European and US defence spending has spiralled recently, but what about APAC?
We initiate coverage of Aerospace & Defence (A&D) with a high-level overview of the APAC region, which remains less prominent than Europe and the US but is increasingly strategic. While Western defence stocks have rallied amid global conflict and rising defence mandates, APAC hosts some of the world’s largest defence spenders and a growing base of indigenous A&D players. Rising geopolitical tensions and closer alignment with the US and Europe are accelerating collaboration, particularly around automation and advanced defence technologies.
APAC Macro – What’s Changed
- Japan has approved a record ¥9tn ($58bn) defence budget and is midway through a multi-year plan to lift spending to 2% of GDP, positioning it to become the world’s third-largest defence spender. Heightened tensions with China and Taiwan underpin this shift.
- South Korea spends ~2.6% of GDP on defence, with budgets pledged to rise sharply through 2026, driven by the persistent North Korean threat and its Defence Innovation 4.0 programme focused on AI-enabled systems.
- Australia is increasing defence spending through 2030, with naval tensions and the AUKUS pact reinforcing its strategic role near the South China Sea.
A&D Economics and Value Chain
APAC A&D dynamics favour electronics-led suppliers, particularly in Japan, South Korea and Australia.
- Japan leads in R&D, manufacturing and electronics
- South Korea manufactures at scale with growing export capability
- Australia plays a procurement-led role, shaping long-term defence programmes such as AUKUS
Monetisation is driven by engineering-to-order contracts, MRO services, outcome-based agreements and an increasing contribution from digital services and software.
Technologies of Interest
- Autonomous and unmanned systems
- Drones
- Advanced weapons platforms
Recent conflicts have highlighted the strategic and economic effectiveness of automation, with derisking personnel loss and enhancing long-range deterrence now central to modern defence doctrines.
Competitive Landscape
Global primes dominate high-end platforms, but indigenous players retain an edge in localisation and political alignment, particularly in China, Japan, India and South Korea. Contract allocation is often driven as much by geopolitics as by technical capability.
Winners, Losers and Risks
Winners
- Companies exposed to automated systems
- MRO providers benefiting from extended use of ageing aircraft amid supply constraints
Losers
- Civil aerospace manufacturers, due to persistent supply chain disruption
Key Risks
- Defence spending cuts
- ESG-driven divestment pressure
- Ongoing supply chain bottlenecks
Great Perspective Ibrahim.