a missile in the eyes of the agreement. The threshold is a 500-kilogram payload that can be carried more than 300 kilometers. Such aircraft are considered “category 1,” and there is a presumption that an export license will be denied.
Exceptions are rare, and are not made simply to help a company’s bottom line.
“You have to have a strong national security reason to overcome the presumption of denial,” Ellis said. “It can be done and it is done. … You have got to make an argument that it is good for U.S. national security and foreign policy interests. Your shareholders do not really enter into the equation that much.”
General Atomics has designed an export version of its medium-altitude, long-endurance UAV, the Predator XP, which can be sold overseas, Ames said. It could not change the range threshold. The aircraft are much too fuel efficient to be held to under 300 kilometers, he said. The internal configuration was changed so it can’t transport a 500-kilogram payload. Its wingtips were also changed so it can’t carry munitions, making it purely an ISR-gathering platform.
Components are other potential sticking points, Ellis warned. The Defense Department, and some 20 sub-agencies, are deeply concerned that cutting-edge technologies found within the aircraft are not exported. Anything to do with GPS, cryptology, or sensor fusion will trip a review, she said.
There is another path to profits that doesn’t involve selling unmanned aircraft. Fee-for-services is a new business trend, the analysts said.
“This is definitely a growing area,” Finnegan said. Insitu with its Scan Eagle small UAV was a pioneer in this field. Instead of buying a new, expensive unmanned aircraft, and going to the trouble of training pilots and sensor operators, government, military or private sector entities can pay a firm to fly the aircraft and gather data for them.
Mike Blades, senior industry analyst at Frost & Sullivan, said, “I really do think this market is going to transition to ‘everyone wants one’ to ‘I don’t want one. I want someone else to do it for me.’” And that includes government customers. Major defense companies will move into the fee-for-service model to make up for lagging sales, he predicted.
Ames said General Atomics is considering getting into the fee-for-service business. “We’re looking at all models … you have to be responsive to the customers,” he said.
Finnegan added that fee for service has the advantage in international markets of not facing the same export requirement hurdles. It does need approvals, but getting a license to do this is not as onerous as trying to export the hardware.
U.S. companies do have competitors. While General Atomics still dominates the medium-altitude, long-endurance category with its Predator line, and Northrop Grumman has the long-endurance Global Hawk, other countries’ manufacturers are positioning themselves to compete. First and foremost are the Israeli firms, which were pioneers in the field.
Meanwhile, it has been very difficult for European companies to build up their position in this market, Finnegan said, because their budgets are small, and there is a lack of an unmanned aircraft industrial base. Yet there are a handful of export products that could come from Europe in the coming years, he said. France, for example, has intentions to build a UAV in the same class as the Predator.
Maple said Russia has significant growth potential, with many programs under way. The Israeli company AIA has entered into a joint venture with one Russian company, as it has with European and U.S. partners. Elbit and Boeing recently announced they were teaming up on a project, he said.
China, India, Brazil and Iran all are working on their own indigenous capabilities. Some, but not all of the nations building UAVs are signatories to the Missile Technology Control Regime, Ellis said.
Photo Credit: Lockheed Martin