Winners & Losers in the Defense Budget

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A recent blog post described the phenomenon of the “Bow Wave” and its importance to Defense spending priorities. AMREL takes its responsibility of supplying mobile computing solutions to warfighters seriously, so we keep a close eye on how Defense allocates its resources.

Under the “Bow Wave’s” influence, who are the winners and losers? Take a look at what the well-respected experts at the Center for Strategic and International Studies (CSIS) are predicting to be the top acquisition programs.

Defense 2

Defense Modernization Plans through 2020

A cursory analysis reveals that the Air Force, specifically aircraft acquisition (even more specifically the F-35) is the big “Bow Wave” winner.

“The Air Force is the largest contributor to the overall modernization Bow Wave. … funding for Air Force major acquisition programs is projected to grow by 73 percent in real terms from FY 2015 to its projected peak in FY 2023. This growth is driven primarily by aircraft programs. The Air Force’s three largest programs in terms of funding are the F-35A Joint Strike Fighter, Long Range Strike-Bomber (LRS-B), and KC- 46A aerial refueling tanker.”

Defense Modernization Plans through 2020

In spite of the presence of some big-ticket seafaring items on the above chart, the CSIS claims that the Navy and Marines do not much to look forward to in their future, at least according to a strict “Bow Wave’ analysis. However, I have doubts this will prove to be true. For one thing, they have plans:

“The Navy has been able to modernize by incorporating economically efficient capabilities, but much remains to be done. The sea service is making significant investments in aviation, he (Adm. Mulloy) noted, but it needs the RAQ-25 unmanned aerial vehicle quickly. Other critical capabilities include the SM-6, the LRASM, the HVP and maritime TACTOM.”

Signal

If things heat up in the South China Sea, I suspect the Navy won’t have any problems getting funding.

The CSIS analysis says that the Army will be another big winner.

“The Army’s budget for major acquisition programs is projected to increase 28 percent in real terms from FY 2015 to the peak in FY 2022. The Army’s plans indicate a significant Bow Wave in funding for ground systems…

“… the Army plans to ramp up funding for five major vehicle programs over the next five years… The largest of these programs is the Joint Light Tactical Vehicle (JLTV), a replacement for the Humvee. The program plans to reach full rate production of 2,200 vehicles per year by FY 2040. The Army is also developing the Armored Multi- Purpose Vehicle (AMPV), with low rate production planned to begin in FY 2020 and a total planned procurement of 2,897 vehicles. Programs are also planned to replace the Paladin self-propelled Howitzer, to upgrade Abrams tanks, and to modernize the fleet of Bradley Infantry Fighting Vehicles. Together these programs will increase funding for the Army’s major ground systems nearly threefold between FY 2015 an FY 2021.

“The Army has several modernization programs for communications systems planned as well. The Warfighter Information Network-Tactical (WIN-T) plans to continue fielding Increment 2 capabilities… The Army also plans to ramp up production of two variants of the Joint Tactical Radio System (JTRS): the Handheld, Manpack, and Small Form Fit (HMS radio and the Airborne, Maritime, and Fixed (AMF) radio. Having already experienced cost overruns, schedule slips, and many program changes, these three major Army communications programs are poised to more than double in funding between FY 2015 and FY 2021.”

Defense Modernization Plans through 2020

Then there are the non-service specific programs that can be expected to be well-funded. For example, cyber security will be favored in the budget process.

“Cyber right now is the cat’s meow—a notion sure to keep funding flowing for technological solutions, at least in the near term, to counter the emerging threats, according to Col. Gary Salmans, USAF, senior materiel leader of the Cryptologic and Cyber Systems Division within the Air Force Materiel Command.”

Signal

“President Barack Obama championed cybersecurity efforts Tuesday in seeking $19 billion for the cause as part of his fiscal year 2017 budget proposal. …The budget proposal for FY17, which begins October 1, is a 35 percent increase over the current fiscal year.”

Signal

Everybody loves SOCOM, so expect them to be eating steak, not hamburger. Space is being heavily militarized, so that’s another market Defense vendors should consider.

“In its enduring space race to narrow the materializing gap between the United States and peer competitors, the Air Force’s fiscal year 2017 budget emphasizes sustaining mission capabilities and improving space resilience by investing in command and control programs, situational awareness technologies, expendable launch systems and satellite communications.”

Signal

“U.S. officials to make recent bold leaps in their approaches, including establishing the Joint Interagency Combined Space Operations Center and making the Air Force secretary the principal DoD space adviser. With a goal to shift the Air Force’s space culture to one of warfighting, the center and the service secretary’s office will oversee a five-year, $5 billion budget increase for industry and allies to test new capabilities.”

Signal

 If I wanted to pick the fattest single Defense target, I would say it was retrofitting.

“Upgrades and retrofits of existing programs appear to give the greatest number of opportunities for COTS systems. These are often replacing proprietary systems for more open standards that are ultimately easier and cheaper to maintain going forward.”

Robert Day, Vice President, Sales & Marketing, Lynx Software Technologies,  Military Embedded Systems

The military can’t afford new stuff, so they want to make the old stuff last longer. At AMREL, we are very excited about this opportunity.  Our platform flexibility, extensive technical support, and customization capabilities make us a very good fit for this. In fact, many of the programs favored by the “Bow Wave” (communication, vehicles, SOCOM, etc.) present excellent opportunities for us and our partners.

For over 30 years, AMREL has been proud to provide mobile computer solutions for American Defense needs. Whatever requirements arise, you can be sure that we will be there to meet them.

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“Bow Wave” is Critical to Defense Budgets

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At AMREL we play close attention to pressures placed on the Department of Defense (DoD) budgets. We strive to respond to ever changing needs of our clients and market forces.

How are things going for the DoD? If you listen to the leadership, not so good.

“Every single time I stand on stage, I tell people the budget is getting worse and worse, and I’ve always proven to be correct,” said Tony Montemarano, executive deputy director (Defnse Information Systems Agency) … “there are a lot of legacy programs … that now will lose funding.” Signal

“Adm. Mulloy cited an old saying about Navy chiefs squeezing nickels ‘until the buffalo squeaks,’ advising chiefs today to watch their spares closely…” Signal

“The Navy continues to postpone much needed repairs and upgrades for the majority of our infrastructure,” said Admiral Michelle Howard, vice chief of naval operations. “We are still paying down the readiness debt we accrued over the last decade, but more slowly than we would prefer and at continued risk to our shore infrastructure.” VOA

The above represents just a small sample of the grumblings emanating from our military leadership. Complaints about budgetary limitations are ringing across the land. A half-trillion dollar Defense budget is just not enough.

 

Defense budget

What’s going on here? Is this just business as usual? After all, no officer ever advanced his career by loudly proclaiming his command had too much money. Let’s look at the Defense budget:

Defense 1

DoD Budget Request 2017

The budget for 2017 is $521.7 billion, which is down from previous requests (2013 was $525. 4 billion). As can be seen from the above chart, procurement funding has decreased, while funding for research has increased. Of course, this doesn’t include the Overseas Contingency Operations (OCO) budget, which has been slashed. Supposedly OCO doesn’t affect base expenses and is used only for actual war operations.

Could these relatively modest decreases be responsible for the economic squeeze that Defense is so vigilantly complaining about?

 

War is bad for living things and new acquisitions

During the Iraqi and Afghanistan campaigns, the DoD had to divert funding from upgrades, maintenance, readiness, and acquisitions to pay for the land wars. Furthermore, the money spent the land wars did not contribute to DoD’s assets or goals. Equipment was scraped, abandoned, or given away.

“For the most part, war-related acquisition funding was not used to modernize and recapitalize the inventory of equipment.”

Defense Modernization Plans through 2020

Bow Wave

As a result of this diversion, the programs for new acquisitions were stalled and goals became delayed to an unknown time. This created the phenomenon known as “Bow Wave.”  Think of the bow of a ship pushing into the ocean. The wave it creates is constantly moving forward. The defense community uses this as a metaphor for the current state of funding. A “Bow Wave” in defense parlance, is the delay into the indefinite future of major expenses. It’s sort of like a balloon payment at the end of a mortgage.

The “Bow Wave” is expected to suck all available funding, causing non-prioritized projects to suffer. As a result, the brass is scrambling to declare that their individual programs are overwhelmingly important, while the other guys’ pet projects are just waste.

In the big fight about defining what is and what is not waste, we could simply build the kind of military we need and get rid of everything else. One small problem with that way of thinking; take a look at DoD’s goals as outlined in the DoD Budget Request 2017.

“Funds a joint force with the capacity and capability to:

– Defend the homeland

– Respond to five challenges

o Russia

o China

o North Korea

o Iran

o Global counter-terrorism”

As you might expect, the forces required to deter Russia are quite a bit different from those that would engage China and so on. No one really knows what war we are going to fight next.

How is the “Bow Wave” going to affect defense-spending priorities?  A future blog post will discuss winners and losers in upcoming Defense budgets.

 

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What to look for in 2016

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Recently, I read several articles that listed predictions, e.g. “Top Ten security Risks in 2016.”  Like everyone else who services Defense and Security industries, AMREL is always looking ahead to see what products and services will be in demand.

What I noticed is that none of the articles predicted the big stories of 2016 that have already happen, i.e. the crumbling stock market and collapsing oil prices.  Rather than make predictions, I decided to analyze these events and their implications for the year ahead.

 

Oil

As has been widely reported, oil prices have slumped because of Saudi Arabia’s aggressive campaign to wipe out fracking. Fracking and other non-traditional methods of oil extraction have resulted in unprecedented levels of North American oil production.  Fracking is expensive; oil needs to be around $60 or $70 a barrel for it to be economical. Saudi’s aggressive pumping of cheap oil has pushed it down the price of a barrel to around $30. This has caused a massive reduction of capital investments and extensive layoffs in the fracking industry, which is what Saudi Arabia wants.

 

Stock market

Why has cheap oil caused the stock market to decline? Obviously, oil companies are suffering from the Saudi campaign, and this is a drag on the whole market. Some argue that eventually the economic benefits of cheaper oil will become so evident than even the famously manic-depressive stock market will have to notice them.

However, the other possible cause of oil’s price decline is what is really spooking the financial markets. China drives the world’s economy, especially with its voracious appetites for raw materials. Nobody believes the Chinese government’s official statistics, so businessmen are always looking for indications of the true state of its economy. If oil prices are low, that means their economy is not demanding as much, which means that it is slowing down. That means a lesser demand for raw materials, and that means bad times for all.  Add to this that Brazil, a major supplier of raw goods to China, is having serious problems, and you got yourself a worldwide economic freak out.

 

What does this mean for Defense industries?

How will the Chinese government react to its economic slowdown? After all, the Communist Party has held onto power partly through China’s unparalleled economic growth rates. How will they placate their citizens who expect and demand upward mobility? The Party could enact political and economic reforms that will enable true transparency, genuine economic freedom, and an elimination of the near-surrealistic levels of smothering corruption.

Sorry about that last sentence. I needed a good laugh. What the Chinese leadership has done in recent years and will probably do in the future when faced with a discontented public is foment nationalism and beat the drums of war.

Educated Chinese still talk about the “century of humiliation” when Japan and Western powers carved up China like a roast turkey. Nationalistic pride is a raw nerve easily aggravated, especially when it comes to matters of territorial claims.

Consider:

  • China is heavily dependent on trade.
  • United States Navy is capable of enforcing choke points of China’s major trade routes in the South China Sea.
  • China has border disputes with virtually every one of its neighbors (not an exaggeration).
  • China is aggressively ramping up its naval capabilities.

The United States us fully aware of this situation and has tried to shift its military resources in the so-called “Pacific Tilt.”  Good news for Defense firms that supply Naval needs. No so good for those that supply land-based military needs.

I am not suggesting that there will be a war between a China and the US. Nobody wants that (it should be pointed out, however, that historically “what everybody wants” has very little to do with whether or not a war starts). But what it does mean is a build-up of military assets and equipment.

I am also assuming that the United Sates will be able to avoid further major land-based operations in the Middle East.  After the expensive, inconclusive wars in Iraq and Afghanistan, the American public simply has no appetite for another lengthy ground battle.

 

Three things to look for in 2016

  • California real estate prices. The phenomenon of cash-rich overseas Chinese investors buying up California real estate is so well known that it is practically a cliché. If the Chinese economy is really in trouble, and the threat of war looms large, expect the already insanely expensive housing market in the Golden State to heat up further as wealthy Chinese seek safe harbor for their assets.
  • Marines get busy. Satirist Tom Lehr says it best:

When someone makes a move
Of which we don’t approve,
Who is it that always intervenes?
UN and OAS,
They have their place, I guess,
But first send the Marines!

If America is serious about a show of force in the South Chinese Sea, expect to see Uncle Sam’s Misguided Children (USMC) conducting training missions on remote rocky atolls. Also, keep track of aircraft carriers, Unmanned Combat Air Vehicles, the DF-5 (Chinese ICBM) and other technologies that may be used in coming Pacific face-off.

  • Syrian peace talks. Just because we don’t want to fight a major land war in the Middle East, doesn’t mean that we won’t. Right now, the region resembles a live action version of the board game Risk. No sensible, rational person would want to get mixed up in this unholy mess. So, we can’t rule out US involvement.

The Russians are supporting the brutal Syrian dictator Assad. They are dragging their feet in the Syrian peace talks, trying to gain military advantage before any final settlement. However, the Russians have their own troubles. European sanctions against them for their Ukrainian intervention, low prices on their only economic asset (oil) and the fact that achieving a meaningful military intervention in the Middle East is like trying to sweep back the ocean with a broom are just few problems that might force them to negotiate peace in earnest. Keep in mind that the Russian government is unprincipled, sociopathic and thuggish.  This means they will be easier to deal with than the other players in the Middle East.

Speaking of unprincipled, thuggish, sociopaths, it looks like Iran has decided to play nice. The kerfuffle with the captured American sailors could have been a lot worse. Yes, Iran violated international law with the humiliating videotape of the sailors’ capture and forced apology. But this is nothing compared to the grand drawn-out comic farce it could have been.  Within days the sailors were released and all naval equipment was returned.

Please note the economic benefits of the nuclear deal will be slow in coming. The deal only removes some of the sanctions against Iran. Oil is at an all-time low. Iranian pumping infrastructure is old and rusty. The $100 billion dollars unfrozen assts that you may have heard about is an exaggeration; Iran owes a lot of that money to other countries. Money is a powerful motive to get along with your neighbors and curtail military actions.

Furthermore, the US is circulating rumors that Iran has withdrawn most of its forces from Syria. Other rumors indicate that Iranian involvement with Syria is deeply unpopular with the Iranian public.

The Syrian war is by far the most dangerous conflict in that part of the world (even more so than the Israeli-Palestinian one). A peace agreement, even a flawed one, would be an enormously stabilizing event. While it may be farfetched, it is not a possibility that can be dismissed out of hand.

 

AMREL’S role

We haven’t noticed any dramatic change in the nature of our purchasing orders. Whatever the Defense needs will be this year, we will meet them. For over 30 years AMREL has supplied customized rugged solutions to the Defense market.

While we are best known for supplying land forces, we also have provided equipment to the Navy, Coast Guard, and Marines.  They appreciate the durability of computer platforms in surviving humidity, salt fog, and other challenges of a marine environment. In fact, January’s Customization of the Month features a push-to-talk handheld that we did for the futuristic DDG. Read about it here. We don’t just sell rugged computers. We sell rugged customized solutions.

What do you think? Got any predictions you want?  Write editor@amrel.com.

 

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Latin America Defense Market: Hot or Not?

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Americas Society/ Council of the Americas has an interesting infographic on Defense spending by Latin American countries in 2013 (see below). While worldwide Defense spending fell 1.9% in 2013, it actually increased in Latin America by 2.2%. Gangs, drugs, and other transnational criminal activities are driving military expenditures.

A couple of things to keep in mind:

  • Increases vary significantly by country. Honduras, Nicaragua, and Paraguay had the greatest increases, while Brazil (the region’s biggest spender by a very wide margin) had a decrease of 3.9%.
  • Defense spending has dramatically increased everywhere since 2005. So even though Brazil actually cut its 2013 budget, it still much larger than it was just a few years earlier.
  • Everybody wants to sell to Latin America. Chinese and Russian presidents conducted high profile tours of Latin America, specifically to strengthen Defense and security ties. Brazil is expected to accept delivery of Russian anti-aircraft missile systems in 2016.

What about 2014?

Do the 2013 trends illustrated by the infographic hold true today?  Americas Society/ Council of the Americas drew their facts and figures from research by the Stockholm International Peace Institute, so I visited their website to find more up-to-date information.

According to their Trends In World Military Expenditure, 2014 (2015 is not available yet) “….spending in Latin America was essentially unchanged” for 2014.

In fact, “Total military spending in South America was $67.3 billion, down 1.3 per cent in real terms since 2013…” For the second year in a row, Brazil again cut military spending marginally (1.7%). For more details on 2014, see the table below the infographic.

Even with these slight decreases, overall Latin American Defense spending was still higher than 2005 by a whopping 48%.

To make sense of this data, I contacted James Bell, AMREL’s Director of Sales for Latin America. He has many years of experience and is an expert on these markets.  His reply:

“Military spending in Latin America has slowed somewhat due to dramatic changes in the currency exchange rates during 2015 in favor of the US$ — making the purchase of imported products 20% – 30% more expensive.  This has the effect of governments cancelling more expensive military programs in favor of smaller, more highly focused solutions.”

In the case of Brazil, the Stockholm International Peace Institute also cited social protests and a stalled economy as reasons for the flat expenditures.

AMREL has not noticed any significant change in the level of acquisition of our products by Latin America. Interest continues to be shown in our DK tablets and our RK laptops.

If you have questions about this important market, please contact James Bell at jimb@amrel.com

latin america

Source: Americas Society/ Council of the Americas

white bit

latin america 2014

Source: Trends In World Military Expenditure, 2014

 

 

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The Future of Robots is China

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 “China could well turn out to be ground zero for the economic and social disruption brought on by the rise of the robots.”

New York Times

 

Last November, the World Robot Exhibition was held in Beijing. It was an opportunity for the media to gawk at cute, dancing automations, and stoke unfounded fears about China’s “advanced armed attacked” robots (“Isn’t that just a PackBot with a rifle strapped to it?”).

It was also time to consider how important China is to the future of unmanned systems, especially those for industrial applications. According the International Federation of Robotics (IFR):

  • China was the biggest market for robots in 2014.
  • In 2014, Chinese factories accounted for about a quarter of the world’s industrial robots (54% increase over 2013).
  • By 2017, China is projected to be home to the most robots of any country.

Substantial_increase_in_China_and_Korea

Source: International Federation of Robotics (IFR):

 

A good example of China’s commitment to unmanned systems is Foxconn, the maker of iPhones. Three years ago it announced that it would install 1 million robots in order to automate about 70% of factory work.  It already has a fully robotic factory in Chengdu. Other Chinese companies are enthusiastically pursuing similar plans.

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Opportunities for Western robot manufacturers

The path to widespread Chinese adoption of industrial robots is not without its obstacles. For one thing, Chinese-made robots have a significant quality problem.

Qu Daokui, chairman of Siasun Robot and Automation, a Shenyang-based industrial robot producer, stated in the South China Morning Post that quality is the number one challenge faced by Chinese robot manufacturers. This industry “lacks core technology,” he is reported to have said and is stuck at “low-end application in a high-end industry. As a result, it is under pressure of being marginalized in Western-dominated markets.”

Evidence for the quality problem is found in Foxconn’s troubled “Foxbot.” Difficulties with this robot forced the manufacturer to scale back its ambitious automation plans.

Some of the sources for poor quality can be tied to the relative newness of the Chinese robot industry. It is estimated that 15% are start-ups less than five years old. Chinese robot manufacturers still have not geared up production to meet demand and lack the latest technologies, such as 3-D printing.

Like everyone else in the world of robot business, AMREL is always on the lookout for new markets (we make Operator Control Units for unmanned systems). The poor quality of Chinese robots offer opportunities for foreign robot suppliers. China relies on imported key parts such as sensors and motors. In fact most robots are imported, as demonstrated by the chart below:

China_2014_more_than_56000_new_robots

Source: International Federation of Robotics (IFR):

Ironically, Chinese industry which has made the world dependent on its manufacturing is itself dependent on foreign imports of industrial robots.

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Jobs

However, quality and dependency on foreign imports are not China’s biggest robot problems. By far the biggest concerns are about job loss. Sixteen million factory jobs disappeared between 1995 and 2002, roughly 15% of total Chinese manufacturing employment. Many think that Chinese job loss caused by automation may be faster than it was in the West.

Chinese workers are already having a tough time. One survey states that 43% of Chinese workers consider themselves to be overeducated for their current positions.  China’s dramatic reduction of poverty is historically unprecedented, but it has not translated into middle class lifestyle for most.

Furthermore, no one really understands the Chinese economy; it is a unique combination of wild infrastructure spending, state–directed capitalism, extremely high domestic savings rate, and poor incomes for typical workers. Many economists are hesitant to apply traditional models to the Chinese economy.

Add to the uncertainty about the impact of robotics on the economy and its workers, there is anxiety about basic Chinese social structure. The grip of the Chinese Communist Party is rock solid, but what happens when robot-created job loss hinders China’s extraordinary growth rate? Authoritarian regimes fear their people in a way that democracies don’t.

The whole world will be looking to see how China handles these challenges. Humanity has been dealing with job loss caused by automation for over a hundred years, and has yet to find a good answer.

The problem of robots and jobs can best be illustrated by an anecdote supposedly told about Walter Reuther, past leader of the United Auto Workers. An automobile company executive was showing the legendary union leader around a modernized factory floor. Pointing out the new industrial robots, the executive teased Reuther, “How are you going to collect union dues from all these machines?” Reuther replied, “That is not what’s bothering me. I’m troubled by the problem of how to sell automobiles to these machines.”

Have inside information about this topic? An opinion? Inappropriate jokes?

Send them to editor@amrel.com

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FAA & the UAV Explosion

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Go to a solar energy conference, and much of the discussion will be about financing. Go to a meeting of national security professionals and you will hear about terrorism. Gather folks interested in unmanned systems – specifically Unmanned Aerial Vehicles (UAV) AKA drones –  and you will hear endless talk about the Federal Aviation Administration (FAA).

So, it made sense that last November Robotics Business Review held a webinar on the FAA’s impact on drones. In 2012, Congress ordered the FAA to develop a comprehensive plan to safely integrate UAVs into the National Airspace System (NAS). This Congressional directive has had an interesting side-effect in that all across the country, law firms are adding unmanned divisions to deal with expected UAV regulations. We may think of UAVs as a technological challenge or as a business enterprise, but right now it is the legal environment that will determine their future.

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Believe the hype

The first thing the webinar made clear is that the UAV market is exploding. See table below.

UAV Facts & Figures FAA artcile

Two major factors are driving this incredible growth. First, the combination of the UAVs and cameras is magic. UAVs with cameras are used by:

  • Farmers to determine which crops are getting enough water
  • Engineers to inspect bridges, buildings, wind farms, oil rigs, power lines, cellular towers, and other parts of our infrastructure
  • Firefighters to examine wildfires
  • Realtors to photograph properties for sales
  • Law enforcement to patrol borders & exert crowd control
  • Filmmakers to capture shots that would be otherwise too expensive
  • Roofers to check shingles

Secondly, UAVs are a relatively cheap package of hi-tech goodies. For $1000 to $4000, you can get not only a camera, but also a satellite connection, GPS, infrared sensors, sonar, as well as some autonomous capabilities. One of the seminars participants stated the concentration of technology in a UAV is comparable to that of a smartphone. For the amount of money involved, it’s a good value, and represents a low financial threshold for a pioneering innovator looking for a new disruptive application.

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FAA & the law

Current law mandates that anyone who operates a UAV for business purposes needs a pilot license. This is absurd over qualification, and many expect it be changed in the near future. One of the webinar’s participants speculated that a simple low-fee brief online course will be all that is required.

Another current requirement is that a business operator of an UAV needs a Section 333 exemption. The FAA is understaffed, underfunded, and overworked, so the paperwork for this exemption can take 3 months. As you might expect, promoters of UAVs for business applications are chomping at the bit and are impatiently waiting for new regulations that will make their enterprises more practical.

Until recently, recreational users of UAVs needed to follow only a few simple rules. UAVs must:

  • Fly within Line of Sight of the operator
  • Fly below 400 feet
  • Be kept 5 miles from airports

One of the biggest problems facing the FAA is that recreational users do not know about these rules, or simply ignore them. The webinar was full of cautionary tales of UAVs endangering aircraft thousands of feet in the air, hampering firefighting efforts, and interfering with airport operations.

Under proposed rules (that have been announced since the webinar), recreational operators will need to register their UAVs if it weighs between a half-pound and 55 pounds. The low end of this weight requirement has created some backlash.  As one person put it, “You want me to register a toy when we don’t even register guns?”

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Government regulations are good for business

While the new recreational rules stirred controversy, it is the business regulations that entrepreneurs are anxiously awaiting (since AMREL makes Operator Control Units for unmanned systems, we are among those keeping a close eye on this). While some may grouse about anti-business bureaucracies, there are solid reasons why the process is proceeding at a glacial pace.

The FAA was never designed to regulate UAVs.  It oversees manned aircraft, and does a pretty good job at it. On any given day, there are over 7000 aircraft in American skies. Yet, accidents are so rare, that even a near-miss will make the news.

We may not like the intricate bureaucratic labyrinth that the FAA has weaved around air travel, but it has demonstrated its value. Without invasive government regulations, people would have no confidence in air travel, and that industry would be a fraction of what it is today.

So, it should be no surprise that the FAA would adopt a similar heavy-handed regulatory approach to UAVs, especially since they have proven problematic. Not only have UAVs endangered aircraft as mentioned above, but they have also rammed into skyscrapers, crashed into football games & tennis tournaments, interfered with police helicopters and have entered secure airspaces, such as the White House.

The good news is that the FAA is looking to business to help solve these problems. The advisory task force has such industry luminaries as SpaceX and Amazon. With the help of these big players, the FAA will eventually comply with Congress’ mandate and issue regulations that will integrate UAVs into the national airspace. When that happens, the Era of Business UAVs will have finally arrived.

Have inside information about this topic? An opinion? Inappropriate jokes?

Send them to editor@amrel.com

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U.S. Army War College Key Strategic Issues

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The US Army War College (USAWC) just released its key strategic issues for the academic year 2015/2016. People who wish to understand the direction of the American military would be wise to study this document.

What is the US Army War College?

Every year, the USAWC provides graduate level instruction to approximately 800 Army colonels, and lieutenant colonels. Before matriculation, all students must have first completed U.S. Army Command and General Staff College. Also attending are some civilians from Department of Defense, State Department, and the National Security Agency as well as officers from other military services.  After completing a full time 10 month course (or a half-time 2&1/2 year course) students are awarded a master’s degree in strategic studies.

In brief, this is a high-level leadership course for high–level leaders.

What is the Strategic Studies Institute?

A significant element of the USAWC is the Strategic Studies Institute (SSI).  Interestingly, the SSI website does not list education or courses as their “product,” but focus on a variety of white papers, studies, monographs, and books. The SSI has a worldwide network of “external partners” who write about half of these publications. These publications are distributed to decision makers in the military, government, and industry. In addition to the above-mentioned master’s program, these publications are an important way of influencing military and security policies.

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What is the Key Strategic Issues List?

As described by the SSI website, “Every year SSI compiles a Key Strategic Issues List (KSIL) based on input from the U.S. Army War College faculty, the Army Staff, the Joint Staff, the unified and specified commands, and other Army organizations. This is designed to guide the research of SSI, the U.S. Army War College, and other Army related strategic analysts.”

 

What does the KSIL actually say?

I had two immediate impressions of the KSIL. First, it doesn’t provide answers, it raises questions. For example the KSIL doesn’t state something along the lines of, “The American military better get its act together in the Pacific theater, because China is scaring the bejejuss out of its neighbors.” Instead, it asks a variety of related questions, including “How can the Army best contribute to security assurance and deterrence in East and Southeast Asia?”

Secondly, it lists emails of numerous professors, many of whom are key influencers in their own right. For someone doing serious research on American military thinking, and needs to reach out to significant people, this is a treasure trove of contact information.

 

Quantitative analysis

One way of determining the importance of a topic is to count how often it is mentioned.  The KSIL is a PDF document, so I was able to use the “find” function to search for appropriate words.

For example, the word “China” is mentioned over 10 times. This is to be expected. The current administration has been very public about its “Pacific Tilt.” It makes sense that the Army would prepare its leadership for this theater.

Cyber war was mentioned 10+ times. I discussed this with Robert Culver, Robert Culver, AMREL’s Director of Business Development Programs (DOD), who has had a long career in both the Army and Pentagon procurement. He reported extreme interest in cyber war at the recent AUSA gathering and suspects significant funding will be flowing in that direction.

More disappointing was the complete lack of references to unmanned systems. Even the more colloquial terms “robot/robotics” were only mention 3 times, and usually in a laundry list of other issues. Just a few years ago, unmanned systems was the hot girl the military couldn’t wait to date. Now, it’s the ex that gets blocked on FaceBook.

Robert thinks the non-mentions of unmanned systems are insignificant. He said that the KSIL is a strategic document, and unmanned systems are a tactical issue.

I understand his reasoning, but I don’t entirely agree. Unmanned systems have important ramifications that could be considered strategic in that they affect our ability to project force on a regional basis. Unmanned systems achieved prominence in Afghanistan and Iraqi campaigns, which despite our continued involvement, are being flushed down the memory hole. IEDs, the most lethal weapon of those campaigns, get zero mentions. No mention at all of counter insurgency (insurgency only once). As further evidence of our disengagement with the Middle East, Africa got more mentions than Syria, ISIL (ISIS), and Iraq put together.

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War is just so complex

Important topics expressed in KSIL are “complexity” and “hybrid” warfare. As illustrated by Russian tactics in the Ukraine, a complex/hybrid war occurs when the enemy is simultaneously fielding traditional state-controlled military forces, irregular militias/guerillas, cyber attacks, and media/propaganda campaigns.  Lt. Gen. Robert M. Shea, USMC (Ret.) writing in Signal magazine, gives a nice, introduction to the challenges of complex/hybrid wars. He is concerned that the traditional American strength of joint warfighting is being eroded by the demands of this new kind of war.

 

Amateurs study tactics. Professionals study something else.

I was disturbed that there were very few mentions of acquisitions, procurement, and logistics. I understand that these are technically tactical concerns, and are much less sexy than cyber warfare. However, the continued inability of the American military to deal with the problems affecting procurement has profound strategic implications.

Our reliance on expensive weapon systems as well as expensive soldiers has severely limited our ability to project force in many parts of the world. Clever enemies have turned the poor quality of their fighters and equipment into an advantage. A lost battle may cost them $10,000, but the victory for us may cost us $10 million. Even for as nation as wealthy as ours, this is not sustainable. Top-level officers and strategic leaders may not be interested in this problem, but they should be.

 

Read it for yourself

The Key Strategic Issues List is worth reading in its entirety.  Download it here.

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Killer Robots Are Here

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From the very beginning, people have been concerned not only about what unmanned systems can do for them, but also what they can do to them. Indeed, the first time the word “robot” was used, was in a 1920 Czech play that depicted a machine rebellion against mankind.

More recently, there has emerged an international campaign to stop “killer drones.” This blog has previously expressed skepticism over the supposed “inherent immorality” of unmanned warfare. However, I think the more important issue may be the lethality of non-military unmanned systems.

For one thing, concerns about safety issues have significantly delayed the spread of unmanned system to civilian markets. An expert once told me that safety and legal concerns are the single biggest factor in delaying unmanned agricultural systems. They are also a major reason for the slow adoption of autonomous cars.

Many are anxious over the role of robots in industrial accidents. The rate of injuries and deaths of civilians in work settings is nothing to sneeze at. For example, we are used to thinking of casualties during war as being something that happens exclusively on the battlefield, but “The Bureau of Labor Statistics reported that each year between 1942 and 1945 there were some two million disabling or deadly industrial accidents, a total of more than six million.” Indeed, the eHistory website asserts that for every American military casualty, there were eight industrial casualties on the home front.

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After a worker’s death in Germany, killer robots and industrial accidents are in the news. In response to to this report, journalist Margarita Noriega interviewed a cyberlaw expert. The interview below originally appeared in Vox.

After sharing a story on Twitter about a robot who killed a man in Germany, Ryan Calo, professor of robotics and cyberlaw at the University of Washington School of Law, replied that it is not that unusual for robots to kill people. Naturally, I had a few questions. Here they are with Calo’s answers, including why robots aren’t going anywhere anytime soon.

Margarita Noriega: What just happened in Germany?

Ryan Calo: A man was killed while setting up an industrial robot at a Volkswagen plant. Apparently the robot grabbed the man and crushed him against a metal plate.

Margarita Noriega: You mentioned that this was more commonplace than people might think. Can you explain?

Ryan Calo: About a person a year dies in robot related accidents in the U.S. alone. You can see this in the statistics complied by OSHA, the Occupational Safety and Health Administration. Recent incidents include “Maintenance Worker Is Struck And Killed By A Robot”(2013) and “Robot Crushes And Kills Worker Inside Robot Work Cell” (2012). The reason people are reporting on this death, I think, is that robots are very much on the mind. Of course, we should keep this all in perspective—more people are killed by bees or sharks than robots, at least in the United States.

Margarita Noriega: What do we mean by “robot” in these cases, anyway? And how is “likeness to humans” defined?

Ryan Calo: In my work, I define a robot as having three qualities that distinguish it from previous or constituent technologies. A robot must sense its environment, process what it sense, and then be organized to act directly on the world. I don’t define human likeness because I don’t think it’s necessary. I do, however, think that robots that look and act like people raise particularly interesting legal and ethical issues. You can read more here in my article Robotics and the Lessons of Cyberlaw.

Margarita Noriega: How are these cases handled, since the robot has no malicious intent?

Ryan Calo: Most industrial accidents—robot or otherwise—are handled in the U.S. by workers compensation. This means that the worker or their family receives a statutorily defined amount of money from a fund, depending on the severity of their injury. Technically the worker could sue the manufacturer of the robot but would have to show that s/he operated the robot within specifications. Usually some human error is involved, as apparently was the case in Germany. Where it gets tricky is when robots are not designed for any particular purpose and can run third party apps.

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Another hard issue is what to do when the robot displays emergent behavior, that is, behavior no one involved in the programming could anticipate. My paper Robotics and the Lessons of Cyberlaw discusses. We’re already seeing this with Internet bots that, for instance, threaten someone’s life.

Margarita Noriega: You predict here that robot cases will increase. How does one avoid being killed by a robot, anyway?

Ryan Calo: I think the answer is that you are very unlikely to be killed by a robot, unless you come into military conflict with the United States. If you are, for instance, a factory worker, it is very important to follow established security protocols around robots and especially to stay out of the danger zone unless you are sure the robot is off. What I predicted in that 2009 blog post was that robotics would become the subject of laws and legal cases. And it is. Think of all the recent cases and statutes involving drones.

Margarita Noriega: What question haven’t I asked about killer robots?

Ryan Calo: One question is what is different about industrial robots. Industrial robots generally stay in one place and do the same thing over and over. They are dangerous because they can exert enormous force are not usually able to sense the presence of a person. As robots come to do more and more things, as they leave the factory floor and enter our offices, hospitals, and homes, they will be designed to be much safer.

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Why are autonomous cars happening now?

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Why are we seeing self-driving cars right now?  This question was originally asked in Quora. Below is my answer:

To understand the development of autonomous cars, it is helpful to think of them as a kind of a robot, or to use a term more favored by those in the industry, an “unmanned system.” Autonomous cars (Unmanned Ground Vehicles) transform the role of people from that of an operator/driver to one of payload/cargo. Two trends, one demographic and the other technological, are driving the development of autonomous cars.

The significant demographic trend is the aging of population. In the 2013 Robotics Roadmap, which was presented to the Congressional Robotics Caucus by industry leaders, the impact of this surging senior demographic was discussed for almost every possible unmanned application. Countries as diverse as the United States, Japan, Mexico, and even in the Middle East are experiencing a growth in the number of elderly inhabitants. These people want to maintain their independence as long as possible. Seniors are a growing and eager market for autonomous cars.

The driving technological trend has been the spread of unmanned systems, especially for military purposes. The military view unmanned systems as a “force multiplier,” i.e. a way of reducing the number of personnel (soldiers). Since soldiers are the single most expensive item on a battlefield (a wounded US combatant can cost $2 million), the deployment of unmanned systems can result in significant cost savings.

However, most unmanned systems still require humans to operate them. To realize their full economic and tactical potential, some degree of autonomy is required. As a result, there is very good research being done on autonomous capabilities of unmanned systems. Since autonomous cars are actually a kind of unmanned system, this technology is maturing very rapidly.

There are other factors driving the development of unmanned cars. Some futurists think that economic doldrums will place private vehicle ownership out of reach of ordinary people. Supposedly, the next generation will come to depend on fleets of taxicabs, made more economically practical by their autonomous capabilities.

For more discussion on this issue, please see the following articles:

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Bank’s Biometric Bandwagon

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Biometric applications for financial services have emerged as the darling of venture capitalists. Business journals are filled with reports about banks, such as the giant Oversea-Chinese Banking Corporation (OCBC bank), adopting biometric applications that allow it clients to access their accounts on their mobile devices. When biometric development companies, such as EyeVerify and Nymi secure funding, financial magazines pay attention.

Considering the use of biometrics by financial services is expected to top $8 billion by the year 2020, investor interest is understandable. Up until recently biometrics were applied to law enforcement, military, and other niche security applications. Why is banking jumping on the biometric bandwagon?

 

Follow the fear

There is a growing perception that traditional methods of securing information (such as passwords) have become increasingly unreliable and vulnerable. Just look at a few recent headlines:

  • In the last 10 years, Identity Theft Resource Center calculates that more than 778 million records have been exposed by data breaches.
  • In 2014 alone, NASDAQ estimates that 700 breaches exposed an estimated 81.5 million consumer records.
  • Highly-publicized hacks include Home Depot, Target, and even the personal financial information of the First Lady, Michelle Obama.

In addition, the growth of mobile devices has created a demand for password alternatives.  People want to conduct financial transactions on their telephone, but they do not want to input account numbers and complex passwords on small mobile screens. Biometric authentication is not only seen as more secure than passwords, but also more convenient.

 

What is biometrics?

Biometrics technologies identify a person through physical characteristics.  Fingerprints are perhaps the most well-known. Other biometric technologies include iris & retinal scans, heart rhythms, facial & voice recognition, and palm vein identification. Their permanence, convenience, and uniqueness are considered advantageous over conventional passwords.

Biometric applications occupy several broad categories:

  • Enrollment – Entering a person’s physical characteristic and identity into a database. Enrollment is the first experience anyone has with a biometric application. When a person is arrested, they are enrolled, i.e. their fingerprints are inputted into a police database. Enrollment overlaps with registration, which is a process that involves your identity claims. If I enter my fingerprints into a database, while claiming to be Joe Smith, but I am really John Doe, I have successfully enrolled, but have fraudulently registered. Enrollment applications can be very technologically demanding. The quality of digital information entered into national databases is highly regulated, and can be difficult to achieve.
  • Verification (AKA matching) – Are you who you say you are? This is by far the most common use for biometric technologies. Every time someone checks the photograph on your driver’s license, they are verifying your identity by comparing it to a physical characteristic. A closely related application is authentication, which determines if you are authorized for access, i.e. not only you are really John Smith as you claim, but you also are entitled to enter the building. Most biometric applications focus on verification, since it is the one most in demand, and the technologically easiest to create.
  • Identification – Who are you? If you are arrested, and refuse to identify yourself, a police officer can try to find out your name by running your fingerprints through a database. Unlike the verification process, identification doesn’t deal with any claims about identity; it simply establishes identity through a physical characteristic alone. This is a technologically more demanding process than simple verification.

There no standard, universally accepted classification scheme for biometric applications. Even terms can have different meanings (you will notice that sometimes in this article, I use the same word to mean slightly different things). However, the categorizations as defined above are useful in that they communicate broadly the different technologies and needs that are in demand today.

 

Passé passwords

The adoption of biometric applications by financial services has been driven by the assumption that they are more secure than passwords. There is reason to doubt this.

Passwords, despite their bad reputation, actually work fairly well. In spite of alarming headlines, the vast majority of people do not experience hacks, or at least ones with severe consequences. This is especially true if they take some commonsense precautions, such as separate passwords for important financial accounts, and frequent changes in passwords.

Biometric technology, like passwords, can be hacked. For years, experts have warned about criminals using gelatin “sleeves” to “spoof” fingerprints. Of course, countermeasures can be implemented, but then criminals will work hard to defeat them, which lead to different countermeasures, and so on. Pretty soon, the back-and-forth war of biometric technologies begins to look like the current state of passwords, in which criminals and security experts are involved in a constant battle.

The presence of fingerprint sensors on the iPhone 6 and other popular mobile devices has increased the attractiveness of biometric authentication to financial services. Why not exploit the hardware that many of their customers already have? Of course, the very popularity of these sensors increases their value as targets for criminals.

In addition to fraud, another problem with biometrics is the human body itself. For example, fingerprints can be “rubbed away” by hard physical labor or aging. A bank servicing farmers or an elderly population will have to consider this before mandating fingerprint authentication for accessing financial services.

I am not downplaying the importance of biometrics as an emerging technology. I am simply stating that financial services should adopt them cautiously and be aware that they are not without their problems.

I believe that biometric technology will be used in the financial sector primarily in combination with passwords. Two forms of independent authentication will enable the greatest security.

 

Enrollment

Since many biometric firms focus their efforts on the “low-hanging fruit” of verification, their potential customers in the financial services are often uninformed about the technological challenges of enrollment.

This is especially important for in-house security. Already, in some banks, officers can only make important transactions after they verify their identity with a biometric authentication. Obviously, when a new employee is hired, enrollment into the bank’s database must happen. For this, the bank will need its own enrollment equipment.

Biometric enrollment equipment need not be cumbersome or difficult to use, but they should be sturdy. Enrollment is often performed by various employees with different levels of skill, not to mention clumsiness. Some commercial biometric devices are fragile, and subject to frequent breakdowns, which can lead to costly delays. It actually makes economic sense for the bank to invest in ruggedized devices that may cost more, but are far more reliable.

Enrollment creates unique demands on biometric devices. The quality of any given device captures varies greatly and could be critical to their utility.

Biometric information is stored in Electronic Fingerprint Templates (EFT) or Electronic Biometric Templates (EBT). To access national databases EFTs/EBTs need to conform to strict criteria. Currently, the Automated Biometric Identification System (ABIS) and the Integrated Automated Fingerprint Identification System (IAFIS) demand that EFTs/EBTs match the latest Fingerprint Acquisition Profile (FAP) (the current highest standard being FAP 45). A financial service that wishes to authenticate the identity of its employees or clients would be wise to use enrollment devices that generate FAP 45 quality files.

 

Solve a security problem by creating a larger one

Although biometric spoofing is a common criminal practice, I am unaware of anyone using a digital biometric file to commit fraud. However, it doesn’t take a lot of imagination to envision a stolen EFT/EBT being used to fake an authentication. One day we will see news banners declaring a high-profile hack has pilfered “millions of fingerprints.”

Consequently, biometric applications will force financial services to take stricter security measures, not more relaxed ones. As one skeptic of biometric authentication remarked, a person can change their password, but not their fingerprints. Consumers will want the greatest assurances from banks that their biometric information is safe.

 

All’s well that ends Orwell

Consumers will need other kinds of assurances as well. There is something a little Orwellian about large institution having intimate information about your physical characteristics.

Any financial service using biometric applications will need to be proactive in assuring their clients. Privacy policies must be public and displayed prominently. Clients should be informed that biometric information will only be used for identification purposes and will not be shared with any third party.

The good news is that, for the most part, consumers have shown little fear of most biometric applications and appreciate their convenience.

 

Conclusion

The enthusiasm venture capitalists have shown for biometric banking applications is well-founded, but there are unknowns. For example:

  • Will passwords be replaced or merely supplemented?
  • Will facial or voice recognition ever be as robust or support an infrastructure as developed as fingerprints?
  • Will the future demand multimodal or single mode biometrics?

Pioneers who develop and adopt biometric technologies dream their applications will be gold mines. If they guess wrong or lack caution, their gold mine may turn into a money pit.

To learn more about AMREL’s Biometric Solutions, click here.

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