Global defense contractors that had relied on traditional large weapons systems are transforming into venture capital (VC) investors, pouring a record amount of money into military tech startups. As recent conflicts have sharply increased demand for low-cost, high-efficiency new weapons, capital flows in the global defense industry market are rapidly shifting toward advanced technologies such as drones and unmanned autonomous systems.
According to the Financial Times (FT) on the 26th, major defense contractors closely tied to Western governments, including Lockheed Martin and BAE Systems, have put $4.1 billion (about 5.7 trillion won) into startup venture capital investments this year. It is the highest level since then. Analysts say weapons manufacturers are going beyond simply producing arms and are assuming the role of investment firms to secure next-generation defense technologies.
Andreas Reinecke, head of sales for defense digital and cyber at Airbus, cited the war in Ukraine and other conflicts recently and emphasized that "the pace of technological change in modern warfare is fast." Reinecke added, "To avoid falling behind amid rapid change, it is essential to have workable partner systems with small, agile corporations."
The fervor for investing in defense startups is spreading to the market for large-scale mergers and acquisitions (M&A). According to Dealogic, global defense-related M&A and fundraising this year have already surpassed $40 billion (about 55 trillion won). If this trend continues, it is expected to exceed the record high of $59 billion (about 81 trillion won) set in 2019. French defense corporation Thales acquired Exail Technologies, a marine robotics and navigation corporation, for 3.9 billion euros (about 5.8 trillion won). U.S. firm Lockheed Martin also bulked up by buying maritime technology corporation Ultra Maritime for $3.45 billion (about 4.7 trillion won).
Major defense contractors are also pouring substantial funds into securing promising early-stage technologies. U.K.-based BAE Systems committed 50 million euros (about 75 billion won) to two defense startup funds. German drone maker Quantum Systems raised $1.2 billion from backers including Airbus, giving it a valuation of $8 billion (about 11 trillion won). U.K. maritime defense corporation Kraken Technology also joined the ranks of unicorns after receiving a $175 million (about 240 billion won) investment from investors including Germany's Rheinmetall.
The industry's restructuring trend was also evident at the Farnborough International Airshow near London. Of the 1,636 exhibitors at the airshow, half were defense companies, the highest proportion on record. According to analysis by Vertical Research Partners, internal research and development (R&D) expenditure by 13 major weapons manufacturers worldwide, excluding Airbus and Boeing, is projected to reach $11.6 billion (about 16 trillion won) by 2026, up more than 25% from 2021. FT noted, "As the paradigm shifts, a survival race has begun in the industry to avoid losing the initiative."