Why The Defense Sector Is Globalizing So Quickly

In a world where economic nationalism is ascendant, the defense sector is a defiant outlier. Its globalization accelerated in 2024, from the deepening of the Australia-UK-U.S. alliance and UK-Italy-Japan trilateral fighter jet initiative to South Korea’s burgeoning defense production in Europe.

To be sure, the U.S. remains the world’s preeminent military power: The country spent $916 billion in 2023 on defense, accounting for 37% of global expenditure and more than the next nine highest-spending countries combined, according to the Stockholm International Peace Research Institute (SIPRI).

• The U.S. defense budget is growing more slowly than those of its allies and partners
• New supply chains are forming in Europe and Asia

Yet starting from a much lower baseline, the military budgets of U.S. allies and partners are growing faster than Washington’s as they warily eye the worst threat environment since the apex of the Cold War. As unprecedented demand strains the U.S. defense industrial base, which is still recovering from pandemic-induced shocks, new supply chains are developing elsewhere.

Supply chain resilience has risen in importance since the COVID-19 pandemic, Melius Research Vice President Scott Mikus says. “When COVID hit, those factories shut down, and countries realized if you don’t have some sort of alternative supply in another geographic location, you are at the whim of whatever the government decides.”

At the same time, “if you want a country to order more of your products, having same sort of manufacturing footprint there is a good idea,” he adds, using Lockheed Martin as an example. Aviation Week reported in September that Lockheed might assemble and maintain C-130Js at Tata Advanced Systems in India if the defense prime wins an Indian Air Force order for up to 80 medium transport aircraft. An expanded partnership with Lockheed would move Tata into the defense maintenance, repair and overhaul market for the first time.

In the first nine months of 2024, non-U.S. NATO military spending rose 18%, while Asia’s defense expenditure increased 10%, compared with 7% in the U.S., investment bank TD Cowen said in an Oct. 7 report. The spending mix is shifting toward weapons, which surged 35% for non-U.S. NATO members. In contrast, such spending by the U.S. has risen only an estimated 9%.

Among the top beneficiaries of this trend are the largest defense contractors. By TD Cowen’s estimate, foreign military sales represent about 21-26% of revenue for Lockheed Martin, Boeing Defense, Space & Security and RTX’s Raytheon Missiles & Defense.

In Europe, the Baltic states, alarmed by Russia’s invasion of Ukraine, are increasing defense spending and cooperation. Estonia, Latvia and Lithuania pledged in December 2022 to raise defense spending to 3% from 2% of GDP. In January 2024, they agreed to set up a common Baltic defense zone on their borders with Russia and Belarus.

There is “some uncertainty about U.S. support, plus the fact that our adversaries are now cooperating,” says Cynthia Cook, senior fellow and director of the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies. North Korean troops are now fighting alongside Russia against Ukraine, illustrating the “willingness of North Korea to engage in expeditionary warfare,” she notes. “They may take lessons away from this conflict about modern warfare” that improves their capabilities.

During the Zero Gravity Summit in October in Salt Lake City, Palantir Senior Counselor Greg Little painted a bleak picture of rising geopolitical tensions. “It’s not hard to make the argument, in my mind, that in a lot of ways, World War III has already started,” he said. Unlike during World War II, the U.S. now lacks a world-leading defense industrial base, putting it at a competitive disadvantage vis-a-vis China, Little added.

Concerns about China’s military buildup, widely judged to be the largest of any country since World War II, are driving greater defense spending across the Asia-Pacific region. In July, the U.S.-Japan Security Consultative Committee released a statement that highlighted Beijing’s “intensifying attempts to unilaterally change the status quo by force or coercion in the East China Sea,” where Japan administers the Senkaku Islands, which are also claimed by China. The statement further expressed concern about China’s “threatening and provocative activities in the South China Sea” and nontransparent, “rapid expansion of its nuclear weapons arsenal.”

Newly published data by SIPRI shows that revenue among Japan’s five largest defense manufacturers rose 35% to $10 billion in 2023. “A policy of military buildup in Japan since 2022 drove a flurry of domestic orders,” SIPRI said in a Dec. 2 news release, adding that the value of some companies’ new orders jumped more than 300%.

Japan announced a $59 billion defense budget for 2025, its largest yet, in September. In its budget request, Tokyo emphasized that the international community “has entered a new era of crisis.”

Italy, Japan and the UK said in October that they are expediting their joint development of an advanced fighter jet under the Global Combat Air Program, with the goal of deploying it by 2035. Leading the program are Italy’s Leonardo, Japan’s Mitsubishi Heavy Industries and the UK’s BAE Systems.

Leonardo DRS CEO William Lynn said on a third-quarter earnings call that the company’s international sales have doubled in the past 3-4 years to 10% of overall revenue from 5%. “Putin crossing borders in Europe, Iran in the Middle East and then the threats that China is posing by its increasingly aggressive behavior—all that’s driving our allies to higher defense budgets,” he said.

Among U.S. allies, South Korea has emerged as the most significant player in new defense supply chain. It aims to become the world’s No. 4 defense exporter by 2027. Wooyeal Paik of Yonsei University notes that Seoul’s defense exports have surged in value to a projected $20 billion in 2024 from $2-3 billion in the late 2010s. With major sales to Australia, Poland, Romania and Saudi Arabia this year, “the South Korean defense industry is indeed truly going global,” Paik states in an April report published by the Italian Institute for International Political Studies.

Looking ahead, some industry executives see a bigger role for autonomous systems in new supply chains and a revival in the U.S. defense industrial base. “Mass matters again—we’re learning that from [Russia’s full-scale invasion of] Ukraine and wargames focused on China,” says Paul Ben-field, head of strategy at autonomous vehicle-maker Forterra. “We’ve been oriented toward expensive platforms. We can’t afford that moving forward, and neither can our allies and partners with smaller budgets.”

Cost-efficient advanced manufacturing and robotic processes can help alleviate the strain on the U.S. defense industrial base while boosting domestic manufacturing, he says. At the same time, given the challenges of transporting defense systems across theaters, production capacity in the Indo-Pacific region makes sense.

Taiwan’s bid to become an Asia-Pacific drone production hub is a key example of this trend. It hopes to leverage its advanced manufacturing capabilities and capitalize on growing antipathy toward China, the world’s top producer of uncrewed aerial vehicles (UAV). Taipei aims to reach NT$30 billion ($920 million) in drone production value by 2028 with a monthly manufacturing output of 10,000 UAVs.

Taiwan established a counterpart to the Pentagon’s Defense Innovation Unit in February. This move “opened up the possibility of coproduction,” Tzuli Wu, an associate research fellow at Taiwan’s Institute for National Defense and Security Research, said during an Atlantic Council event in October.

Phoenix-based autonomous systems developer ZenaDrone intends to manufacture up to 90% of its drone components, including batteries, sensors and circuit boards, in Taiwan, Taiwanese industry newspaper DigiTimes reported in November.

U.S.-Taiwan Business Council President Rupert Hammond-Chambers says that “Taiwan is certainly focused on drone development, and they are making some headway” with such companies as Thunder Tiger in developing platforms for domestic and foreign markets.

The possible entry of Taiwan’s system integrators into the research, development and production of defense articles is important, Hammond-Chambers says. “They can bring real expertise and entrepreneurialism to the sector while also producing end-items at the most efficient time and cost,” he notes.

As for the prospects of joint production with the U.S. in Taiwan, Hammond-Chambers notes that “domestic voices” might argue that U.S. technology should be made in America as part of the incoming Trump administration’s industrial policy. “We’ll have to wait and see which voices win out,” he says.