European defence industry at a crossroads

The European Union has just adopted the SAFE (Security Action For Europe) programme, worth €150 billion, which will enable the 27 Member States to benefit from the Union’s signature to borrow on favourable terms in order to finance their defence acquisitions. Adopted just two months after the Commission proposed it, SAFE meets three objectives shared by the Member States: to help Ukraine in the face of Russian aggression, to ease the financial constraints on their military budgets, and to further pool their defence efforts. These three interlinked objectives are disrupting the traditional way of operating for arms companies and forcing them out of their comfort zone.

The war in Ukraine has given rise to a new industrial model that concerns both production and the development of new capabilities. When it comes to equipment consumed on the front line, companies are being asked to produce more and faster, forcing them to invest more in the short term than in preparing for the future. At the same time, we are seeing the emergence, first in Ukraine, of new, often small players who are playing a central role in responding in real time to the demands of operational personnel in the field. Drones, whether land, air or naval, which play a central role on the front line, are the primary beneficiaries of this innovative ecosystem. But the addition of adapted digital systems also makes it possible to increase the performance of existing equipment at a lower cost without having to completely redevelop it. Driven by combat experience, fuelled by digital innovation and imposed by urgency, this incremental approach is proving its operational and financial effectiveness. This is the first lesson to be learned by our manufacturers.

Despite increased defence spending by European countries, budgetary constraints prevent them from achieving all their desired capability objectives. In Paris, the implementation of the Military Programming Law (2024-2030) remains uncertain at this stage, despite the upward trajectory of the military budget. This difficulty is particularly acute for heavily indebted countries such as France, which are forced to arbitrate with other government missions in order to meet their defence objectives. There are two options for addressing this challenge: spending more wisely by following the Ukrainian model and pooling efforts more at the European level, and reviewing certain capability targets in light of the new realities of the threat. The new mantra of ‘producing more, faster and cheaper’ requires a review of the armed forces’ needs and procurement culture, but also a transformation of the operating methods of companies accustomed to the recurrence of major programmes carried out over decades. This will not happen overnight, but it is clear how the combination of budgetary constraints and the reorientation of capability requirements is leading to greater robustness and agility. This is the second lesson that companies must take into account in their strategy.

Triggered by the war in Ukraine and stimulated by the new attitude of the United States, the European Union’s intervention in the defence industry is finally causing a major upheaval with significant consequences for players in the sector. The various programmes put in place by the EU to strengthen the competitiveness of its military industry now provide access to new resources to finance research and production. At this stage, these funds are still limited and do not replace national budgets. However, they have a significant impact on the industrial fabric: their disbursement is subject to European conditions, forcing companies to form transnational partnerships, sometimes even with their competitors, in order to benefit from them. Project after project, consortia are being formed to respond to the Commission’s calls for tenders, paving the way for the necessary consolidation of the sector. The SAFE instrument will supplement national budgets through debt, provided that states commit to joint purchases of equipment produced within the Union, thereby expanding the market for the selected companies. The defence industry can no longer ignore this third dimension when anticipating its business plans.

Without talking about a revolution in a cutting-edge sector where long lead times are the norm and where legitimate sovereignty imperatives do not allow for rapid change with the risks that it entails, the environment in which European defence manufacturers operate is undergoing profound change. In a growing market, they cannot be content with reaping the dividends of war and must prepare for new imperatives in order to survive: greater agility, greater competitiveness, greater Europe.