September 23, 2011 –  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.

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.

EXPORT SPOILSPORT

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.

There's also tougher competition from foreign countries, especially Israel and China.

"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