In the late 1980s, the United States, along with more than 30 countries, signed an agreement called the Missile Technology Control Regime, or MTCR. The goal of the agreement was to control the Cold War-era proliferation of weapons of mass destruction, or WMD.
However, the MTCR also stifled foreign sales of unmanned aircraft because of what’s called “presumption of denial.” Basically, that’s when a company decides not to compete for a foreign arms contract because it knows it’ll be denied under the terms of the MTCR. But if the Obama administration is successful with its Export Control Reform initiative, the rules that govern the sale of unmanned aircraft systems, or UASes, could be re-examined. That’s potentially great news for Northrop Grumman Corporation (NYSE:NOC) and General Atomics.
Navigating the arms-race fallout
The MTCR was designed to limit WMD delivery system sales by creating two categories. Category 1 items, which include UASes capable of delivering a payload of 500 kg to a range of 300 km, are subject to “unconditional strong presumption of denial regardless of the purpose of the export and are licensed for export only on rare occasion.” In other words, the U.S. government — specifically the Department of Defense, Department of State, and Congress — almost always deny exports of these types of systems. Clearly, this is bad news for Northrop Grumman Corporation (NYSE:NOC)’s Global Hawk, and General Atomics’ Predator and Reaper.
In fact, in 2011, James Pitts, then head of Northrop Grumman Corporation (NYSE:NOC)’s Electronic Systems unit, told the Financial Times, “Countries have an insatiable appetite for drones … and unless something changes in U.S. policy [UASes] will be another area where in five years we will look back and say, ‘Gee, we missed the boat, the U.S. missed the boat.'”
Why this matters
According to the Teal Group, from 2012 to 2021, there will be an estimated $28.5 billion spent on UAS R&D, with the U.S. market accounting for 62% of that figure. The U.S. market is willing to spend so much on UAS R&D because there’s an estimated $60.6 billion UAS procurement market over that same period. Also, according to the Teal Group, the U.S. has a clear competitive advantage over exporting rivals such as China, Israel, and Europe.