How the defence and space industries work
Who buys, who builds, how governments procure, the contract types, and the parts of the space economy.
Industry brief, with a one-minute summary: Defence and spaceFirm processes and online tests change from year to year and differ by office. Use this to prepare, and confirm the exact current steps on the firm's own careers page.
Key takeaways
- Defence has one main customer, the government, which decides what to buy, how much to pay and who else the product may be sold to.
- How governments buy: the armed forces state a requirement, the ministry runs a competition or picks a single supplier, and a contract is signed.
- Under a fixed price the government pays the agreed amount whatever the cost.
Key idea
Defence has one main customer, the government, which decides what to buy, how much to pay and who else the product may be sold to. Contracts are large and long, so a defence company's future is written in its backlog (orders won but not yet delivered). Space was once the same, but launch and satellite broadband now also sell to businesses and households.
Defence companies build and support the equipment armed forces use: aircraft, ships, armoured vehicles, missiles and air defence, ammunition, radars and electronics, and the software that connects them. The customer is almost always a government, either the company's own or a foreign one through an export deal. A few very large companies called primes win the main contract and act as systems integrators: they design the whole system and put it together, buying engines, sensors, electronics and parts from tiers of suppliers below them. Equipment stays in service for 20 to 40 years, so maintenance, spare parts, training and upgrades (together called sustainment) bring a long, steady stream of revenue after the first sale.
- From budget to equipment in service
- Key: Government budget and requirementParliament approves the money each year; the defence ministry decides what capability it needs.
- Key: Prime contractor (systems integrator)Lockheed Martin, BAE Systems, Rheinmetall, Thales, Hindustan Aeronautics: designs, integrates and delivers the platform.
- Tier 1 subsystemsEngines, radars, electronics, weapons: for example Safran, Rolls-Royce, Leonardo, Bharat Electronics.
- Tier 2 and 3 parts and materialsMachined parts, steel, explosives and propellants, chips, rare earth magnets. Often the real bottleneck when demand rises.
- Key: Delivery, training and sustainmentMaintenance, spares, upgrades for decades; often the most profitable part.
- ExportsSales to allied governments, usually needing an export licence from the seller's government.
Money starts with a government budget; margin sits with whoever controls the design and the support.
| Contract type | How the company is paid | Who carries the risk of higher costs |
|---|---|---|
| Fixed price | An agreed price for the product, whatever it costs to make | The company: overruns come out of its profit |
| Cost-plus (cost reimbursable) | Its costs, plus an agreed fee | The government: it pays the extra cost |
| Incentive | Costs plus a fee that rises or falls with cost, time or performance | Shared, by an agreed formula |
| Framework agreement | A ceiling and prices agreed up front; orders (call-offs) come later over several years | Volume risk stays with the company until orders arrive |
| Government to government | One government buys from another, which contracts its own industry | Depends on the deal; often includes local work (offsets) |
So-what
New, unproven development work is usually cost-plus or incentive, because nobody knows the cost. Mature products in volume are usually fixed price. A company that takes fixed-price development work takes on real risk.
How governments buy: the armed forces state a requirement, the ministry runs a competition or picks a single supplier, and a contract is signed. Big programmes take years to decide and decades to deliver, but budgets are approved year by year, so companies watch government budget plans closely. Many countries insist that part of the work is done at home (local content or offsets), for example India's push to buy Indian-made equipment and the Gulf states' goals to build their own defence industries.
The space economy
The space industry has four parts. Launch companies carry satellites to orbit. Manufacturers build the satellites. Operators run them and sell services: satellite broadband and TV, Earth observation (pictures and radar images of the ground, sold to governments, farmers, insurers and others), and navigation signals such as GPS. Ground equipment, from user dishes and navigation chips to ground stations, is by far the biggest part by revenue. Satellites fly in low Earth orbit (LEO, a few hundred to about 2,000 km up, close enough for fast internet but each satellite covers a small area, so thousands are needed) or geostationary orbit (GEO, about 36,000 km up, where one satellite covers a third of the Earth).
| Part | Revenue in 2025 | Note |
|---|---|---|
| Global space economy | About USD 429 billion | Up about 3 percent; includes government space budgets |
| Commercial satellite industry | About USD 303 billion | About 71 percent of the total |
| Ground equipment | About USD 165 billion | Dishes, terminals, navigation chips, ground networks |
| Satellite manufacturing | About USD 20 billion | A record 4,434 satellites launched |
| Commercial launch | About USD 12.4 billion | Up about 33 percent |
So-what
Launch gets the headlines, but it is one of the smallest parts by revenue. Most of the money is made on the ground and in the services satellites sell.
A defence company signs a fixed-price contract and its costs then rise 15 percent. Who pays for the overrun?
Which part of the space economy earns the most revenue?
Sources for this lesson (4)
- SIPRI: global military spending surges in 2025 (press release, April 2026)
- NATO: The Hague Summit Declaration, 25 June 2025 (official text)
- Satellite Industry Association: 29th annual State of the Satellite Industry Report (May 2026, official summary)
- Recognized public explanations of case-interview concepts and frameworks
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