EDM: Since 2016, a new level of ambition matched by new policy initiatives has catapulted defence to the top of the EU’s agenda. What will this mean for the European defence industry?

Wolff van Sintern: There is indeed more momentum in the industry than we have seen for decades, triggered by a range of very different political developments. Without any doubt, defence budgets in the majority of the European countries are about to grow in the medium term even without an explicit 2%-of-GDP target. For the European defence industry we will see over time a greater consolidation on both the demand and the supply side. In terms of demand, Ministries of Defence will increasingly need to align the requirements for their major procurement projects and weapon systems and define and procure new systems jointly with other nations. The supply side will react to this with structures that allow the industry to meet this more standardized and aligned demand.  First indications of this new world can already be seen, for example the merger of a French and a German tank manufacturer merged just a few years ago.  Another current example is the intention of the German and Norwegian governments to procure identical submarines. This shows how the joint definition of requirements not only lowers procurement and lifecycle costs, but can also be the first and most important step towards deeper, more intense cooperation and interoperability between nations. 
 

Compared to the US, Europe’s defence industry and market remain fragmented which complicates efforts to make member states’ armed forces more interoperable. Is such a situation sustainable and compatible with the EU’s new ambitions on defence? 

Detailed analyses on fragmentation conducted in 2013 and again in 2017 show that nearly six times as many systems are used in Europe than in the US. A few examples reveal the extent of this problem: While the US produces only one main battle tank, 17 different types are built in Europe. Correspondingly, the US have a single main battle tank manufacturer while Europe had 13 in 1986 and still 6 in 2016. The US build 4 different destroyers and frigates, while Europe builds 29 – and has twice as many shipyards to do so.  From an economic point of view this is clearly not an ideal situation. If we want more interoperability among the armed forces of different member states, we need to decrease the number of systems and their variants. Nobody can really expect in-depth cooperation between different armed forces if – just to name one example – each frigate combat system looks very different. Greater standardization is important for another reason, too: It will enable states and governments to pool innovation effort funds so that they can develop new capabilities and remain competitive. Many new players are contributing to innovation in defence, and we in Europe should take this opportunity to team up and promote and push innovation.

Europe should take this opportunity to team up and promote and push innovation

One of your recent analyses of defence spending and productivity in Europe found that up to 30% of annual European defence investment could be saved through pooling of procurement. Could you think of a better argument for deeper defence cooperation?

The best argument for deeper defence cooperation and joint procurement is not the money it would save - though those are important - but the political and military benefits it would bring: greater integration based on standardized requirements and equipment, a higher level of interoperability, expanded capabilities, and greater – and more stable – weapon system availability. In short, Europe would be more effective from an output perspective. All of these gains would strengthen Europe's defence capability, which would be a strong signal in itself. 

The economic argument is secondary. It's clear that we could get more out of the existing system without spending even one more euro. Tackling these potential savings – which would indeed amount to 30% of spending – would free up resources to build additional capabilities and increase operability. 
 

There are also additional productivity gains possible after the joint purchase of capabilities, for instance in maintenance and other functions. Do you have estimates of how much could be saved there by doing these things together?

The savings logic that applies to procurement also holds true for maintenance and all other lifecycle costs. Massive potential exists to reallocate resources to new capabilities, because 30-60% of a weapon system's lifecycle costs are due to maintenance. Globally, defense maintenance represents a roughly USD 200 billion market. In order to reduce maintenance cost the sequence is important. First are joint requirements among multiple European armed forces for a particular weapon system – leading to the procurement of identical products – as a prerequisite to realizing lifecycle costs savings. Without identical products, real maintenance cooperation just can’t happen on a broader scale. Therefore one needs to also be realistic about the timing of such benefits.

Overall the focus should shift a bit more from input – or how much we pay – to output – what we get for our money. Cost-effective maintenance is necessary, but from an objective point of view, ensuring the availability of major weapon platforms or getting them operational at all are much bigger challenges at the moment for almost any nation. Reducing complexity by having fewer systems with an inherently better learning curve would help, as would more sharing of best practices among nations.

New approaches and tools for managing availability are essential, too. These can include incentive structures in industry contracts: Do suppliers get paid for spare parts, or the actual availability of weapon systems? Users and the industry also need to apply more sophisticated analysis methods, like predictive maintenance, to optimize maintenance schedules.
 

Despite the potential in productivity gains and cost-savings, member states still remain reluctant to engage in joint procurement, often for sovereignty’ reasons. How can this discrepancy be overcome?

In a world where a unilateral mission is an exception and joint European efforts are the "new normal," the question of whether joint procurement will impact nation states' sovereignty is the wrong one to ask. From the perspective of a German and European citizen, the biggest loss of "sovereignty" is the loss of capabilities that has occurred in the last several decades. Increasing our capabilities and the availability of our weapon systems thus needs to be a priority, and joint procurement and management are essential to do so. 

The questions we need to ask concern industrial policy and the appropriate share of work for national industries. Where do we focus industrial capacities in Europe, where are national monopolies necessary, and which areas should be opened up for European competition? How can  we structure a European defence industry that serves best our European needs? These are the questions that Europe's member states need to answer.

Looking forward, the discussion comes down to whether a single nation has the funding and expertise to develop the next weapon platforms on its own. Given the growing complexity of defence products and the industrial consolidation that has already taken place, the answer will increasingly be “no.”

According to your own findings, Europe deploys six times the number of different weapon systems than the US, even though it spends only 40% as much. How can this be changed?

As we have seen, fragmentation is very high. The reason for this lies within the industrial interests of the different nation states and a legacy of national monopolies, which grew from a political procurement process focused on supporting local defence players. To move towards joint European procurement, we have to talk about the elephant in the room: national industry workshare. As long as there is no joint European vision on what a consolidated defence industry could look like, national defence players will naturally continue to align closely with their national customers plus seek export opportunities.

The main question is how European governments and European institutions, such as the EDA, can organize such a dialog and, within the limits of European antitrust and competition law, create a blueprint for a consolidated European defence industry. The German-Norwegian naval cooperation mentioned earlier is just one example, although the fact that Norway is not part of the EU makes this joint effort more flexible in some respects. 

Reducing the number of different weapon systems in service takes time, as replacement cycles are long. It will even take decades to see the full effect. However the European supply side has already seen significant consolidation – for instance, the number of combat aircraft manufacturers fell from 16 in 1986 to 6 in 2016. There's simply less opportunity for fragmentation as a result.  
 

One of EDA’s core missions is to facilitate defence cooperation and strengthen Europe’s defence technological and industrial base. What could the agency do more or perhaps differently in this respect? 

I'm not in a position to comment on what the EDA could or should do; tasking and funding the agency is up to the EU member states. However, I think it is very clear that we need a strong convener to organize the necessary dialog between the member states. We need transparency and early cooperation on planned procurement projects, but even more importantly we need a serious dialog on Europe's future industrial landscape and the capabilities which are supposed to be supported and advanced within Europe.  

This dialog should range from high-level decisions on the industry blueprint to the very detailed technological questions involved in defining joint requirements. Given the importance of this discussion for the future integration of the European armed forces, we need someone fully dedicated to moderating this dialogue and who knows both the user and industry perspective. It comes down to talking "with each other” and not “about each other.”

Wolff van Sintern 

Since joining McKinsey in July 1999 in Atlanta (USA), Wolff van Sintern has worked predominantly in the Aerospace & Defense and industrial equipment space. He is a member of McKinsey's Advanced Industries Practice and leads McKinsey’s activities in the defence sector in EMEA. Wolff van Sintern also coordinates McKinsey’s collaboration with the Munich Security Conference (MSC) and contributed as Co-author to the McKinsey reports on “The Future of European Defence” as well as the McKinsey on Defense series.



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