Defence Technology: Shield of Innovation

This piece is part of a series that dives deeper into the most prevalent themes of this year’s iteration of our flagship research piece, Charting Disruption. This feature focuses on defence technology, as part of a larger section on Paradigm-Shifting Technologies, exploring a variety of innovations in this space. For additional insights from the project, please click here.

Rising geopolitical tensions, accelerating deglobalisation, and the increasing integration of next-generation technologies into defence and national security are driving a significant rise in military and defence spending. By 2030, global defence expenditures are expected to surge roughly 40% from 2023 levels, surpassing US$3.4 trillion, with a growing portion allocated to artificial intelligence (AI), cybersecurity, and other advanced defence technologies.1

AI-enabled systems are at the forefront of this transformation. The global drone market, for example, is expected to become a US$33 billion industry by 2030, transforming the economics of war.2 Beyond drones, AI-powered platforms in unmanned ground vehicles (UGVs) and robotic combat vehicles (RCVs) are gaining momentum. Additionally, investments in foundational data platforms and IT infrastructure are accelerating to support these advancements.

Key Takeaways

  • Global military spending has risen consistently over the last two decades with further growth anticipated, driven by rising geopolitical tensions, deglobalisation, and increasing investments in advanced technologies like AI and cybersecurity.
  • Technological innovations, including AI, robotics, and drone technology are reshaping the nature of warfare, enabling smaller, less-resourced militaries to effectively challenge larger forces.
  • Defence software and IT infrastructure investments are expected to grow significantly as militaries increasingly rely on data analytics and AI-driven solutions, creating substantial opportunities for defence technology providers.

Intensifying Defence Investments and Commitments Are a Global Phenomenon

Global military spending has steadily increased over the last two decades, with further growth expected. Fuelled by the ongoing wars in Ukraine and the Middle East, world military expenditure hit an all-time high of US$2.4 trillion in 2023, and it is expected to approach US$2.6 trillion for fiscal year (FY) 2024.3,4 By decade end, defence spending in the U.S. alone will likely top US$1 trillion, according to the Congressional Budget Office.5

These trends extend beyond the U.S. and are evident worldwide. As of October 2024, the Council on Foreign Relations listed over 30 ongoing conflicts worldwide.6 As a result, major global economies and conflict-prone regions continue to bolster their defence spending. For example, in 2024, 72% of the North Atlantic Treaty Organization (NATO) allies are on track to meet or exceed their target investment of at least 2% of gross domestic product (GDP) on defence, up from only 11% in 2014.7 Estimated spending among this cohort for 2024 is expected to surpass US$400 billion.8 Globally, military burden–a measure of the relative economic cost of the military for the country–also rose to an average of 2.3% in 2023, up from 2.2% in 2022.9

Spending Growth May Help Digital Solutions, Cybersecurity, and Aerospace and Defence Contractors

In the past, military spending primarily revolved around acquiring conventional hardware and ensuring uninterrupted ammunition supplies. Today, this remains true, as defence contractors continue to report accelerating sales growth and raise guidance, driven by traditional munitions refreshes and increasing military spending. However, budgets now reflect the shift towards digitisation, with increases in defence spending showing support for technology-based solutions. Innovations in technology are reshaping modern warfare by introducing new capabilities and altering traditional strategies. As a result, AI, robotics, and cybersecurity increasingly play pivotal roles in revolutionising the nature of conflict.​

Visualising these trends, the U.S. defence budget for cyber activities for fiscal year 2025 increased 15% from fiscal year 2023.10 Similarly, the U.S. Pentagon’s budgetary request for AI funds grew 105% from 2022 to 2024.11 On a global scale, spending on AI military solutions is projected to grow at an 11% compound annual growth rate (CAGR), rising from US$8.8 billion in 2023 to US$22.6 billion by 2032.12

Defence Tech Innovation Provides a Target Market for Software and Drone Companies

Government spending on technological solutions necessitates investments in modern, nimble, foundational software infrastructure, benefiting a wide range of platforms and specialised defence IT providers. Moreso, despite recent surges in defence spending, software still only accounts for less than 1% of U.S. Department of Defence spending.13 As defence increasingly relies on AI and data analytics, the military will likely need to boost its software investments meaningfully, potentially positioning defence software companies with a significant runway for growth in the years ahead.

For example, Palantir, a company that helps organisations and governments analyse complex data, has experienced strong revenue growth in recent years, driven by major government contracts focused on advancing U.S. defence capabilities with AI. In Q3 2024, the company’s U.S. government revenues grew 40% YoY to US$329 million. Given this surge, FY 2024 revenue guidance was raised to US$2.81 billion, up from US$1.1 billion in 2020.14

Unmanned aerial vehicles (UAVs) and drones are also becoming increasingly vital on the battlefield, with global military drone spending forecasted to grow at a 13% CAGR to over US$34 billion by 2030.15 Advances in autonomy and affordability have significantly expanded UAVs’ applications, allowing them to rival costlier defence systems like tanks.

This shift potentially changes the economics of war, enabling less financially resourced armies to effectively challenge larger, wealthier militaries. Today, drones costing as little as US$500 can neutralise artillery or tanks worth millions of dollars, which can also reduce physical human presence and casualties on the battlefield.16 Long-range drone systems have also proven economically advantageous. While unit costs range from thousands to hundreds of thousands of dollars, they demonstrate strong cost-efficiency compared to the conventional air defence systems required to counter them.

Conclusion: Defence Technology Is Shaping the Future of Warfare

The global defence landscape is undergoing a profound transformation, driven by heightened geopolitical tensions, rising military budgets, and the rapid integration of advanced technologies. Traditional defence systems continue to play a pivotal role, but the growing emphasis on AI, cybersecurity, and autonomous technologies signals a shift toward more agile and cost-effective solutions. These developments are reshaping the economics of warfare, enabling smaller nations to compete with major powers while creating significant opportunities for innovation and growth across the defence industry. With global defence spending projected to surpass US$3.4 trillion by 2030, the sector is set to experience sustained expansion, redefining the future of national and global security.