3
Second Quarter 2014
Industry Trends
(Defense and Gov. Services)
Source: 2015 OCO Budget Amendment, industry newswires, map –
The Economist
“Two Arab countries fall apart”
The conflicts in Ukraine, Syria and Iraq intensified during Q2; meanwhile the US continued to scale back
its military forward operating presence. The Syrian conflict’s spillover into Iraq and intensified sectarian
violence caused by the military success of the Islamic State of Iraq and Syria (ISIS) underscores the
likelihood of long-term, violent regional instability. Despite the escalation, the Obama administration
remains committed to reducing US military presence in Afghanistan and the Middle East. This position
is evident in the continued decline of Overseas Contingencies Operations (OCO) funding and flat
defense spending. However, in May President Obama called on Congress to support a new $5.0 billion
initiative, the Counterterrorism Partnerships Fund and European Reassurance Initiative (CTPF / ERI).
The fund would allow the US to address emerging threats in and bolster support to North Africa, the
Middle East, and Eastern Europe. CTPF / ERI complements the US transition to what the White House
calls a “light footprint” approach to foreign policy, allowing the US to respond and react to emerging
threats without deploying troops on the ground. The requested funding will be allocated into three
categories: 63% to Counterterrorism Support, 25% to Syria Regional Stabilization Initiative, and 13% to
Crisis Response. As boots on the ground operations in Iraq and Afghanistan decline, this new initiative
aims to effectively combat current and future terrorist threats and crises across the globe.
The light footprint approach necessitates an agile, responsive and technologically superior military force
able to react to world events. Amidst the push to reduce size and spending, the Pentagon aims to
rapidly modernize its capabilities, retire unneeded weapons systems, and build a more agile military
force better equipped to respond to modern threats as well as shifting US foreign policy. Leadership has
communicated that to accomplish this, spending will be concentrated on modernizing, acquiring and
adopting new technology. Examples include the Army’s plans to retire its aging Kiowa Warrior
helicopters and replace them with upgraded Apache helicopters teamed with unmanned aerial vehicles;
the Navy’s plans to temporarily decommission select cruisers and return them to service after significant
modernization overhauls; and the Air Force’s plan to retire the A-10 warthog and its demonstrated
commitment to the F-35. This spending trend is helping drive market premiums for innovative
companies providing specialized products, services and technologies as well as encouraging
consolidation amongst larger and more traditional industry players.
I
9th
I
19th
I
26th
I
27th
I
29th
ISIS takes control
of Mosul, seizes
$429 million
Grand Ayatollah
urges Iraqi
call to arms
US sends 300
military advisors
to Iraq
Obama Administration
seeks $500 million
for Syria rebels
Iraq launches
counter attack
against ISIS
Syrian air force
bombs ISIS
positions in Iraq
ISIS announces
establishment of
new caliphate
Escalating Conflict in the Middle East – June 2014
I
13th
I
24th
I
15th
ISIS claims
execution of 1,700
Iraqi soldiers
ISIS Footprint June 2014
114
105
85
84
53
45
10
$0 B
$50 B
$100 B
$150 B
$200 B
FY11 FY12 FY13 FY14 FY15R
Afghanistan Iraq CTPF / ERI
3
1
5
1
OCO Funding 2011 – 2015 Requested
