Defence giants to maintain grip on weapons market despite drone boom
Report finds industry’s ‘primes’ will still account for 80% of global sales well into the next decade
Defence giants will continue to dominate industry revenues into the next decade, according to a new report that plays down the threat from technology start-ups.
A study by consultancy BCG and Vertical Research Partners found that despite faster growth in cheaper mass-produced systems such as drones, complex weapons built by established contractors will still account for more than 80 per cent of the market in 2033.
Diana Dimitrova, leader of BCG’s UK aerospace and defence practice, said that while “both defence tech companies and established contractors will grow . . . the majority of spending will remain with traditional players delivering major platforms and complex systems”.
Researchers chose a select set of programmes for complex capabilities and analysed how many could be replaced by or substituted for “affordable mass” alternatives by 2033.
Expensive systems comprised about $65bn of spending in the US, the EU and the UK last year, compared with about $5bn for affordable mass systems and just $55mn for single-use systems, according to the report.
While the market for larger systems is forecast to grow to an annual spend of $79bn by 2033, that for smaller defence systems will still only reach $17.5bn as the newer categories are growing from smaller bases.
In Europe, where governments have embarked on a rearmament drive in the face of Russian aggression, BCG separately forecasts that the market for defence equipment will more than double from about €150bn in 2024 to €380bn by 2035. Defence tech players are expected to secure €50bn-€80bn of this. The forecast assumes Europe achieves its target of spending 3.5 per cent of GDP on defence.
The findings come ahead of next week’s Farnborough Airshow, where defence start-ups will compete with established “primes” to show off their latest offerings.
Security risks have pushed defence to the top of the agenda at the biennial show. Organisers said defence companies, including defence tech and AI-focused players, would represent about half of the 1,600 exhibitors this year.
Some industry leaders have warned that the advance of more nimble tech-focused companies focused on autonomous systems will disrupt the established hierarchy of the world’s defence industry, where primes have long dominated.
In Europe, investors have poured billions of dollars into newcomers such as Helsing and Quantum Systems, boosting valuations and stoking concerns of a defence bubble.
Military budgets, however, are still skewed towards large platforms such as jets and tanks. Byron Callan, analyst at Capital Alpha Partners, said that although new systems such as drones were a “new and significant factor shaping defence . . . we don’t see them fully displacing manned platforms, particularly in ground warfare”.
The BCG analysis found that profits from more complex systems were more sustainable given the need for maintenance and spare parts over their operational lifetime. Complex weapons typically derive about half of their lifetime profit from maintenance, spare parts and upgrades over their operational lifetime.
Established contractors are also more protected from a drop in spending during peacetime given long-term relationships with governments, according to the findings.
However, Dimitrova warned that prime contractors still needed to adapt and consider “where to compete and where to place their capital”.
“Do they continue to invest in a stable and profitable business of developing exquisite programmes, or do they think about getting greater exposure to higher-growth segments — can they simply buy the most successful start-ups?”