by Claude-France Arnould, EDA’s Chief Executive*
Defence and Security policy is not only a subject for politicians, diplomats and military strategists. Delivering credible defence capabilities is also about getting the underlying economics right; about having sufficient, sustainable resources available. and about retaining independence of action or “operational sovereignty”.
Recalibrating Defence in the new financial environment
At the moment European governments are going through a financial crisis which has further accelerated cuts in defence budgets. Europe’s ability to deliver effective military capabilities risks being eroded as Defence Ministries respond to their share of budget reductions. To keep the same military capabilities and to satisfactorily prepare for emerging threats with smaller budgets, a new approach is required.
A more systematic “Pooling and Sharing” of military capabilities – doing more together – is a response to these financial pressures. Member States are increasingly recognising that, in certain areas, it is better to have excellent shared capabilities rather than unsustainable national ones. They are responding to the challenge and searching for innovative ways to deliver more military capabilities together. EDA is playing a key role in supporting their efforts, acting as a hub to facilitate Member States’ initiatives on a European collaborative basis.
More off-the-shelf procurement, with greater openness to competition, is also seen by governments as a means of living within constrained budgets. This is consistent with the European defence package which entered into force this summer with the objective of strengthening an open and competitive European Defence Equipment Market and a long-term and genuine European Defence Technological and Industrial Base (EDTIB).
These developments have the potential to have far-reaching implications for Europe’s Defence including for its defence industry.
EDA’s role in strengthening the EDTIB
EDA is supporting Member States in identifying and analysing the implications of the changing business environment to Europe’s Defence Technological and Industrial Base. Only with a realistic appreciation of industry’s broad capabilities, including a good understanding of its limitations, can Member States ensure that their strategies will be supported by a strong and viable industrial base.
In this context the Agency is assessing progress on and considering an update of the 2007 Ministerial EDTIB Strategy. That document was a call for Member States to adopt a more collective, European approach to the industrial base matters rather than a range of purely national ones – “to recognise that a fully adequate DTIB is no longer sustainable on a strictly national basis” and to “develop a truly European DTIB”.
Inter alia the Strategy noted the importance of identifying Europe’s key industrial capabilities and need for less dependence on non-European sources of supply, both of which are important parts of EDA’s on-going work.
Industrial Capabilities at risk
European governments’ investment decisions underpin the future of the EDTIB. Their funding of military R&T is crucial to the sector’s future competitiveness and their decisions as customers shape its future size and structure. However, defence planners can take industrial capacity as a given, and perhaps be unaware of issues such as non-European dependence and long term security of supply. The risk is that for short and medium term financial expediency decisions could be taken which have a negative effect on the industrial capabilities required for the future. The situation is further complicated by a mismatch between the evolution of governmental defence policy and decision making in privately owned defence companies.
Ensuring that the value of Industrial capabilities is understood
In market economies it is only reasonable that industry makes money; defence companies are no different. Driven by the need to demonstrate shareholder value, companies can quickly shed industrial capabilities where there is no sign of sustaining government contracts. Companies can (and do) change business. Industrial capabilities – specialist competences - that can take many years to establish can be shed very quickly. Sometimes this happens through strategic decisions at corporate level; other times through middle managers “good housekeeping” measures: either way the outcome can be damaging. Reconstituting such capabilities is time-consuming and often prohibitively expensive. Obviously if you are dependent on non-European suppliers the case is the same but the decision is out of your hands.
That the key specialised facilities, skills, competences and know-how to develop, produce and support complex defence systems is retained in Europe can be clearly demonstrated. These competences do not exist in the civil world. If you take defence seriously, you recognise the value of a strong indigenous industrial base. You want suppliers on whom you can depend and who meet your security of supply requirements; having sufficient industrial capabilities to react flexibly and positively to evolving needs and priorities, particularly during times of conflict.
One only has to look at US defence industrial policy and at the efforts of emerging powers like China and India to develop indigenous defence industries, to recognise that the retention and development of such capabilities is of strategic importance.
The EDTIB underpins the credibility of the European Union’s Common Security and Defence Policy. It is a prerequisite that Europe identifies the key industrial capabilities it requires to meet future operational requirements and takes positive, collective, action to ensure that, in these key areas, the technology and the manufacturing capabilities are retained in Europe.
A strong EDTIB that exploits competition is required. However there must be acknowledgement of the need to sustain strategic industrial capabilities where necessary and agreement on a common means to achieve this with specific delivery methods. There currently exists no systematic process at European level to ensure that the EDTIB will be able to meet EU Member States’ future military capability needs. No practical means where by Europe can complement and add coherence to national investments. These weaknesses clearly need to be corrected and this is an issue that EDA is addressing in the context of the EDTIB strategy update.
What is the role for industry and what can industry offer?
Industry can help shape the evolution of government demand. It cannot afford to sit on the fence as defence policies evolve in the new financial climate. This is not going to be “business as usual” and there are opportunities for industry to help focus the debate. There is a need for a better industry-government dialogue on a European level; only when industry fully understands what will be needed in the years ahead can it realistically assess what issues it will face. And government decision makers need to fully understand the industrial base consequences of defence choices.
At EDA we see industry as a real partner. We recognise the need to better utilise the expertise and knowledge imbedded in the defence industry and the need for engagement. For example on Pooling and Sharing we have sought to proactively inform and consult. We will continue to develop this mutually constructive dialogue.
For industry’s voice to be heard in the new cash constrained environment there has to be a new message; a new bargain between industry and government. Industries need to take the initiative and make proposals on how they can assist through reciprocal action with governments.
There are many areas that could be considered. From an EDA perspective the following “illustrative list” merits further consideration. Industry could consider making proposals on:
- New business models; that would reduce the development risk and increase the speed of complex defence programmes.
- Risk sharing incentives which would reduce the cost of ownership of defence equipment.
- How governments might benefit from adopting commercial best practice solutions particularly in the context of pooling and sharing.
- How governments and industry might maximise the benefits of the R&T investment crucial to future competitiveness through avoiding duplicative defence research.
- An offer to increase industry R&T investment if governments can restructure their budgets to release more money for defence research.
- How prime contractors can take greater responsibility for the long term health of the supply chain.
- How industrial duplication could be addressed through companies reaching agreement on better sharing of industrial competences.
Difficult decisions lie ahead as Europe adapts to the new financial realities. If Europe is to retain the robust and competitive EDTIB it needs to underpin its future political freedom of action there needs to be change including a new business model for government and industry relations. By embracing new and innovative ways of working together we can retain effective military capabilities and a world class defence industry. And that’s something we at EDA believe is worth striving for.
*Article published on “Focus”, the magazine of the Aerospace and Defence Industries Association of Europe (ASD).