on the Present Status and Future of the European Defence Industry
First: Expected - A Boost and a Boom
The war in Ukraine has fundamentally changed the security landscape in Europe with important decisions to invest more in the armed forces of EU and NATO countries. Military expenditure will grow in the short-term and medium-term and it can be expected that the NATO aim of spending at least 2% of the Gross Domestic Product will be surpassed in many cases. This will lead to increased procurement, resulting in growing orders for the defence industry. These higher investments in defence are not limited to Europe alone. n reaction to the war in Europe and the intensified US-Chinese competition countries in Asia have also invested in their military sector.
As a result, we expect a strong boost in military expenditure and a boom for the defence industry which will last for at least one decade.
Two: Parallel Trends - A Revival of “Traditional” Armaments and Automatisation of the Battlefield
The Russian war in Ukraine has decisively changed the perspective of manufacturers of land systems and of “traditional” armaments in two respects: firstly, the importance of land defence systems has grown as a result of the type of war being fought in Ukraine. EU countries will quickly upgrade their tank and armoured vehicles’ capacity. Secondly, the pressure on military budgets, particularly procurement budgets, is being replaced by the availability of additional funding. At the same time, development of weapon systems is characterised by ever-integrating new technologies, particularly electronics and information technologies. Autonomous and robotic warfare and collection of real-time data are likely to play an important role in the near future.
As a consequence, traditional defence producers now have a historical growth potential, but at the same time, they are being challenged to invest in new technologies and IT, failing which, they will lose ground to newcomers.
Three: Blurring Boundaries - Commercial and Military Technologies
The enormous growth in commercial electronics and information technology has led to blurring the boundaries of the defence and commercial sectors. Commercial developments are relevant for weapon systems and are increasingly applied in defence development. We can observe a spin-in of commercial technologies. Many of the large defence producers rely on commercial suppliers or have reacted by acquiring or developing specialised electronic divisions. Also, many of the big IT providers, especially in the US, are competing for defence contracts.
Therefore, the boundaries between traditional defence manufacturers and commercial manufacturers are becoming increasing blurred, as is the case between commercial and defence technologies.
Four: Pulling in Two Directions - Growing Europeanisation and Continuation of National Interests
The EU has been struggling for decades with its role in defence matters but has in recent years increased its influence and competencies. It should be emphasised that the EU-member states do not speak with one voice in defence matters. There are differences between Nordic, East European and West European countries, not only on strategy, but also on how far the EU should have an integrated defence policy. The EU Strategic Compass aims at overcoming these different approaches. Procurement policies in European countries have traditionally been, and are still, driven by a priority for national champions. The armed forces of EU countries operate a large variety of competing types of weapon systems. Despite regular commitments to the Europeanisation of arms projects, procurement continues to largely take place in the various national countries rather than on an EU or European NATO level. The principal reasons for this are national industrial and technological policies. National interests often prevail when it comes to protecting jobs and sharing technology. The steady move towards more cooperation and continued nationalisation exist side by side.
Our conclusion: National-oriented security and defence policy in Europe is no longer a realistic option, but EU co-operation remains a slow and laborious process. Due to the war in Europe, we observe an increasing discussion on a more independent EU security and defence policy and possibly an intensified role in defence for the EU Commission.
Five: Technological Competencies - At the Forefront and Comparative Gaps
Many of the European companies have been very successful in exporting arms. This is a sign of their technological competitiveness on the world market. This is particularly the case for ships (submarines, frigates and fast patrol boats) and certain land systems. In other areas such as the fighter aircraft and helicopters, as well as in certain sectors of military electronics, European companies lag behind US companies that dominate global defence production.
This is, among others, the result of comparatively small national procurement programmes and a fragmented EU defence industrial base.
Six: Defence Industrial Base - Too Small and Too Fragmented
Twenty-five companies of a total of the global top 100 defence companies are located in Europe, compared to 41 in the US. On average, the European companies are considerably smaller than their US competitors. This is partly the result of limited demand in EU countries, but also the lack of joint projects and deficiencies in cooperation. The problem is exacerbated by continuing uncertainty about the future role of Great Britain after Brexit, which has the potential of influencing many aspects of European defence and the European arms industry. A degree of consolidation of companies has been achieved during the last two decades. However, the systematic implementation towards a common defence industrial base in Europe has repeatedly failed due to national interest.
Consequently, the structural problems of the European arms industry have not been solved. The current boost in demand is just moving the structural deficits into the future.
Seven: Uneven Distribution - Location of Companies
The regional European map of arms producing companies shows a clear imbalance between East and West. The larger companies are all located in Western Europe, most prominently in France, Germany, Italy and Spain (and the UK, no longer in the EU), the countries with the highest defence budgets in Europe. Therefore, the second-tier and third-tier supplier industries are also mainly distributed in these Western European states.
We conclude, that, unless national interests are overcome, this imbalance in the location of defence manufacturers is likely to reproduce itself, which poses a hindrance to systematic EU procurement cooperation.
Eight: Uncoordinated Export Policies - Increased Globalisation and Export Dependence
Given the size of the defence market in the EU, defence producers depend on arms exports to the global market. Exports have become a must for all larger defence companies to keep existing capacities occupied. At the same time, globalisation has increased because companies manufacture increasingly less in-house and rely on the supply from subcontractors all over the world. This leads to a complex landscape of supply chains and a diversified network of sub-contractors and suppliers, often in several countries. Despite several political commitments, EU arms export policies remain uncoordinated, and there is great variance in their political restrictions.
Our conclusion: EU defence producers depend on the global market. So far, national laws regulate such exports. Increasing cooperation in Europe will require common EU laws or guidelines to regulate exports.
Nine: Bottleneck - Lack of Qualified Personnel and Need for Union Representation
For the purposes of adequately responding to the actual boom in defence procurement, most defence companies must employ more, and, especially, highly qualified personnel. However, such qualifications are not easily available. Trade unions are challenged by the consequences of consolidation and European solutions because they will have consequences for regional distribution and also jobs in parts of the industry. The unclear contours, the fragmentation of industry and the diversity of the companies involved also pose a challenge for workers’ representation. While workers in the larger defence industry companies are usually well organised in trade unions, experience shows that representation of interests in smaller companies is weaker.
Therefore, it seems that networking workers’ interests between military and commercial sectors and across national borders will become one of the main tasks for trade union work in the coming years
Ten: Financial Squeeze - Can all the promises be met?
Decisions about and announcements regarding an increase in defence budgets suggest growth for the defence industry. However, there is a growing challenge to finance European policy in the defence sector due to the high deficit spending during the corona crisis and fears for an economic recession. In addition, since weapons are becoming increasingly complex, their unit cost will continue to increase.
This price development has the consequence that the quantities of weapons procured will be reduced from one generation to the next. In turn, lower production runs will lead to underutilisation of capacities or dependence on exports.