19 March 2024

Directed Energy Dilemmas: Industrial Implications of a Military-Technological Revolution

Stuart Dee and James Black

Amidst fighting in the Red Sea, Israel-Gaza, and Ukraine, focus is intensifying on the threat presented by the proliferation of drones, missiles, and rockets and their potentially devastating use against both military and civilian targets. In a recent blog post, James Black at RAND Europe examined the potential for directed-energy weapons (DEW) such as high-powered lasers and microwave weapons to swing the balance away from the attacker and towards the defender in the ongoing struggle for control of contested battlespace. Alongside more traditional gun- and missile-based interceptors, DEWs are part of urgent investments by NATO members in a layered approach to integrated air and missile defence (IAMD). But with wide-ranging and disruptive implications for defence budgets and for industry that have only just begun to be considered, could the military impact of this possible DEW revolution be just the tip of the iceberg?

Small, cost-effective drones, including so-called loitering munitions that blur the line between a drone and a traditional missile, are changing both the military and economic calculus of conflict at an alarming pace. The bottom line is that it is becoming significantly cheaper to attack than it is to defend against such threats. Estimates suggest that Iranian-supplied Shahed drones, currently being utilised by the Houthis to harass shipping in the Red Sea and by the Russians to target Ukrainian cities, cost between $2,000–$20,000, depending on size.

The Ukrainian Armed Forces have been deploying a similarly effective logic for over two years now in their defence against Russian invasion; crudely homemade projectiles attached to a commercially available drone can cost as little as $400 to assemble, yet are devastatingly effective at destroying expensive enemy equipment. A Ukrainian drone team assembled at a cost of just $700,000 disabled Russian equipment worth $80 million, the team's commander said in an AP interview. This is a lopsided exchange by any standards.

In the Red Sea, we are beginning to see a similar asymmetry, as U.S. and British officials raise concerns about the financial cost of keeping similarly hastily prepared Houthi drones from disrupting international shipping—currently up to $2 million per missile shot at incoming Houthi targets. Although we do not have clear data on all the defensive weapons used in each engagement, the U.S. Navy and the United Kingdom's Royal Navy jointly confirmed that on a single day in December 2023 they shot down 15 drones. By even conservative estimates, this is going to get expensive, and quickly.

Consider the promised benefits of DEW, both from an operational and cost perspective, and it becomes clear why militaries around the world are actively investing in R&D to mature this capability alongside other forms of air and missile defence. The UK Ministry of Defence went as far as to point out the precise cost benefits when announcing its recent successful test-fire of its new DragonFire laser weapon system, specifying an approximate cost per shot of £10 ($12–13) and claiming that “Firing it for 10 seconds is the cost equivalent of using a regular heater for just an hour.” That defence ministries are now publicly outlining the precise economic benefits of a weapons system on a cost-per-shot basis underscores just how significant the issue of cost asymmetry and its political and public perception are becoming. But what are the implications for the business models of the DEW industrial players competing in this technology race? Who stands to benefit—or lose out?

For its part, the United Kingdom's DragonFire DEW capability is the result of an industry partnership between MBDA, Leonardo, and QinetiQ. But they are far from the only large players exploring this burgeoning market. And at face value, it is clear to see why there would be such interest. The U.S. Department of Defense has already requested $1 billion in funding (PDF) for domestic directed-energy programmes for 2024. Given the economic and operational imperative being driven in the Middle East and Ukraine, as well as the threat of China, it's unlikely that the pace of funding will slow. The United Kingdom's joint industry and government investment of £100 million in DragonFire is smaller, but a proportionately substantial share of the United Kingdom's widely stretched defence R&D budget. Israel, with U.S. support, is investing even more, having directed $1.2 billion to develop an Iron Beam laser-based air defence system to complement its existing missile-based Iron Dome and defend against Hamas and Hezbollah rocket or drone attacks.

So, there is clearly a government-funded appetite for R&D and experimentation, from which industry in turn will benefit. But, in the longer term, what could this pivot to DEWs mean for business models in the defence sector? On that point, there is less consensus.

A Cycle of Mutual Need Requires Planning

Companies in the business of making complex weapons (military-speak for missiles) don't just chase the one-off paydays that come from selling new weapons. Margins on these initial contracts are often fairly low, especially compared to other more profitable sectors such as tech. As such, companies—and the private finance that backs them—tend to bet their long-term prospects on their ability to secure not only a steady flow of follow-up procurements by domestic or export customers, but also recurring payments for through-life services such as maintenance, repair, and upgrade work. Though, of course, a missile can only be used one time if fired, a great deal of support goes into keeping the hardware and software of munitions stockpiles up-to-date and ready for battlefield use.

Government and industry therefore remain locked in a cycle of mutual need. Ongoing payments from public sector customers keep production lines and workers busy, and serve as healthy indicators to investors and shareholders of firms' continuing profitability. In turn, this unlocks the private sector's willingness to invest in new facilities, recruitment, training, and product lines. Governments need this to happen so that the military's needs can be met, with industry investing both in new technologies that give a battlefield advantage and in productivity measures that drive down unit costs and improve value for taxpayer money. In turn, industry needs enough revenue from governments for this cycle to continue. The incentives are of course different if munitions production is state owned, but this is not the case in most Western countries. This makes recurring revenues key to lubricating the whole system. For example, a third of BAE Systems' revenue from its operations in the United States in 2022 came from sustainment and combat mission system services to the U.S. military. Similarly, when U.S. giant Lockheed Martin (PPT) reported a 3 percent drop in sales revenue from 2021 to 2022, this was partly due to reduced income from global sustainment.

DEWs entail rather different forms of support than traditional missiles, however, and this is where we begin to see industrial disruption and dilemmas. Missile systems are both expensive at the point of order and require ongoing support—bad for the customer, but a driver of revenue for the manufacturer. However, governments and industry can at least plan for levels of likely future need by making assumptions about the scale and tempo of combat operations, as well as live-fire training.

Even rough planning for missile use and replacement gives industries a guide as to continued demand. To this end, the UK Ministry of Defence has adopted a Team Complex Weapons approach, working closely with industry partner MBDA, and established a 10-year agreement to provide some certainty on long-term needs, which should spur investment. The United Kingdom and France also work closely on their joint requirements and future plans. Governments also help industry by supporting companies' export efforts. International organisations like the NATO Support and Procurement Agency also try to drive efficiencies by bringing allies together on procurement, as with a recent deal to buy 1,000 Patriot missiles for Germany, the Netherlands, Romania, and Spain.

Even less complex weapons, such as artillery or conventional munitions, provide industry with at least a baseline ability to plan, given they often require certain components to be replaced after a given number of uses or a period of time, as critical parts erode through wear and tear. These are often specialist by their nature and the barriers to entry for supplying such parts are notoriously high—as we are now seeing with the infrastructure, workforce, and supply chain challenges that that the United States and Europe are facing in scaling up artillery production to support Ukraine. This means it is far from straightforward for new competitors to enter the market and start working with explosives or sensitive military electronics, increasing the reliance on established incumbents.

New Weapons Systems Will Require New Ways of Working

DEWs may disrupt this dynamic. The advent of such weapons holds significant potential military benefits, if the technical and wider kinks can be ironed out. DEWs offer a way of dealing with cheap and numerous targets like drones more cost efficiently than more expensive kinetic interceptors, freeing them up for use against higher-value air and missile targets. But laser and microwave weapons may also upend the industrial and commercial logic that has shaped the complex weapons sector since World War II.

One potential challenge is that, while DEW platforms can rebalance asymmetry in conflict by cheaply and quickly neutralising low-cost threats, this could inflict collateral damage on the long-term revenue surety of the defence companies needed for their development. Defence acquisition often throws up unique, challenging dilemmas like this. Clearly DEWs still hold promise for industry, given that so many companies are showing significant interest. However, the challenge for governments is that after their initial R&D subsidies end, DEWs may not be economically compelling for industry. There's ultimately not enough money to be made in sustaining these systems, unless bought at sufficient scale to make both a big battlefield impact and the business case for investment stack up.

This could be partly solved if businesses shift focus to power provision , the 'bottomless magazine' that many DEW applications promise, or high-cost expendables like heat transfer materials or optical elements. Indeed, a rapid proliferation of DEW systems at low cost could generate sufficient economies of scale to balance out the revenue lost by moving away from conventional weapons systems. But industry would need confidence that military customers will provide that market, if they are to invest in and sustain the facilities, supply chains, and workforce skills needed to deliver at scale.

While DEWs are coming, then, they don't seem to be coming as quickly as some of their prospective users might hope. This means industry and governments have time to consider these dilemmas. Overall, considering DEWs and the market and industrial dynamics that surround them brings forth one of the fundamental truths of defence economics; any system that promises everything always delivers it at the cost of something. In this case, the promise of a cheaper alternative to missile-based defences could come at cost to elements of industrial resilience. Any major technological innovation will see winners and losers in defence markets across NATO, bringing political wrangling over who profits and who is stuck with job losses and nothing to show for years of R&D investment.

It is for allied governments across NATO and beyond to define how precisely to balance the benefits of DEWs as part of a wider-layered approach to IAMD, with the less favourable side effects of disruption in defence industry. As such, perhaps the energy weapon revolution in the battlespace will be just the start of the disruptive potential for DEWs.

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