Unmanned aerial vehicle (UAV) technology and artificial intelligence are rapidly reshaping modern warfare, but the world's largest defense contractors have found that there is still strong demand for tanks, fighter jets, and other traditional military equipment.
The latest financial reports from defense companies in the United States and Europe show that despite the surge in demand for advanced sensors, automated systems, and anti-drone technologies, traditional weapons are still driving year-on-year growth.
Rather than saying that drones and autonomous combat are replacing traditional arms manufacturers, it is more accurate to say that they are creating new businesses for many of the same companies.
From anti-drone defenses to advanced sensors integrated into tanks and fighter jets, the technologies that are transforming the battlefield are also changing, and even expanding, the markets served by traditional defense giants.
Traditional defense remains strong.
Lockheed Martin (Lockheed Martin) reported that its missile business saw a 24% year-on-year increase in revenue in the third quarter; RTX secured contracts for mature missile systems worth several billion dollars. In Europe, the German defense contractor Renk experienced a 46% surge in orders for its military vehicles business in the first nine months of this year.
However, the same financial reports also show that the boundaries between traditional weapons and emerging defense technologies are becoming increasingly blurred.
German defense electronics company Hensoldt reported that its optoelectronic business revenue increased by 52% year-on-year. The company's chief financial officer told CNBC that a large portion of this growth came from traditional military equipment, including tanks and armored vehicles.
In the meantime, the revenue from Rheinmetall's air defense operations—including its anti-drone systems—increased by 63%, despite the company lowering its annual performance forecast due to project delays.
A constantly changing battlefield
Morningstar believes that the rise of drones is changing traditional military platforms, rather than replacing them. Tanks and other weapons are increasingly being integrated into interconnected, data-driven battlefield networks.
Over the past five years, especially since Russia's full-scale invasion of Ukraine in early 2022, as governments around the world have increased their military spending, the order books of defense giants have continued to swell.
However, analysts generally believe that this round of arms expansion is structural, and even if the war between Ukraine and Iran ends, it will not reverse this trend. More importantly, after years of insufficient military investment, and in the face of increased uncertainties regarding U.S. security guarantees and concerns about Russia's next moves, Europe now must accelerate its efforts to catch up.
However, due to a series of events such as project delays and contract cancellations, the market is concerned that valuations have surpassed the industry's delivery capabilities, putting defense stocks under pressure this year.
The advancement of modern warfare and technology – Ukraine's use of drones on the front lines is a prime example – has also undermined investors' confidence in defense contractors, with markets concerned that new technologies may squeeze demand for traditional military equipment.
Beyond the front lines, NATO plans to invest over $40 billion in the next five years in building anti-drone capabilities. NATO Secretary-General Jens Stoltenberg ( Mark Rutte ) warned that drones have fundamentally changed modern warfare.
Nevertheless, Hensoldt Chief Financial Officer Christian Ladurner told CNBC on Thursday that the demand for traditional military equipment remains a key driving force for growth.
He stated that the company's rapidly growing optoelectronics business supports optical and sensing technologies, benefiting from the efforts of European governments to supplement traditional military equipment, despite the fact that newer battlefield technologies are attracting increasing attention.
He also mentioned that as the military deals with an expanding range of threats, from small drones to ballistic missiles, the demand for air defense systems is on the rise. He noted that despite the market growing by 20% annually, there is still "insufficient investment" in this area.
The tight supply of Patriot interceptors produced by Lockheed Martin has had a noticeable impact, especially in Ukraine. Previously, the United States depleted a large portion of its stock during the Iran war, and this advanced system is capable of intercepting high-speed missiles.
Concerns about the U.S. mid-term elections
Recently, due to market concerns that a Democratic victory in the U.S. midterms could lead to cuts in U.S. military spending, defense stocks have come under pressure.
Analyst Roman Schweizer stated on Thursday in the program “Morning Call” on CNBC that although this result weakens market expectations for defense spending, and the Democratic control of Congress makes it unlikely that a proposed $1.5 trillion budget will pass, which may also drag down military spending growth before 2029, there has been no substantial change in geopolitical calculations.
He said, "This is a multi-year outlook, and I believe we have already seen these changes in both the United States and Europe." He mentioned internal budget difficulties, as well as doubts about NATO's increased spending targets.
Morningstar Analyst Loredana Muharremi told CNBC that the weakness in European defense stocks on Wednesday was mainly driven by sentiment.
She said, "Some investors may now think that the United States will provide stronger support to Europe, thereby alleviating the pressure on European governments to increase spending; however, even with stronger American support, we still expect Europe to stick to its own spending plans."
"Compensating for Europe's own military capability gaps and establishing the necessary industrial capacity to deter Russia requires years of investment."
