Readiness 2030: A Strategic Shift for the European Defense Industrial Base
In today’s geopolitical climate, current European defense spending levels are simply inadequate.
In the UK, the Minister of Defense Procurement, Maria Eagle stated, “The Government is firmly committed to increasing defense spending to reach 2.6% of GDP by 2027 and has set an ambition to reach 3% by 2030” and the German Defense Minister also highlighted the need for increased defense spending by suggesting a defense budget of 3% GDP may not be enough and could raise defense spending to 3.5% of economic output by 2029.
These statements, combined with the NATO 2025 commitments, signal both the ability to leverage increased spending and a political environment amenable to long-term investment.
The geopolitical climate is enabling generational change
The war in Ukraine, combined with a more amenable European polity, has created an environment that has spurred EU member states to redirect domestic wealth to boost defense capabilities. The war has also provided a testing ground for nations to assess their newly developed capabilities. There have already been significant changes. German defense conglomerate Rheinmetall recently surpassed top carmaker Volkswagen in terms of market value, driven by increased investor capital in the industry. Türkiye is accelerating its manufacturing advancements across product categories; domestic spending is up, and opportunities to develop, test, and employ these capabilities in combat are many.
The EU multiannual financial framework (MFF) 2012-2027 has long included funding for cooperation on defense-related activities, but the EU Commission has now unveiled its plans for European Defense, known as ‘Readiness 2030’. This initiative provides a financial lever for EU Member States to drive an investment surge for defense capabilities. Readiness 2030 includes a new financial instrument called SAFE (Security Action for Europe) to support investment in domestic European defense manufacturing that includes incentives for securing domestic supply chains.
And change is already happening
As the immediate demand for enhanced defense capabilities grows to deter future conflict, domestic European defense manufacturers must prepare now for this surge. There is little time to wait for traditional business cycles.
One way to short-circuit organic growth to support increased demand is through acquisitions and partnerships with well-established adjacent players in the market. This is already happening with traditional giants such as General Dynamics European Land Systems partnering with Rheinmetall to provide the German Army with 256 Piranha 5 vehicles.
Non-traditional defense manufacturers are also entering the market, shifting their production capacity from strictly commercial to a mix of commercial and defense-related products. ICEYE Ltd., a Finnish microsatellite manufacturer, builds synthetic-aperture radar used to monitor pack ice. But now their technology is used for battlefield real-time imaging. There are many more examples like ICEYE Ltd., but this type of reindustrialisation will only accelerate.
Even so, increasing opportunity and demand may not be sufficient to force an immediate shift.
In the United States, despite the urgency of the COVID-19 pandemic, the federal government stepped in and invoked the Defense Production Act in conjunction with emergency contracts to spur manufacturers to prioritise mechanical ventilators over the goods they normally produced.
While European nations have not yet matched this scalable action, governments could certainly employ such strategies if the industrial base finds itself unable to be as responsive as it should be or if the war in Ukraine grows hotter – or gets closer to home.
Time for manufacturers to take charge of their future
At the end of the day, individual or mid-sized manufacturers cannot force governmental action and may not be able to leverage partnerships or acquisitions. But all is not lost. Companies that lack scale or influence (and frankly, even the ones that do) should focus on three areas: leveraging governmental and investor capital, pursuing talent to exploit the opportunity, and employing technology for agility and scale.
To meet production goals, manufacturers should first leverage funding incentives before the geopolitical truth changes and public sentiment wanes. While these programmes are generational opportunities, it does not mean the money will last for generations. In addition to the obvious capital benefits for manufacturers leveraging these programmes, they also encourage cross-border partnerships.
The European Defense Fund, which encourages cooperation between EU defense companies, allocates £5.3 billion of its total fund for collaborative capability development projects. NATO-friendly cooperation is simply a necessity for smaller individual domestic manufacturing bases of EU nations because justifying homegrown manufactured assets is frequently impractical. When added to the recent investor frenzy in the market, the defense industry finds itself with a truly unique opportunity.
Next, the defense manufacturing industry across Europe is facing a major labor and skill shortage due to underinvestment in new defense programmes, a lack of appeal to new workers, and an ageing workforce crisis.
To combat this challenge, organizations must utilise increased investment to re- and upskill their talent, so they can build the capabilities they need to match the expanded work volume. Burgeoning demand for skilled manufacturing talent in the defense space is frequently transferable to the commercial sector – a haven for talent should the growth in the DIB slow.
Lastly, the digital world has a vast toolkit of software applications to help solve logistical and process issues. Modern enterprise business solutions, the proliferation of AI applications, and connected workforce solutions help companies overcome skilled labor shortages. Legacy software applications were simply not architected for today’s speed of innovation, demand for scalability, or disruptive technological change. As such, defense companies would do well to leverage some of the increased availability of capital to invest in disruptive technologies and bring the rest of their business systems up to date. In fact, the question isn’t if defense companies will need these capabilities to keep up, it’s simply when.
A new digital arsenal for defense manufacturers
There are three powerful digital tools defense manufacturers should consider as the EU ramps-up spending:
(1) Reducing the skills shortage burden – Dynamic scheduling brings order to the chaos of change
Constraint-based AI algorithms can optimize workflow. For example, if there’s a shop-floor issue, dynamic scheduling optimisation will reprioritise workflows over waiting for human input. This enables manufacturers to maximise the deployment of their current talent based on workflow parameters, including shift patterns, SLAs, travel time, and skills, to increase workforce efficiency. With labor shortages what they are, keeping those skilled associates focused on their work – rather than waiting for reprioritisation meetings – can have an outsized impact on volumes over time.
(2) DIB Disruptions are to be expected – having a contingency plan will be key
Disruptions to operations when demand is pressing can be disastrous. Organizations must leverage simulations, which give them an opportunity to develop contingency plans on the shelf to execute. Volatility in raw material sourcing, surges in demand, and even disaster recovery plans should be simulated so contingency planning isn’t happening while the event is happening. That is much too late. These actions future-proof defense manufacturers, allowing them to build in operational resilience to best respond to future disruption.
(3) Defense manufacturers need to begin their AI journey
AI continues to mature as a technology offering and frequently isn’t a perfect match – but defense manufacturers shouldn’t let perfect be the enemy of good. Programme management is an area primed for better productivity enabled by AI applications. Understanding, planning, executing, and reporting on government programmes within the four walls of a manufacturing operation is incredibly complex, with loads of manual, low-value work underpinning programme management. Even if the tech can’t quite provide everything a programme manager needs, the act of leveraging this advanced technology will train and develop the people in this new paradigm of work.
Programme management isn’t the only potential use case. Preconfigured contextualised AI-copilots with baked-in compliance can identify suppliers based on regulations, cost, time, and availability when sourcing new parts. The use cases are many, and the organizations that can deploy them effectively as they mature will be ready to leverage AI in a disruptive way as the technology evolves.
The time is now for Europe’s DIB to seize the initiative
The level of investment in the European DIB we are witnessing today has not occurred since the Cold War. Defense manufacturers need to seize this generational opportunity, whether that be to upskill workforces, capitalize on increased investments, form partnerships with defense and non-defense organizations, or implement and upgrade digital tools in their operations.
There is no guarantee how long this period of increased investment will last, but the manufacturers that seize the initiative will be able to cope with the pressures of the rising demand and increase their revenue and growth trajectories. And much more importantly, contribute to the security of Europe.
Chris Morton, Global Director for Aerospace and Defense at IFS,
The featured graphic was generated by an AI program.