Looking at European defence/security exports today, one sees an incredibly healthy situation. Europe overall is the second largest exporter of defence technologies, behind the US, with particular success in MENA (source: SIPRI).
The EU is expending significant energy and resource to allow Europe to remain competitive in the period ahead, as part of its push toward greater technological and capability autonomy. Whilst there has been progress, the global security and technology construct is seeing a step-change. Much of this is being driven by China’s rise. Is Europe capable of responding to these changes fast enough to allow its defence export industries to remain competitive?
The recently held European Defence Agency (EDA) conference highlighted the significant opportunities and challenges facing Europe’s defence and security industries. There is no lack of ambition in Europe (‘strategic autonomy’), and the EDA itself has become a well-run agency that is doing a good job managing a very challenging task (on a tiny budget too!). Despite progress on cross-EU collaboration, the Union is still far away from having the singularity of focus or mission that the Great Powers enjoy. Numerous challenges need to be overcome, such as defence export regulations.
The world is not sitting back, waiting for Europe to get its act together. As we highlighted in our recent EMS-capability note, the world is quickly moving into a two-speed defence/security construct. The high-end is being dominated by the US & China (and to some degree Russia), and the low-end (which are primarily the needs of Emerging Economies), is increasingly supplied by China.
What place does Europe’s defence/security industry have in the new global hi/lo-capability construct? Clearly, Western-leaning nations will continue to buy Western made capabilities, but the ability and desire to fund these capabilities is determined by the health of national economies. As General Mark Milley, Chairman of the US Joint Chiefs said only last week, the economic fallout from COVID-19 on the US, will likely adversely impact US defence funding capacity in the years ahead. The same will apply to varying degrees to many other economies (China is a major exception).
The coming period will likely herald a period of tough choices for many Western nations that lack capability in the high-end ‘fight’ but cannot afford to increase defence spending to align with the new Great Power arms race. Even the US, according to General Milley, must look at cutting non-essential spending, for example on force deployments and exercises. Bright spots exist – the recent decision by the UK government to increase its commitment to Defence spending was not only a surprise (to many), but it had a ‘high end fight’ focus to key forward spending commitments (AI, Space, Robots, Cyber). Which European nations will follow this lead?
China has upended the global defence-industrial paradigm, via its array of ‘Manhattan Projects’, application of ‘China Speed’ to rapid prototyping and manufacturing, and output at scale not only of ‘good enough’ capabilities for mass export, but domestic capability production rates that are close to ‘WW2 levels’. As we discussed in our recent US/China note, there is no time to lose, nor turning back, in the need to effectively counter China.
The US DoD has made enormous changes – quickly – to culture and processes to meet the China Challenge – DoD has had to swallow a number of Chinese ‘Sputnik moments’ (e.g., DF-17, Quantum satellite etc), and is now playing ‘fast-follower’. The EU is moving to respond to this new high-speed, ‘techno-war’, but at ‘EU pace’.
The warning signs for Europe’s defence/security industry are evident, as key new capabilities have globalised quickly, and Europe has largely missed the market, due to lack of early investment in ‘domestic’ capability by EU nations. UAV’s (inc LO) and cyber are now huge, fast growing global markets (the former highlighted in our recent Karabakh note. It’s not just the US and China that are eating Europe’s lunch in these new markets. Israel, but also newer players like Turkey, are serious competitors, partly aided by US export limitations (now being reduced).
One could argue that as warfare moves away from ‘atoms’ to ‘ones and zeroes’, a nation like Israel would ‘naturally’ win global market share, as it is in the automotive industry, due to its long history of IT/software success, and cyber capabilities via Unit 8200 etc. Clearly, in UAV’s and cyber, the US and Israel incorporated these early into their war-fighting capabilities as strategic assets and have accumulated many years of experience. Although Europe has had the very real Russian threat, it has remained highly reliant on US technology (and often not allowed access to tech as advanced as used by US Forces themselves). More high growth ‘niches’ will appear, but in the absence of strong ‘domestic’ EU-wide support, Europe’s defence exporters won’t gain the experience or scale required to succeed.
Middle East markets will be a key litmus test in the period ahead. Defence buyers in the region have expressed a clear desire to broaden their vendor base, but their experiences when buying Chinese equipment, as an example, have generally been poor. European vendors still have a clear quality edge, for now. A potential game-changer is the warming of relations between some key nations and Israel, and this is already causing a rush of trade delegations in both directions. Israeli vendors have become dominant in India and other Emerging countries for supply of key missile, EW, cyber and UAV capabilities. Israel will be a real threat to European vendors in the Mid-East now.
Perhaps the biggest challenge facing Europe’s defence export industries is that even if they can keep up technologically, they could increasingly be priced out of markets. US vendors have scale benefits, and Chinese/Russian vendors have local cost structures that are 40-70% below Europe. This is another key reason why European nations must recognise that globally competitive scale across competencies is in everyone’s interest. Airbus has managed this challenge successfully in commercial aircraft.
There is reason for cautious optimism. Firstly, the EDPIP process is already resulting in real capability enhancements for real needs. The EDA has done a clever job identifying six key capabilities that can benefit now from pan-EU collaboration in a reasonable timeframe. NATO will also likely become more important, not less, as a bridge to UK and US collaboration, especially as the NATO mission itself is evolving to have a greater world view. Very few countries will be able to afford hypersonic missiles, 6th Gen air superiority or Strategic Stealth Bombers (B21/H20), and the US, with its new financial reality, will have its own strategic interest for Europe to have capabilities that can match China/Russia.
The key to survival for Europe’s defence export industry in the absence of sufficient political action, is innovation, and luckily, throughout the EU supply chain, there is huge positive momentum, from the Primes down to the bottom of the food chain, via the expansion of miltech/Spacetech cyber accelerators and incubators, and well as forthcoming NATO/EU-funded ‘patient capital’. European vendors continue to demonstrate world leading innovation in areas like radar, Naval capabilities (especially non-capital ships, submarines and ASW, as well as radars and sensors), land systems and cyber. New Space and counter-space capabilities are emerging, as are UGV capabilities (Rheinmetall, MILREM), and even counter-hypersonics.
This all suggests that whilst national EU political agendas and culture challenges will continue to be competitive millstones, Europe’s military-industrial base, with its global footprint as an aide, can remain relevant in the period ahead.