The wars in Ukraine and Iran have demonstrated one thing: conventional numerical and material superiority alone is no longer enough to determine the outcome of a conflict. Drones costing just a few thousand dollars, which can be replaced within a matter of weeks, have neutralised assets sometimes worth hundreds of times their price. This economic asymmetry is bringing about a lasting shift in the defence sector’s investment priorities.
The military drone industry illustrates this shift. Ukraine, which is expected to produce several million units this year, is establishing itself as a leading industrial player in this field, alongside Turkey. For established Western companies, the added value lies less in the manufacture of the drones themselves than in the reconnaissance sensors, guidance systems and on-board artificial intelligence (AI) technologies that make them truly operational.
Conversely, the proliferation of drones has created an urgent need for defence systems capable of countering them at a lower cost. Recent attacks on civilian infrastructure – whether in European capitals or at airports in the Gulf – have highlighted the economic asymmetry of the problem: a conventional interceptor missile costs several million dollars, whilst the threat it neutralises costs only a few thousand. The development of low-cost interception solutions – whether automated machine guns for close-range targets or small fragmentation missiles for medium ranges – is now a priority area of development for the industry.
Digital and space: new drivers of growth
Beyond drones, it is the entire defence electronics and digital ecosystem that is undergoing rapid growth. Electronic warfare, cybersecurity and spectrum protection are becoming central to detection, communication and navigation in hostile environments. Several major European defence groups therefore expect the proportion of their turnover linked to digital technologies to increase significantly over the coming years. AI, for its part, is beginning to transform mission planning and resource allocation, although human oversight is likely to remain the norm for the most sensitive decisions.
The space sector represents another source of long-term growth. The IPOs of several major players in the sector have reignited investor interest in a market whose potential size is estimated at thousands of billions of dollars by 2035. The main obstacle remains the cost of launching into orbit, although this has fallen by a factor of more than 30 over the past 40 years, paving the way for the wider commercialisation of space, from telecommunications to data infrastructure. In Europe, a project to create a constellation of secure satellites aims to reduce the continent’s dependence on non-European suppliers, although it is not expected to become operational until the end of the decade.
Military robotics: the next game-changer?
Finally, military robotics, which is still in its infancy, could represent the next major breakthrough. In Western societies, where soldiers’ lives are seen as a scarce and precious resource, the use of autonomous systems – which are faster and more easily replaceable – is on the rise. Several Asian economies, which are particularly advanced in civilian robotics, appear well positioned to adapt these technologies for military purposes, with potentially deflationary implications for costs across the sector as a whole.
For investors, this shift encourages them to look beyond the big, established names in traditional defence. The growth sectors of the coming decade – defence electronics, sensors, cyber security, anti-drone systems and space platforms – are reshaping the landscape of opportunities in a sector undergoing a major technological transformation.
