PARIS — Over the next ten years, European defense manufacturers are predicted to see their revenues from European clients increase annually by between 10.5% and 11.5%, driven by the majority of countries aiming to meet NATO’s spending goals for 2035, according to a report by Rothschild & Co. Redburn.
Countries like Germany, which have historically spent less, alongside those situated near perceived threats from Russia, are expected to experience the rapid growth, noted analysts Olivier Brochet and Joe Orchard in their October 2 analysis.
Active joint venture and mergers and acquisitions strategies will enable “the most agile companies in the sector” to capture an even larger portion of the expanding procurement budget, Brochet and Orchard stated.
They highlighted that Rheinmetall and Leonardo have been prominent examples of the joint venture strategy, in contrast to Thales and BAE Systems which have captured growth through their existing presence in local markets.
The U.S. industry has also employed the joint venture approach in Europe, with Anduril partnering with Rheinmetall and Kratos with Airbus in combat drones, and Lockheed Martin with Rheinmetall and RTX with MBDA in air-defense missiles, according to Brochet and Orchard.
Investment in European defense will focus on areas such as air defense, critically needed capabilities for Europe, as well as ground defense equipment like tanks and artillery. Other priority areas include deep strike, air dominance, aerial drones, counter-drone technology, naval capabilities, and space.
Drone innovation is still “very far” from reaching maturity, while anti-drone warfare capabilities have become as crucial as the drones themselves, the analysts noted. The cycle of countermeasures observed in Ukraine is no longer than three months, meaning counters are deployed within three months of the emergence of a new system, they stated.
“This implies that until the threat from Russia becomes more defined, European governments may be hesitant to place large orders for the production of drones that they would subsequently store, with a high risk of them becoming obsolete in just a few months.”
Funding for any public good such as defense comes from either borrowing or taxes, and this funding challenge is “particularly acute” for countries like France, the United Kingdom, Italy, and Spain, which have high levels of public debt, the Redburn analysts remarked.
Brochet and Orchard noted that public support for rearmament in Europe cannot be assumed, especially when it means trading social security for defense security in the absence of an immediate threat.
“This could lead to a significant and potentially radical rejection of the rearmament effort in European countries, particularly those far from the European border,” they said. “Upcoming elections in Europe are likely to test the determination of voters, with a risk of reversing the plan should a change in government occur.”
Another risk for European defense companies is pricing pressure should the conflict in Ukraine eventually conclude, the analysts mentioned. At that point, they expect a flood of battle-tested products to hit the international market, especially drones and ammunition, potentially offered at low prices and with short production times.
Western suppliers are implementing defensive strategies such as establishing joint ventures with the Ukrainian Defense Industry, according to Brochet and Orchard.
Jamal Peterson reports on defense, aerospace, and tech policy. With a military background and a strategic mind, he dissects complex subjects with clarity, offering readers sharp, reliable insights.
