Delivering the ‘defence dividend’ for Scottish SME manufacturers
Dave Atkinson, UK Head of Manufacturing, SME & Mid Corporates, considers how SME manufacturers in Scottish defence supply chains are well placed to respond to the unprecedented global security environment.
Read time: 3 mins Added: 05/11/25
A secure future
The message is clear; the world is changing, and the UK must step up to meet the evolving security threat faced by the nation and its allies. But, while strengthening our defence capability is fundamental to the UK’s ongoing national security, it can also be an important instrument of industrial renewal.
The UK’s new Industrial Strategy and Strategic Defence Review reflect a world where a growing focus on national security will direct ever more investment into defence supply chains. They outline the nation’s ambition to build a more integrated, innovative and resilient defence sector, which can be a key driver of economic growth.
Central to this strategy is a renewed ambition to reform and reshore defence procurement, which will drive significant new investment into Scottish defence supply chains. It’s a move that the Prime Minister has said will create a ‘defence dividend’, rebuilding our industrial base and creating the jobs of the future.
Diversify, innovate, invest
Aerospace, defence, security and space sectors already make a highly significant contribution to the Scottish economy, worth £3.2 billion in 2023 and employing 33,500 people, including 1,500 apprentices1.
The Ministry of Defence already spends more than £2.1 billion a year with the defence sector in Scotland2, and the UK’s Industrial Strategy highlights defence and advanced manufacturing as being among eight sectors with the greatest growth potential over the next decade3.
During that time, the Prime Minister has committed to raising national security expenditure from its current level of 2.3% of GDP to 5%. That includes 3.5% earmarked for core defence and 1.5% for wider resilience and security4 - a sum that, in today’s terms, equates to more than £140 billion annually5.
Crucially, future procurement targets will ensure that small and medium-sized enterprises are better represented in this spend.
The implications for Scotland’s manufacturing sector are profound and Bank of Scotland can play an important role in backing Scottish manufacturers as they diversify, innovate and invest for the future. Manufacturers of all sizes must remain alert to their role in contributing to an expanding defence market.
And the UK is not alone in accelerating defence investment.
An international outlook
In the last year, the UK defence sector has seen at least £1.4 billion of foreign direct investment by international contractors, demonstrating their confidence to invest here.
Most recently, against a backdrop of increasing tensions with Russia, Norway placed a £10 billion order for a fleet of anti-submarine frigates to patrol the North Atlantic. It’s the most valuable warship export deal Britain has ever secured and will be led by BAE Systems’ Glasgow shipyard, with more than 400 companies across the UK supply chain also expected to benefit.
There is also Babcock’s shipyard in Rosyth, Leonardo’s advanced electronics site in Edinburgh, Thales’ optronic centre of excellence in Glasgow and Raytheon’s hi-tech manufacturing facility in Glenrothes - to name a few.
Tier 1 suppliers like these will continue to rely on the skills and services that SME manufacturers can deliver, including precision engineering and components, tooling, fixtures and maintenance, electronics assembly and more.
Boosting the Scottish defence industry’s ecosystem in this way isn’t just about driving revenues; long-term contracts create the certainty manufacturers need to invest in long-term challenges, like improving productivity, upskilling workers, increasing exports and addressing regional inequality.
Support for SMEs
For industry, the opportunity is matched by challenge. Meeting the stringent compliance, security and quality standards demanded by defence contracts requires substantial investment and capability. While the hurdles are considerable, the rewards can be transformative.
Britain’s declared ambition to become a ‘defence industrial superpower’ promises not only to secure the nation amid an uncertain geopolitical landscape, but to rebuild its industrial base in the process. To that end, Bank of Scotland has specialist teams that can provide the financial solutions that support manufacturers as they work to expand capacity, develop new capabilities or diversify into defence work for the first time.
And we have built longstanding partnerships with industry bodies including MTC (Manufacturing Technology Centre) and Make UK Defence, which can help manufacturing firms access defence supply chains and unlock growth opportunities.
Defence contracts can also open the door to funding streams including grants and accelerator programmes which are designed to foster innovation and skills development. It’s an auspicious time for manufacturers, who can capitalise on this increasingly supportive environment and determination to make defence an engine for economic growth across the UK.
For SMEs and larger contractors alike, the message is clear, the new defence era presents opportunities that will define the UK’s economic and security trajectory for decades to come, and you can be part of that future.
Speak to your Relationship Manager about how we can support your business in Aerospace and Defence.
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References
3 https://www.gov.uk/government/publications/industrial-strategy-sector-plans/sector-plans
5 https://commonslibrary.parliament.uk/research-briefings/sn02783/
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