How Ukraine’s drones turned the tables

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0:17Good morning from the Financial Times. Today is Thursday, May 28th, and this is your FT News Briefing. Oil prices continued their roller coaster ride yesterday, and Ukraine's drone production could be turning the tides of the war. Plus, consulting startups are launching a formidable challenge to the big four, all thanks to AI. I'm Sonia Hudson, and here's the news you need to start your day.

0:58Oil traders think the U.S. and Iran are getting closer to a deal. Yesterday, Iranian state TV broadcast details of a proposal to extend Tehran's ceasefire with the U.S. and reopen the Strait of Hormuz. Brent crude fell as much as 5 % yesterday. The proposal included a commitment to restore shipping to pre-war levels within a month and an American promise to lift a naval blockade on Iranian ports. The White House, however, called the report a, quote, complete fabrication.

1:39The tides could be turning in the war in Ukraine. Russia adopted a law yesterday that allows the central bank and other financial institutions to shoot down drones. Now, this comes after Ukraine has stepped up its strikes thanks to a surge in domestic drone production. Ukraine's turnaround has challenged the long-held conventional wisdom that Russia's bigger army can outlast Kyiv. Here to tell us more is the FT's chief Ukraine correspondent, Chris Miller. Hey, Chris. Hi, Sonia. So give us a sense of scale here. How much has Ukraine grown its drone supply? Well, if you look at 2022, when Russia first launched this full-scale invasion, drones were being used by the dozens or by the hundreds, right?

2:26Mostly for surveillance and reconnaissance. But they hadn't really created what they are doing now in turning them into weapons and having them carry bombs and really industrializing and revolutionizing modern warfare as we know they are now. And many of these drones are what we are seeing used against Russian forces in the battlefields of eastern Ukraine here and far beyond the front line. Right. And that's why Russia is allowing these financial institutions to defend themselves against drones, like I mentioned earlier. How has Ukraine been able to ramp up its drone production on such a large scale?

3:08Well, in the sort of spirit of mass mobilization here, companies that made household appliances or companies that were involved in the steel industry have now refurbished their production lines to produce parts for weapon systems and drones. There are Saturday night house parties now where people will get together and make dinner and wine and then put together FPV or first-person view drones. And so we're seeing it done on small hobby scales, but also on this greater industrial scale, thanks not only to its resources and capacity here, but to Western partners, particularly Europe, which has provided billions of dollars recently.

3:53And so Ukraine is already using some of that money to buy many of its own drones that it's producing now and sending them to the front lines for their troops. Chris, how much of a difference has this scaling up in drones actually made in the war? Is momentum back on Ukraine's side? Ukraine certainly thinks so. And we're sensing a whole lot more confidence on Kiev's side right now. They don't feel like they've got the Russians on the run, but they certainly have slowed the ground offensive. The long-range strikes are making an impact on Russia's economy and certainly bringing the war closer to home to Russians who, for much of the last four years, didn't really feel the war being waged by their military.

4:39Now they're getting a sense of what Ukrainians have suffered over the past four years. And so they are making an impact. Yeah, well, given all this confidence that Ukrainians have, are people in Kiev talking about an end to the war and what that could potentially look like? Not really. They're talking about maybe the beginning of the next phase of the war, where they could potentially press Russia into negotiating in earnest instead of negotiating from this maximalist position where they've been able to make demands of Ukraine for an uneasy peace. The Ukrainians believe that the best way to push Russia into stopping its full-scale invasion of their country is to show strength instead of sitting at the negotiating table from a weaker position.

5:28And so what these drones have allowed Ukraine to do is to show that it's a much more threatening military than it was in 2022. Many analysts and European and American officials I speak with say that the Ukrainians are probably the strongest military in Europe right now. And so they're using that might to try to press Russia. Chris Miller is the FT's chief Ukraine correspondent. Thanks, Chris. Thank you.

5:57The European Central Bank is warning that U.S. President Donald Trump's policies could trigger a global financial crisis. The ECB issued a twice-yearly report yesterday that's an overview of the threats to the global economy. In it, the bank wrote that the economic fallout from the Iran war is pushing up inflation and damaging growth. The report said that fallout, combined with Trump's trade policies and his retreat from international cooperation, could threaten the financial system.

6:35Artificial intelligence is eroding the dominance of big four consulting firms. It's given rise to a growing group of small firms that use the technology to compete with large ones. AI is hitting the big four in another way too. It could potentially replace the work done by the firm's junior consultants. Here to tell us more is the FT's Elisheva Kissen. Hi, Elisheva. Hi. So I listed two big disruptions. Let's start with how AI is allowing smaller firms to compete with the big four. That's EY, Deloitte, KPMG, and PwC. so the main way that it's allowing smaller firms to compete is that it's it's eroding what used to be the big four's biggest advantage which was just scale traditionally if you wanted to do well in consulting you needed huge numbers of junior staff because they handle all the research and the report writing etc etc so setting up a startup wasn't just wasn't really a thing but in the last couple of years we've seen a rash of them and they've been led by really big industry names, big four partners, senior people who've taken this leap.

7:46So what these new small firms are arguing is that because AI can now do a large chunk of the work that used to have to be done by armies and armies of people, a smaller consultancy can take on major lucrative projects that were out of their reach before. And just to give you a sense of scale, the Management Consultancy Association has estimated that smaller firms are seeing growth rates of up to 50 % because AI is helping them compete with their larger rivals. Yeah, so tell me more about some of these internal weaknesses that AI has created for big four firms that these smaller firms are trying to exploit now.

8:23Yeah, so I discovered three main ways that AI is sort of challenging the basic economic foundations for the big four and the other large consultancies. One of them was those big firms rely on large cohorts of junior people whose billable hours create profits for a much smaller number of partners at the top. But a lot of the work that those junior consultants used to do is increasingly automatable. At the same time, AI is undermining the billable hour model. If an AI system can do the job in minutes, you obviously can't continue charging by the hour because your revenues would collapse. It's just taking less time.

8:57And then the third issue was around expertise. Clients can use AI themselves for the first layer of analysis often. They're increasingly needing consultants more for deep specialist knowledge. So that plays more to the strengths of boutique firms because they're already very focused on a particular area. The big firms have specialisms too, of course, but they'll need to move more in that direction of developing those deep, deep specialisms. Well, how are big four firms responding to these threats? So in a couple of different ways, the main one is investment. They're investing huge sums of cash, billions globally, into building their own AI models, training their people on AI.

9:35They also, because they're significant firms, they have the pull to forge alliances directly with OpenAI and Anthropic, which is hugely attractive for clients. Another thing that they're doing is they're changing their pricing model. So they're moving towards subscription or success-based pricing, which is a difficult transition, but will change the way that they handle things. How big of a disruption do you think these smaller firms that we're seeing this rise in will ultimately be for the big four? We don't yet know how much market share the small firms will manage to grab. That's the key question.

10:13There's still limited hard evidence that AI has are ready to transform the sector at scale. Clients are really loyal to established brands, but the smaller challenges are led by real sector veterans, and they have repeatedly vowed that they can take market share. So if AI does continue to reduce the importance of sheer headcount, size, and scale, then the barrier protecting the incumbents will probably weaken over time. Elisheva Kissen is the FT's accountancy correspondent. Thanks, Elisheva. Thank you.

10:50You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News briefing. Check back tomorrow for the latest business news.

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