Shrinking budgets have defense suppliers looking in other directions

Bleak prospects for U.S. defense spending are sending companies that traditionally have supplied electronic components and subsystems for aerospace and defense applications in an interesting, yet predictable new direction.

Rather than be hurt by shrinking defense spending, these companies are looking in different directions to boost revenue streams. Instead of waiting for defense spending to come back, suppliers of embedded computing, software, and complex digital signal processing are looking to the automotive and medical technology industries for future growth. This is a good thing for the continued health of the electronics industry, but may not be best for the military.

In some ways, Pentagon officials have themselves to blame. The long-term military emphasis on commercial off-the-shelf (COTS) technology, begun in the 1990s, means component and subsystem suppliers no longer are at the mercy of fluctuations in the defense market. Heavy military reliance on COTS electronics has created a true "dual-use" supplier base. We no longer need to fantasize about Lockheed Martin making transit buses and Raytheon designing washing machines to talk about dual-use technologies.

What does this mean for the defense supplier base? It might not be good news. When companies leave the defense business, they often leave it for good. If companies let their defense segments go dormant, connections go cold, knowledge of Byzantine military regulations becomes dated, and long-term relationships with defense systems integrators starts to atrophy.

Those who have been defense technology suppliers understand the high price of entry to this business. Once out, re-entry is time-consuming, expensive, and sometimes just not worth it. Starting from scratch oftentimes is just impossible.

I've seen this phenomenon before, and much of what I see now feels eerily similar. Let's go back 20 years: The first Gulf War was over, the Berlin Wall was in rubble, the Cold War was history, and Bill Clinton was headed to the White House. Among the first things Clinton did was reduce defense spending; it was a good time to do so. Military forces were well stocked after the Reagan defense buildup of the 1980s, and the Cold War's end meant that continued big defense budgets to counter the Soviet military threat were no longer necessary.

What we saw then was the beginning of a long decline in military spending that lasted into the next decade. Mitigating factors, however, were at work around the same time-namely, the rise of the Internet and the telecommunications boom that demand for Internet bandwidth created. During that lull in defense spending, we saw plenty of long-term military technology suppliers drop their government activities and run headlong toward the emerging and lucrative telecom market. Many of those companies never returned to the defense business, and more than a few of them disappeared altogether when the telecom boom went bust.

As the telecom boom subsided, new things happened to refocus attention on military technology, most importantly the terrorist attacks of 9/11 and the second Gulf War. Now we're starting the see the cycle repeat, as another likely long-term dip in defense spending begins-whether or not it's an opportune time. Today, it's not telecom that's capturing the attention of traditional military suppliers; it is the promise of automotive and medical electronics markets.

Like it or not, this is where many companies are headed. Whether they end up neglecting their military segments remains to be seen. What is clear, however, is the defense electronics industry is in a major period of transition.


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February 2014
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