PRIVATE & CONFIDENTIAL PRIVATE & CONFIDENTIAL February 5, 2014 February 5, 2014 Asian Defense M arkets Implications for the Global Aerospace and Defense Industry Prepared for: Participants of Avascent’s Asian Defense Markets Webinar
Panel Participants Wallace “Chip” Gregson J on Barney Senior Advisor, Avascent International M anaging Director, Avascent • Assistant Secretary of Defense, Asian and Pacific • Fifteen years of experience in strategy in the Security Affairs global A&D sector • Lieutenant General, US M arine Corps (Ret.) • Focus on Avascent’s Global Expansion and – Commanding General, M arine Corps Forces, M &A efforts Pacific, and M arine Corps, Central Command • Former Naval Officer, NATO Fellow; M BA – Commanding General, M arine Corps Forces, Harvard, B.S. Honors Naval Academy Japan Stephen Ganyard, Aleksandar D. J ovovic President, Avascent International Senior Associate, Avascent • Deputy Assistant Secretary of State, Plans, • Twelve years of professional experience in the Programs and Operations, Pol-M il Affairs A&D sector and consulting • Colonel, US M arine Corps (Ret) • Expertise in defense systems, global markets, – M ilitary Assistant, Deputy Secretary of and international political risk Defense • Government and private sector advisory – F/ A-18 Hornet Pilot – Commanding Officer, experience; positions at Brookings and Squadron and Air Group level Georgetown University, M .A. SAIS-JHU PRIVATE & CONFIDENTIAL | AVASCENT | 2
Avascent is uniquely able to address client challenges from a range of perspectives Strategy & M anagement Strategy & M anagement Consulting Consulting • Growth-oriented management Senior Advisory Services Senior Advisory Services Data Analytic Services Data Analytic Services consulting • M ixing deep market expertise • Offers the insight of a • Database provides detailed with rigorous analytical senior-level strategic database of global defense methods and client service advisory supported by markets commitment Avascent’s core analytical • Visibility into market size, • Combines sector-specific capabilities segmentation, forecasted expertise with traditional • Leverages decades of growth, competitor market management consulting experience at the highest share, and opportunity space capabilities levels of government, • Scope spans 46 countries business, intelligence and worldwide international affairs PRIVATE & CONFIDENTIAL | AVASCENT | 3
Avascent has developed a unique understanding of economics, policy, and global business over two decades of corporate experience bolstered by a broad network of senior advisors Avascent Global Coverage: Selection of Recent Projects Select Senior Leaders • Avascent ‒ Steve Irwin, PhD., President Avascent, USG and Stimson Center, Washington DC • International Advisory Network ‒ Steve Ganyard, Fmr. Deputy Assistant Secretary of State and Marine Corps F/ A-18 Squadron Commander ‒ Ambassador Eric S. Edelman, Fmr. Under Secretary of Defense for Policy ‒ Lt Gen. Wallace “Chip” Gregson (USMC, Ret.), Asst. Sec. of Defense, Asia-Pacific Security Basic Information Firm History • 90+ full-time professional staff augmented by advisory network • Founded 1984 as DFI International—a research consulting firm serving government and corporate sectors - Over 50% hold Masters and PhD degrees • Over 40 senior advisors based worldwide • DFI Corporate Services spins out as Avascent (2007) • Headquarters: • Avascent doubles in size within four years of independent operation, - 1615 L Street, NW, Washington, DC while maintaining a lean, analytic, client-focused approach • European Office: • Its sister organization, DFI Government Services, acquired by leading - 59, rue des Petits Champs, Paris UK defense firms: Detica (2007), then BAE Systems (2008) PRIVATE & CONFIDENTIAL | AVASCENT | 4
Setting the Scene for Singapore • Robust U.S. Government presence DoD, State, Commerce, FAA all attending - • Both civil and defense/ security-related agencies focusing on the region • Significant pre-show coordination among USG participants Recognition of the value of “ Team US A” - Dak Hardwick representation with foreign partners • Director, International Affairs Aerospace Industries Association • Former Country Director, Office of the • Strong, on-the-ground advocacy push from Under Secretary of Defense (Policy) • Former Legislative Director & Military Commerce to USG attendees Legislative Assistant, U.S. House of Representatives • International Government Relations, • Harris Corporation AIA will be available for questions/ assistance
A sophisticated appreciation of Asia’s complex defense sector opens up opportunities in excess of $110B in the coming years, as well as more effective positioning for Asia-bound US programs and systems Defense spending in Asia has mirrored the steady economic rise of the region in past decades China, the region’s leading economy, is becoming equally assertive on the political and military front, seemingly reinterpreting its long-established approach of “peaceful rise” In response, the US has initiated a “Pivot to Asia” strategy that remains somewhat ill-defined, but signals a change in defense and alliance priorities and funding In the coming five year period, Avascent projects $380 billion in defense investment among Asia’s leading addressable markets, such as J apan, India, S. Korea, Australia, and others Roughly a third of these funds remains uncommitted to specific providers and/ or programs making the region highly attractive to global defense and aerospace firms Affordable strike weapons, tactical aircraft, persistent ISR, unmanned solutions, undersea and electronic warfare capabilities are among leading requirements across the region PRIVATE & CONFIDENTIAL | AVASCENT | 6
Asia’s economic growth is among the most important, and likely enduring, “ mega-trends” of our time, driving business and policy decisions alike GDP Growth in Asia-Pacific Historical & Projected (Constant US Dollars, % Annual) 2013 Real GDP ($T) 10% $.25 Lao PDR China Historical GDP Growth Rates ‘07 – ‘12 Vietnam $5.0 Bhutan Bangladesh India 5% South Korea Cambodia Nepal M yanmar Sing. Indonesia Brunei Thailand Taiwan Australia New Zealand J apan M alaysia 0% 5% 10% Projected GDP Growth Rates ’13 – ’23 Note: 2013 GDP represented by flags is approximate and aimed at portraying rough order of magnitude values PRIVATE & CONFIDENTIAL | AVASCENT | 7 Source: IHS Global Insight, IMF, World Bank, PWC, Carnegie Endowment, Avascent Analysis
While not part of today’s discussion, it is impossible to ignore the prominence of the Asia-Pacific region in civil aerospace; the upcoming Singapore Air Show will bear witness to this growth trend Commercial and Business Aircraft Backlog 2014-16 Traffic Growth by Airline Domicile 800 % of Global RPK 2011 2031 700 2011 2031 2014 Asia-Pacific +5.4% 600 28% 32% 2015 +4.1% 2016 Europe 27% 24% 500 North America +3.3% 27% 20% 400 M iddle East +7.3% 7% 11% 300 Latin America +5.9% 5% 6% 200 +5.4% CIS 3% 4% 100 +5.0% Africa 3% 3% 0 Asia North Europe Middle Latin Africa 0 2,000 4,000 6,000 Pacific America East America RPK (Billion) and Caribbean In the coming three years, the Asia-Pacific region is While traffic in the European and North American expected to receive over 1,500 commercial and regions is expected to remain stable, Asia-Pacific business aircraft, easily topping numbers from airlines are expected to see their global traffic share North America and Europe increase from 28% to 32% cementing their leading role Similarly, space opportunities across the commercial and civil government customer set, to include communication, navigation, science and other applications, must not be overlooked Sources: Ascend, Boeing, IMF, FAA, Airbus 2012 GMF, Avascent Analysis PRIVATE & CONFIDENTIAL | AVASCENT | 8
Defense spending in the region has also grown, first and foremost as a result of China’s impressive defense modernization, as well as its neighbors’ response to these developments Historic and Projected Defense Spending, 2000-2033 Defense Spending, Real US$2013 Billions 800 Projected Assumptions Assumptions 700 • • US base defense budget (non-OCO) at US base defense budget (non-OCO) at $495B for FY2014 $495B for FY2014 600 • • Annual US defense spending growth Annual US defense spending growth in real terms at 1.0% (historical long- in real terms at 1.0% (historical long- 2029 term rate) over the period 2016-2033 term rate) over the period 2016-2033 500 • • Current Chinese defense budget of Current Chinese defense budget of $200B in 2013, approximately 3.5% $200B in 2013, approximately 3.5% 400 GDP GDP +10% • • Chinese GDP growth of 6.2% from Chinese GDP growth of 6.2% from -10% 300 2014-2033 and defense budget 2014-2033 and defense budget pegged to GDP pegged to GDP PRC Defense Budget ~50% of US DoD Budget, 2016 200 100 Year China projected to achieve spending parity with the United States 2016 U.S Presidential Election 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 Note: Figures reflect real, inflation adjusted GDP estimates (2013 $US) PRIVATE & CONFIDENTIAL | AVASCENT | 9 Source: IHS Global Insight, IMF, World Bank, CIA, DoD, Avascent Analysis
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