Despite a fragmented landscape, the industry’s momentum has grown since Russia invaded Ukraine.
By Financial Times
The bellicose rhetoric from the US about the need for Europe to play a bigger role in defence is unleashing a new rally in the continent’s defence stockpiles. The demand for tanks, soldiers and munitions is a given. Less clear is whether industry is able to capitalise on it. US defence companies have done a good job of matching government spending with strong returns for investors, through heavy research and development spending, economies of scale and the appropriate deployment of technology. But Europe is a fragmented landscape, with different countries buying different specifications. The lack of cooperation is costing the bloc between 25 billion and 100 billion euros a year, the European Commission has calculated.
The scale that European companies have is at least partly due to the US market, which accounts for two-fifths of sales at BAE Systems, or more than Europe and the UK combined.
At Airbus it contributes more than a fifth, and at Leonardo more than a quarter, in 2023. The creation of a unified US-style market of almost 30 countries will not happen. But unified standards and specifications are entirely possible; at least a group of countries are in harmony. This could be expanded, thus enabling more efficient use of capacity and expanding economies of scale. Likewise, facilitating joint investments across borders would strengthen supply chains and ultimately lower unit costs. Defence manufacturers rely on a range of parts and components and would benefit greatly from European-scale assembly.
Consolidation at the top is the stuff of fantasy. Collaboration is not. Pooled resources, whether manufacturing platforms, R&D or joint procurement, all help with both capacity and costs. There is also precedent.
Take the MBDA missile manufacturing joint venture run by the UK’s BAE Systems, France’s Airbus and Italy’s Leonardo. The trio is also involved in the consortium that makes the Eurofighter jet fighter. Germany’s Leonardo and Rheinmetall are joining forces to develop and market Italy’s new main battle tank through a 50-50 joint venture. The challenges for all of this are legion, and gaps remain. When it comes to software, Europe is light years behind the US; after all, that country’s tech industry was created by the Pentagon. German drone and defense AI startup Helsing, valued at €5bn, pales next to America’s Palantir – market cap $270bn – and its own startup Anduril, which is said to be worth $28bn.
However, the industry’s momentum has been growing since Russia invaded Ukraine. Far from amassing huge order books, European manufacturers have introduced efficiencies in factories and supply chains. Equipment delivery times have already improved, according to industry sources.
They are also integrating new processes, such as 3D printing. More acceleration is possible. After all, if Ukraine was able to build a drone production line from zero to 4 million-plus while fighting a war – it shouldn’t be beyond the powers of Europe to start plugging the gaps and preparing for a rush of orders.
