Emerging markets, particularly in Asia, will see greater investment, with systems increasingly sourced from domestic, rather than Western, suppliers.
What defense capabilities will see the highest demand in 2014?
Over 2014, we're going to see some variations in terms of the demand around defense capabilities. It's going to be split pretty closely between the traditional and emerging markets right now, but there are some fundamentals that we're going to see across those areas in terms of demand for capabilities.
Those are going to be structured largely around unmanned systems. We're also going to see emphasis, particularly in the West, on strategic systems. These are making sure the development, maintenance and futures for things like ballistic missiles, submarine forces, naval forces, strategic forces, as well as things like intelligence, surveillance, reconnaissance - those capabilities are maintained and those capabilities are developed.
So we'll see the research and development continue, we'll see the investment continue in those areas.
As we look across the globe into the emerging markets, I think we're going to see more emphasis on capabilities and demand around those capabilities for modernization. Helicopters, troop support, troop systems. These are the vehicles - light-armored vehicles - and systems that are going to help these countries and military forces develop and improve their core assets in their militaries.
Where will new markets emerge, and what will those markets demand?
New markets in 2014 are for the most part going to be an extension of what we see in 2013. The shift from north to south, west to east is going to continue. The emphasis in terms of those markets and where demand is going to be driven is going to be across Asia Pacific and south Asia, as well as selective country markets in the Middle East and in Latin America.
Specifically we're watching pretty closely around South Korea right now, Singapore, Indonesia, Vietnam and the Southeastern Asian countries. Japan as well. And also in South Asia, you can't leave the region without talking about India, who has had some structural issues in terms of their budgets and the spending areas, but certainly has the interest, the requirement from a security standpoint and the willingness and budget to keep investing and creating demand in that country market.
And of course, you can't avoid China who, as most I think understand at this point, is strongly focused on their investment and creating not only demand but certainly improvements in their military forces and capabilities.
And Latin America we're watching pretty closely. Brazil, obviously, because of some significant events driving demand in that market space from a security and military standpoint. World Cup coming up this year, the Olympics in a couple of years, as well as traditional, for lack of a better term, "non-state issues" that create security threats; narcotics, organized crime, border issues, which drag in some investment which we'll be looking at across countries like Argentina, Chile, Colombia and also Mexico.
In the Middle East, it's driven a lot by the security issues. We've seen Syria and Iran, and of course the interest in developing and modernizing their militaries relative to their neighbors, so we're looking pretty closely right now. The UAE, some significant spins in demand out of Saudi Arabia over the past year - we'll see where that develops coming over this year.
How will the changing security environment affect established defense markets?
The security environment over 2014 is going to have an impact across several different layers of the issues that are driving threats across the world in 2014, and the industries are going to respond across those.
The primary top tier piece is probably around the state-level actors and the impacts that they're having on the security environment, and the demand that they're driving out of places like Syria, Iran, North Korea, and the impact that that's going to have on the investments and markets that are affected by those actors in those regions.
And in that respect, certainly from a North Korea-type player we're seeing more strategic investment, things like missile defense, versus the more focused, traditional types of engagement that we're seeing in Syria from a force-on-force type of security environment, and then what we're going to see evolve out of that and those markets are those non-state threats and security issues that we're seeing develop, and this is terrorism, obviously a global issue, but we'll see it focused in regions like the Middle East in responses.
And organized crime, narcotics, trafficking - those types of issues that are trans-national and affecting areas in particular or where the focus is, like Latin America, of course these are unfortunately pandemic and across the world, but we'll see the investments is those markets as well in response to those security threats.
How will the defense industry's competitive landscape change in 2014?
The competitive landscape across the defense industry over 2014 is going to improve, and by improve, what I mean is it's going to become more competitive. This is an environment that has been developing over the last several years, driven in large part by two major factors: economic capabilities and wherewithal, and security threats.
The two pieces have come together in particular as we've seen a shift in the marketplace across Asia Pacific - the rim in Southeast Asia, South Asia - as well as the Middle East, where there's always been certainly an interest and the wherewithal to focus on defense and military investment, and across Latin America.
What's going to be interesting in that investment is how the traditional market responds, so how are the U.S.-based manufacturers and suppliers and European based manufacturers and suppliers going to respond?
Continuing austerity in those markets, a focus that's been developing over the last two years in terms of those international markets and how to access them, but now a lot more players are capable of entering the market from those emerging markets themselves.
So a lot of focus in places like India, Japan, South Korea, Singapore in investing in their domestic industries so they don't have to rely on those traditional market players coming out of Europe and the U.S. This adds a level of complexity, certainly, because of the volume of competitors that are entering the market and will continue to enter in 2014, and also it provides the opportunity for those markets to become more sophisticated themselves, so we're going to look pretty closely at policy and regulatory environments over 2014 as they evolve and become more sophisticated as these emerging markets learn and become more effective in their own manner in terms of process and management, export and import, around this market space.
William Edgar Managing Director, Intelligence Plus Program, Aerospace, Defense & Security, IHS