The outstanding performance of EO systems in recent conflicts has put them at the forefront of the 'sensor-to-shoot' paradigm. They were critical to the success of the military operations carried out in Kosovo, Afghanistan and Iraq.

Realising their centrality to the pursuit of an independent defence policy, several European countries, notably France, Germany and the United Kingdom have focused their attention on developing EO systems. This has also been seen as a means to close the 'technology gap' with the United States.

"Many European nations today consider EO systems as being a 'strategically important' technology, one, that they cannot afford to depend on others to have," points out Frost & Sullivan Analyst Consultant Rab Rattray. Over time, technological advances are set to create EO systems with enhanced capabilities.

The overriding need to reduce 'sensor-to-shoot' time is expected to spur the development of integrated systems capable of identifying targets precisely over long ranges. Moreover, systems offering improved interoperability, flexibility and, speed as well as superior platform survivability are likely to experience wider uptake. For participants lacking the expertise to meet the requirements of new build programmes, fleet upgrades still present an opportunity to expand business.

"Armed forces are increasing their return on investment in current programmes by extending the life of their inventory," explains Mr Rattray. "Industry participants that can work in tandem with their governments stand to make huge profits."

The market is expected to expand as upgrade programmes such as the Tornado and new build deliveries such as A400M, Eurofighter and NH90 are implemented. EO systems for Surveillance and Reconnaissance applications and Missile Systems are projected to be the largest markets, recording about seven per cent average annual growth until 2013.

The unmanned aerial vehicles (UAV) market, though the smallest, is anticipated to be the fastest growing one with an average growth rate of about 18 per cent over the next decade. A large part of this success can be attributed to the UAV's high performance as compared to manned platforms, especially in reconnaissance roles.

Despite these positive signs, the highly fragmented nature of the European market continues to loom as a major market restraint. Fragmentation has not only led to duplication of R&D efforts, but also to inefficient spending.

This has constrained market growth in Europe; especially in comparison with the more unified US market. Adds Mr Rattray: "Most European countries today tend to view US electro-optic systems as providing superior performance at competitive prices, and this is likely to inhibit growth of the market for European products. Therefore, it is essential that European countries make a concentrated effort to close the 'technology gap' with the United States".

Consolidation of procurement among the European nations is a likely solution to counter this technology gap and balance other political obligations. Currently, Europe spends almost 35 per cent as much as the United States on defence. However, the fragmented nature of this spending power reduces the efficiency of procurement.

Devoting enough resources to strategic technologies with dual-use potential is a logical must and officials in the European Union are trying to evolve a ten-year timeline for consolidated European defence procurement.

A consolidation of this magnitude could mean cost savings of up to 20 per cent for participating nations, and some of these savings are likely to positively impact suppliers in the form of new business.

US companies currently dominate the European market for EO systems. Their comparative advantage lies in their typically superior capability, competitive pricing and the large US defence budget.

Trailing Lockheed Martin and Raytheon are European companies such as Thales, Sagem and BAE SYSTEMS. The competitive landscape has been marked by a spate of mergers and acquisitions. Such consolidation activity has positively impacted both large and small organisations.

For instance, Sagem's acquisition of Leica Vectronics, and the imminent merger between BAE SYSTEMS and Finmeccanica's avionics operations have opened up an array of new markets. "Within this largely concentrated market, there are a number of participants vying for the same contracts" concludes Mr Rattray. "Differentiation and innovation will be integral to survival."

Related Links
Aerospace at Frost and Sullivan

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