Scottish small businesses in focus as UK ramps up defence industry

This meant that what he had to say to Scottish businesses, defence industry executives and civil servants about Russia in a hotel conference room in Glasgow this week really hit home.

Having recently invested heavily in its northern fleet, Moscow was driving naval activity at “vastly increased tempo and capability”. This was translating into “more numerous and more capable incursions into UK territorial waters” at a level unthinkable only five years ago.

“We are in a completely different paradigm,” said Muddiman, naval regional commander for Scotland & Northern Ireland, working out of the Royal Navy’s Rosyth base. He was speaking at an inaugural “Scottish Defence Procurement & Supply Chain Summit”, which included the Ministry of Defence (MoD), UK Defence Innovation (UKDI) and ADS, a trade association for the UK’s aerospace, defence and space industries, as partners.

Muddiman’s comments were the latest in a drumbeat of warnings about the threats posed to the UK as increasingly worrying geopolitics has sparked the biggest increase in defence spending since the Cold War.

Now, an effort is underway to galvanise private sector participation in building the supply chains needed for new technological capabilities – and to reach what policymakers call “warfighting readiness”.

Militaries have always depended on technology. But this time it’s different, as Scottish secretary Douglas Alexander told the conference: “Russia’s illegal invasion of Ukraine has reinforced the importance of industrial and technological readiness, resilient supply chains and the ability of democratic nations to innovate and to adapt at pace.”

Moreover, Ukraine’s rapid development of battlefield drones has been a wake-up call to Europe, showing that new technologies need to be developed and ramped up quickly.

Yet government and big defence contractors increasingly realise this can’t be done without the thousands of small- and medium-sized enterprises (SMEs) across the UK that have niche expertise either in such technologies, or those for civilian use that might also have military applications – so-called “dual-use”.

“We want to increase participation from SMEs … because it’s often those smaller firms driving the most dynamic innovation in AI, cyber, advanced manufacturing and digital systems,” Alexander explained.

Currently, SMEs account for only four per cent of UK defence expenditure. Scotland is set to be front and centre of an effort to shift this given its significance to UK defence, with industry turnover in Scotland growing by 74 per cent from 2020 to 2024 to £3.3 billion, according to ADS.

The sector in Scotland employs 16,250, dwarfing the salmon industry’s 2,500. This is mostly spread across frigate-building in Glasgow by BAE Systems and by Babcock at Rosyth; submarine periscope manufacture at a Thales plant in Glasgow; and radar system production in Edinburgh by Leonardo, which relies on Scottish-based companies for about a quarter of its supply chain.

Scotland is also home to SMEs with dual-use potential. One is Edinburgh-based Flowcopter, which has developed an unmanned cargo drone the size of a Land Rover. Zelim, also based in the Scottish capital, has developed an AI-enabled “man overboard” detection system that is has caught the attention of navies for use in detecting unidentified objects approaching vessels.

Yet there are hurdles to overcome if Scottish SMEs are to match policymakers’ ambitions.

Cumbersome procurement is a common feature of dealing with big defence contractors. This is particularly difficult for SMEs given the urgency of generating cashflow as Emma Baker, senior defence policy advisor at ADS, explained. “There can be a degree of reticence among these companies about getting involved in defence if they perceive it to be slower or less commercially rewarding than the civilian market,” she said. “Part of the responsibility for the industry is to ensure that, if we want to foster this kind of innovation, the environment is as supportive as possible.”

For SMEs that are keen, it has often been hard to get the attention of large defence groups. Prestwick-based Precision Tooling received applause at the conference after an executive described hitting a brick wall.

The message does seem to be landing. Babcock last month launched a 10-point “SME Engagement Charter”, including a “Sandbox-to-Battlefield” element for early collaboration and a pledge to pay SMEs promptly. “The pace of change is driving us to be different,” said Gareth Hedicker, chief operating officer in Babcock’s marine unit.

Government is also acting. This week, 13 UK tech companies – including Flowcopter - were awarded contracts worth up to £4 million to work with the MoD to speed up procurement. January saw the launch of Defence Office for Small Business Growth, a new unit to help SMEs bid for and win more defence contracts, in turn helping deliver on a government pledge to increase defence spending with SMEs by 50 per cent by 2028.

Scotland will be the focus of efforts to rapidly develop dual-use technologies when UKDI, set up last year to coordinate innovation between the MoD and other departments, will this autumn establish a “Scottish Defence and Security Cluster” to help match private equity funders with SMEs.

A second challenge is improving collaboration between Westminster and Holyrood, which has an ambivalent approach to the defence industry.

Stewart McDonald, former SNP defence spokesman and now director of Regent Park Strategies, said: “Scotland sits at the heart of one of Europe’s most contested neighbourhoods, and given the threat landscape and the scale of critical national infrastructure we host, it is time for politicians at both Holyrood and Westminster to take a far keener and collaborative approach to

Scotland’s security and resilience.”