Expect to see some changes in the computer board business in 2011, particularly in market demand for boards and systems. First, demand the in military and aerospace segment is due for a fall, considering the federal budget problems and the newly elected faces in Washington.
In 2010, the DoD spent more than $80 billion on intelligence alone, or 12% of the $664 billion defense budget. However, that includes everything, not just the electronics. It is clear that as we reduce our footprint in Iraq and Afghanistan, we will spend less on boots, butter, bombs, and bullets. Nevertheless, we will probably spend more on intelligence gathering systems and equipment long into the future.
Some pundits forecast a possible 20% to 25% cut in the Department of Defense (DoD) budget. The programs most likely slated for reduction are weapons systems and large platforms like bombers, submarines, and aircraft carriers. We are still going to build helicopters, unmanned aerial vehicles (UAVs), and some new ground vehicles, which are loaded with electronics.
Beyond The Military
The telecom market will continue to amaze us with abysmal business conditions. About 93% of Americans have a cell phone now and 28% of those are smart phones. Wireless service providers have resorted to lowering their rates to lure customers from their competitors, reducing their revenues and their overall profits.
Wall Street pundits have predicted that the saturation of the cell-phone market will lead to financial difficulties for AT&T and Verizon, as there is no way they can continue to reduce rates and invest in all the bandwidth needed to support Web-enabled devices. In 2011, the telecom board market will be about as promising as the snow-blower market in Miami.
The industrial segment is still reeling from the collapse of the European economies during the sovereign debt bubble earlier this year. In addition, all European Union countries have announced reduced government spending and austerity programs to deal with their huge debt problems. In most EU countries, government spending is 50% to 70% of their GDP, so don’t count on any demand for boards for use in transportation or infrastructure projects.
The diminished demand for manufactured goods worldwide eliminates the incentive to automate any factories. In fact, labor is cheaper than robotics and programmable controllers in most of Asia. Therefore, the industrial segment will continue its lackluster appeal for all of 2011.
The medical segment is in a tizzy trying to decode the healthcare bill passed in 2010. Hospitals have no incentive to buy new MRI equipment if the government health insurance plan is only going to pay $100 for the procedure. This uncertain environment will continue through 2011 and diminish sales of high-end medical equipment until we see what happens on the insurance side of the equation. The medical care providers must have some reasonable idea about future revenues before they will buy any new gear, and that uncertainty has the medical equipment markets all jammed up for now.
By The Books
Looking at our VITA members’ 2010 results, we can see that the large diversified companies suffered the most in 2010. Some of these companies saw sales down 20% to 25% for the year. The smaller boutique companies, those totally focused on the military and aerospace segment, showed good growth and profitability.
Diversification was a liability in 2010, a disastrous strategy when three of the four major segments declined. It is doubtful that the larger diversified board companies will do any better in 2011. The smaller military and aerospace suppliers will still do pretty well, even with the tinkering being done to the defense budget.
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Taking the top 10 board vendors’ sales for 2010, you come up with a total of about $3 billion across all segments. If you assume that these top 10 suppliers control 80% of the board market, the total market was $3.75 billion. Most market research reports come close to this with their $4 billion estimates.
Another interesting statistic is that no board company has ever experienced sales over $750 million in a single year in the entire history of the industry. The Motorola Computer Group (later sold to Emerson) grew to about $750 million during the telecom love fest, but it fell precipitously from there when the telecom market bubble burst.
The number-one company in the board industry today is very diversified and does about $650 million. But that number may also be declining when you consider the uncertainty and the precarious world market conditions. Expect to see these larger companies get motivated to buy up other companies in a mergers & acquisitions surge in 2011. If they cannot grow organically, they must either buy other companies or sell themselves off. Either way, the number of board vendors will decline in 2011.
Out of the top 10 board vendors, there are six companies with significant military and aerospace product lines. These companies shipped about $800 million to military and aerospace apps in 2010. Again, if those six companies were 80% of the market, then the total military and aerospace board market was about $1 billion, or 25% of the total worldwide board market.
With the observed decline in telecom, industrial, and medical demand in 2010, the military and aerospace segment may actually be closer to 33% of the total world board market today with the U.S. creating an overwhelming majority of that demand.
VDC Research claims that the VME singe-board computer market was about $375 million in 2009. When you add-in the I/O cards (analog-to-digital, digital-to-analog, sensor interfaces, etc.) and the packaging/backplanes/power supplies, you come up with something close to $700 million or 70% of the military and aerospace market sales. This feels about right because most vendors say that VME is still close to 80% of their military shipments. VME is still the number-one backplane architecture used in the military and aerospace segment by a very large margin.
The VPX fabric-based architectures are now going into deployment and probably constitute close to $100 million in total sales this year. VPX usage will continue to grow for a few years (using copper-based connections) until we standardize optical architectures (the VITA 66 specification for optical backplanes) for 10G and higher data rates.
Three new specifications (VITA 73, VITA 74, and VITA 75) are now standardizing small-form-factor (SFF) architectures (small cubes of electronics) for use in UAVs, military ground vehicles, and avionics. Those cubes will be interconnected with optical data connections for SWaP-sensitive applications (limited Space, Weight, and Power).
With VME, VPX, SFF, and optical architectures added together, we will see board usage in military and aerospace applications grow to $1.5 billion or more in the next few years, despite certain reductions in the overall DoD budget.
The potential for attack on the Iranian nuclear reactor, the potential for a military coup in North Korea, the rise of Yemen as a terrorist stronghold, the recent instability in South America coming from Venezuela, the uncertainty about the leadership in Cuba, and the volatile situations in Lebanon, Gaza, Syria, and Egypt will increase demand for advanced military hardware throughout the second decade of the 21st century.