By Soham Chatterjee and Bijoy Anandoth Koyitty
(Reuters) - Almost a century after the first pilot-less plane was test launched from the back of a truck in the English village of Upavon, unmanned aircraft vehicles (UAV), or drones, are smarter, more lethal ... and seeking new growth drivers.
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A leaner U.S. defense budget means there will be less scope for big defense programs, but drone makers are betting that a focus on intelligence gathering and risking fewer lives in combat will keep the market growing.
"There's a very large unmanned need for information gathering and communication relay," said Tim Conver, Chief Executive of AeroVironment Inc <AVAV.O>, which is a leader in small UAVs with its popular Raven and Puma models.
"We are committed to creating a business as a stratosphere satellite," Conver told Reuters.
Global spending on drones is forecast to nearly double in the next decade, growing to $11.3 billion a year -- and suggesting a near-$95 billion market over the next 10 years, according to industry research firm Teal Group.
Big-hitters in the market include Boeing <BA.N>, Northrop Grumman <NOC.N> and Lockheed Martin <LMT.N>, as well as privately-held General Atomics Aeronautical Systems and Textron Systems-owned <TXT.N> AAI Corp.
As companies develop next-generation UAV features to cater to their primary defense market, their efforts are focused on two areas: weaponization and intelligence.
"Historically, we have seen larger aircraft like the General Atomics' Predator as a weaponized variant. We're seeing a trend of weaponization down to smaller classes gaining momentum," said Michael Lewis, an analyst at Lazard Capital.
Textron's Shadow unmanned system is another example of an armed drone. Among smaller UAVs, AeroVironment recently won a $5 million contract from the U.S. Army for its Switchblade.
As the United States draws down its troop presence in battlegrounds from Iraq to Afghanistan, so the need for intelligence gathering capability increases, driving demand for the Predator and Northrop Grumman's Global Hawk.
"With UAVs, you can do more with less as they act as a force-multiplier," Michael Ciarmoli of KeyBanc Capital Markets said.
Though fewer troops on the ground may mean less need for the hand-held UAVs carried by some soldiers, the Defense Department will still buy the small UAVs as it has yet to complete its inventory requirements.
AeroVironment, founded by aircraft designer Paul MacCready in 1971, is known for its focus on small UAVs, but the California-based firm has recently branched out into electric vehicle charging stations.
The company is developing its Shrike brand of ultra-small UAV, which weighs just 5 pounds and can fit in a backpack. Shrike will focus on surveillance and intelligence gathering.
"AeroVironment's positioning as the sole-source supplier of small unmanned aerial systems to the Department of Defense gives it a protected niche in the defense market," said BB&T Capital Markets analyst Jeremy Devaney.
U.S. drone makers have a technological edge over international peers and could be looking at lucrative export contracts, though these are often out of reach because of strict rules on arms exports.
The economic argument to help sensitive arms sales may gain traction as campaigning for the 2012 U.S. presidential elections kicks off against a backdrop of a 9 percent unemployment rate.
"In a time of slower growth in the U.S. market, companies can be expected to push sales in international markets," said Philip Finnegan, a Teal Group analyst.
The Obama administration has begun consulting Congress on plans to sell Global Hawk spy planes to South Korea, a Reuters report has said. Such a deal would need a waiver of the Missile Technology Control Regime (MTCR), a voluntary arms control pact involving at least 34 countries.
Both surveillance and armed U.S. drones, which have been widely deployed in Afghanistan and Iraq, have received strong interest from Japan, Australia, Saudi Arabia and nuclear neighbors India and Pakistan, among others.
AeroVironment, AAI, Northrop Grumman and General Atomics have principally sold their UAVs to NATO allies. Exports make up just 7 percent of AeroVironment's sales, and 6 percent of Northrop's.
While U.S. authorities' concern is more about the transfer of advanced sensor capabilities abroad, UAV makers would at least be able to export airframes, plus maybe sensor and weapon suites approved for foreign sales.
The Defense Security Cooperation Agency that oversees foreign military sales is working on pre-approved lists of countries that would qualify to buy drones with certain capabilities.
Meantime, NATO sales might provide some relief.
"As our NATO partners attempt to standardize their weapons portfolios more in line with what the U.S. uses, we will see more sales of systems such as AeroVironment's Puma and Raven UAVs," said Lazard's Lewis.
"Three years out, AeroVironment will be selling more internationally than they are today."
A potential growth area for UAVs is in commercial markets, where there is increasing demand for law enforcement, exploration, disaster recovery and border security.
In the United States, however, prospects are some way off unless the Federal Aviation Authority (FAA) opens up domestic airspace for commercial UAV operations.
"Airspace restrictions will play an important role in how quickly these new opportunities become reality," said Lindsay Voss at the Association for Unmanned Vehicle Systems International.
"When these two obstacles are overcome, the possibilities for the global UAV industry are endless," she said, referring to the export rules and FAA restrictions.
(Reporting by Bijoy Koyitty and Soham Chatterjee in Bangalore; Editing by Ian Geoghegan)