The Invest 2035 Green Paper has declared its intention from the outset to develop a plan for the next 10-years, looking beyond just a single election cycle. This choice was inescapable given the nature of designing an industrial strategy but another Labour victory in 2029 is by no means guaranteed. It is vital that this strategy is designed to account for the timescales typical of firms in the defence sector and beyond. This blog will be delving into the third priority of how the UK builds certainty and stability for its defence industry.
The defence sector intersects with a broad range of different markets. Telecommunications, Aerospace and Electronics are all well matured industries within UK defence but new developments in artificial intelligence, energy storage and even biotech are all becoming more significant to the area. The players that seek to induce drastic changes to the market by leveraging these technologies are more likely to emerge from new start-ups than existing multinationals. The timescales that these companies operate at will differ significantly depending on their market space and success at identifying a viable business model. To make these comparisons we evaluate the time expected for a firm to reach its full customer base also referred to as T-max.
Average T-max by Market Sector
As shown in the graph, the traditional large scale engineering more hardware focused industries like aerospace and electronics trend towards longer roadmaps to maturity. This is understandably a result of longer development cycles, resulting from the challenges of prototyping with specialised components, physical transport times and the challenges of competing with well-established traditional engineering firms. Innovative new business models developed in emergent markets, like the drone industry, may result in shorter T-max’s but firms in market spaces like software and financial services will always find it easier to mature faster. By accounting for these differences between market sub-spaces when developing our industrial strategy, we can ensure timelines are designed accurately. The horizon for implementing the production of the UK’s heaviest equipment may sit well beyond 10 years, but AI products beginning their development journey today may be reaching the vast majority of their potential customer base in less than half that time.
How can we account for these differences? Investment is currently one of the most significant concerns for UK government, but its sources will change depending on sector and maturity. Any successful venture will see revenue sources gradually shifting towards customers as the primary source but government investment, venture capital and strategic partnerships all play a role. These revenue sources should not be delivered over the same timeframes regardless of sector. High T-max businesses will need longer cash runways to build their customer bases to sufficient levels to support their overhead. There are also major differences between the incentives for public and private investments. Venture capital is rarely motivated by the national interest and typically prioritises short investment horizons with large returns. Market sub-sectors that do not fulfil these criteria will struggle to raise funds in the same manner.
Typical Investment Sources by Maturity
For the UK drone industry there may be opportunities to leverage venture capital but highly specialised military equipment from new players will likely have to rely on state support in their early stages. Products/services built on potential dual-use technologies on the other hand have a much deeper pool of potential customers. Through identifying companies that can incorporate these customers, we can make more efficient use of our resources. New AI driven terrain mapping software will have applications in military and civilian use-cases. Cutting edge electronic warfare countermeasures will not. Both are critical capabilities but one will have a far easier pathway to drawing private investment in their early stages. Firms developing the latter types of technologies must draw support from government or strategic partners.
All these companies will face varying regulatory challenges depending on their positioning in the value chain and the business model they choose to adopt. Emerging markets, in particular, are an agonising problem from a regulatory perspective. New technologies can turn existing ordinance on its head and throw up absurd barriers to entry for players attempting to exploit new opportunities. As the government creates new bodies and drafts new rules it is crucial that they begin by defining the remit of the organisations involved. In the past the Triple Chasm Model has organised this by categorising regulatory foci by technologies, products/services and markets. However, new developments in healthcare, AI and beyond have made increasingly clear that data must incorporated into this framework. Restrictions of personal and proprietary data are well established but new grey areas are emerging in the use of contextual data that we are only just beginning to understand. In order to understand the regulatory landscape relevant to the drone industry we have mapped out the relevant standard-setting and enforcement bodies in the UK by value-adding element and organised them by their focus. The critical gaps that must be addressed lie in the use of contextual data and the new reality of managing an increasingly complex airspace environment.
Drone Industry Regulatory & Standard-Setting Bodies within UK
The UK needs to move quickly to ensure it does not fall behind its competitors. The recently announced UK Regulatory Innovation Office may play an important role in the future, but its remit remains ambiguous, with 4 market sectors outlined but no detail on how they will be approached. The Competition & Markets Authority displays a similar lack of clarity on its direction. The replacement of its chair may be necessary to fulfil the governments objectives, but it is impossible to verify this without clarity as to what said objectives are. Moving forward the government must explicitly outline its position on what trade-offs the country is willing to make as we balance safety and innovation.
Any new regulation requires an intricate understanding of the relevant markets, products and technologies it relates to. Join us later this week where we will discuss how better defining technology definitions can help identify niches for new products and services.