European Defence Electronic Markets Booming

Documental Solutions, After five years of building a bottom-up database, through analysis and examination of over 7,000 European defence electronics program business opportunities, the true picture of the European C4ISR market has emerged. Documental Solutions’ bottom-up methodology, in by far the largest study ever conducted, has revealed the European Defence Electronics market (excluding all platforms and weapon systems) to be worth some $13.5bn in 2007, rising to over $15bn in 2008. 
 
The $1.5bn increase between 2007 and 2008 cannot be attributed to any one single factor although there are a number of market segments that stand out, in particular the electo-optical and vehicle mission systems markets. 
 
Between 2007 and 2008 there is a $400m increase in vehicle mission systems, primarily electro-optics. Whilst helicopter mission system markets will grow by $142m, a 17.6% increase and space and submarine mission systems will grow by 48.5% and 78.2% respectively. 
 
Geographically, the growth in spending over the next year will be focused on Spain and the UK with 20.2% and 18.2% growth respectively. Electro-optical markets are expected to grow 22.9%, far more than any other area. Man portable electro-optics, vehicle electro-optics and electro-optic electronic warfare equipment are the leading market segments.  
 
EUROPEAN MARKET OVERVIEW 
 
BAE Systems and SAFRAN will lead European growth between 2007 to 2008 with confirmed defence electronics growth of 22.7% and 23.7% respectively and Thales-Raytheon systems can expect at least 19.9% growth. Of course, further program wins this year could further increase these figures. 
 
The largest share of the 2007 market makes Thales the market leader, with a $2bn turnover in defence electronics. Next largest is Finmeccanica with $1.3bn. Both have arguably succeeded because of their capture of domestic and UK markets. 
 
The following companies held leading market shares in the European defence electronics mission systems markets in 2006. EADS turned over $1.1bn, SAAB group turned over $560m, BAE Systems turned over $550m, Lockheed turned over $514m, SAFRAN turned over 480m (although strong growth coming) in 2007. Raytheon, ITT and Northrop Grumman turned over some $400m each in 2006. 
 
Beyond the larger contractors there are over 200 companies in the C4ISR market turning over $4bn per annum in over 3000 program business opportunities in the 2006-2016 period. These figures do not include joint operations without a leading partner. 
 
The majority of the market segments are either mature or in decline, but the aggregate of all markets is growing at some 1% a year (Not including inflation). This is because those segments that are growing are growing at remarkably high rates. Examples of high growth areas are: vehicle protection systems, SATCOM on the move, tactical battle management, man portable electro-optics, and Wide Band Network Radios and Naval electro-optics. Some 1911 program business opportunities worth $2-3bn a year of European un-awarded defence electronics programs will be awarded from 2007 to 2016. 
 
Unsurprisingly, the biggest defence electronic spenders are France and the UK, both spending some $2.5bn each per annum on defence electronics from 2006. France will see a growth rate of around 3% from 2007 to 2016. Whilst Bulgaria is expected to see an 8% growth rate from 2007 to 2016, Switzerland and Finland are both expected to see declines of around 8%. However, it should be noted that the high cost of embedded mission systems in platforms can have a dramatic effect on smaller countries ability to spend in other areas.  
 
BREAKDOWN BY SECTOR 
 
– Military aviation mission systems spending is expected to rise from $2.1bn in 2006 annually to $2.2bn in 2016. The UK, Netherlands and Norway are all expected to see significant growth, whilst Germany, Sweden and Poland are set for a fall. 
 
– Naval mission systems will climb to around $2.1bn per annum in 2012 but will fall back to $1.8bn by 2015. Submarine platforms in particular will see a marked decline in almost all areas except for communication systems. 
 
– Land mission and joint systems account for the bulk of spending with some $6.4bn in spend and will hold its value through to 2016. Man-portable elements will increase from $500m to $1bn a year by 2012, although it is expected once the main soldier modernisation programs have gone through it will fall slightly. 
 
European military communications markets (over 1300 program business opportunities) are worth some $3.5bn per annum and this is expected to be steady through to 2015. The majority of market growth will come from software definable radios (in a variety of roles) and UAV datalinks. There will also be high growth in a number of niche connectivity areas such as; ISR datalinks, Wideband Network Radios, squad level communications and local area networks. Naval communications are also expected to see a revival in the longer term. 
 
Thales and EADS clearly lead the market and are set to retain much market share. There are not many opportunities in the next year but between 2009 and 2011 the number of opportunities to improve market share will increase. Rockwell Collins currently has very bright long term prospects through communication systems for JSF. Leading the growth are Sweden, Finland and Belgium who will each see over 12% growth over the 2007-2013 period as they upgrade and improve various communications capabilities. 
 
European radar markets (over 1600 program business opportunities) are worth around $4bn annually and are expected to hold that value till at least 2013. Whilst there are areas of growth the emphasis of different types of sensing equipment and lack of a substantiated air threat is leading to a decline in funding. 
 
Space based radar (Likely to drop to a third of its current value) and ground/fixed radars (likely to halve in value over the next ten years) and naval radars (negative 4.8% CAGR) will see significant decline. Areas that will increase include land based close-in protection radar systems (growing to some $50m a year post 2012), vehicle protection systems (set to be worth some $300m) and airborne fixed wing radar (growing to $1.6bn in 2012 and then slightly declining to $1.35bn by 2016). 
 
Thales and Finmeccanica dominate the market with over $600m each, with BAE Systems, SAAB and Lockheed Martin following in a second grouping with over $300m each. The longer term will see Northrop Grumman become a major radar player in Europe through JSF and its other existing systems. 
 
European electro-optical and infra-red markets (2300 program business opportunities) will see a big jump between 2007 to 2008. But the market will then remain very stable at $4bn over the next four years. This was surprising because of the lack of stated or projected future space based electro-optic opportunities (a drop from $300m to 30m a year is expected between 2006 and 2015). 
 
The growth comes from naval and vehicle mounted systems. Remote over head weapon systems, vehicle protection systems and naval electro-optical staring technologies (all with growth rates over 9% CAGR between 2006 and 2015) will significantly boost the market in the long term. In the short term man-portable electro-optic requirements will boost the market by about $300m between 2006 and 2011. 
 
Whilst Thales, Finmeccanica and Safran dominate the market, it is Lockheed Martin and EADS who are set to retain their respective market shares going forwards through to 2015. 
 
European command and control markets (1010 program business opportunities) will increase from $2.5bn a year to around $3bn a year between 2006 and 2016. This is by far the fastest growing segment because the main connectivity programs in Europe are now either in or going into service. France, Italy and Germany have already made extensive digitization steps. Yet the UK, Spain, Sweden and Eastern Europe will see higher growth. The market for logistic systems and tactical battle management will boost the market in the short term whilst ISR, integration and infrastructure programs will provide longer term growth. 
 
By 2008, around $800m a year of the European defence electronics market will be mounted on unmanned systems. This unmanned mission system market will remain stable to 2010 but is then expected to fall because the larger UAV programs will have reached their peak production timelines. 
 
Two areas of noticeable decline are due to platform decline. Naval platform markets falling continue to affect the market for naval mission systems. Although ballistic missile defence requirements may well provide a strong boost post 2012. The second area is military satellite markets. The very strong decline in Europe in demand for space based mission systems dramatically affects the value of the market. Although this is off set by the market for satellite services in Europe which is no less than $400m per annum, although with urgent operational requirements it will rise higher over time.  
 
GEOGRAPHICAL BREAKDOWN 
 
In 2006 Europe imported 20.7% of its defence electronics mission systems requirements, almost entirely from Israel and North America. Some 944 program business opportunities in the European Defence electronics market were made by overseas firms. 
 
Lockheed Martin is the non-European market leader with some $500m per annum in Europe in 2006. Northrop Grumman turned over $350m in 2006 and Raytheon turned over $300m in 2006. Europe imported $210m of defence electronics from Israel and another $70m from Russia in 2006. Total European defence electronics mission systems imports showed that Radar based products accounts for $785m in 2006, whilst Command and control accounted for $428m in 2006, communication systems accounted for $495m in 2006, and Electro-optical products accounted for $725m in 2006. 
 
Eastern Europe continues to support a surprisingly large number of companies. However, this is not supportable in the long term, as has been demonstrated in Western Europe, and there needs to be a cross-border consolidation between these companies and/or Western European companies. This will enable the Eastern European companies to survive in specialist niche roles. Most Eastern European countries already use Western equipment, especially in communications. However, in radar, Command and Control and electro-optics they are still quite reliant on either Russian or domestic capability. 
 
It is clear that whilst Europe can support multiple defence electronic businesses in most areas there are some that require consolidation. This is especially true in the naval radar and command and control mission systems market because of the downturn that is expected to occur over the next ten years. Naval Command and Control and Radar both need consolidating as the market is stagnant. There also needs to be consolidation in the land C2 domain, an example being that almost every European country has a different artillery support command and control system. However, with medium to high growth in this area it is unlikely that there will be any political pressure for this to occur. 
 
Thales is leading the pack with specialist houses in the Netherlands, France, UK, while Spain. Italy, Germany and Sweden must determine which of Finmeccanica, Rheinmetall, EADS and Saab is going to lead which market electronic segments. Yet with such few cross border programs in defence electronics between these countries, a badly needed reorganisation isn’t going to happen soon. Yet it is the key to these companies competing against Thales and to enable them to compete in the medium and long term internationally.  
 
Documental Solutions offers comprehensive database and analysis solutions that enable its customers to focus their efforts on deeper market analysis, more thoughtful planning and better decision-making rather than on time-consuming data gathering.