Budget cuts will directly affect the US PCB supply chain.
With the US deficit running above $13 trillion and continuing economic uncertainty, the federal government has begun instituting significant cuts in military programs. These cuts will have a direct effect on the North American interconnect industry, both PCB fabricators and assemblers.
The just-issued Quadrennial Defense Review (QDR) foresees major cuts across the board in defense hardware. To some extent this includes already announced cuts, such as reductions in F-22 fighter plane acquisitions (to 180 total airframes) and to F-35 aircraft as well. Inventories of aircraft such as the A-10 attack plane, B-1B bomber, and the venerable B-52 also will be reduced.
At sea, while the government states its commitment to a 313-ship Navy, analysis of projected budgets over the next 10 years suggests that, between replacement construction and new classes of ship, the US Navy more likely will be reduced to approximately 270 vessels. The ASDS submarine program is in jeopardy, while carrier battle groups are projected to shrink to 10 from 15. Overall capital budgets for military programs may drop as much as 30% over the next five years, much of this in electronics.
Cost overruns on major programs have been horrific as well. The Littoral Combat Ship (LCS) program has in three years’ time ballooned from $220 million/ship to $480 million/ship – and that’s before the contracts have even been awarded. The F-35 fighter program budget has increased almost $100 billion over the past decade, and development remains 2.5 years behind schedule. While some of this is related to a massive flow of change orders and technology development issues, much of the problem lies with a hollowed-out workforce and knowledge base. These overruns cut further into available funds for new hardware. Former Defense Secretary Donald Rumsfeld entered office with a mandate to streamline the Pentagon procurement process. Instead, his efforts were devoured by the military-industrial complex.
What will be the effect on the US interconnect manufacturing base? The North American industry has shrunk from a high of $10 billion in 2000 to approximately $2.8 billion today. One reason it did not shrink further was the cushion of defense electronics. Many manufacturers went through the rigorous steps to qualify for MIL-PRF-31032, MIL-55110 and other standards, and the shift from commercial to military production kept many companies alive through the recession. These trends will require manufacturers to anticipate, adapt and innovate.
At the same time, many military systems have been commoditized, some successfully, others not so much. In other cases, subsystem manufacturing has been shifted offshore either because of commercial off-the-shelf technology (COTS) programs or efforts by some contractors to reduce costs.
Bluetooth and iPhone-type applications in military applications have been growing exponentially, but the loss of the handheld market to Asia means that much of the hardware technology has migrated offshore. This will have a long-term effect on programs such as Land Warrior. Because of security concerns, several major defense contractors have established secure communications projects, but these will have minimal impact on the demand for interconnect product.
Indeed, the proliferation of consumer-level high technology is amazing. The capabilities of handheld devices – whether for communications, data recording, conversion and transmission, or imaging – are beyond Buck Rogers. The mythical Star Trek Tricoder today is close to reality. And yet the defense technology establishment has lost its connection with the underlying electromechanical roadmap.
Discussions with key defense interconnect manufacturers have established there are significant opportunities, especially at the leading edge. Yet there is cognitive dissonance at the top. The role of enabling technology, especially at the interconnect level, has been forgotten. In addition, technology security has become a significant issue.
On the security side, the cyberwarfare arena has, according to many reports, been underfunded and misunderstood. Recent headlines in the telecommunications market, where governments have expressed deep concerns about potential technology breaches when purchasing networking gear that may be susceptible to trapdoors, viruses, and remotely executable programs, illustrate real-world issues with non-trusted components and hardware.
From every challenge springs an opportunity. There are real interconnect hardware-based solutions available both to protect systems and provide enhanced security, not only from penetration, but of intellectual property.
High-density interconnect combined with embedded active and passive component technology offers a security platform only dreamed of even five years ago. If critical IP or security is on an embedded chip, it can be shielded both physically and electronically, increasing the difficulty of corruption by orders of magnitude. Hard encryption keys can be made even more secure. Not only that, it makes a better, more reliable, more cost-effective product. Ask Apple or RIM or Sony.
Espionage efforts against the North American technology base have cost our national defense trillions of dollars when considering the loss of advantages in fields ranging from nuclear weapons design to aircraft design to under-the-hood applications such as the interconnect. Even simple applications such as software keys can be made more secure using a technology that, while slightly more expensive, saves much more on the back end. Think of the cost of the recent Wikileaks scandal. If adversaries cannot penetrate systems and/or copy technology or documents, how much is that worth in the long run?
The downsizing of the military electronics market is virtually inevitable. However, there is a chance to redefine and rebrand the interconnect, and with it, to add real value to the end-user. The North American industry, for once, can build on the experience of others. The inflection point for economically competitive leading-edge technology with reduced risks of implementation is close at hand.
The 1990s saw massive outsourcing and then offshoring based on the commoditization of the interconnect. The reality even then was that the interconnect is the cardiovascular system of every single electronics device in the world.
The electronics interconnect industry owes much of its life to the military sphere when OEMs such as Ford, Philco and Motorola found new and vital applications such as artillery fuses during World War II for what were then called printed wiring boards. Integrated design, engineering and manufacturing was critical to the success, and to an extent, to the winning of the war. We may have come full circle. Defining the interconnect as an active component changes the game and will require a much closer relationship between the manufacturing floor, the packaging designer, and the systems designer. This is one potential avenue for the interconnect industry, but will require significant re-engineering of management thinking and investment in plant and equipment.
However, the payoff in jobs, in productivity, in profits, is real and demonstrable. Over $3 trillion was spent in stimulus funding and to stabilize the US banking system. Virtually every dime spent, though, has been to maintain the status quo. We must spend our defense dollars especially wisely today. At the same time, innovation has taken a massive hit. Innovation will help grow our economy for the long term, and electronics are at the heart of the modern economy. The interconnect is the heart of the electronics device. Where better to invest?
The alternatives are not especially palatable. While electronics content will continue to grow as a percentage of overall systems cost, the hardware portion has to a great extent plateaued. In addition, with commoditization and design rules that are in many cases 30 years old, where is the potential for profit that keeps a company viable? Where will growth, or even stability, come from in a declining market?