- Like any other, the defense market is characterized by a hierarchy of players.
- In Europe, while the air and maritime sectors had made progress in restructuring for many years, the land armaments sector was only just beginning to change.
- However, a hierarchy is taking shape, with system integrators at the top, followed by innovative and high-end systems and equipment manufacturers, then mid-range equipment manufacturers, whose independence is ultimately compromised
While defense manufacturers do indeed separate themselves from the rest of the market by the products they distribute, and the types of clients they serve, they are otherwise subjected to all the other normal rules of the industry market. Financial resilience, capacity to innovate, flexibility to client demands and critical size are all factors they must keep in mind and which will heavily impact their future. In Europe, not all producers are performing equally.
Until now, Europe has not been able to shake off one of its main industrial problems in the defense industry: overcapacity due to overlaps. Since the European market is not integrated, as the American market is, many States still compete against each other for clients. Due to the nature of armament, these clients will often be few, and local. Long-distance deals do exist, of course, but are in very limited numbers and generally reserved to technologically specific segments. In its 2019 report, the Rand corporation writes: “There is both a considerable degree of fragmentation in the armoured vehicle holdings of EDA pMS and a considerable degree of overlap among countries that own the same vehicle families in all three vehicle categories. This coincides with an overcapacity within the European defence industry relative to the size of the European market.” The European market is limited to roughly 30 client-States and falling defense budgets are further tightening the market.
Entrance thresholds, being lower than in the naval and aeronautics segments, encourage the higher number of players and prices vary significantly, according to technological capacities. In this intricate market, some defense firms fare much better than others. And now that the market is starting to segregate integrators from simple producers, good and bad fortunes may accelerate. Indeed, the market is divided, with simple developers on the one side, and architects on the other, which are able to integrate, in addition to developing. Hans-Christophe Atzpodien, chief of the BDSV (German armament syndicate) explains what is at stake: cooperation amongst European firms will enable the suppression of redundancies and the deployment of Europe’s true potential.
The market leaders
Success begets success: firms which currently have leadership and have positioned themselves as key players will likely maintain their position in the foreseeable future. Leadership can currently be acquired in one of two categories: systems integrators (often known as Tier 1), who are responsible for the assembly of the final product and its delivery to the client, and equipment builders (also known as tier 2 or 3 manufacturers, depending on their innovation skills and their products’ quality), who design and produce modules under the leadership of the integrators. In this new modus operandi, two factors stand out as critical : direct contact with the client, and the ability to understand the notion of “systems of system”. These factors enable the manufacturer to adapt and innovate, both upstream and downstream, and thus adapt equipment rapidly upon user feedback – something the French have established leadership in. This guarantees that end users – military forces – can have the best gear possible, adapted to their working environment. Naturally, as such, firms which operate in countries who have high levels of military activity will have a great advantage in keeping their thumb on the pulse of military relevance. This hinges on the fact that customers and the final purpose of these defense firms’ products are, in their essence, unique.
In this environment, only firms with high export figures and those with specific and critical expertise will prosper. Several European firms, such as Nexter and RheinMetall, fall within this category. Smaller manufacturers with less aggressive export policies, such as Belgian manufacturer CMI, are already losing ground (see below). Highly-specific segments such as high-tech ammunition exclude most manufacturers, and are covered by a handful, like Nexter, RheinMetall and Nammo.
Firms on the fast track are architects or systems integrators, who benefit the rising complexity of military systems and find themselves at the pinnacle of the value chain. In Europe, this basically boils down to Nexter, GDELS and RheinMetall. Nexter is the French Army’s main supplier and, with France as the militarily most active country in Europe, this serves as a guarantee for the quality of what they are able to produce. Smaller manufacturers with technological nuggets also have a bright and shining future, such as Milrem (Estonia), which possesses the most advanced land robotics programs, like the Themis platform, and collaborates with leading firms, Nexter and MBDA. German RheinMetall is also on a hot streak, though this may not be as structural a growth as they may wish. Export sales are up: a slumping automobile sector, in which they are also heavily involved, has led them to re-focus their efforts towards armament, if only temporarily. Also, domestic sales are booming thanks to the Bundeswehr catching up on modernization programs which have fallen behind schedule. However, the export sales afterburner is coming at a heavy cost, which may put a damper on future performance : RheinMetall has been barred from India and Greece, and is suspected of having outsourced production to South Africa in an attempt to skirt export regulations. If so, it should expect to come under additional fire as ethical pressure mounts on manufacturers.
Traditional manufacturers coasting on the market
Numerous manufacturers in tiers 2 or 3 have found niche markets and enjoy the leisure of long-term governmental contracts. Their technology is currently relevant, as it will remain in the foreseeable future. Their market position is secured, as long as tier-1 integrators are willing and able to send orders and as end users continue to recognize their value. The Kongsberg-Patria consortium is a good example of this category, as their products satisfy basic needs of even the most advanced armies. The consortium, for example, has seen its mortar shell contract renewed by the US Army. The Patria 8×8 military vehicle places itself in the mid-range of the market, neither low-grade nor high-grade. Patria is a relatively modestly-sized company, and virtually the only one in Finland. Because it must cover all segments (land, naval and aeronautics), it is unable to build advanced expertise in any of them and lacks command on many of the latest technological developments which forces now require. Finland therefore turned to Germany to buy its latest fleet of tanks, as Patria did not master the spectrum of attack capacities and heavy armor at the level which the Finnish army requires.
General Dynamics European Land Systems is also among the “coasters”. With lack of focus on its strategy, GDELS is maintaining its momentum mostly thanks to its name, and represents little more than several acquisitions taped together, with little or no synergy. It is keeping its head above water, but its flagship program, the Ajax military vehicle for the British Army, ran into serious turbulence, and GDELS had to accept being a co-contractor on Spain’s 8×8 VCR program.
Finally, KMW is still in the black also, with the Leopard 2’s maintenance contracts still proving a healthy source of income. The second-hand market for the Leopard 2 is also promising, thanks to the many countries who wish to acquire the high-quality tank without choking down the hefty price tag of the new version. KMW is making sun while the sun shines, but its cash-cow may get skinny in a hurry, with the use of heavy tanks decreasing in the world. Fortunately, it has partnered with Nexter, forming the new Franco-German KNDS, which may prove beneficial if it can catch some of the French partner’s synergy. Nexter entertains extremely close tie with the very operational French army and will be a leading player of the MGCS program.
Many players dropping out of the game
Finally, there are the many firms whose business model has reached their limits and who are slowly dropping out of the market or losing touch with their clients. These are the firms which have fallen too far behind in terms of innovation and, while they have maintained their production and operational capacities, are no longer able to respond to their clients’ needs adequately. In other words, these are the firms whose clients have technologically outgrown them.
John Cockerill, formerly known as CMI, is specialized in cannons, from medium to large calibers, but has fallen behind as ammunition technology soared in recent years. Aware of its stalling, it has recently massively re-invested in its research and development capabilities.
Italy’s manufacturer’s have also lost touch, even with their domestic forces. Iveco and Oto Melara, which traditionally equipped the Italian esercito, were unable to present successors to the Dardo and Freccia programs, or even an upgrade to the Ariete. Italian forces will therefore presumably be simply turning to foreign suppliers in the very near future.
Finally, the Eastern part of the continent which was rich in manufacturers until now, seem to have been unable to catch up with the technological hampers induced in the 1990s. Polish group PGZ , for instance, was unable, despite a large-scale consolidation of the domestic military market under its leadership, to supply its own army in heavy armor. Polish forces therefore had no choice but to turn to foreign suppliers and purchased the German Leopard 2 (see above).
In an attempt to revamp its dynamic, PGZ supplier announced that it would be in the top ten European land defense producers within the next 15 years, and it may be accurate in this forecast. What the statement fails to indicate, though, is that this may well mean last on the market, given how disparate the market is, and how quickly some manufacturers are losing speed. The market’s invisible hand may be doing what European governmental elites have failed to do for decades: integration of the land defense industry on the European level