03 February 2021
Governments, particularly in the fields of aerospace, defense and government services, have long been drivers of some of the most important technological innovations, from the microchip, to GPS to the Internet itself. In the US, one-third of patents rely on government-funded research. Now, more than ever, companies that support or service these government entities must keep pace with tech innovation or risk irrelevance or elimination from the market.
"Macquarie Capital understands the critical role that technology plays across all industry verticals and our Aerospace, Defense and Government Services team has been focused on transformative technologies such as AI for some time. AI is increasingly a key topic in our conversations with clients."
Tim Alden, Macquarie Capital
One such disruptive technology is artificial intelligence (AI). Often when people hear AI, they envision in-home smart devices or self-driving cars, but its scope extends much further – including to industry, research, academia, and, increasingly, government.
Despite still being in its infancy, the potential for AI and especially its application in the machine learning space – providing systems with direct access to data and allowing them to automatically learn and make better decisions over time – is so advanced it rivals, and in some cases exceeds, the intellectual capacity of humans.
Recently, the US Government has been highly focused on enhancing domestic AI capabilities to develop integrated tools and solve complex problems. Opportunities for artificial intelligence government work have grown 61%, 100% and 155% each year since 20161 and there has been a 600% increase in the number of AI-related contracts valued at over $100 million1.
AI is far-reaching, transformative technology with uses that extend beyond counter advancements due to geopolitical instability – US non-defence artificial intelligence spend is slated to grow 34% from GFY20 to GFY212.
An area poised to greatly benefit from the deployment of AI is human services. Caseworkers often manually verify the eligibility of beneficiaries by collecting data across multiple systems; a process that tends to be time consuming. AI software can connect the various systems and replace the administrative burden with a single keystroke greatly enhancing speed and accuracy. In San Diego County, AI reduced the time to approve a Supplemental Nutrition Assistance Program (SNAP) application from 60 days to less than a week3.
“Advancement of this technology in recent years has seen exponential growth with no signs of slowing,” said Macquarie Capital Managing Director Tim Alden. “Macquarie Capital understands the critical role that technology plays across all industry verticals and our Aerospace, Defense and Government Services team has been focused on transformative technologies such as AI for some time. AI is increasingly a key topic in our conversations with clients.”
It should come as no surprise that major market participants have shifted considerable time and resources to grab a slice of this sizeable new market opportunity. It is likely that integrators who have not been in front of AI opportunities for the past few years will struggle to play catch up and gain the trust and support of customers in the public sector.
Other industry participants have focused on acquiring businesses with significant artificial intelligence capabilities to gain a foothold in the space. Leidos Holdings, Inc., a science and technology leader, acquired Dynetics, Inc., an industry-leading applied research and national security solutions company, for $1.65bn in cash in December 2019. Leidos CEO Roger Krone highlighted in the earnings call that “Dynetics' technical capabilities address five of the seven technology priorities laid out by the Under Secretary of Defense for Research and Engineering, specifically, hypersonics, space, directed energy, artificial intelligence and machine learning and microelectronics”.
“Artificial intelligence technologies continue to be at the forefront of strategic M&A dialogue with many key industry players. There is an emerging realisation that acquiring the technologies, in addition to developing them internally, can afford a competitive advantage in time to market and overall cost,” says Macquarie Capital Senior Managing Director, Jeremy Parker.
Investment, continued innovation and market forces will determine winners and losers in the artificial intelligence space. What is clear is that these will play out against a backdrop of exponential progress in both the development and application of AI as both governments and private enterprise continue investing in the future of thought.