Although reduced defence spending affects R&D programmes, its biggest impact is on industrial production. By downsizing orders for frigates, tanks, helicopters and other military hardware, EU governments are hitting manufacturing plants throughout the region.
This is making life hard for defence industry contractors. Small- and medium-sized companies used to be able to absorb their fixed manufacturing costs for long-batch quantities over several years. That is no longer the case, yet customers still expect them to maintain the same level of service in terms of spare parts, obsolescence management, etc.
This situation is made even more critical by market divisions within the EU. That puts European defence contractors at a disadvantage compared to counterparts in the United States, where purchasing decisions are made at federal level and the quantities of equipment ordered are way beyond those sought by individual nations within the EU. The scale of orders helps American SMEs offer equipment off-the-shelf at competitive prices.
US companies are often able to standardise specifications, amortising R&D costs on larger product series. Producing larger batches of equipment, they can cover development costs faster and realise a return on investment in a shorter timeframe.
The situation in Europe is very different. In most cases, product specifications are still made at a national level, with only rare exceptions in which two or three countries sign up for transnational programmes. The presence in most European countries of major national players such as for example in the submarine-building industry, DCNS in France,Fincantieri in Italy and Thyssen Krupp Marine Systems in Germany illustrates the market’s fragmentation.
The development of so-called dual-use programmes is a possible solution. There are many examples of dual-use products designed for both military and civilian purposes. They range from equipment to protect against nuclear, chemical and biological hazards used by military personnel, police forces and fire fighters, to electronic boards and computers developed for armoured vehicles, public transport and industrial applications.
The advantages are obvious. Companies working for the defence sector have some of their development and innovation costs financed by military spending, but can also increase industrial capacity as the same products address civilian market needs. The defence sector benefits from cost and service optimisation as a direct result of larger scale industrialisation, bigger production batches and the amortisation of fixed costs on more products. It looks like a win-win situation.
Clearly, this dual approach cannot be applied to all defence industry products. There are confidentiality limitations with strategic technologies, and the specific characteristics of certain products means they don't have civil applications. However, the increasing cost of R&D and the acceleration of technological progress are contributing to the growing strategic importance of this kind of diversification.
This article is part of Friends of Europe’s upcoming discussion paper on the future of dual-use technologies in Europe.
The full discussion paper will be available in early September. Read the other articles here.