In today’s world, global conflicts are fought part in part using technologically advanced methods. Therefore, a surge in the defense industry can not be ignored. Technology investments such as AI, space systems, and advanced drones will be in high demand in the coming years.
According to an analysis by Financial Times, the top 15 defense contractors are expected to generate free cash flow of approximately $50 billion in 2026. This figure is nearly double their combined cash flow at the conclusion of 2021.
Michael Sion, partner at Bain & Co consultants said, “Many companies are looking to expand what they offer to get ready for advanced technologies.” He explained that larger companies are expected to pursue fast-growing parts of defense, such as space and defense electronics.
In previous years, the war in Ukraine has accelerated the development of new technologies. It is expected to drive dealmaking in the next few years as companies look to expand in fast-growing areas.
In addition, the new U.S. administration has recently spoken about not being dependant on China for weapons. With a stance of hiring highly skilled immigrants, the nation is set to create high-tech.
Notably, a recent report by Bain indicates that the value of venture capital transactions in the defense sector has increased by 18 times over the past decade. An increasing convergence of commercial and defense technologies has helped to promote growth.
Here’s why the defense industry is expected to grow
In 2023, BAE System announced the acquisition of Ball Aerospace, a US-based supplier of mission-critical space systems, for $5.6 billion. This transaction is among the most recent corporate transactions in the industry. Aerojet Rocketdyne, a manufacturer of rocket engines, was acquired by US defense prime L3Harris in 2022.
In addition, AeroVironment, a drone manufacturer, announced in November that it would acquire BlueHalo, a company renowned for its drone swarm. This is to counter-drone technology on an all-share basis for approximately $4.1 billion. Wahid Nawabi, AeroVironment’s chief executive, stated that the company intended to become a “next-generation” prime contractor that would concentrate on “defense technology.”
In a recent Financial Times interview, Nawabi said he wanted to create a company that did all the things that the US Department of Defense is focused on and needs. That included unmanned systems, loitering munitions, space communications, electronic warfare, and cyber security.
In the same light, Robert Stallard, an analyst at Vertical Research Partners, stated that there was a high probability of activity in the defense technology space, which includes drones, AI, and lasers. However, it was improbable that the large prime contractors would consolidate at the upper end of the sector.
Also, Bain’s Sion stated that the defense industry’s modernization requirements presented an opportunity for private capital to assume a more significant role. He stated that private capital can assist in bridging the “funding gap” between the United States’ defense expenditures and its military requirements.
Meanwhile, Stallard stated that consolidation and M&A should occur in Europe. Still, joint ventures and teaming are significantly simpler approaches. This is because they enable the Europeans to combine their resources without stirring up politicians over the potential loss of sovereign capability.
Nations working towards technology independence
In this era, nations that are reliant on external sources for technology and weapons have been striving to develop them independently. This is particularly accurate in the case of large nations with a bad relationship. BRICS and the United States, as well as China and the United States, have been making concerted efforts to reduce their dependence on one another.
For status, the US has strived to reduce its dependence on China, even in terms of physical weapons. Last year, the U.S. Navy reduced the number of Chinese suppliers in its “critical technologies” supply chains by 40 percent. In addition, the new administration has come up with a notion. That they could employ highly skilled immigrants instead of kicking all of them out.
Musk and Ramaswamy, who have been appointed by Trump to lead his Department of Government Efficiency (D.0.G.E), defended the use of H-1B visas by companies. They contended that technology companies, including those owned by Musk, rely on foreign workers to operate.
Chinese spy balloon. Military exercises in the South China Sea. Provocative maneuvers in the Taiwan Strait. China is testing us. We cannot depend on an adversary for our modern way of life. Declare total economic independence from China: the CCP is vulnerable & the time to act is… pic.twitter.com/fnBnqpEi0j
— Vivek Ramaswamy (@VivekGRamaswamy) December 7, 2023
Musk wrote on X, “If you want your TEAM to win the championship, you need to recruit top talent wherever they may be. That enables the whole TEAM to win.” Musk has also been operating SpaceX, which manufactures and launches advanced rockets and spacecraft.
In addition, China is also looking to reduce the dominance of the American company Nvidia. This is because 90% of the market share is held by GPUs manufactured by Nvidia. Communication technology is the enduring throne that Jensen Huang is on the brink of securing in the AI industry. On December 9, China launched an antitrust investigation into the US chipmaker Nvidia.
Also, BRICS nations are preparing for military dominance. Russia has established a weapons program in China to develop and produce long-range attack drones for use in the conflict against Ukraine.
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