Q4 2020: cyber security and space high on US defence radar

One of the most challenging aspects of cyber warfare is that it can take a long time for it to become apparent that an attack is happening — or has happened. The recent SolarWinds attack — widely reported as one of the biggest cyber-espionage incidents to date — compromised thousands of systems, many of which belonged to US departments. It was identified in December 2020 but is believed to have started as far back as March, a stark reminder of how attacks can remain undetected for months, and that cyber risk extends to software supply chains. 

Meanwhile, the COVID-19 pandemic has seen a surge in people working from home, more money being spent online and business and society being more digitally connected than ever before. These shifts have created the perfect conditions for cyber crime. According to US cyber security reports, there were as many as 4,000 FBI cyber attack complaints a day at one point in 2020, a 400% increase from pre-coronavirus.¹https://www.prnewswire.com/news-releases/top-cyber-security-experts-report-4-000-cyber-attacks-a-day-since-covid-19-pandemic-301110157.html With coordinated threats becoming harder to spot, securing systems and data is becoming ever more arduous owing to the increasing frequency and sophistication of attacks.

“Cyber is certainly going to continue to be one of the high priorities of the OSD [Office of the Secretary of Defence],” a former Northrop Grumman VP said in a Forum Interview. “If I look at the Missile Defence Agency, one of the concerns I always had was the ability of an adversary to penetrate missile defence networks and access information about how the system works.” Indeed, “the need for cyber security in any platform is driving a lot of investment and a lot of sales, [it’s] a big market segment for defence and space,” we heard in another Interview. 

This can represent a huge opportunity for contractors, albeit with some caveats. “The cyber threats are very, very real and I think 10 or 15 years ago, there was an expectation that they were going to be the next big front for move-the-needle types of revenues for some of the large primes,” the former Northrop VP added. “My thinking now is that it’s ended up becoming an important structure but probably one that is more attuned to a company that is very much in just that market.” In other words, cyber has become so important across the board that “you need to focus a market at it”. Experts suspect this could be one of the reasons why Northrop recently divested its IT missile and support services business. In addition, it was noted that cyber profit margins, as defined by the defence industry, are considerably lower than those for integrated hardware, at 2-4% versus as much as 10-12%, respectively. “Most of the margin that one delivers in integrated systems is after you have fully delivered the product to the force. It is in the post-production pieces, the tooth-to-tail ratio, if you will,” a former senior director at Raytheon Co said.

The importance of US cyber security to the defence industry cannot be overstated. As a non-negotiable expense, the US cyber security market is lucrative to be in, despite the relatively lower margins. The increasing number of A&D cyber jobs, jumping from 59,000 in 2010 to 83,000 in 2018, is a case in point.²https://www.aia-aerospace.org/wp-content/uploads/2019/09/2019-Facts-and-Figures.pdf However, this field is also increasingly competitive, with companies/systems only as secure as their weakest link. Being one step ahead in terms of understanding vulnerabilities and addressing risk is key to successfully averting an attack. Tackling cyber crime at all levels is an urgent priority, particularly as it has become “the cheapest, easiest, fastest and most effective form of warfare”, Forbes wrote last year.³https://www.forbes.com/sites/steveandriole/2020/01/14/cyberwarfare-will-explode-in-2020-because-its-cheap-easy–effective/?sh=65b0a85ee05d The Biden administration has made cyber security a top priority in 2021 and beyond.

Turning to space defence, investments remained strong in H1 2020 at USD 12.1bn, according to PwC.⁴https://www2.deloitte.com/us/en/pages/manufacturing/articles/global-aerospace-and-defense-industry-outlook.html Momentum is likely to remain robust this year, as we heard from an array of specialists, with the government’s focus on space crucial to its growth over the next few years. Indeed, a former VP at Raytheon Co “can’t remember a time where there was this much activity” in the sector. A downturn in overall defence spending, driven by the COVID-19 crisis, is likely to trigger a “slow decline in total manpower”, with space coming to the fore as a surveillance resource. We heard there appears to be a “great deal of private capital” looking to be invested in a number of areas, including remote sensing, low-Earth orbit communications, hypersonics, and the small launch vehicle market.

Nevertheless, it was acknowledged that this “is still a very tough business to break into, and it’s even tougher to stay in a profitable manner”. According to the aforementioned specialist, between two-thirds and 80% of new start-ups will either “vanish entirely” or be “swallowed up” in the next two to four years. Areas that are gaining most traction include advanced artificial intelligence, machine learning and data analytics. “The disruptors, those who will separate themselves, are those who will be able to apply those technologies to create either faster or new sources of information.” 

Amazon Web Services and Google have already dipped their toes into the water and are “very well positioned”, according to the former Raytheon VP. “I think, first, they’re going to move into the analytics business, the ground processing, the value-added services, which, by the way, is one of the two areas [with]… a continued and increasing return on invested money.” If these tech giants demonstrate that they can securely enable hardware-based processing infrastructures and systems to exist virtually, the competitive landscape could transform quite dramatically. In response to this, legacy companies may partner or strategically collaborate with disruptors to ensure they don’t fall behind. “The question is just how much, just how far and how wide do Amazon Web Services and Google aspire to move their footprint into this world? Judging from what they’re doing, the answer is fairly substantially.” 

Other forces at play include prime contractors increasingly seeking to bring value in-house through vertical integration, as some companies are “undoubtedly worried about their margins being sustainable” in the current climate. First- and second-tier suppliers, such as Ball Aerospace, Harris and Raytheon, are also trying to move up the value chain to “selectively become primes”.

Despite the level of activity and sophistication in not just cyber and space, but across the defence spectrum, the industry is not immune from the economic impact of COVID-19. The former Raytheon senior director anticipates that the US market growth will contract by 3-5% over the next three to five years, with similar — if not steeper — declines likely internationally. However, the crisis has brought already pressing issues into sharper focus and should accelerate efforts to conquer these challenges in all corners of the industry. With technology now one of today’s biggest threats and solutions, the battlefield is becoming increasingly digital.