On the Future of European Defence Industry
Oct 12, 2023
That the European defence industry is fragmented is a problem which has been under discussion at least since the beginning of the millennium and the birth of the European security and defence policy. It was from the start a standard topic in informal consultations between on the one hand European defence ministers and on the other hand the NATO Secretary General and the EU High Representative.
The debate was complicated by the fact that most of the major conglomerates in Europe were at the same time global and diversified into the civilian sector. They therefore often tended to resist labels such as defence industry and European. A level playing field access to the American market required another posture. Again, this is nothing new: as a representative of a major multinational company would say:
” When in the United States I am American. When in Germany, I am German.”
That there was a logic to this wider approach related closely to the fact that innovations, to a large extent, migrate from the civilian to the military sectors of technology - contrary to what was perceived as the normal process during the Cold War. And this not only in the Warsaw Pact - where secrecy mostly made such spin-off effects more difficult. When the Swedish Royal Academy of War Sciences discussed defence innovation recently, the presentation was inspired by advice from Google.
Some may argue that the problem of fragmentation is overstated. That the United States has developed a production system with limited fragmentation is understandable given the fact that it is only one country although representatives of each state fight hard for production facilities to be located close to their constituents.
In Europe, threat perceptions, military geography and other factors vary across the continent. This alone leads to a more differentiated analysis of equipment requirements. On top of this, resilience in terms of security supply has become a very important issue as war is now raging close to the borders of several EU member states. Diversification of sources of supply is typically a more important issue for small states.
So, when the chief of defence of France General Burkhard recently in an interview with the European Defence Agency (EDA) argued that:
“Ukraine war confirms the need to define a long-term strategy to ensure the defence of Europe”.
This may seem like a call to action with few easy deliverables, beyond what is already underway. As would be expected from a representative of French interests he focuses on the need for European strategic autonomy:
“In the longer term, we need to invest in the EU’s strategic autonomy, focusing our efforts on high-end capabilities to develop the area of competence of the EU's Defence Technological and Industrial Base (EDTIB) and collectively try to reduce our dependencies.”
In one respect, this call for action echoes language also in the German security strategy published this year, proposing to reduce one-sided dependencies. But it is not obvious that the German version in this respect refers to dependencies on the United States. What is now happening with the proliferation of procurement of F-35 also to Germany will lead to more, not less, dependency on the US.
The Russian aggression has led to all Western states looking for quick solutions to urgent procurement requirements, all the way from heavy weapons systems to ammunition. Burkhard argues:
“Off-the-shelf procurement can sometimes be a very relevant solution for a dilemma between the immediate military need and budget constraints, especially when dealing with strategic stakes.
Whenever possible, we must choose the EU. When equipment exists, but the problem lies in its price or in its manufacturing capabilities, it might be wise to group the purchases. It will then enable European defence companies to face the industrial constraints thanks to economies of scale. The incentive measures taken by the European Commission also encourage to buy in Europe. It is however also important for the EDTIB to get ready to propose satisfactory and sustainable technical and financial solutions, matching the pace in which the nature of conflicts is evolving. This sometimes also requires the willingness to take risks.”
Against this background, it would still seem likely that many decision-makers - frustrated due to earlier failures to move forward towards reducing defence industry fragmentation - will adopt a passive attitude as regards the more long-term problem.
However, a thorough analysis conducted by a Spanish researcher Paula Alvarez-Couceiro published in War on the Rocks in April of this year takes another view:
“If addressed proactively — the war could be the catalyst that drives European countries to address the fragmentation of the defense industry and the limitations the conflict has highlighted. — the European Union should determine much more specific areas of focus that can help build a path forward toward addressing common threats”.
This is not only in her view a European, but also a US and NATO interest:
“the European Union and its allies, including the United States, should recognize that the development of a more robust European defense industry will strengthen NATO and allow the United States to devote more resources to the Indo-Pacific.”
And like Burkhard she puts high hopes on the fact that there is now a strategy on the European level, the EU Strategic Compass, which has put forward a shared assessment of geopolitical, threats and challenges.
At the same time Alvarez-Couceiro argues that:
“the expansion of the European defense industry fundamentally collides with U.S. defense industrial interests in Europe”.
The Russian full-scale invasion of Ukraine in her view, shows the flaws in the current defence system:
“including the rapid depletion of stock, an over-reliance on imports for critical raw materials and semiconductors, and a delay in promised defense budget increases”.
The verbs used by her to describe the processes in the United States in comparison with what is happening in key countries such as Germany: the United States decide whereas the European countries consider. She laments, notably, the slow start of the implementation of the 100-billion-euro procurement plan in Germany.
And one may add: the only reason that has made it possible for the European Peace Facility to finance assistance to Ukraine in a timely fashion seems to be that countries deliver in kind and are only compensated financially much later.
Unsurprisingly, since Alvarez-Couceiro is an employee of the Spanish shipbuilding firm Navantis, focusing on the European patrol corvette project she argues that this project proves that collaboration is possible in a highly fragmented environment. However, the complexities also of this project include the link to China and the risk of job losses in technology transfers. This is an issue which has mobilised resistance not only on the part of individual member states, but also the European Commission.
And these are only limited difficulties in comparison to what the future of combat air system programs, involving Airbus and Dassault aviation, are facing. The German decision to purchase 35 F-35 no doubt makes cooperation in this sector more complicated.
No easy solutions
There are no easy solutions - so much is clear from the available material. The question is, however, how serious the problem is. The Swedish Defence Research Institute (FOI) in 2021 tried to review the overall conclusions of a McKinsey study on defence industry fragmentation put forward to the Munich Security Conference in 2017. In the Swedish study, an effort was made to see what this picture meant if analysed on the level of market segments.
- Looking at the main battle tanks, for instance, it was shown that the Leopard 2 totally dominates the modern generation of main battle tanks with more than 70% of the market.
- The picture is much different when analysing infantry fighting vehicles were no single IFV dominates the market with the Swedish CV 90, still in the lead with about 20% of all modern IVFs as of 2021.
- As regards self-propelled howitzers one might ask whether the Swedish analysis from 2021 now needs to be updated given the deliveries of Archer and other modern systems. Before the war, the market was dominated by American equipment and legacy equipment from the Warsaw Pact. So, in this sector, the picture may change over time as the war continues.
- The Swedish study then continues to analyse the situation as regards fighter aircraft, where changes are underway of course with the F-35 procurement decisions.
- As regards destroyers and frigates, the picture of 2021 showed a high level of fragmentation, where as regards, conventional submarines, the German systems maintain a clearly dominant market position.
So, the conclusion of the Swedish study was that the European defence market is inductively, fragmented, but unevenly, so.
An update of the Swedish study covering the situation as the war proceeds would be interesting to read.