Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The world is at its most dangerous since the second world war. The war in Ukraine will soon enter its third year, with Russian President Vladimir Putin vowing to intensify attacks. The Israel-Hamas conflict is already into its fourth month, and clashes in the Red Sea, Lebanon and Iran raise the risk that hostilities could spill over into an all-out regional war. China’s economic rise has come with greater military assertiveness too. A more belligerent world is bad news for everyone — except perhaps the defence industry. As threats rise, so do its order books.
Pipelines at some of the world’s biggest defence companies — including Lockheed Martin, General Dynamics and BAE Systems — are near the healthiest on record, having grown 10 per cent between 2021 and 2022 alone. Demand for military hardware remained strong last year too. Governments are buying weapons, ammunition and equipment to fight wars, donate to allies, or build reserves. In Europe, countries are replenishing national stockpiles depleted by offerings to Ukraine. Global military expenditure hit a record $2.2tn in 2022.
Investors have got on board. The MSCI’s global benchmark for defence stocks is up about 15 per cent over the past 12 months. British defence shares — which have soared more than 140 per cent since the start of 2021 — are at record highs. Private equity funds are circling for opportunities, and venture capital investment in US military tech start-ups is booming.
Business should remain strong. The conflict in Ukraine shows that the age of big tank and artillery battles is not over yet, as some had wagered. But technical advances mean new forms of warfare have also developed. There is high demand for drones, sensors, precision missiles, and communication equipment. Companies need to boost their security too. The global cyber warfare market is expected to grow more than 250 per cent in the next decade.
The industry has been caught out by conflict and rising threats. Companies are struggling to raise production amid labour shortages and supply chain disruption, which is itself a result of rising global instability. Restarting dormant manufacturing lines takes time. Even production from active facilities for complex equipment, such as precision weapons, can take two to three years. Indeed, Ukraine is using up munitions faster than they can be made. For manufacturers, keeping up with innovation at the same time is not easy.
Western allies and industry will need to collaborate to diversify and raise the resilience of defence supply chains, including by building up strategic reserves and digitising operations. Manufacturers are wary of ramping up production only to be left with surplus capacity. But after years of reducing military stockpiles, many governments realise they need to be replenished. Companies also need to train, retain and attract talent better, including through apprenticeships and tie-ins with research institutes.
Larger contractors with longer development cycles can struggle to keep up with technological advances too. This provides opportunities for nimbler start-ups, which often focus on the commercial market, to get into military applications, including for robotics and unmanned systems. Procurement processes need to become more agile and fairer: competitions for contracts are often stacked against smaller businesses. This is particularly important when investor ESG metrics can also limit such companies’ access to finance.
Even if current conflicts do not escalate, it seems clear that the world is in a new era of geopolitical tension and increased war risk. Society may hope for the best, but the defence industry must prove it can be prepared for the worst.
