The Defence Industrial Strategy (DIS) redefined the British industrial base as “UK-based” companies rather than “UK-owned” or “UK-headquartered”.  This will open the door to greater foreign investment in the UK defence sector. Is that a good or bad thing? Especially when UK SMEs are struggling to attract investment.

Growth in the Defence Industrial Base: Ambition rather than Commitment

The 2025 Defence Industrial Strategy (DIS), promised for late Spring 2025 was eventually published yesterday, on the eve of DSEI, with promises for growth in the defence industrial base.  At the macro level it reiterates the Government’s ambition to increase defence expenditure from 2.6% GDP in 2027, to 3% in the next Parliament, and 5% by 2035.  In terms of commitment, a modest sum of £250m has been allocated across five regional growth areas: Plymouth, South Yorkshire, Scotland, Wales, & Northern Ireland.

The financial detail to deliver this strategy is deferred and will be outlined at a later date (as yet unknown) in the upcoming Defence Investment Plan, and the Defence Reform and Efficiency Plan.  This is where the ambition will need to align with budget.

A change in British Sovereignty Definition

The DIS has shifted away from traditionally recognising British Sovereignty as “UK-owned” businesses to “UK-based” businesses. An important distinction to attract foreign-owned defence prime contractors to base themselves in the UK, providing capability, jobs, and supporting the supply chain.

This also opens the door for foreign ownership and investment into UK businesses which has been heavily publicised (and criticised) in recent years with acquisitions of Cobham, Meggitt, Ultra PMES, and AML.

Is this a bad thing if British-owned companies are failing to get investment in the UK market? I'm looking forward to discuss this with colleagues across the sector at DSEI this week. The opportunity for British businesses to attract investment on the global market, yet deliver capability within the UK, with a specific focus on export capability will certainly be welcomed.

In any event, the National & Security Investment Act (NSIA) now provides a safeguard for sovereignty issues in relation to defence and national security. Yet there will always be concerns for the longer-term sovereign strategy of the UK’s supply chain if it becomes trans-national in ownership.

Whilst this is a question around investment, UK SMEs in particular still need to innovate, win work, and deliver growth targets - the DIS has delivered somewhat in this regard with a commitment for 10% of its equipment procurement budget to be spent on “novel technology” (although not SME nor UK-owned specific) as well as ramping up focus on SMEs with a published increase in expenditure by £2.5bn by 2028 (ie over a 3 year period).

Does the additional expenditure for SMEs hit the 25% SME expenditure targets? And why stop short of a Direct Spend target?

Previous SME defence spend targets were set at 25% across both direct procurement (ie. contracted to the MOD direct) and indirect spend (ie contracted via primes and the supply chain).

Direct SME spend with the MOD hovered around 4-5% with an additional indirect spend of appox 15 % across Primes.  The MOD therefore lagged behind its own target as well as average SME expenditure across other Government departments (average 11% direct SME spend). This lack of direct MOD spend affects a SME’s ability to commit to building capability, to plan with certainty, and attract investment especially where the direct contracting with end-customer (ie MOD) vs indirect contracting is a key metric for investors. Arguably this is the key driver for building a strong SME industrial base in the UK.

So whilst the new commitment to expenditure with SMEs is hugely welcomed, it’s unclear how this relates to the current SME % expenditure commitments and whether this additional spend will be via direct or indirect expenditure.  Some maths is involved but effectively this means the MOD still does not hit the 25% SME annual expenditure target.

So why not set a direct spend commitment? Arguably this is the key driver for building a strong SME industrial base in the UK. Is it perhaps a lack of confidence in the current procurement reform which remains the single blocker to the MOD’s ambitions for SMEs despite successful initiatives with Commercial X. If the well-publicised concerns around SME procurement (especially security clearances and unfavourable commercial & IP terms) can be addressed under the current procurement reform efforts (such as the planned & mandated central digital platform) then the MOD has a chance for success to meet its ambitions.

Perhaps that could be a focus for the new Defence Office for Small Business growth, as well as the SME representation on the Defence Industrial Joint Council, and new SME Action Plan.

The views expressed in this blog are the author's, and do not represent those of Chief Disruptor or any other institution. 

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