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Methodology - Defence reports

Visiongain defence reports are compiled using a broad and rich mixture of both primary and secondary information to produce an overall industry outlook. In order to provide our clients with the best product possible, Visiongain analysts often interview market-leading vendors and industry experts and review a wealth of financial data and product information from a vast range of sources.

The skill of the defence analyst is in meticulously sifting through vast amounts of available information, which is often contradictory, and then blending primary and secondary research together to produce a cohesive industry outlook that is well argued and comprehensive.

This is where Visiongain’s expertise really adds value. The experience of the defence analysts allows them to consider historical precedent and take a broad analytical industry overview over a ten year forecast horizon, rather than be influenced by current events.

Primary research
Where possible, primary research interviews are obtained from key industry experts within the defence sector in question covering a broad range of issues, from detailed contract information and technical insight to discussion of the economic factors driving the sector. Further supporting interviews are also sourced from the military, industry consultants and other stakeholders.

Unlike many of our competitors who do not conduct interviews with companies or experts in the defence sector, Visiongain passionately believes that only by consulting extensively with industry can a thorough and accurate research report be produced. The company interviews therefore underpin and inform our analysis and forecasting giving authority to our conclusions and market outlook.

Secondary research
Secondary research is performed by analysing hundreds of contracts from a multitude of sources including company annual reports, SEC filings, contractual announcements, information from company web sites, news reports, online and in-house databases, industry journals, and statistical publications. By using a vast array of sources we do not rely upon one single source of data. We firmly believe this much more accurately triangulates upon the reality of a market sector. Examples of sources include government spending releases and announcements from: US Department of Defence (DoD), UK Ministry of Defence MoD), Direction Générale pour L’Armement (DGA), Australian Defence Materials Organisation (DMO) etc.

Further examples include annual reports, company information, interviews when possible and press releases from the leading prime contractors including: Lockheed Martin, Northrop Grumman, BAE Systems, General Dynamics, L-3 Communications, Boeing, SAIC, Thales, Rockwell Collins, EADS, Honeywell, Harris Corporation, Finmeccanica, IAI, ITT Corporation, Thales, Rafael, Raytheon etc.

Market sizing
The bottom-up approach is primarily used to calculate market sizes. Current market sizes are established by analysing hundreds of contracts from a multitude of sources and by consulting with industry experts when possible. Regional and national market size data and company market share data are also derived from a similar bottom up contractual analysis process.

Forecasting
This mass of information from the secondary data sources and contractual analysis are then combined with primary research insight from the company interviews to develop the expected market forecasts. When forecasting, the

Visiongain defence analyst uses a bottom up approach and assesses percentage growth rates in the market on a year-by-year basis, assessing the impact of any events or circumstances that may influence revenues for that market or market segment. Drivers and restraints in the global, regional and national markets and submarkets are also considered to develop market forecasts for each of the national markets and submarkets to build up a global market forecast over a 10 year horizon.

Visiongain’s added value
Visiongain believes this diverse approach produces an accurate and objective sectoral and regional analysis and provides a sounds basis for calculating market sizes and forecasting. The entire body of secondary and primary research is then blended together to produce a cohesive research report which, due to its breadth of sources, produces an accurate, thorough and analytical overview of the defence sector in question.

Visiongain believes that there is real value in blending primary and secondary research as it triangulates upon the reality of the market sector by incorporating multiple and diverse viewpoints.

The following issues are considered when forecasting national markets:
Factors used in Visiongain’s defence market forecasting

Methodology
A broad range of drivers and restraints are analysed in combination with a SWOT analysis of the industry sector and likely pipeline developments. During the research process a broad range of macroeconomic and microeconomic factors are examined and these are a major determinant in Visiongain’s analysis of a defence sector.

Government policy
Government policy documents and “Roadmaps” stating declared strategic and technological paths aimed at achieving a long term military capability are studied in detail to explore high level strategic thinking that ultimately is the driving force for most new technological defence sectors. The unmanned aerial vehicle (UAV) roadmap produced by the US government is a good example of a new technology being heavily spent on, despite budget cuts, to produce an overall military airborne intelligence, surveillance and reconnaissance (ISR) capability.

Analysis of government budgets
Nevertheless, government policy documents state intent rather than actual numbers of units to be procured and market sizes. A government’s desire for a platform or system is often at direct odds with its affordability or even its acceptance by the taxpayers of the country in question. This is where Visiongain steps in to add value by quantifying the market size potential for a particular defence sector by analysing all of these conflicting issues. It is often the case that during times of affluence, new platforms fare well, and during times of austerity existing platforms have their service life extended by upgrades and retrofits. The ratio of new procurement versus upgrades, retrofits and maintenance repair and overhaul (MRO) therefore varies significantly over the economic cycle.

Political landscape
National governments of different philosophies have a significant impact upon defence sector spending. Throughout history there has always been a general tendency for right wing governments to favour higher defence spending and conversely left leaning governments have usually opted by slightly lower defence spending. Furthermore, governments who believe it is their role to police the world to look after their interests clearly have to have substantial military capabilities to fulfil that role. The US, UK and NATO countries are clear examples of this.

National security and global security outlook
Will the world be a more dangerous or a safer place than it has been in the past? Global insecurity will not subside in the near future. There are new factors that compound this scenario – the threat of global terrorism is (at least perceived to be) higher than it has ever been. Furthermore, ‘resource stress’ and energy security are making the ownership and supply of major commodities increasingly the root cause of many global conflicts whether it be for oil, gas or other natural resources such as mineral deposits or even fertile farmland or forests.

Evolving procurement pattern in new platforms and technologies
Governments with limited defence budgets are having to procure more wisely than ever. As such they are demanding the following features when procuring:
• Lower cost - this is increasingly a deciding factor rather than opting for pure technical capability of a platform or technology where money is no consideration. Total cost of ownership (TCO) is also increasingly being evaluated in a much more considered way.
• Interoperability - the increasing network centric warfare environment used by coalition forces is driving common communications standards facilitated by commercial off the shelf (COTS) components
• Upgradeability - government and military services expect platforms and systems to be easily upgraded in line with technological advances. The wide adoption of COTS components clearly assists this trend.
• Faster procurement - it is well known in the defence sector that many designs and systems are out of date by the time they have been developed, manufactured and delivered – which reinforces the need for easy future upgradability. Increasingly governments are requesting Urgent Operational Requirements (UOR) to procure a platform or technology to meet a very specific military need. Clearly companies that have existing off the shelf systems ready to deliver are at a competitive advantage in this situation.
• Emerging market growth - whilst mature western defence markets plateau, stagnate or even decline, emerging markets are the main contributors to global defence sector growth. Even in high value and technologically advanced sectors, emerging markets are making inroads into previously unexplored market sectors. Poorer nations, who previously could not afford airliner based airborne early warning (AEW) platforms can now afford much cheaper UAV’s providing basic airborne ISR capabilities.
• Public opinion - nevertheless, public opinion is a major factor in defence budgets and defence sectors. The defence analyst may encounter controversy surrounding an issue or positive public support for a particular military procurement or course of action.
• Regulation - many countries limit the import or export of certain sensitive or advanced weapons or systems due to their perceived strategic value to the country or countries that possess them. The Foreign Military Sales (FMS) program in the US is an example of selective export controls. The FMS program is the government-to-government method for selling US defense equipment, services, and training. Arms sales to allied nations are thought to further national security and foreign policy objectives by strengthening bilateral defence relations, and enhance coalition building, not to mention improving technological interoperability between US forces and allied forces during coalition operations.
• Barriers to market entry - although many Asian emerging market offer rapidly growing defence sectors ripe for exploitation by companies, in practice many of these markets, China especially, are effectively closed markets to western contractors. Often the only way for a western company to enter an Asian emerging market is to collaborate with a local company under a joint ventures (JV) agreement and / or partake in a process of technology transfer.
• Cyclic industry - the defence industry is notoriously cyclic. Defence procurement contracts are often agreed years in advance of their delivery. In practice this means that defence spending is often out of sync with the natural economic cycle and can often result in a boom in the defence industry whilst the rest of the economy stagnates.
• Evolving nature of warfare - unlike the cold war, modern military enemies are more fragmented and less tangible and the enemy is less well defined. This so called ‘asymmetric warfare’ and its expected continuation as the West’s major threat, clearly influences the procurement of almost every kind of military platform and technology. No longer are nuclear missiles a major issue, but simple body armour protection for troops against IED’s is now a large growth area.
• Technological shifts and advances - Moore’s law, where the average processing power of a computer microprocessor has doubled historically every 18 months to 2 years, is clearly a major factor to be considered in the evolving nature of defence systems procurement – especially due to the long lead times for procurements of platforms. The advent of the network centric warfare environment clearly drives companies to enhance interoperability and push the technological envelope as the growth in digital communications and intelligence, surveillance and reconnaissance (ISR) data rapidly increases.
• Analysis of competitive landscape - defence sectors are analysed in terms of the number and types of market players operating. A market sector may be consolidated with just a few established players or it may be fragmented with many disparate players. A market sector may also be mature, with established players securely dominating the market, or the market may be a new emerging sector with the market share all to play for.

Total cost of ownership (TCO) is also increasingly being evaluated in a much more considered way.

Within Visiongain’s analysis, depending on the consolidation within the sector, we try to analyse the 20 or so leading companies within a market sector highlighting their specialisms, market focus, product range and services and where the sector sits within their broader business activities.

Where possible we also try to perform, market share analysis of the leading companies within a sector to establish who the market leading players are and illustrate the level of consolidation and fragmentation within the sector. The defence market sector may have lots of large systems integrators or prime contractors, tier 1 or tier 2 suppliers, making the market attractive for smaller subcontractors. In contrast, the sector may be dominated by highly vertically integrated companies that manufacture the entire turnkey system – leaving little in the way of subcontracting opportunities for smaller companies.

The perceived attractiveness of the defence market is also considered. As has previously been stated there may be barriers of entry to the market. There may be pipeline developments, new products, new technologies, or an evolving emphasis which will make the sector more or less attractive to a particular company in the future. The profitability of a company is also assessed. The resultant revenue available plays a major part in investment potential for a product and/or acquisition of companies that already have a foothold and expertise in a market that the larger company wishes to enter. Due to shrinking defence budgets, defence contractors have had to diversify their operations to maintain revenues. Many contractors are now venturing into aerospace and homeland security related sectors which have an overlap with defence systems e.g. within border security, aviation security, maritime security and critical infrastructure security,

Visiongain’s methodology
As has been demonstrated, a large number of factors and issues must be considered in assessing a defence market sector. Visiongain believes that there is real value in blending primary and secondary research as it triangulates upon the reality of a market sector by incorporating multiple and diverse viewpoints.

Visiongain believes this proven methodology of using a broad and rich mixture of diverse research sources, reinforced with the views of industry specialists and experts, produces an accurate and objective sectoral and regional analysis and provides a sounds basis for market size evaluation and forecasting.

The skill of the analyst is in distilling the vast quantity of available information and forming a clear vision of the market sector over a 10 year horizon in a clear and informative manner. This is the value of a Visiongain report.

Defence Reports methodology
What is differentiated, unique and proprietary about our research?
• Visiongain specialises in producing highly analytical market reports that focus upon a particular technology sector, such as the UAV market or Naval Vessels in the Asia Pacific market
• Visiongain conducts primary research from leading experts in the defence sector and this insight reinforces the credibility of our analysis and provides the reader with confidence in the forecasts and analysis provided.
• Visiongain reports are very data rich - currently averaging more than 100 tables, charts and graphs per report quantifying and forecasting the market sector precisely. This makes the reports highly quantitative and market focused.
• Visiongain’s methodology uses a unique and proprietary blend of extensive secondary and primary research to form an overall accurate picture of a market sector. We believe that by researching widely and consulting with experts that this allows the reality of a marketplace to be triangulated upon more accurately.
• All Visiongain market data and forecasts are original and calculated by our analysts using and extensive bottom up approach by analysing numerous contracts, programs and sales figures.
• Almost all Visiongain reports provide 10 year market forecasts for the leading 10, 15 or 20 leading national markets. The long term forecasts provide investors with confidence to invest within a sector over a long term horizon. AGR rates are provided year by year to illustrate fluctuations in the markets and overall CAGR figures for the 10 year period are also provided. As such the forecasting is comprehensive and detailed providing the reader with precise actionable information with which to justify and formulate business strategies.
• Visiongain reports provide extensive details of significant contracts providing the investor with targeted information with which to make business decisions. Details would include contracting authority, contractor name, subcontractor name or names, contract value, contract length, product name or service, number of units and would also include analysis of the significance of the contract.
• Visiongain reports profile the leading 10 to 25 companies within the sector allowing investors to understand the regional and submarket penetration of market players operating within the sector, the products and services they provide, and how significant their business operations are within the sector.

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