The global aerospace and defense (A&D) industry is undergoing a major transformation in 2025, driven by rising geopolitical tensions, technology shifts, and supply chain disruptions. A new KPMG report outlines how the sector is adapting to meet growing challenges — and finding opportunities along the way.
Global uncertainty fuels demand
Defense spending globally has shot up, with 2024 seeing the fastest growth in nearly 40 years. Events such as the war in Ukraine and escalating tensions in the Middle East have pushed nations to rethink their defense strategies. Alongside this, countries like China and the U.S. are intensifying their rivalry, not just in defense but also in technology, AI, and space. Tariffs, export bans, and trade restrictions have added pressure to global supply chains. Aircraft deals have even fallen through — such as China reportedly returning 50 Boeing jets due to tariff hikes.
Building resilient supply chains
The just-in-time supply models of the past are no longer reliable. The pandemic, followed by trade conflicts, exposed the vulnerability of long, global supply chains. Now, companies are “friendshoring” — sourcing from politically aligned nations — and investing in technologies like digital twins, AI, and blockchain to monitor and manage risks better.
Sustainability remains on the radar
While defense priorities have pushed sustainability down the list in some markets, the industry knows it cannot ignore climate concerns. Aviation alone accounts for 2% of global emissions. Commercial players are focusing on innovations like sustainable aviation fuel (SAF), recycling carbon fiber, and improving energy use in production facilities.
Innovation and startups take center stage
Startups are rapidly reshaping the defense landscape. In just the first quarter of 2025, over $1.5 billion in venture funding flowed into U.S.-based A&D startups. Companies like Shield AI and Helsing (a strike drone maker in Germany) are scaling faster than ever.
The road ahead
As Grant McDonald, Global Sector Leader at KPMG, puts it: “The A&D industry will continue its growth trajectory because leaders are focusing on what they can control, while adapting to external shocks.”
From building agile supply chains to scaling innovation, and from embracing sustainability to unlocking the space economy, the aerospace and defense sector in 2025 is bold, fast-moving, and brimming with potential.
