The final part of our Analyst Q&A with Ruchi Chaturvedi of Strategic Defence Intelligence discusses the role of IT, data and computing technology in military forces, and the trends that will have the biggest impact on the global military market during the coming years.
Q. How will the global military IT, data and computing market influence future military operations? What kind of opportunities does this technology offer military forces?
Growing use of IT systems in various aspects of the armed forces and an emphasis on Network-Centric Warfare for future asymmetric warfare needs without proper security measures have been increasing the vulnerability of these systems to cyber-attacks using advanced techniques in the sector.
As per SDI estimates, the cyber security. A major factor driving this sector is the transition of modern warfare, from the battleground to networks and cyberspace, with militaries across the world spending significantly on the development of their defensive and offensive capabilities in the areas of network-centric warfare and cyber security. Historically, computing technology has largely benefitted from research and development activities in the military domain. With the huge demand for computing products, interconnectivity and data bandwidth, it has now resulted in the militaries of various countries leveraging the technologies in the consumer market for use in various defense applications.
The military IT, data and computing market is expected to be dominated by North America, followed by Asia-Pacific and Europe. The US is the highest spender in the global military IT, data and computing market, with a large number of programs being pursued in the areas of Enterprise Resource Planning (ERP) software products, the Tactical Local Area Network (TACLAN) family of systems, software support for radars, net-centric networking products, a transition to cloud computing, and cyber security. Europe is anticipated to emerge as the second largest market for military IT, data, and computing, with a major portion of expenditure attributable to the UK, Russia, and France. Asia-Pacific is another major spender in the domain, with most major militaries formulating programs to establish robust communication networks among various tactical units and securing critical networks and infrastructure from cyber espionage.
Many countries, such as the Russia, are rapidly developing their network-centric warfare capabilities; this is expected to bring about major changes in war fighting techniques, due to the enhanced fighting capabilities of the military. This trend is predominantly observed in the US Army, which is the biggest spender in the networking segment globally. The US Defense Advanced Projects Research Agency (DARPA) announced plans to boost cyber security expenditure by up to 50% over the next five years. Israel has also announced a plan to significantly increase its expenditure on developing new cyber security technologies to keep its networks safe.
Enhanced networking capabilities provide a boost to the fighting capabilities of the individual soldier and to those providing logistical support. This trend is seen most in the US Army, which is the highest spender on military IT in the world. Each service — army, navy, and air force — has developed its own comprehensive network, referred to as the Joint Enterprise, which consists of the Defense Information Systems Network and the Global Information Grid–Bandwidth Expansion (GIG-BE) program. Such initiatives are now being implemented on a global scale, with a large number of countries entering into collaboration agreements in order to preserve the security of their critical infrastructure and other sensitive military information.
Q. What trends do you expect to dominate the global military market over the next five years, and how will these affect global operations?
The global defense industry is currently observing a period of dramatic change. The West (The US and Europe) is under enormous pressure owing to the termination of very expensive wars fought in Afghanistan and Iraq that has in turn resulted in a deficit induced economic and political turmoil in these countries even when major Military missions continue under war against ISIS.
Declining budgets in the Western world and growth in Asia and the Middle
Roughly the entire West has considerably incised defense spending in recent years, after drawdown of military from both Afghanistan and Iraq. This will impact budget allocations for procurement of equipment, further more defense cuts are expected in the future. Many defense companies anticipate reinstating the lost revenues with global sales to countries other than the conventional large buyers (the United States and a few countries in Europe). The extensive thought is that growth will be through international defense sales from emerging markets. Therefore, even though the global defense expenditure is expected to increase, albeit modestly, over the next 10 years, the North American and European share in it will reduce significantly, with countries in Asia and the MENA region poised to offer the maximum opportunities for arms procurements. This power shift has started reshaping the global landscape of defense spending.
The defense cuts have overall implied certain changes in the strategic thought process of suppliers as earlier they used to focus on major challenges to enter new geographies such as export-control regulations, offset requirements, technology-transfer requirements, and intellectual-property issues, this is now not a major concern in current situations for the suppliers but more about the political landscapes of the procuring nation.
Arms race in Asia reflected in modernization plans
Underlying economic strength of many countries in Asia has aided weapons modernization plans. Various ongoing conflicts such as the ones between India-Pakistan, India-China, North Korea–South Korea and China-Japan have mandated the robust procurement of advanced weaponry by the three large spenders in order to develop their defense capabilities in relation to each other. Moreover the volatile situation between China and various Southeast Asian nations has created an environment perfect for large scale military acquisitions. The urgent need to replace ageing defense equipment with new and technologically advanced weaponry is driving procurement among the smaller countries in the region.
The Asian market can be divided into two halves with the first comprising of the four powerhouses, China, Japan, India and South Korea which account for over 75% of the region’s defense spending. The other half consists mostly of emerging Southeast Asian nations including Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam, all of which have collectively doubled their military spending over the last decade. Indonesia will be fastest growing defense market in Asia till 2021, with a CAGR of 17.88%, followed by China-11.7%, India-6.8%, and Malaysia-6.9%.
Indigenization of Defense Manufacturing
After years of being reliant on the US and European suppliers, the developing world is now placing greater emphasis on developing their indigenous manufacturing capabilities, in order to reduce their overdependence on the traditional suppliers. Asia has taken the lead in this with India’s ‘Make in India’ campaign paving the way for industry growth through foreign collaborations. India is expected to exhibit the strongest growth trajectory in terms of domestic manufacturing over the next decade. China has historically been the strongest domestic manufacturer of defense equipment outside of the US and Europe, but the lack of transparency in the country’s defense industry presents limited opportunities for global defense companies. Southeast Asia is also expected to emerge as the next hotbed for local manufacturing. Emergence of Southeast Asian nations such as Indonesia, Thailand and Malaysia, will witness a decrease in reliance on US and European suppliers, by focusing on manufacturing defense equipment locally, a move that is already generating export opportunities.
The Latin American defense manufacturing market is dominated by Brazil, which accounts for almost half of the region’s defense expenditure. The Brazilian Association of Defense and Security Equipment, which includes about 170 companies, is poised to spend upwards of US$120 billion over the long term to fulfil domestic requirements and boost annual exports. Argentina and Chile have also announced plans to revive their local defense manufacturing capabilities, albeit at a much smaller level.
Defense budgets cuts to prompt Portfolio rationalization and restructuring as a way to drive growth and manage costs
Declining defense budgets have exerted significant pressure on the industry which is expected to result in considerable portfolio rationalization and restructuring. Companies are now looking to spin off specialized businesses into separate entities and divest non-performing segments which are outside of the firm’s core business. The next decade is expected to witness increased consolidation in the global defense industry. Companies are attempting a shift to adjacent businesses, including commercial aerospace, civil helicopters, cybersecurity, business with other government departments (such as public security), and other businesses, as ways to make up for the reduction in defense spending. Also, investment into research and development (R&D) is on the rise as organizations focus on driving incremental innovation as a way to gain a competitive edge and adapt their existing products to adjacent markets.
Partnership Agreements to enter new geographies are expected to increase
Over the last decade a large number of foreign OEMs engaged in strategic partnership agreements to expand their presence in new international markets. For example, in 2014, Saab formed a strategic partnership with Embraer under which the latter will have a leading role in the development and production of the Gripen NG next generation fighter aircraft in Brazil. In 2011, China and Pakistan set up a joint JF-17 marketing agency to promote export sales of the multi-role fighter aircraft. India and Israel developed a surface to air missile which was tested in June, 2016. Such partnerships not only help in technology transfer but also lead to a greater availability of a company’s products in new geographies. This trend of forming partnerships to expand market presence is likely to continue.
Q. Outside of those you already cover, what other industries do you find interesting? Have you ever considered covering this industry?
Strategic Defence Intelligence (SDI) conducts extensive research on the global market for various platforms, equipment and systems that find usage in the modern aerospace and defense market. Examples of our research include forecasting sales and detailing prevalent market conditions that influence demand for items such as armored vehicles, military aircraft, naval surface combatants, military submarines and military rotorcraft among several others. Apart from covering 32 core sectors, our focus has been on advanced and evolving sectors such as cybersecurity, critical infrastructure, Unmanned Systems among others.
The global military market will see growing adoption of IT systems over the coming years, with a strong focus on network-centric warfare and cyber security. Various militaries will increase their spending in the global military IT, data and computing market in attempts to stay on top of cyber espionage and ensure safe and secure networks. In addition, a large number of global events are transforming military operations, including declining budgets in the West and an arms race in Asia. As technology continues to innovate, we can only imagine what new weapons will become central to global military operations.
We'd like to thank Ruchi for taking the time to answer our questions and sharing her extensive knowledge of the global military market with us.
About the Analyst:
Ruchi Chaturvedi, with more than eight years of experience in research and consulting across industry sectors such as Defense, Power, Alternative Energy and Clean Technology leads the defense research and reports team. During her tenure she has authored extensive Research Blogs, White Papers and Thought leadership content on Technology Sectors and has also handled major consulting projects with Industry giants.
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