British Manufacturers Urge Government to Back SMEs in Defence Deals

British manufacturers have issued a call to action for the government, urging ministers to mandate foreign defence contractors to reinvest a significant portion of their contract value into the UK economy. The plea comes as the Ministry of Defence (MoD) prepares to unveil its latest defence industrial strategy, which could redefine the economic impact of military spending.

MakeUK Defence, representing 600 engineering firms in the British military supply chain, has proposed offset agreements as a core element of future defence procurement. These agreements, already commonplace in over 50 developed economies, require foreign contractors to invest directly into the purchasing country’s economy. In some cases, this means investing in manufacturing sites, transferring technology, or even supporting local training initiatives.

The organisation is calling for a substantial inward investment threshold in future contracts. It has suggested that 75 to 90 per cent of the economic value of MoD deals with foreign companies should be reinvested over a ten-year period. In its statement, MakeUK Defence stressed the importance of legally binding agreements to ensure commitments are fulfilled, rather than relying on voluntary or ad hoc arrangements.

Countries like Poland and Gulf states offer clear examples of the potential benefits of offset agreements. By linking contracts to economic investment, these nations have secured both advanced technology and new military capabilities as part of deals for missiles, fighter jets, and armoured vehicles. In comparison, the UK’s offset policy has been inconsistent and lacks formal enforcement, putting domestic businesses at a disadvantage.

Currently, UK small and medium-sized enterprises (SMEs) receive a modest share of defence spending. MoD figures reveal a quarter of its spending indirectly benefits SMEs, with just 4 per cent awarded directly and the remainder trickling down through prime contractors. This lack of substantial domestic investment has prompted calls to redirect defence contracts in ways that support regional growth, particularly in areas like the West Midlands and the northeast.

The proposed measures align with recent political rhetoric from senior leaders calling for a stronger defence economy. MakeUK Defence believes a reinforced focus on involving UK SMEs could transform the sector, especially given the potential for “non-traditional” contractors from adjacent industries, such as automotive or oil and gas, to step into the defence supply chain.

The government’s new strategy, due to be announced soon, could set the stage for a revitalised defence economy that benefits workers and regions across the UK. Whether ministers will heed the calls for mandatory offsets remains to be seen, but industry leaders say the move would be a clear step towards aligning defence spending with broader economic priorities.