UK bets big on defence SMEs, but can it change the country’s fortunes?

Small and medium enterprises (SME) in the UK are being encouraged to explore potential opportunities in the country’s defence sector, following the publication of the government’s plan to support emerging industry players.

Publishing its ‘Backing your business’ policy paper on 31 July, the UK government has laid out what it considers a viable strategy that includes a long-term plan to support SME business.

The SME sector is being tapped to revitalise a UK economy teetering on the edge of recession, amid a rapidly worsening business environment caused by the twin shocks of a rise in employer national insurance payments and a depressed job market.

In a bid to prompt UK SMEs to engage with defence opportunities offered by the Ministry of Defence, the UK government has launched a new SME Procurement Education programme and formed a Defence SME Support Centre to simplify access.

The SME Defence Centre will introduce a single point of access for smaller businesses with clear link to support services, the UK government stated.

As part of a shift to encourage investment in emergent technologies, the UK Ministry of Defence (MoD) is now tasked with spending 10% of its budget on innovation.

It is unclear what the definition for innovative technologies allows for, although it is likely a call to promote the greater integration of SMEs in providing for military capability, an area where the MoD has historically been poor.

Recent examples of this pivot by UK SMEs can be seen in with MGI Engineering which is transitioning from its Formula 1 and motorsport origins to producing loitering munitions, otherwise known as One-Way Effectors or suicide drones.

Fellow UK SME Perfect Bore Manufacturing has also moved into producing UK defence systems to produce 120mm mortar tubes, leveraging skillsets developed supplying other sectors.

Is the UK walking its defence SME talk?

According to UK government data, while direct SME spending rose to £3.52bn in 2023-24 across the country’s varied sectors, the overall share of procurement going to SMEs has declined over the past five years.

Additional support includes expanding UK Export Finance to £20bn (£26.3bn) to enable SMEs to deal in overseas markets, creating 70,000 Start-Ups Loans, and a £3bn boost to the British Business Bank to help lenders offer more SME loans.

It should be noted that such schemes are open to all SMEs regardless of sectors, although the UK government is pinning a great deal of hope on the defence sector in particular.

“There are particular opportunity areas for SMEs, such as the defence market,” the UK government stated on 31 July.

Preference for overseas kit contrary to public claims

While there should be opportunity for UK SMEs in defence with the country’s defence budget increasing, this will primarily benefit larger national, European, and US firms.

However, the UK procures a significant proportion of its equipment from mainland Europe and the US, recently opting to acquire US-origin F-35A fighters instead of a top up buy of Eurofighter Typhoons, which would have offered far higher economic returns.

In addition, UK parliamentary statements have confirmed that 40% of the value of each of the Challenger 3 main battle tank and Boxer mechanised infantry vehicle programmes is being  sourced from non-UK entities.

While the UK retains, more or less, the ability (if not always the political will) to design, develop, and manufacture military platforms for the air and naval domains, this is not the case for land. All of its major land programmes, from the Challenger 3, Boxer, Ajax armoured vehicles, to the future RCH 155 artillery system, are being developed or led through European or US expertise.

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