2011 Global R & D Funding Forecast - Industrial R & D: Aerospace, Defense and Security
No segment has a stronger connection to public R&D investment than aerospace, defense, and national security. The U.S. and many foreign governments invest massive amounts on defense and security-related R&D every year. As an illustration of the scale, the U.S. government will spend more on defense R&D in 2011 (about $80 billion) than our estimates of total R&D (government, corporate and academic) for every country in our global analysis except the top three.
The impact this funding has on companies’ internal R&D budgets and activities, and the directives behind it, cannot be overstated. As a result, when budgetary concerns develop at the federal level, effects are evident throughout the defense industry.
Funding Pressure Ahead
National Defense, the magazine of the National Defense Industrial Association, summarized the situation for U.S. federal R&D spending: “The perfect storm for defense is here, for real this time.” In the past, defense budgets have been minimally affected during periods of budgetary constraints. This is about to change, as multiple factors—significant budget deficits, the growing federal debt crisis and related scrutiny of discretionary spending like R&D, the sluggish economy, the changing status of the Iraq and Afghanistan wars and the evolving nature of our defense activities in general—are aligning to change the level and focus of defense spending in the future. As Secretary Gates cautioned earlier in 2010, “The attacks of September 11th, 2001, opened a gusher of defense spending that nearly doubled the base budget over the last decade … Given America’s difficult economic circumstances and parlous fiscal condition, military spending on things large and small can and should expect closer, harsher scrutiny. The gusher has been turned off, and will stay off for a good period of time.”
The ultimate impact on aerospace, defense, and national security R&D remains to be seen. Pentagon officials have already stated that while efficiency in R&D activities will be sought, at least the basic research budget of approximately $2 billion annually will likely be immune from the expected overall defense cuts.
Against this backdrop of impending fiscal pressure are additional concerns over the allocations within the defense R&D portfolio. The report, S&T for National Security, issued by the JASON Program Office, describes the importance of DOD basic research, but concludes, “important aspects of the DOD basic research programs are ‘broken’ to an extent that neither throwing more money at these problems nor simple changes in procedures and definitions will fix them.” The report identifies the main problem as a shifting focus from “long-term basic research to short-term deliverable-based research.”
So where does this leave industrial R&D activities in the aerospace, defense and national security segment? Some observers see defense following the pattern of other mature industries dealing with significant cost constraints. There will be further efforts to push the development of innovations into the supply chain or to look to the private sector to find new ways to help finance innovation.
As the largest U.S. aerospace and defense-related R&D performer, Boeing has faced a number of R&D related hurdles in recent years—though none directly connected to its defense and national security business.
Some in the R&D community might say more funding is better. In Boeing’s case, this is not always true. Performance of its earliest 787 Dreamliner flight test aircraft caused it to write off $2.7 billion against R&D expense in 2009. The extent of testing and rework on the three flight test aircraft made it unlikely that they could be sold, so Boeing elected to restate their value from inventory to R&D expense. Some industry observers predict additional charges, although Boeing’s guidance indicates that its 2011 R&D expenditures are likely to decline by about $500 million over earlier projections.
The other significant news for Boeing is that resolution may be near on its joint U.S. ongoing dispute with Airbus (jointly with the EU) over subsidies in the development of their respective wide-body aircraft. The WTO has ruled that both parties received illegal subsidies from their respective governments. Many anticipate that these WTO rulings will now lead to a negotiated final settlement.
Trend Toward Collaboration
One unusual aspect of aerospace, defense, and national security R&D is collaborative and cost-sharing requirements of some federal R&D and procurement programs. For example, NASA selected Boeing, Lockheed Martin, Northrop Grumman and others to collaboratively provide R&D assistance on future aerospace vehicles.
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Similarly, DARPA often convenes R&D capabilities of multiple firms in a combined competitive and collaborative approach. A recent example is the Triple Target Terminator (T3), an air-to-air missile designed to shoot down high-performance targets, for which both Raytheon and Boeing will receive $21.3 million cost-sharing development awards. This important role of the DOD in supporting and pushing the industry to catalyze innovation has not gone unnoticed. Recently, Russian President Dmitry Medvedev urged the establishment of a Russian agency similar to DARPA to assist in the development of new technologies for the military.
Based upon recent and planned R&D program announcements, aerospace, defense and national security R&D will likely continue along many technology fronts, including electronics (e.g., surveillance and sensor capabilities, wireless and other networking technologies; increasingly smaller navigation and guidance components and electronic warfare countermeasures); unmanned and autonomous platforms (e.g., larger scale, more robust systems and unmanned options for future manned vehicles); new long range, multifunction weapon systems; and warfighter safety and capability enhancements (ranging from lightweight armor/systems to continued development of flexible displays for battlefield use).