Defence spending for Australia, like much of the world, is on the rise which may not be surprising given all the sabre-rattling that is going on.

Funding for 2023-24 has exceeded $50 billion for the first time, set at AU$52.588 billion, amounting to 2.04% of GDP.

Based on the Australian Government’s 2020 Defence Strategic Update, military spending was forecast to reach 3.5% of GDP by the end of the decade, according to ANZ research calculations.

At that level, defence spending was projected to be the highest since Australia’s involvement in the Vietnam war in the late 1960s to early 1970s, a time of conscription for many young men.


Australia’s defence budget is at its highest since the Vietnam War

Australia’s defence spending trends since 1950 and forecasts out to 2030: ANZ Bank


2023 Defence Strategic Review

In 2023, the Federal Government has gone a step further than the 2020 Defence Strategic Update, and released the Defence Strategic Review (DFS), considered the most significant defence report since WWII.

The review lists six new priority areas and is expected to shape the country’s Defence policy and national security posture for decades to come including:

  1. The acquisition of nuclear-powered submarines
  2. Develop Australian Defence Force’s (ADF’s) long-range strike capability and the domestic manufacture of munitions
  3. Improve ADF’s ability to work out of Australia’s northern bases
  4. Improve the growth and retention of a highly-skilled defence workforce
  5. Lifting capacity to introduce disruptive new tech into ADF capability, in close partnership with Australian industry
  6. Deepening diplomatic and Defence partnerships with key partners in the Indo-Pacific.

While the exact price tag of this major Defence shakeup has not been revealed the government has signalled it will require “significant financial commitment”.

“Defence must have the funding it needs to deliver this enhanced capability,” the review says.

“To this end, Defence funding will increase over the next decade above its current trajectory to implement the Review, including the delivery of the conventionally-armed, nuclear-powered submarine program through AUKUS.”

Furthermore, China’s continued military build-up is also raising concerns and was flagged in the DFS.

“China’s military build-up is now the largest and most ambitious of any country since the end of the Second World War,” the review says.

“China’s assertion of sovereignty over the South China Sea threatens the global rules-based order in the Indo-Pacific in a way that adversely impacts Australia’s national interests. China is also engaged in strategic competition in Australia’s near neighbourhood.”

Furthermore, the War in Ukraine, which started in February 2022 when Russia invaded the Eastern European nation is showing no signs of an end or de-escalation adding to further global tensions.


Context of Australia’s defence strategy

The AUKUS pact announced in 2021 was arguably the most significant security arrangement between Australia, the US and Britain since World War Two

Headlining the pact was a deal to build nuclear submarines, which led to a deal with the French Government being axed.

Australia is also part of the Five Eyes Intelligence Community, which dates back to 1946 and also includes Canada, New Zealand, the UK and US.

Since 1951 Australia has been part of the tripartite ANZUS security pact, a mutual defence treaty between Australia, New Zealand and the US to protect security of the Pacific.

Consisting of four members – Australia, the US, Japan, and India – the country is also part of the the Quadrilateral Security Dialogue, commonly termed the Quad.

And a legacy of the Cold War since 1971 Australia has been part of the Five Power Defence Arrangements (FPDA).

Consisting of Australia, Malaysia, New Zealand, Singapore, and the UK, the FPDA commits its members to consult in the case of an attack on Malaysia or Singapore.

And although Australia is not a NATO member, its ties to the organisation have reportedly grown because of ADF deployments to Afghanistan under the NATO-led International Security Assistance Force.

You can read more about Australia’s security relationships on the Parliament of Australia website.


Changing nature of warfare

The nature of warfare is changing too. Direct confrontation has given way to cyberwarfare, defined “as using computer technology to disrupt the activities of a state or organisation, especially the deliberate attacking of information systems for strategic or military purposes”.

There are new threats of war such as space, which has jurisdictions worldwide rethinking strategies of old.

Russia’s threat to to strike Western satellites aiding Ukraine, has space lawyers, politicians and industry executives concerned about the safety of objects in orbit.

The War in Ukraine has also highlighted the role of unmanned aerial vehicles (UAVs) and drones in modern warfare.

Both Ukraine and Russia are using drones in a wide assortment of missions during the conflict.

Yes, modern warfare is changing, and old strategies must be rethought.


Here is a list of ASX defence stocks:

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From land, sea, air and now space

Space is the new frontier in defence, and there is demand for space systems to detect, track and catalogue objects in space that may present a threat to ground-based and aerial assets. In the DSR space was specifically mentioned.

“Defence’s space capability must be optimised for capability assurance and communication’s provision,” the review said.

Aerospace company Electro Optic Systems (ASX:EOS) is involved in space defence. Its defence systems include laser physics, advanced optics, precision control systems, space domain sensors and communications technologies, and remote operated combat vehicles.

“The Ukraine war and geopolitical tensions significant increases in global defence activity and planned spending technology is key differentiator,” a company presentation said.

EOS outlined the new technological threats faced by 21st century society in its Battlefield of the Future pictogram.

Defence forces face new technological warfare threats

Battlefield of the future: EOS presentation


Robotics and drone technology

Drone technology is considered a new military threat due to their low cost and difficulty to defend against. Several Australian ASX companies operate in the unmanned aircraft or drones’ space.

Droneshield (ASX:DRO) said the market for its counter-drone technology, which did not exist 10 years ago, is rapidly growing market with a $US10 billion potential, driven by rising international tensions.

DRO says its advanced detection and counterdrone products are designed to bolster the security of a location and support security personnel in addressing the increasing and diverse range of UAS threats.

The company has a number of key partnerships including with the Australian Department of Defence, US Department of Homeland Security, US Army and Airforces.

Elsight (ASX:ELS) has developed communication technology for real-time data, video and audio transmission over cellular networks and sees significant opportunities around drones.

Halo is the company’s drone communication technology that allows unmanned aircraft to fly beyond the visual line of sight and is undergoing testing in California.

Aerospace company Orbital (ASX:OEC) is a world leader in the manufacture of integrated engine systems for tactical unmanned aerial vehicles or UAVs, such as its ScanEagle 3 model.

The company also manufacturers aeroengines for Boeing from its Perth-based and US facilities and is developing a hybrid propulsion system for a vertical take-off and landing UAV with defence technology company Northrop Grumman.

Xtek (ASX:XTE) operates through two separate divisions including ballistics and technology. Within XTE’s Ballistics Division, the primary focus revolves around the renowned “HighCom Armor” brand, specialising in the development, manufacturing, and distribution of personal protection ballistic products for global military, law enforcement, and first responder agencies.

In the realm of cutting-edge military technology, XTE’s advanced branch is dedicated to providing a comprehensive range of solutions. This includes Unmanned Aerial Vehicle (UAV) and Unmanned Ground Vehicle (UGV) offerings, advanced detection systems, optical payloads, state-of-the-art 3D mapping and modelling software, and tactical situation awareness software.


Military equipment suppliers positioning for demand growth

Alexium International (ASX:AJX) has developed flame retardant nylon and cotton fabrics for various industries including bedding and military applications.

AJX’s products have been supplying for testing and evaluation with the US military. The company is also securing partnerships with US military supplier to prepare for production of  its flame retardant nylon/cotton (NyCo) products.

Bisalloy Steel Group (ASX:BIS) produces different types of steel including armour plate for ballistics, defence, naval, vehicles market and for both in Australia and internationally.

“We provide steel for extreme conditions and environments and part of our business is defence and protection,”  says managing director and CEO Rowan Melrose.

Brainchip Holdings (ASX:BRN) is a smart sensor analytics company whose products cover several markets, including video analytics, speech and speaker recognition.

The company says its technology can also be applied to autonomous vehicles and unmanned aerial surveillance drones.

Bluchiip (ASX: BCT) provides sample tracking technology for use in harsh environments and extreme temperatures.

The company’s initial target market was in healthcare for secure tracking and tracing of biosamples, but it also has applications in security and defence and aerospace/aviation.

Codan (ASX:CDA) was founded by university friends in 1959 to tackle a range of challenges in electronics engineering, listing on the ASX in 2003.

CDA produces landmine detectors for defence and security force customers around the world. The company also sells tactical communications equipment and has delivered Land Mobile Radio systems to customers.

The company says growing military and military spend particularly in the Five Eyes Intelligence community presents opportunities.

Quickstep (ASX:QHL) stands at the forefront of providing cutting-edge composite solutions to the worldwide aerospace and defense industries. They specialize in crafting components for prominent aircraft models like the F-35 Joint Strike Fighter, C-130J, and F/A-18, counting industry giants such as Lockheed Martin, Boeing, Northrop Grumman, and BAE Systems among their esteemed clientele.

Moreover, QHL is actively broadening its horizons by venturing into the thriving drone sector, recognizing their growing utilization by defense forces across the globe.

Titomic (ASX:TTT) specialises in the defence, aerospace and mining sectors, TTT produces a range of high-performance components, including ballistic protection and pressure vessels, from light titanium. This metal is prized for its superior material characteristics over competing metals like stainless steel and aluminium.

Recently, the company has expanded its portfolio to include anti-corrosion and metal repair solutions, specifically targeting the defence and mining industries with the aim of prolonging the lifespan of infrastructure.

TTT’s novel cold spray technology delivers solutions to unique challenges within these sectors, offering customers innovative solutions tailored for the challenges of these demanding environments, while providing the company with high growth opportunities.

IperionX (ASX:IPX)  controls a patented and proprietary portfolio of low-cost and low-carbon titanium processing technologies that can enable the world’s first fully circular titanium supply chain.

IPX  says increasing demand for titanium applications in the well-established defence and aerospace sectors is a key potential growth avenue for the company.


Focus on soldier survivability

Xtek (ASX:XTE) is developing a range of defence-related products for its customers and functions through two distinct divisions including ballistics and technology.

Within the Ballistics Division, XTE focuses on its renowned “HighCom Armor” brand, specialising in the development, manufacturing, and supply of personal protection ballistic products to military, law enforcement, and first responder customers worldwide.

Meanwhile, XTE’s technology branch is dedicated to providing solutions such as UAV and UGV systems, detection and optical payloads, 3D mapping and modelling software, and tactical situation awareness software.

The ADF is among XTE’s customers. The company says ongoing geopolitical instability in Eastern Europe and the South China Sea is fuelling global momentum and prompting increased investments in defence worldwide.


Building ships Austral from Australia

Australia has a long coastline to defend and its navy has to patrol three large oceans. Among the most established ASX companies operating in the defence sector is shipbuilding company Austral (ASX:ASB).

ASB operates ship yards in five countries – Australia, China, Philippines, the United States and Vietnam.

The company’s  aim is to become the Indo Pacific’s leading naval defence prime contractor and in its FY23 results reported growing industrial and sovereign capability in Australia and the US, with several new projects won and existing contracts further developed.

Worldwide, the company was awarded contracts for 11 new ships, while a total of nine ships were delivered by its shipyards.

The USS Canberra (LCS 30) was commissioned in Sydney in July 2023. Originally designed by Austal Australia and constructed by Austal USA, the USS Canberra is the first US Navy ship to be commissioned outside of the US.

ASB says one of its key innovations in recent times has been its DeepMorpher artificial intelligence tool that is helping to optimise hull forms, quickly and efficiently.

“At Stockhead, we tell it like it is. While Iperion X and Quickstep are Stockhead advertisers, they did not sponsor this article.