The evolution of military technology has taken on a new face over the past decade. With greater safety for the soldier being a top priority in modern warfare, the armed forces have been leaning more and more towards the unmanned air vehicles market (UAV).  Ranging from intelligence, surveillance and reconnaissance to electronic attack and combat search and rescue roles, these systems can be controlled remotely or follow pre-programmed flight plans to perform their missions without the necessity of a human crew. Ground support technology is also a key component in the successful operation of these crafts and is an important area of development in this growing market.

The initial exposure to UAV technology to the civilian sector likely came from science fiction. Movies like Halcyon’s “Terminator” franchise envisioned a world where machines, created as part of a computer software based defense system called Skynet, surpassed the expectations of their artificial intelligence wiring and became self aware.  In reality, research into UAV systems has been going on behind the scenes for more than half a century. The leaps in technological advancement in the last few decades, though, have sparked a stronger desire by the U.S. government to boost funding for these ventures and increase the prominence of UAV on the battlefield.  Operation Enduring Freedom and Operation Iraqi Freedom have witnessed the most widespread use of these systems, to date. The achievements of Northrop Grumman’s (NOC) “Global Hawk” and General Atomics’ “Predator ” systems  have put these firms at the forefront of Defense Department funding. Lesser-known player AeroVironment (AVAV) is gaining precedence as well, with its smaller “Raven” and “Wasp” UAV systems while Israel’s Elbit Systems (ESLT) (maker of defense electronics) has teamed up with General Dynamics (GD) to build a stronger foothold in this space.

Demand for UAV should continue to surge in the years ahead and this sector, which includes air vehicles, ground control equipment, and payloads may well be worth around $18 billion in the next ten years.  This ought to translate into a more intense competitive landscape with newer entrants like large aeronautics companies Lockheed Martin (LMT) and Boeing (BA) and smaller defense technology firms all vying for their piece of the pie.  Additionally, those companies with hefty war chests will probably employ an acquisition strategy in order to gain further market penetration.  Geographically, we think that the U.S. will remain the top spender with Europe and Asia trailing behind.  Meanwhile, civilian uses for UAV in the law enforcement, firefighting and commercial air transportation industries are also in the cards.

Although we do not expect fully autonomous robotic systems to dominate the battlefield in the coming decades, we believe that the significance of robots in 21st century warfare will rise in tandem with the technological advancements in this expanding sector. Governments around the globe will likely spend a greater portion of their budgets on UAV over the long term, as they seek to reduce human casualties and gain an edge in the combat arena.  As a result, there should be adequate room for defense firms, both small and large, to widen their market share and generate solid returns.