BREAKINGVIEWS-Gulf money will boost Europe's defence startups

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By George Hay

LONDON, March 17 (Reuters Breakingviews) - Iranian “Shahed” drones have become a disturbingly familiar sight in Dubai. Unmanned aerial vehicles (UAVs) have hit the Fairmont Hotel, as well as the Gulf city’s main airport, and even been seen pursued by an F16 jet over Al Mamzar beach. It’s obvious that the United Arab Emirates, which suffered two-thirds of the 2,150 drone attacks in the first week or so of the conflict, urgently needs to upgrade its drone-fighting capabilities. That could lead to an infusion of cash into European defence-technology startups in Ukraine and elsewhere — and boost the region's own security too.

In one important sense, the conflict is extremely bad for Europe. In the first three days of the war, Gulf states launched 800 PAC-3 MSE Patriot missiles, in a largely successful effort to shoot down rockets launched by Iran. Missiles travel much faster than drones, and hence require much more advanced and expensive defensive weaponry. A worldwide shortage of Patriots and other interceptors, largely made in the United States, could see European militaries shoved further back in a global queue.

The drone market, however, looks less zero-sum. Fuelled by a surge of venture capital money into the defence sector, there are now hundreds of startups in the European drone strike and "counter-UAV" space, like Germany’s Helsing and Stark, valued at $14 billion and over $1 billion respectively. Many of these have tested their products in Ukraine, which after four years of war has its own homegrown anti-drone groups with proven capabilities.

Despite Europe's drive to rearm, many of the region's firms may be making less kit than they could. Start with Ukraine. Ihor Fedirko, who runs the Ukrainian Council of Defence Industry lobby group, reckons domestic weapon makers may only be producing at 40% of potential capacity. That’s arguably understandable in the war-torn country, since Kyiv is focused on meeting local needs rather than building up a massive weapons-export machine.

But European countries more generally are not moving as fast as they could in awarding contracts for guarding their eastern flank via initiatives like the so-called “Drone Wall”, with notable exceptions like Germany. The upshot is that, despite all the talk of rearmament, some drone and counter-UAV startups with promising products currently risk going bust.

An infusion of new orders from wealthy states like Qatar, the UAE and Saudi Arabia could therefore help. These Gulf countries are already being shot at, and therefore need quick solutions – hence why they have already reached out to Ukraine's President Volodymyr Zelenskiy for help. They also have oil riches and sovereign wealth fund cash. The Qatar Investment Authority has nearly $600 billion of assets, while Saudi’s Public Investment Fund has over $900 billion. The combination of the Abu Dhabi Investment Authority, Mubadala Investment Company and a string of other funds means the UAE’s resources are even bigger.

Most of all, they clearly lack some counter-UAV basics. Since February 28 the UAE has, according to the WSJ, been periodically using Patriot missiles that cost $4 million each to intercept Shaheds, which start at more like $35,000. In economic terms, then, each interchange costs the target Gulf state more than it costs Iran. It echoes a tactic that Russia has used in Ukraine: send hundreds of drones at once, on the basis that even if 90% are downed, the cumulative cost will still be less than one interceptor.

Kyiv has long since worked this out, and now deploys $15,000 Merops reusable interceptors made by ex-Google CEO Eric Schmidt’s Project Eagle, and even cheaper options like Octopus and Sting. Other groups like Germany’s TYTAN are rolling out similarly inexpensive products. That kit is precisely what the under-fire Gulf states may conclude that they need.

Plentiful cheap interceptors are critical in deterring mass drone attacks. But they’re only part of the picture. The UAE and its neighbours will also need sensors, drone-specific radar and electronic warfare capabilities, made by companies like Ukraine’s Kvertus. And Gulf states will require software, offered by both European and Ukrainian groups, to help guide interceptors towards drones. Meanwhile, Zelenskiy has already begun to deploy skilled interception personnel to the Gulf.

Some of the hardware and software bought by Gulf acquirers will, like Project Eagle's Merops, be American. But a lot of it will also be European. Newly hot demand should give the region's young suppliers, many of which might only have one contract and one buyer, more diversification. An injection of investment into Europe could tangibly increase the scale and valuations of counter-UAV startups, according to Jonathan Dimson, who leads McKinsey’s European defence work. That could see unicorns like $3.5 billion German group Quantum Systems and other players like the UK's Cambridge Aerospace get bigger.

A flood of Gulf money will accelerate the integration of Ukrainian defence expertise into the wider European market. Maritime drone group UFORCE recently launched globally with headquarters in the UK. A new flood of work could further encourage other Ukrainian companies with know-how to partner with European defence groups that have the connections and scope to secure big contracts. That in turn could make Gulf buyers more comfortable about buying from both.

Ukraine still needs to make it easier for its homegrown defence stars, like drone interceptor SkyFall, to export. In recent months there have been signs of progress, but restrictions remain. Either way the prize is clear: SkyFall, for instance, estimates that it could export up to 20% of its 50,000-unit monthly production target without compromising domestic needs. While the Gulf’s drone shock will drastically fast-track affected states’ counter-UAV capabilities, it could have a similar impact on Europe’s too.

Follow George Hay on Bluesky and LinkedIn.

(Editing by Liam Proud; Production by Streisand Neto)

((For previous columns by the author, Reuters customers can click on HAY/george.hay@thomsonreuters.com))