Defense Business Brief: Dispatch from Farnborough

LONDON—Private capital is becoming a key part of the defense industrial bases on both sides of the Atlantic, but distinct “cultural differences” in the UK may stymie progress, finance experts say. 

Asked what the UK could learn from how private capital has rallied behind defense tech in the U.S. in recent years, Fiona Walters, CEO of Serco’s UK and Europe business, cited a sense of enthusiasm to move quickly—and to persist even when things get hard. 

“There's optimism on the part of the government, there's optimism on the part of business, and there is this, kind of, leaning in to [say] ‘OK, we're going to solve this problem together,’” Walters said Tuesday during a panel discussion on the future of defense investment as part of a finance summit at the Farnborough International Airshow. “The sense of still being able to achieve anything is really profoundly different.” 

But that doesn’t mean UK investors and entrepreneurs need to emulate their American counterparts. 

“We're not going to become the U.S., and nor should we necessarily want to be. I think the issue is about how do you harness that optimism around actually being able to create and do something, to evidence it, and do it quickly,” said Walters, whose company is a major government contractor managing services and facilities across multiple sectors, including health, IT, transport, justice and defense. 

Walters’ comments come as NATO leaders are calling for expansion in Europe’s industrial base, in part over concerns that U.S. companies will be unable to produce enough weapons to restock Pentagon arsenals depleted by the Iran war to build up European militaries looking to deter Russia.

An enthusiasm gap isn’t the only hurdle facing the UK defense industry. Another panelist, Joe Cassidy, KPMG UK’s head of technology, media, and telecoms, said the UK has been working on reforms to overcome some regulatory challenges, but many companies and investors are still risk-averse, and may not understand where defense fits into the broader industrial strategy. 

“There is no shortage of capital in the UK, first of all. So let's not kind of convince ourselves that's the case. The problems that we've had with the Valley of Death, so call it Series C capital, broadly speaking—those are true in every sector. There isn't a risk appetite for that investment. We've been trying to unlock some of the—through the Mansion House reforms and the Edinburgh reforms—some of the pension fund capital to be allocated into scale up sector, and that's true for defense as well. But that's been a slow, very slow-moving beam,” Cassidy said.

“So, some of the culture is, again, around that regulatory constraint historically, our risk appetite in and around Series C, but…I think we haven't told the story, the investor story, as well as we might about the industrial strategy, how important defense is in regard to that, how resilience links to it, and what the spillover effects are for the broader economy and growth.” 

And a third panelist suggested that the UK had the enthusiasm it would take. Across multiple sectors, such as AI, cyber, and advanced manufacturing, “there's a real willingness to pivot their business models to defense,” said Stuart Foster, Barclays’ head of Coverage, UK Corporate Bank. “So if we have the universities, we have the talent, we have the people, we have the will…it just feels that there's an enthusiasm backed by capability and talent should we create the right framework and environment to unleash that.”

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A bit of Farnborough chat

Spotted! In addition to a Congressional delegation that included Sen. Jeanne Shaheen, D-N.H., Defense One spotted William Kimmitt, the Commerce Department’s undersecretary for international trade, ahead of a meeting with Boeing executives on Monday. 

State and local governments traversed the Atlantic to woo new business into their districts. There were booths for California, West Virginia, Missouri, Mississippi, Illinois, Alabama, Arkansas, Texas and Ohio, to name a few. 

• Cleveland Mayor Justin Bibb told Defense One about his aims to bring more defense companies into the city: “The biggest choke point right now, and the big reason why I'm here, is telling the Cleveland story and putting Cleveland in the conversation,” Bibb said.
• “When folks are thinking about aerospace events, more than likely Cleveland's not at the top of that list,” Bibb said. The city built the 350-acre Midline business district “to attract aerospace, defense, advanced manufacturing, health care companies” and bring in 2,500 jobs over the next 10 years. The business park doesn’t have any defense or aerospace companies committed to it yet, but the goal is for that to change next year.  

The “first in flight” state wants to grow its defense and aerospace sector. North Carolina is courting foreign direct investments, which make up nearly half of its pipeline projects, said Lee Lilley, the state’s commerce secretary. 

• It's a fact that may surprise “some people because it feels like the international environment is a little chaotic and unsettled at times,” Lilley said. “But…companies want to be located in the United States. It's still a tremendous market for them” and it’s a benefit for foreign companies to have supply chains in the U.S. and North America. 
• Mixing legacy and new defense tech: North Carolina is home to aerospace upstarts Boom Supersonic and JetZero, the latter of which recently broke ground (and secured $3 billion in financing) on a new sprawling campus on 600 acres in Greensboro, N.C.
• It’s that space appeal Lilley wants companies—even if they were hatched somewhere else—to latch on to. 
• “Our list of projects here is a mix of large legacy producers like Boeing, like Airbus, like Lockheed Martin, and then several of these startup organizations…that are doing innovative work that are really responding to the needs on the battlefield” with “dual-use capabilities. And they need to get to market fast. We pitch North Carolina as a place where you can do that.”

One non-Farnborough thing: The Marine Corps is picking up an autonomous turret from Allen Control Systems for its ground-based air defense program. I wonder if they’ll get it in rose gold.