Increased EU defence investment means Europe’s Defence Industrial Base must get ready for change
According to NATO, the Russia-Ukraine war has underscored the need for the European continent to stand ready to take greater care of its own security. Germany’s Defence Minister Boris Pistorius recently indicated that even a defence budget of 3% of GDP may be inadequate. European nations are coalescing around the idea that defence spending at current levels is simply not meeting the mark.
The industry must face the fact that the geopolitical context has fundamentally changed
Geopolitical changes across Europe have prompted some member states to redirect domestic wealth to boost their defence capabilities. In addition to increased spending, the war in Ukraine has provided an opportunity for nations with relatively unproven military tech to test and prove their assets. Whether it’s countries with established defence manufacturers such as Germany, with Europe’s biggest ammunition maker Rheinmetall overtaking top carmaker Volkswagen in terms of market value, or new players such as Türkiye accelerating its manufacturing advancements across product categories, including drones, armored vehicles, and naval vessels—domestic spending is up and there are many opportunities to employ these capabilities in combat.
The EU multiannual financial framework (MFF) 2012-2027 includes separate funding for cooperation on defence-related activities. But the EU Commission has now upped its game with the recent unveiling of its plans for European Defence and ‘Readiness 2030’, an ambitious financial lever for EU Member States to help drive an investment surge in defence capabilities. The EU also released its new financial instrument SAFE (Security Action for Europe) to support member investment in defence capabilities, including domestic supply chains to increase market efficiency.
With Europe planning to increase its defence investment, what does this mean for the European Defence Industrial Base (DIB)?
European defence manufacturers have a unique window of opportunity
Domestic European defence manufacturers must be prepared for a surge in demand as the need for enhanced capabilities and assets grows. This increase is not only crucial for defending their homeland but also for supporting ongoing conflicts.
This means the defence manufacturing market will no doubt experience a period of market consolidation to meet demand and focus on the need to increase their production efficiency. During this period, organisations could merge or seek help from other European and non-European manufacturers. This is already happening with examples such as General Dynamics European Land Systems partnering with Rheinmetall to provide the German Army with 256 Piranha 5 vehicles equipped with a 15m telescopic mast system.
There is also potential for reindustrialisation as manufacturers shift their production capacity from commercial production to defence-related products to meet demand. This could be driven by economic forces or increased funding, but also by governments, as they reprioritise supply chains to ensure defence manufacturers receive necessary components first or influence civilian companies to prioritise the production of essential assets. This reprioritisation of production happened most recently in the U.S. during the COVID-19 pandemic when The Defence Production Act was enacted to deal with the lack of respirators. While European nations have not yet employed this sort of action at scale, it is certainly a lever if the industrial base proves itself to not be as responsive as it should be.
Regardless of the form of consolidation, partnerships, or reprioritisation, European defence manufacturers have a window of opportunity to leverage increased funding and national priorities. These will undoubtedly not last forever, as public support may not be enduring.
Funding, talent, and technology are at the ready, it’s up to manufacturers to leverage them
In their current state, many defence manufacturers cannot match this increased demand. However, with some strategic shifts, they can be helped.
First, get funded. To meet procurement goals, manufacturers need to leverage funding incentives such as SAFE and the European Defence Industry Programme (EDIP). Not only are there monetary benefits for manufacturers that leverage these incentives, but they also encourage cross-border and company collaboration, perfect for smaller EU nations that cannot justify having homegrown manufacturers of assets they don’t need.
While an influx of capital will certainly help, the defence manufacturing industry across Europe is facing a major labor and skill shortage due to underinvestment in new defence programs, lack of appeal to new workers, and a long-term aging workforce crisis. To combat this crisis, organisations must utilise increased investment to reskill and upskill their current talent, so they can build the capabilities they need to match the increased volume of work.
Next, modernise legacy business processes and leverage new technology to handle increased volume and improve efficiency. Digital systems underlying processes can allow manufacturers to scale with increased volume and have consistent digital systems that aid business collaboration.
Digital technologies underpinning EU’s surge
There are a few capabilities that defence manufacturers should consider as the EU ramps up defence spending:
- Plan for change: dynamic scheduling optimisation
Constraint-based AI algorithms can optimise workflow across the organisation. For example, if there is an issue on the shop floor, dynamic scheduling optimisation will reprioritise workflows instantly instead of waiting for human input. This will enable manufacturers to optimise the deployment of their current talent based on detailed human and workflow parameters including shift patterns, SLAs, travel time, and skills, to increase workforce efficiency. A win-win.
- Have a back-up plan: scenario planning and simulation
Disruptions to DIB operations at a time when demand is high can be disastrous. To avoid this, organisations must develop a built-in forward-thinking resilient system that can prepare them for potential disruptions by putting contingency plans in place to ensure operations continue without costly disruptions. Another win-win.
- Leverage modern technology: integrated project management
It’s time for AI to take the monotony out of tasks. Project managers are busy enough with advanced business systems, juggling multi-tab spreadsheets and meetings. AI must be leveraged for data entry tasks, so project managers can focus on analysis to optimise operations.
Don’t forget about compliance. The defence industry is highly regulated, especially from a procurement perspective. But help is on hand. Preconfigured and contextualised AI copilots with baked-in compliance can help project managers identify suitable suppliers based on regulations, cost, time, and availability when sourcing new parts.
A modernised European Defence Industrial Base
There is significant opportunity for the European DIB as it reacts to meet the increased investment from Member States. It will likely be a period of consolidation, partnerships and reindustrialisation for many domestic defence manufacturers. But EU funding, upskilling workers, and using advanced digital AI-enhanced technologies will all help the European DIB meet the increased volume of demand and maximise revenue and growth opportunities.
