European Land Defense Sector
In 2010 the EU land defense sector had a turnover of around €30 billion and employed 128,700 people. It has the capability for delivering and sustaining key military capabilities in areas such as main battle tanks and armored fighting vehicles, as well as for sustaining and upgrading platforms. Compared to military aeronautics, land defense is less technologically progressive and its systems are less R&D intensive with the exception of Unmanned Ground Vehicles, sensors, precision-guided ammunition and Chemical, Biological, Radiological and Nuclear (CBRN) protection. The sector has developed joint ventures and collaborative research with third parties, but not European collaborative projects similar to the aerospace sector.
The European land defense sector companies are much more dependent on defense-related activities than companies in other sectors, around 80% of their sales are defense-related. Whereas some of them have achieved notable export successes demonstrating its international competitiveness (e.g. German Leopard tank), there are reservations about the overall competitiveness of the sector. US firms tend to be 1.5 times larger on average than EU companies, achieving a larger output over fewer products (economies of scale) and are less dependent on defense.
Between 2005 and 2010 European defense spending declined by almost 10% in real terms. It is forecasted that spending between 2010 and 2013 will show a further decline of about 10%. This stands in striking contrast to global trends. World total defense spending is expected to grow by 6.8% between 2011 and 2015 as austerity in the West will be more than offset by accelerated defense spending in emerging markets. The US is expected to see severe cuts in defense spending by at least 10% over the period, while other regions such as China and Russia will up to double their defense spending. In 2012 Asian defense spending overtook Europe’s defense spending for the first time11. There is a risk that, by 2017, Europe will have lost 12% of its overall defense spending since the start of the economic crisis.
Iindustry consolidation has not taken place to the same extent across sectors. This is especially the case in the naval and land sectors where fragmentation is not only observed at regional level, but also nationally. In the land sector, industrial capabilities are concentrated in a few countries (particularly France, Germany and UK), and the supply chains are complex. The process of consolidation, for example in the area of armed vehicles, has largely taken place along national lines. Within the UK the armed vehicles sector has been reduced from 5 prime contractors to one, namely BAE Systems.
Defense companies need a critical size in order to be able to partially finance innovation (in particular in view of current cuts in EU defense budgets), operate globally and develop services. Yet few defense companies in Europe currently have this critical size, which implies constraints regarding their capabilities of self-financing future developments.
On top of the supply chains are the Prime Contractors (or ‘primes’). These are typically large companies, and in many cases national champions, which interact with Member States defense procurement authorities, or procuring bodies such as OCCAR and NATO agencies. These Prime Contractors work together with lower-tier suppliers in complex supply chains to produce specific defense products. Such a supply chain may involve many hundreds of companies. For example, to produce the UK Warrior AFV, over 200 first tier suppliers could be identified, whereas the German Leopard II tank combines the efforts of about 1,500 supplying companies.
The European defense industry has the capacity to develop, produce and export a wide range of competitive military equipment. Most of its investments in new equipment and defense R&D are linked to important military programmes launched by Member States in the previous decades. The reason why governments have to bear the part of R&D costs is that the time lag between initial investment in research and development through to in-service military capability can be up to twenty years. Moreover, the national orders are relatively small, guided by national specifications that limit the export potential and are subject to export controls. Consequently, there are few incentives for private investment given the timing and unpredictability of financial returns – thus R&D into new technologies relies, to a large extent, on government investment.
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