The government is preparing an industrial strategy to focus on the sectors offering the highest growth opportunity for the economy and business. Eight growth-driving sectors have been identified. Mickledore has considered the drivers of change in these sectors and the implications for business support and investment.
What are defence businesses?
The defence sector has been the Cinderella of Industrial Strategy for many years, with the Government taking advantage of the ‘peace dividend’ and even some financial institutions choosing not to support businesses within the sector. Traditionally, the defence industry has been made up of shipbuilding, aerospace, armoured vehicle manufacturing and munitions, but these have now been joined by fields such as autonomous systems, cyber security, and space-based intelligence.
Drivers of change
Over the past two years, the defence industry has experienced significant transformations driven by rising geopolitical tensions, rapid technological advancements, increased military spending and a re-evaluation of allies.
The key drivers for the industry are:
- Introduction of new technologies, including artificial intelligence, advanced air mobility (AAM), space-based intelligence, and unmanned systems. The introduction of unmanned systems in all arenas of warfare is increasing simultaneously in high-cost, sophisticated measures and low-cost, high-volume deployment.
- Aftermarket services: Artificial intelligence and digital technologies appear poised to lead a revolution in delivering value through maintenance, repair, and overhaul. With sophistication comes the importance of digital updates and data analysis. ‘Smart’ equipment requires ongoing support from the original supplier.
- Cyber is introducing a fourth dimension to the traditional land, air and marine systems. Cybersecurity across the entire economy is essential, with non-military critical infrastructure a new defence consideration and deployment area.
- Supply chain re-engineering. The manufacture of complex defence equipment comprises a highly complex supply chain with multiple tiers of suppliers. Complete visibility of the entire supply chain origin is essential to ensure supply security in manufacturing or complete equipment integrity. Changes in strategic alliances require the re-engineering of supplies and may result in fewer multi-national collaborations in equipment.
UK Position - opportunities and issues
The defence industry trade association, ADS, estimates that in 2023 the defence sector added £12bn to the UK economy, employed 164,000 people, and exported £9.2bn of equipment. The UK is estimated to be the 7th largest global exporter of defence equipment.
However, the UK's defence sector has been a clear example of the country’s laissez-faire approach to international investment and procurement. Whilst the defence giant BAE Systems is protected from foreign takeover, leading defence companies such as GKN, Meggitt and Cobham have been acquired over the last decade. Many of the largest defence businesses in the UK are foreign-owned owned including Lockheed Martin (US), Leonardo (Italy), Thales (France), RTX (US), Northrop Grumman (US), L3 Harris (US) and General Dynamics (US).
Major weapon system design has often involved multi-national collaborations, such as Eurofighter, the missile manufacturer MBDA, and the proposed Tempest fighter jet programme. The MOD is also contractually tied to many significant international businesses. However, the likelihood is that even within these arrangements, more work will now be undertaken to ensure local supply chain content
Securing growth and investment at local level
Defence expenditure will increase beyond the current UK capacity to meet demand. Where this takes place in other sectors, the result is to increase imports and FDI. There will be resistance to this within the defence sector.
- There is a need to identify and support the growth of those businesses already involved in the defence supply chain across the UK. In some cases, these self-identify through their membership of relevant sector groups, but their role is less visible in other areas.
- More work is required to understand future supply chain opportunities within future MOD procurement programmes and with the established UK suppliers. Given the lower level of emphasis on defence in past decades, many capable UK businesses may have previously ignored the sector and supply chain initiatives can unlock potential.
- In locations where existing UK defence businesses have sites, there is an account management opportunity to support their site footprint, their local supplier base and to integrate skills initiatives into future workforce requirements.
- Locations with large allocated employment sites, previously targeted at advanced manufacturing uses and logistics, should also consider adding proactive work to target defence suppliers.
- The shift in defence expenditure towards ‘smart’ systems and cyber-security will result in significant software and telecommunications requirements. This will create opportunities for additional high-value technical and professional roles in various locations.
- Locations that can differentiate themselves in electronics, embedded software and telecommunications have a compelling proposition for further investment.
- Civil defence opportunities will also arise from the cybersecurity requirements of organisations such as hospitals, universities, and critical infrastructure operators. Understanding their requirements and procurement processes can ensure more local investment by their delivery partners.
Conclusion
The inclusion of defence in the Modern Industrial Strategy Green Paper was the first acknowledgement of the sector as an essential consideration in economic development for a generation. The geopolitical situation has shifted dramatically since its publication in autumn 2024. Re-shoring and security of supply have been loosely discussed since the COVID-19 outbreak, but the defence sector is now becoming its focal point. Economic opportunities for our communities can emerge from this gloomy international picture.
Mickledore is an economic advisory business focused on strategy, investment, business cases and evaluation. We have worked on sector strategies across the UK. For more information or a discussion about specific local circumstances contact Nigel Wilcock at nwilcock@regionaldevelopment.co.uk