The defence sector is undergoing a period of transformation. Surging defence budgets and widespread technological innovation are reshaping the industry, although some producers are benefiting more than others. Budgets are growing along are the threats necessitate them, and Governments are demanding more, for less, faster. Given the sector’s reliance on government customers, the ability of producers to leverage emerging technologies to cut timelines and costs will be vital for their future success, and a series of innovations in procurement are demonstrating this.
Let’s revisit the current sector conditions. 2025 was a year of disruption, particularly in defence and security. Increases in instability and conflict have continued to drive Government investment around the globe, with defence budgets continuing to grow rapidly, building on record growth of 7.4% in 2024, according to The Military Balance, 2025 (IISS).
These conditions look set to continue. The opening of 2026 has shown no return to international stability, with war looming in Iran once again, and no sign of any real let-up in Ukraine, Gaza or the South China Sea. This is particularly the case for governments in the Gulf, which face multiple crises in their neighbourhood, including potential state-level conflicts. This means considering a broader range of threats and planning scenarios. Further, as the region looks to the future, Governments working towards economic and security sustainability beyond oil will be mindful of the need to achieve their security objectives in a way that keeps costs down and develops their domestic industries where possible.
In these conditions, the defence sector continues to grow rapidly, with one estimate from Global Growth Insights seeing 4.9% growth in 2025. However, this has not been shared equally. While European firms such as Leonardo, Thales and BAE Systems have seen dramatic surges in their share prices, China’s defence industry shrank by 10%. There are a range of factors at play here, including the particularly significant growth in European defence budgets which arguably redressed a failure to invest in previous years. However, Chinese industry’s failure to capitalise in these positive market conditions also suggests structural issues. Commentators suggest this is due to political issues, most notably purges of senior defence figures as a result of seemingly rampant corruption in the sector. On the other hand, western producers have been able to leverage budget increases to focus on innovation aiming to cut costs, shorten timelines and correct historic issues in defence procurement.
This focus on innovation promises not only to improve procurement outcomes for current projects, but also to revolutionise the underlying systems and processes themselves.
Several areas offer particular promise in 2026:
Digital engineering
While digital engineering (DE) has been around for many years, it underpins the coming wave of innovation in procurement. At its core, DE involves digitising the entire procurement process, ensuring there is a single version of the truth and giving all team members real-time access to it. In doing so it can eliminate missed opportunities, limit siloing and cut both costs and timelines. Beyond development, DE can support deployment itself, with its access to data facilitating equipment monitoring and maintenance. In the UK, the Ministry of Defence’s equipment branch DE&S is working to make DE central to their programmes. Chief among its use cases is testing, primarily through digital twins.
Digital twins & AI-driven simulations
Digital twins is an approach which leverages DE specifically in testing scenarios. Testing and refinement are a major expense in procurement, particularly for physical equipment. Digital twins tackles this issue by creating computerised replicas of prototypes and placing them in simulated scenarios. The cost benefits are obvious, as much of the early testing of equipment and components can be done digitally. These programmes can also run theoretically 24/7. Physical testing remains vital of course but can be limited to scenarios where it is truly necessary.
However, this approach is only as good as the models underpinning it. This is where artificial intelligence comes in. The iterative approach of AI models allows for simulations to more accurately replicate test conditions for a range of mission profiles. Over time this will not only improve testing outcomes and therefore output quality but also increase the trust which defence leaders can put in this technology.
High performance computing (HPC)
To realise these benefits, a huge amount of computational power is required. Supercomputers can help, but they remain scarce and expensive. However, next generation machines operate in clusters, reducing the need for supercomputers by combining multiple smaller systems to achieve exponentially greater computational power. HPC platforms like this lay the foundations for the approaches detailed above. Governments are already integrating HPCs into defence systems, including the USA which recently invested in an HPC cloud giving troops on the ground direct access.
What does this mean for defence customers?
Where producers adopt these technologies early, they will be able to facilitate delivery that is cheaper and faster, while allowing for iterative improvement across programme lifecycles, and even supporting successor programmes through constant data collection and analysis. Off the battlefield, these developments offer greater transparency for customers, who can own more of the process, allowing their domestic capabilities to develop alongside. Less flexible approaches see customers receive only equipment or capability, but not knowledge and real partnership.
In summary, 2026 promises to be an exciting year in defence procurement. Where the industry adopts emerging technology early, and vitally, where customers are open to innovative, transparent and flexible ways of working, there are huge gains to be realised. If the benefits of integrating digital engineering, AI and HPC are realised, we may expect to see a more agile, efficient and effective process emerge, where both governments and producers can benefit.
