Aerospace & Defense Industry Track

GIL Silicon Valley 201210 September 2012, San Jose, CA

Agenda

Chair/ Moderator

Wayne Plucker - Industry Manager, Aerospace, Defense & Security, Frost & Sullivan

2:00 #1- Frost & Sullivan CEO 360 Executive Insight- Aerospace & Defense

Wayne Plucker – Industry Manager, Aerospace, Defense & Security, Frost & Sullivan

2:30 #2- INNOVATION AND GROWTH SUCCESS STORIESZaki Saleh– Vice President – Northrop Grumman Information Systems

One Company’s Recompete is Another’s Takeaway – Organic Growth in a Tough Market

. 2 .

3:00 #3- INTERACTIVE Executive Panel DiscussionGary Leikin – Vice President – Frost & Sullivan

Finding Opportunities in a Challenging Market

3:40 Networking, Refreshment, and Exhibition Break

4:10 #3- INTERACTIVE – An Exercise in Scenario PlanningGary Leikin – Vice President – Frost & Sullivan

5:30 A&D Track Close

The CEO 360 Perspective : Opportunity Despite Reduced Budgets

Prepared for:

GIL Silicon Valley 201210 September 2012, San Jose, CA

Growth, Innovation & Leadership

Wayne Plucker, Industry Manager, Aerospace & Defense

CEO 360

Key Take-Aways:

•The defense sky isn’t falling, it is just a overcast

•Aerospace has a fragmented future

•Security is secure, but international

Table of Contents

Global Aerospace &

Market Dynamics Analysis

Global Spending & Sector Highlights

. 5 .

Aerospace & Defense Outlook

Defense Megatrends

Regional Overview

Table of Contents

Global Aerospace &

Market Dynamics Analysis

. 6 .

Aerospace & Defense Outlook

CEO’s Perspective

2

Economic conditions will dominate the

aerospace market and will have effects

on both defense and security

1

Despite recent budget reductions, U.S.

defense spending is at very high levels.

Proven systems, and research to meet

emerging threats, will continue

. 7 .

3

Market consolidation will increase with

fewer programs of record as mature

technology dominates the next decade.

4

Competition for partnership/acquisition

of innovative firms who can translate

commercial into military applications

5

Defense will follow rapidly developing

commercial standards-based

technology..

Aerospace Industry Outlook:In

du

str

y I

mp

ac

t

High

Economic and Political

Stability in APAC and

Cost effective

solutions

Modular, Upgradable

Platforms

Green/Efficient

Platforms

Industry shares R & D

investment with other

players Emerging markets

becoming the key

target for US and EU

industry

Technology

dependent

future

Technology

. 8 .

2012 – 2021 perspective

Ind

us

try I

mp

ac

t

CertaintyLow High

Modernisation

Requirements

Stability in APAC and

MENA

Incentive to local

Industry – Demand for

technology know how

through partnerships

(JV, Industrialisation,

M&A)

Strong markets

becoming opportunity

hubs for smaller

markets (indirect

access to extended

footprint)

Importance of TLCM

COTS products

increasingly become a

cost-effective option /

increased power of

lower tier suppliers

Merger and

Acquisitions

New market entrantsNew

Competition

New

Competition

Cost concerns.

Technology

Convergence

Defense Industry Outlook:In

du

str

y I

mp

ac

t

High

Modernisation

Requirements

Economic and Political

Stability in APAC and Cost effective

Importance of TLCM

COTS products

increasingly become a

cost-effective option /

increased power of

lower tier suppliers

New market entrants

(other industry)

Security spending

outstrips defence

expenditure

Emerging markets

becoming the key

target for US and EU

industry

Investment in

new market

segments

Dealing with a

cost conscious

customer.

Technology

Convergence

. 9 .

2012 – 2021 perspective

Ind

us

try I

mp

ac

t

CertaintyLow High

Stability in APAC and

LATAM

Incentive to local

Industry – Demand for

technology know how

through partnerships

(JV, Industrialisation,

M&A)

Strong markets

becoming opportunity

hubs for smaller

markets (indirect

access to extended

footprint)

Cost effective

solutions

Smart, multi-purpose,

Upgradable Platforms

Green/Efficient

Platforms

Industry forces to share

R & D investment with

other players

The rise of open

innovation

Merger and

Acquisitions

Competition

with a new

face

Competition

with a new

face

Security Industry Outlook:

High

City Cloud Solutions

PSIM CCTVs

Video Analytics

Networks

UAV’sBiometrics

Ind

us

try I

mp

ac

t

Technology

Existing

Technologies

Existing

Technologies

. 10 .

LowCertainty

Low High

Smart Phones

4G network Long Term Evolution

Police Mobile Office

Sensors

C3i

Networks & Storage

Anti-Cyber

Source: Frost & Sullivan analysis

GIS

Data Mining/Fusion

Ind

us

try I

mp

ac

t

Technology

from other

industries

Newer

technology

applications

Newer

technology

applications

Table of Contents

Global Aerospace &

Global Spending & Sector Highlights

. 11 .

Aerospace & Defense Outlook

Commercial Aerospace

600

800

1000

1200

1400

1600

Air

cra

ft D

eli

ve

rie

s

Air Transport Deliveries

Main-line aircraft fleets• Deliveries ≈ 1000 through 2014

with measured growth

• 787 and A350 will increment and

cannibalize existing model

sales.

• C-Series, C919, A320NEO and

737 MAX drive some increment

. 12 .

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Regional Jets 185 193 192 174 189 248 272 328 237 223

Regional Turboprops 110 109 115 102 110 105 106 104 100 98

Multi-Deck Fleet 17 30 19 7 35 41 40 41 46 55

Twin-Aisle Fleet 167 169 188 181 183 209 235 286 294 320

Single-Aisle Fleet 691 733 768 764 793 761 722 689 805 802

0

200

400

600

Air

cra

ft D

eli

ve

rie

s

737 MAX drive some increment

2015-2020

Regional aircraft fleets• New players-

Sukhoi, Mitsubishi, COM

AC

• Demand has been

falling

• Turboprop strength

Carbon-Tax

Business Aviation

1500

2000

2500

3000

Air

cra

ft D

eli

ve

rie

s

Business Aircraft Deliveries

• Jet orders decline in 2008, but OEMs delivered at record numbers

• 2010 made big dents in jet order books and new OEM model deliveries

• Turboprops slow decline

. 13 .

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Rotary Piston 403 415 433 442 450 455 475 475 485 485

Rotary Turbine 487 528 492 453 450 525 600 660 690 675

Fixed Turboprops 459 535 439 362 357 403 426 447 448 454

Fixed Jets 1040 1154 870 910 760 879 947 976 986 1001

0

500

1000

1500

Air

cra

ft D

eli

ve

rie

s• Piston helicopter market

virtually owned by Robinson Helicopters

• Turbine helicopters dampened by economic conditions.

• Turboprops slow decline

General Aviation

2000

2500

3000

Air

cra

ft D

eli

ve

rie

s

General Aviation Aircraft Deliveries

• 2007 was second best year since GARA

• Market significantly affected by recession

• Recovery is unlikely

• Many long-term OEMs

. 14 .

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Aircraft Deliveries 2675 2119 966 904 1048 1050 1129 1192 1226 1229

0

500

1000

1500

Air

cra

ft D

eli

ve

rie

s

• Many long-term OEMs are now out of business

• North America and Europe are the market, with limited opportunities elsewhere

• Low pilot demand

Civil Aerospace Electronics

5,000

6,000

7,000

8,000

$ M

illi

on

s

Forward Fit Avionics Installation Revenue

Avionics

• Affected most by new

aircraft

• Parts and services add

about 25% to the

Comm/Nav areas and

50% to the Surveillance

. 15 .

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Integration 437 485 498 481 494 512 530 560 592 646

Surveillance 2,66 2,52 2,79 3,05 3,30 3,41 3,63 3,73 3,71 3,88

Navigation 1,74 1,72 1,71 1,70 1,86 1,97 2,02 2,08 1,94 1,90

Communication 937 904 902 899 957 996 1,03 1,07 1,11 1,15

0

1,000

2,000

3,000

4,000

$ M

illi

on

s

50% to the Surveillance

• Integration is the future

Cabin Systems

• Traditional IFE is a

limited future market

• COTS equipment will be

the core

• Connectivity is the future

Defense Budget Cuts: Is it time to panic?

• Military acquisition is

now cost conscious

manner

• Significant cuts in the

US and Europe, but

global defense budget

continues to grow

steadily, now driven by

. 16 .

• Industry is looking at

new markets and new

sectors

• Decline in R&D budget

is one of the biggest

menace.

steadily, now driven by

emerging countries.

Defense Budget Segments

• Only C4ISR and CSSE

exceed a 4% CAGR

over the period

• Missiles, Ordinance, R

otary Wing Aircraft and

Training all exceed a

2% CAGR

. 17 .

• Fixed Wing

Aircraft, Vehicles and

Unmanned Systems

have less than 2%

CAGRs

• CBRNE and Ships

have essentially flat

growth

Table of Contents

Global

Aerospace &

. 18 .

Aerospace &

Defense

Outlook Regional Overview

Aerospace Regional Assessment

0

500

1000

1500

2000

2500

NA EU APAC MENA ROW Private Leasing Cargo

Un

its

Narrow Body Wide Body Regional Jet Regional Turboprop Piston Turboprop BizJets Helicopter

Civil Aerospace Production (Global) 2011

• North America still

dominates the overall

market for aircraft. That is

on the strength of Business

and GA production

. 19 .

0

5

10

15

20

25

30

35

NA EU APAC MENA ROW Private Leasing Cargo

Region

Bil

lio

n $

US

Narrow Body Wide Body Regional Jet Regional Turboprop Piston Turboprop BizJets Helicopter

Civil Aerospace Market Revenues (Global) 2011

• Once price per unit is

factored in, North America

lagged behind APAC and

Europe as an attractive

market. The leased aircraft

are also principally

purchased for use in MENA

and APAC

Defense Procurement Spending Forecasts

. 20 .

Note: All figures are rounded. The base year is 2010. Source: Frost & Sullivan analysis.Note: CAGR is calculated from the base year of 2010.

Security Spending Forecasts

. 21 .

Note: All figures are rounded. The base year is 2010. Source: Frost & Sullivan analysis.Note: CAGR is calculated from the base year of 2010.

Are US Primes International?

US Defence Prime and the International Market:

% of Annual Revenue from Non-US customers

2004

5%

2008

5%

2011

6%

2004

18%

2008

20%

2011

25%

. 22 .

Traditional

International Markets

• Budget cuts force the US to migrate to other

markets (making the European market tougher and

increasing competition in the emerging markets.)

• Industrialization

First Wave of International

Markets (90’s + 00’s)

Current Wave of

International Markets

(2011 onwards)

2004

33%

2008

39%

2011

50%

2004

17%

200

8

17%

2011

19%

2004

17%

2008

17%

2011

19%

Market Conclusions

The United States will remain the largest manufacturer, consumer, and exporter of defense products. Growing economic power and natural-resource competition will drive India and China to have the fastest procurement-spending growth rates.

The European region will experience the sharpest decline in defense-procurement spending and will experience significant defense-industry consolidation and will invest in U.S. defense technology firms because of limited regional and export opportunities.

The top global defense firms will continue to dominate for the forecast period. Expect further

. 23 .

The top global defense firms will continue to dominate for the forecast period. Expect further consolidation among European manufacturers. State subsidized Russian, Chinese, and Korean companies have price advantage and will experience the fastest grow rates

Economic competition, border security, counter insurgency, and counter terrorism requirements will increase. Unmanned vehicles, embedded sensors and computing, information collaboration, nonlethal munitions, cyber operations, and industrial espionage will be prominent global technology themes through 2016.

•The Defence-Security convergence might benefit companies which are focusing on both sectors overall (i.e. Israeli Industry)

Table of Contents

Global

Defense

. 24 .

Defense

Outlook

Defense Megatrends

The European Union’s Energy Trading Scheme Has Started

• The EU estimates 25% of their greenhouse gas from transportation. Air travel between Europe and the rest of the World is estimated at 9% of that.

• The EU says that air travel emissions have grown by 87% in the last 20 years.

Aviation CO2

212 million MT

. 25 .25

20 years.

• Mandated an emissions trading scheme (ETS) for travel to and from Europe. To operate in Europe, flight operators must open carbon registry accounts

• In 2012, 85% will be a free allowance. In 2013-2020

Strategic Materials

• Rare earth materials, very limited sources as shown on the right.

• China leveraging dominance. They want to provide finished goods, not raw materials and have tightened the market.

• In addition to the rare earths, metals such as titanium, nickel, cadmium and chromium are used heavily in

. 26 .26

chromium are used heavily in aerospace. The sources for many of those elements can be challenging

• Alternative is to replace the materials that are price or supply constrained with another material that is more available or less expensive.

• Product certification/quality assurance may restrain manufacture and materials

Rare Earth Production and Reserves (2009 Data)

Country

Production

(Metric Ton) Reserves (Metric Ton)

United States insignificant 13,000,000

Australia insignificant 5,400,000

Brazil 650 48,000

China 120,000 36,000,000

Commonwealth of Independent States not available 19,000,000

India 2,700 3,100,000

Malaysia 380 30,000

Other countries not available 22,000,000

World total (rounded) 124,000 99,000,000

Aircraft Networks

• Digitally controlled systems are becoming the norm.

• As weight and reliability become greater issues, digital systems will be increasingly needed

• New aircraft are “electric” aircraft with digital controls for everything. Trend will accelerate as fuel savings become even more critical

. 27 .

• The networked aircraft is an evolving market.

• Fly-by-Wire controls

• On-board operating systems included in some networks

• Networked information systems for the crew

• Aircraft health management systems are in their infancy.

North American and European Trends

• Engineering was once a desirable career in North America and Europe.

• Aircraft maintenance was also considered to be one of the more interesting career fields.

• Over the past 20 years, aircraft engineers and mechanics have become expendable

. 28 .28

become expendable

• Engineers tend to be “life of the contract” workers.

• Mechanics are furloughed with every market contraction.

• Pay for both engineers and mechanics has not kept pace with pay changes for others.

Speaker’s Details

Thank You

. 29 .

Wayne PluckerIndustry ManagerAerospace & Defence

Tel. 210-247-3869

Fax. 210-348-1003

Email: wayne.plucker@frost.com