United States / Analyst Insights
Drone industry hinges on defense spending and regulations
by IBISWorld
Jan 29 2015

The US Unmanned Aerial Vehicle (UAV) Manufacturing industry is at a crossroads. Industry manufacturers are expected to earn $3.5 billion in 2015, making the industry the largest of its kind in the world. However, UAV manufacturers are almost entirely dependent on constrained US defense spending, and regulations currently prevent the industry’s nascent commercial segment from fully taking off. Despite ongoing attempts to create guidelines that will enable commercial integration of UAVs into US airspace and clarify the status of industry defense programs, operators will contend with much uncertainty in the foreseeable future.

Defense

The defense market accounts for the vast majority of the UAV Manufacturing industry’s revenue, but cuts in defense spending pose a threat to industry operators. IBISWorld expects federal funding to decrease at an annualized 3.4% to $631.3 billion over the five years to 2015. In particular, after rapidly establishing a large inventory of UAVs, the Pentagon began to rationalize its unmanned systems and shifted much of its focus from large-scale procurement to research and development (R&D) of next generation UAVs. As a result, spending on industry programs dropped from peak levels; consequently, industry revenue is expected to decline at an annualized 6.5% in the five years to 2015. Even with the added emphasis on R&D, sequestration and Congressional wrangling have cast uncertainty over some of the industry’s development projects. For instance, the US Navy has delayed its Unmanned Carrier-Launched Airborne Surveillance and Strike program while the military and Congress debate on the future aircraft’s mission, characteristics and capabilities. Capture

Commercial

While the industry’s defense segment continues to decline, its nascent commercial segment is struggling to get off the ground. The commercial applications for UAVs are advantageous (i.e. crop spraying and infrastructure inspection), but current Federal Aviation Administration (FAA) regulations prevent the commercial use of UAVs within US national airspace due to safety concerns. This has prevented companies from monetizing their UAV development work, thereby limiting industry participation. As a result, the commercial segment of the industry only represents an estimated 3.5% of industry revenue and relies mostly on the recreational use of small UAVs. The FAA is currently working on rules for the integration of commercial UAVs into national airspace, but it missed its December 2014 deadline for rule proposals. As a result, those wanting to use UAVs for commercial applications have to apply for special FAA permission, a slow and limited process.

Looking forward

The next five years will be crucial for the industry’s future. As the Pentagon proceeds with new UAV programs, spending on UAVs will rise. Therefore, in the five years to 2020, industry revenue is forecast to climb at an annualized 5.7% to $4.3 billion; however, operators will continue to face uncertainty. For instance, it is still unclear if sequestration (which eased in 2013) will come back in full force during fiscal 2016. Moreover, even if sequestration ends, the Pentagon will likely remain under budgetary constraints, putting industry projects in competition with the military’s other high-priority programs.

In the meantime, the commercial segment is expected to continue suffering from regulatory uncertainty. Though the FAA is expected to release rule proposals covering commercial UAVs operations very soon, it will be years before they are finalized, and many operators fear that the regulations will end up being too prohibitive (e.g. users must obtain a pilot license and UAVs must remain in visual range). As a result of restrictive regulations, industry operators will continue to struggle with obtaining permission to test and research new products, just as international competition heats up. Foreign companies face more lax regulations, making it easier for them to develop and sell new UAVs. China’s SZ DJI Technology Co., for example, has already become the world’s largest consumer drone manufacturer. In response, companies like Amazon.com have increasingly moved their UAV operations overseas. The largest US consumer drone manufacturer, 3D Robotics, already conducts development and manufacturing work in Mexico. Nonetheless, despite this uncertainty, the market potential and declining costs of UAV technology will lead to increased industry participation, with the number of industry operators expected to climb at an annualized 4.0% over the five years to 2020.