With an evolving security environment across the globe, public spending for defense and security has been prioritized by governments. For 2024, NATO (the North Atlantic Treaty Organization) expects 23 member states to achieve NATO’s defense spending goal of 2 percent—up from only three member states in 2014. In the Asia–Pacific (APAC) region, Japan increased its defense budget by 27 percent from 2022 to 2023 after a revision of its national security strategy, which now aims to spend 2 percent of its GDP on defense by 2027. South Korea plans to increase its defense spending by approximately 7 percent annually from 2024 to 2028.
After decades of reduced defense spending, the recent shift in defense budgets includes funding for navies to bolster their capabilities and fleet readiness. McKinsey analysis shows that the naval market could grow from approximately €78 billion in 2024 to more than €100 billion in 2033. APAC is projected to have the strongest growth, reaching a market volume of almost €21 billion by 2033.
The shift presents global military shipbuilders with an opportunity to seek ways to efficiently and effectively meet customer demand. However, to stay ahead of competitors, they will need to assess how to make their products more affordable, flexible, and responsive to customer needs. In addition, both the naval industry and navies could work hand in hand to adapt to evolving needs. As both stakeholders face other challenges, such as significant talent shortages, collaborative efforts may more effectively address these problems.
The unfolding security environment and new technological developments will affect navies and shape the outlook for the naval shipbuilding market over the next decade (see sidebar “Methodology”). We analyze the potential implications for industry participants to help better serve their customers while supporting the renewed imperative of security.
Key developments shaping the global naval market
Today’s navies need to be ready for a broad set of missions, from protecting maritime trade and critical infrastructure to maintaining submarine capabilities. As active conflicts shape the population’s perception of global threats, governments around the world have announced plans to increase their defense and security budgets. At the same time, mission readiness—the ability to deploy assets for their intended purposes—and the mastery of evolving technology are becoming increasingly relevant for navies. These converging trends are expected to shape the naval market in the next decade.
Changing global threat perceptions
In 2011, after multiple years of relative peace, the global security environment began shifting. Between 2010 and 2022, the number of active conflicts more than doubled (Exhibit 1). There was an especially steep increase in international conflicts from 2010 to 2015, including the Russian invasion and annexation of Crimea.
The way the general population perceives global threats mirrors this shift. Data from the Munich Security Index, which measures how the public perceives different risks (such as overall security), shows that the public’s perception of risk related to security has significantly increased since 2021 (Exhibit 2).
Challenges for naval mission readiness
Many navies face challenges to their mission readiness. One such challenge is sustaining aging fleets, with 41 percent of the in-service classes of submarines and surface vessels having been introduced in the 1980s or earlier and with some vessels even operating beyond the end of their intended service life. Another challenge is recruiting and training personnel to properly staff and maintain assets, with shortfalls of 20 percent or more being common, according to McKinsey analysis. These missing personnel may result in fewer ships and submarines that are ready for deployment in open waters.
Technological developments’ impact on navies
Navies are grappling with technological advancements such as more capable electronics, new sensor and communication technology, increased automation, and AI—all of which present both potential benefits as well as risks.
For instance, increased automation could help reduce crew sizes and mitigate challenges with crewing vessels. Technology in the hands of groups such as nonstate actors can have severe impacts on security, as demonstrated by, for example, the 2024 attacks on merchant shipping in the Red Sea. New sensor and communication technology can improve navies’ situational awareness, but it can also increase the likelihood of being detected by adversaries. AI could generate better insights into data, but it could also be a weakness if adversaries were to hack it or feed it incorrect data.
Driven by these technological advancements, naval electronics such as sonar, radar, communication, or electronic warfare equipment are becoming increasingly important components for building fleets that are more advanced. Additionally, warships and submarines rely more heavily on software to function effectively. As both fields develop, naval players have more competitors to contend with.
Outlook for the naval market to 2033
As previously discussed, naval forces are being allocated increases via defense budgets. Part of these funds are then available for acquiring and sustaining naval equipment, and the market segments for naval ships and submarines are expected to experience an upward trend in military spending. Naval shipbuilders and their suppliers can use the assessment of spending trends over the next ten years to more effectively validate and, if needed, adjust their product portfolios and go-to-market approaches.
Demand shifting toward the APAC market
Our modeling shows an estimated average annual growth rate for the global naval market of 2.8 percent (real terms), which is unevenly distributed. Europe and APAC are expected to show the strongest growth, while other regions, including North America, will see slower-than-average growth (Exhibit 3). Submarines account for roughly 30 percent of the market value, while the remaining 70 percent is invested in surface ships, a split that is projected to remain stable from 2024 to 2033.
Conventional submarines showing stronger growth than nuclear submarines
Looking one level deeper into the submarine market group, conventional submarines are expected to see growth of 3.6 percent per annum and will reach a market volume of more than €10 billion by 2033 (Exhibit 4). The growth for nuclear submarines is modeled to be significantly lower, with around 2.6 percent per annum until 2033.
Frigates and corvettes are the largest submarket in the surface vessel segment
In the surface ship market, the smallest segment—consisting of offshore patrol and mine warfare vessels—has the highest growth rate, with 3.2 percent per annum until 2033. The largest segment, frigates and corvettes, making up 44 percent of the surface ship market, is also growing faster than average, with 2.8 percent per annum—a similar growth rate as the “flat-top” and amphibious segment (Exhibit 5). This development is in line with the APAC market—in which these vessels are highly relevant—leading in overall growth.
Implications for the naval industry
The naval industry has an opportunity to serve evolving customer needs. With new opportunity, however, comes new competition and changes to market dynamics. Shipbuilders could consider these implications as they chart their course for the next decade and beyond.
The following considerations are mainly relevant for top management of naval shipbuilders and naval suppliers, from market and product portfolio decisions (CEOs, the strategy team, and product development team) to opportunities to address operational challenges (COOs and their team) to the financial implications of such choices (CFOs and their team). Moreover, some considerations may also be of interest for navies and procurement agencies handling the acquisition of naval equipment.
Rethinking product portfolio and go-to-market approach for the APAC market
The shift of demand toward APAC raises the question of how this development can best be addressed by the global shipbuilding industry. For shipbuilders, the priority may be to assess the current product portfolio and validate whether it matches shifting demand. Second, shipbuilders and suppliers may need to reevaluate their go-to-market strategies and adjust them to the needs of potential customers in APAC.
Key for market success will be the ability to offer modular designs that can be readily adjusted to local requirements without driving up costs for additional R&D. Moreover, players that want to win contracts within the APAC region must master offset obligations and industrial participation. The challenge here will be to find suitable local partners that can be integrated into their own supply chain or can absorb the required transfer of technology.
Offering affordable solutions in response to funding pressure in naval acquisition
Despite growing budgets overall, navies will still need to balance competing priorities, such as acquiring new equipment for replacement instead of for fleet expansion, investing in upgrades and modernization of the existing fleet, increasing wages to attract more talent, or purchasing consumables, particularly ammunition. Consequently, cost per unit is likely to remain an important decision factor for naval customers. While some might order smaller fleets, others might choose to emphasize upgrades over new acquisitions or to deprioritize some requirements (for example, a more limited capability profile for an asset or reducing class size for a new ship) to maximize the impact of additional spending on naval mission readiness. In this context, the naval industry has an opportunity to address customers’ needs and constraints by offering more-affordable options for acquiring and modernizing their platforms.
What does this look like practically for the industry? Beyond typical efficiency levers (such as improving shipyard productivity, optimizing purchasing conditions, or reducing overhead costs), players could pursue several avenues specific to the naval context:
Modular solutions include predesigned modules that provide a foundation for manufacturers to build new platforms and vessels. They also include open designs that allow customers to combine a variety of components, subsystems, and systems in the design of a new platform to meet their specific need. By using key standardized protocols, data and messaging formats, form factors, interfaces, or connectors—such as under the Modular Open Systems Approach (MOSA)—shipbuilders can better control nonrecurring design and engineering costs, as compared with a fully custom design approach.
Joint procurement of naval assets by multiple countries could also reduce the cost per asset because one-off development costs can be distributed across a larger class of (more or less identical) ships. Bundling procurement power for inputs (for example, raw materials or subsystems) could result in more-attractive price structures. While countries have pursued multinational procurement efforts in the past, few attempts were successfully completed because the customer group struggled to compromise on common specifications. This challenge could be addressed by ensuring sufficient economies of scale.
Ultimately, reducing costs and keeping the acquisition of naval assets affordable for the domestic customer will also strengthen the industry’s position within the export market, where affordable products are a key criterion in light of competing priorities and continuing funding pressure.
Staying competitive amid new players in the international naval export market
In the international export market, incumbents encounter three new types of competitors:
Local players that start supplying the domestic market, thus reducing the need for imports, and then add exports. For example, in Türkiye—which had historically imported ships—players began building ships for the domestic market and then also became exporters. In this approach, shipbuilders often start by building locally and absorbing foreign production technology while still using imported designs.
Next-generation global players that pivoted from importing or focusing solely on domestic production to exporting. For example, companies in South Korea have shifted from competing regionally to expanding internationally to regions such as North America, South America, and Europe. The industry saw an early sign of South Korea’s expansion when some European countries selected their designs for their replenishment ship requirements.
Established players that have expanded their product portfolio and now compete in new segments of the international market. For example, Babcock entered the surface ship new-build market with the acquisition of Rosyth shipyard in the 1990s. It also supplies to the Royal Navy and has recently been successful in the export market.
Except for smaller vessels or the sale of secondhand warships, US players have not competed broadly in the international market in recent decades. At the same time, US companies lower in the supply chain (such as naval electronics and weapons) will continue to have a prominent role in the international market.
Incumbents could face this new competition in several ways. Shipbuilders around the globe that are highly dependent on exports could deploy lean principles in ship design, engineering departments, and construction to make their cost base more flexible and efficient. They could also forge partnerships with emerging local players to present combined offerings to potential customers and leverage local engineering know-how and technology for dedicated product development—for example, a combat management or integrated platform management system. Another potential strategy could be acquiring shipyards in export markets. Companies could then strategically tap into labor markets to meet the export markets’ cost levels and use the yards as hubs for exporting within the region; however, this strategy would be on a case-by-case basis and might not be the right model for every company.
Providing new capabilities in electronics and unmanned technology
Keeping electronics and mission systems up to date with rapid advances in technology is a top priority for navies. Companies can distinguish themselves by designing electronics that are easily and quickly upgraded. Established shipyards could partner with players from the electronics supply base to offer a full-service package to customers. Additional moves could include vertical integration (see sidebar “Vertical integration: An alternative approach to capturing value”), investing in relevant R&D efforts, and building an ecosystem of innovative electronics players whose products can complement the shipbuilder’s platform.
The next innovation powered by advanced technology lies in the field of uncrewed naval technology. In the past two years, this market segment has seen a rise in the number of new players because it offers a competitive entry point with products that are much smaller than manned warships and submarines. The in-service fleet of unmanned naval systems is growing rapidly.
Improving shipyard operations through digitalization
Delays, cost overruns, or quality issues in both naval new-build project and sustainment or overhaul projects affect force readiness and ship availability. While there may be several root causes, some of these issues can be overcome by improving shipyard processes and modernizing shipbuilding facilities and shipyards. Concrete measures could include the following:
Deploying a digital operating model allows shipyards to manage the shipbuilding process quickly and seamlessly while avoiding costly errors that stem from poor links between legacy systems. Shipyard digitalization is even more powerful if the supply chain is equally equipped with advanced digital technology such as Internet of Things capabilities, analytics, automation, and cloud computing. These technologies could help ensure a secure exchange of data and information between design and engineering providers, shipbuilders and suppliers, and eventually customers. With more transparency into the supply chain, shipbuilders can address problems early, such as locating missing parts and avoiding inconsistent data, drawings, and plans across the shipbuilding project.
Using digital twins for ship design, upgrades, and sustainment can offer benefits in terms of cost and saving time. For example, digital twins enable full digital representations of each ship to be updated before the actual ship is modified. Testing and certifying new software releases or new hardware components can then happen in a secure environment and under simulated operational conditions without harming the functioning of a warship. In the future, digital twins could be used to predict faults in ship systems (for example, in a gas turbine or an engine) before they occur by running the digital twin in parallel to the operational equipment. Similar efforts are ongoing in industrial turbines. Products starting out as digital twins may have up to 25 percent fewer quality issues when they enter production, and development times could be cut by 20 percent. Although industries differ, these findings are promising and may encourage naval shipbuilders and their suppliers to explore the potential benefits of digital twins.
Digitalizing and automating general and administrative functions, such as procurement, supply chain, human resources, or finance can help drive down cost. McKinsey research suggests that tasks across industries could be automated with technology such as process automation, machine learning, or natural language processing. In human resources, for example, 38 percent of tasks could be automated; in finance, automation is estimated at 41 percent; supply chain management could be automated at 37 percent; and 29 percent of procurement could be automated. Given the often considerable administrative work related to naval programs, efficiency gains in shipbuilders’ general and administrative functions can both accelerate processing times and lower the indirect costs associated with the program.
Collaborating with industry stakeholders to address naval asset shortages
Amid heightened global tensions, navies could benefit from collaborating with industry to overcome the challenge of asset shortages. Given that fleet readiness can be significantly affected by sustainment turnaround times, shipbuilders have an opportunity to embrace alternative, innovative solutions. For instance, yard time can be reduced by shifting maintenance routines from strict calendar-based schedules to condition-based ones and by intelligently grouping maintenance activities.
Several solutions either have already had a positive impact in the field or hold promise:
Performance-based logistic (PBL) contracts in which the customer pays for an agreed-upon level of service have, in various setups, been an effective way for navies and industry to form a government–industry partnership. However, PBL contracts are not a universal remedy for all availability challenges. Additionally, while PBL contracts seek to fairly distribute risk between customer and supplier, customers ultimately will still carry the operational risk of not having military platforms available when needed, independent of the financial penalties borne by the supplier.
Digital solutions have already proved effective in improving the sustainment processes and increasing naval asset uptime. As discussed previously, using digital twins could potentially improve the likelihood of assets staying at sea longer. Analytics of operational ship data can help to improve operational availability by refining maintenance and tailoring preventive maintenance schedules based on analytical insights, especially with advances in machine learning.
3D printing at sea could also present an opportunity for collaboration. Industry players (tier-one or tier-two OEMs) could, where technically feasible, design qualified spare parts and then send printing instructions to ships at sea that are equipped with the necessary printers.
Remote maintenance support could be another potential area for partnership, in which industry provides augmented reality tools to help navies keep assets at sea. Remote maintenance support is cost-effective in enabling specialists to solve problems and support crews remotely as opposed to traveling to the location for repairs.
Addressing critical skills shortages in both the naval industry and navies
Given that the workforce challenge is industry-wide in addition to affecting navies, solutions beyond the company level should also be considered. The global naval shipbuilding industry could help navies cope with the crewing challenge—especially by offering solutions that help reduce the crew size of warships, such as ship digitalization, automation, and AI. Automation of relevant functions of a warship has already helped in several cases to reduce crew sizes significantly in new generations of warships.
At the same time, there are tasks for which automation isn’t available, such as maintenance. In these areas, navies and industry are interested in the same limited pool of labor. To increase this labor pool (rather than competing against each other), industry could consider the following measures:
- cohort-based capability building, skilling initiatives, and educational support, including high-quality vocational training
- retention efforts to keep experienced staff longer or bring retired personnel back
The global naval market is undergoing significant transformation, driven by expanding budgets and increasing demand for advanced vessels. This period of change presents an opportunity for shipbuilders who can adapt and innovate. By leveraging technologies such as digitalization and automation as well as partnerships, shipyards can help navies respond more efficiently and effectively to their evolving needs. Moreover, the integration of proven concepts from other industries into shipbuilding processes could be a game changer, potentially revolutionizing productivity and capabilities in the naval sector. Those who successfully capture these opportunities and lead in innovation are likely to thrive in this dynamic and growing market.
