Ukraine invasion puts spotlight on war tech companies Analysis by Financial Times

The Financial Times newspaper has published an article claiming that the Ukraine war shakes up the defence industry dominated by long-established contractors. Caliber.Az reprints the article.

An industrial estate on the outskirts of Tallinn in Estonia houses an unlikely winner from the war in Ukraine: a start-up that makes autonomous vehicles used to carry casualties and clear routes for soldiers on the battlefield.

Milrem Robotics is part of a wider shake-up of the arms trade in the wake of the conflict that has seen smaller, technology-led companies gain prominence in an industry dominated by long-established incumbents such as Lockheed Martin and BAE Systems.

As well as Milrem, others such as America’s AeroVironment and Türkiye’s Baykar, have caught the headlines after the success of their equipment on the Ukrainian battlefield. Milrem, together with Germany’s Krauss-Maffei Wegmann, has delivered 14 unmanned ground vehicles to Ukraine, while the Pentagon has sent several hundred of AeroVironment’s Switchblade drones armed with warheads. Baykar’s armed Bayraktar TB2 drone has similarly been deployed in Ukraine.

These companies’ success and the speedy deployment of their products in Ukraine underlines the changes sweeping through the defence industry, and how long-established players face challenges from new entrants.

Innovative technologies such as sensors, robotics and unmanned systems — often developed for both civil and military uses — had already started to disrupt procurement before the war but the conflict has accelerated that trend.

“Ukraine has definitely made governments think harder and deeper about their industrial bases, their supply chains’ agility and resilience,” said Trevor Taylor, professional research fellow at the Royal United Services Institute (Rusi). He notes that “military effectiveness is depending increasingly on information advantage derived from sensors, data processing, computing and so on”.

While the big defence contractors are not at risk from the success of their smaller counterparts, it does underline the challenges they — and government procurement agencies — face to keep up with the faster pace of innovation in the commercial world.

The often lengthy development cycles of prime contractors mean that they can struggle to keep up with the rapid advances offered by more agile technology companies, said Johannes Pinl, chief executive of MARSS Group, whose surveillance system has been deployed in Ukraine to protect critical infrastructure from unmanned threats such as drone attacks.

“Agile tech companies have an advantage. We are seeing the beginning of the future battlefield: technology, driven by the commercial market, is taking over,” he said.

Robotics and autonomous systems in particular are expected to evolve significantly over the next five to ten years, said Kuldar Väärsi, Milrem’s chief. Founded ten years ago, the group has evolved into one of Europe’s leading robotics companies with exports to 16 countries, including Nato members. Its vehicles can be rapidly configured to host cameras, rangefinders or even weapons.

Väärsi added that given the fast pace of development, the question for governments will be “how to buy the best available on the market with the most reasonable pricing while also ensuring that you get the necessary updates and upgrades”.

The challenge has already prompted governments to look outside of their usual pool of suppliers. “It seems that defence departments have recently been putting more focus on leap-ahead technologies to achieve transformational results, regardless of their origin,” said Charles Dean, VP of global sales and business development at AeroVironment.

Compared to the past, orders are made to both large and small companies rather than primarily from large prime vendors, he added.

For governments, the question of how to involve smaller suppliers in the procurement process is not new. Both the US and the UK have for some time been keen to diversify their supplier base but their procurement processes had made it difficult for smaller groups, said Rusi’s Taylor.

“The preference is for competitions which are expensive for everybody and time consuming. The big companies are set up for them and are used to them.”

“The defence acquisition process is quite rigid,” agreed Milrem’s Väärsi, adding that it will take time to change and that governments will need to be reassured the company they are contracting with will exist in the long term. One recent positive development, however, he said, was the establishment in 2021 of the European Defence Fund which encourages small and medium-sized companies to take part in collaborative research projects.

In the US, the war in Ukraine has led to the Pentagon “mobilising the defence industrial base in a way that we haven’t seen in decades,” said Jeff Jurgensen, spokesperson for the Department of Defense.

The department, he added, had already been working to diversify its industrial base prior to the war but a new strategy for engaging smaller businesses and to help them compete for defence contracts was launched in January. The initiative includes technical assistance centres to help small firms find opportunities to do business with the department.

Similar efforts are being made in the UK. Andy Start, chief executive of Defence Equipment & Support, the procurement agency of the Ministry of Defence, said the government has made it easier for small and medium sized firms to bid for public sector contracts by changing processes, including ensuring payment within 30 days and abolishing pre-qualification questions for low value contracts.

It is also bringing industry, including SMEs, “much earlier into the acquisition process and at a much higher level of classification so . . . [that] we can work together to come up with more innovative solutions that can be deployed faster,” he added.

For the firms that have benefited from the conflict in Ukraine the big question is whether their success is sustainable.

“Some of the smaller US technology companies have been very active in terms of pushing their way into Ukraine,” said Byron Callan, managing director of research group Capital Alpha Partners. But the big question is, “does that give them a leg up into the broader defence market?”

Industry experts point out that sudden increases in demand for niche technologies have happened in previous conflicts, often with mixed results for the companies involved.

According to Pieter Wezeman, senior researcher at the Stockholm International Peace Research Institute, in the aftermath of the wars in Iraq and Afghanistan, it became clear that the US needed protective trucks. At the start, different companies stepped into the breach to supply these so-called mine-resistant ambush-protected vehicles, but eventually the larger US companies took over.

The same phenomenon could happen this time as larger corporates look to gain market share from their smaller rivals or snap up key technologies.

Milrem in February announced that United Arab Emirates state-owned conglomerate EDGE Group had agreed to purchase a majority share in the company. Väärsi said the transaction means the company will be able to keep pace with the developments in the robotics market. “We need to be able to grow to keep our position,” he said, while stressing that Milrem’s development footprint will remain in Europe.

Some of the larger contractors are also looking at partnerships. Germany’s Rheinmetall announced last year it was teaming up with AI start-up Helsing(opens a new window) to jointly develop software-based systems, including the retrofitting of existing platforms.

The drone industry in particular is ripe for consolidation, said Rusi’s Taylor. Governments everywhere are already looking to develop counter-drone measures which, he predicts, will mean that quite quickly unmanned aerial systems will become more expensive “and then less and less viable for smaller companies”. “We are at the start of the drone wars.”