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A Growth Plan for the European Defense Industry

Only closer collaboration can fill capability gaps and drive revenues

The defense industry worldwide has grown at a tremendous pace in recent years, with revenues of the 100 largest firms globally increasing by 36% in the five years to 2019. European countries have played their part, after NATO members committed to investing in their capabilities at the 2014 Wales summit. Yet revenues among European defense companies have stagnated over the same period, and the region’s biggest players have lost market share to US and Chinese counterparts.

So what is holding European companies back? The main reason is that defense and security spending decisions are made at a national political level, with each country having their own national industry champions, resulting in a huge range of products and platforms developed at great expense by a large number of manufacturers, with few opportunities to sell at scale or to share expertise across borders.

For European governments, this situation results in high-cost defense equipment and does little to fill national capability gaps. No single European country has a comprehensive portfolio of equipment and capabilities across the air, land, sea, cyber, and space domains. At a European level, the full capability spectrum does exist, but systems are not designed to work together, thereby hindering interoperability and the deepening of an independent European defense capability.

To build up pan-European capabilities, companies and governments should

make the potential for a product or service across the European and broader export market the starting point for new product development

cooperate with a wider range of European partners

adopt an agile approach to contracting and

ensure spending is highly targeted and productive

Despite the turbulent Covid-19 situation, the European defense industry has good chances to overcome the effects of the pandemic and potentially emerge even stronger than before. There are no strong signs that governmental spending on defense equipment is slowing down in the mid-term. The volatility of other industrial sectors may therefore drive a shift of resources from civil business segments towards a reprioritization of more crisis-resilient government and defense programs. Yet, it is important to note that in the long run, governments will likely have to weigh military spending against commitments to other sectors they deem important.

A more detailed analysis of government spending on defense across European nations highlights that recent budget increases have mainly been used to increase defense equipment spending, rather than other areas of expenditure such as personnel. However across the region’s main defense spending governments, including Germany, Italy, Poland, Spain, the UK and France, equipment spending is unevenly distributed.

Actions to take to build pan-European capabilities and grow industry revenues

To address the capability challenges and build sustainable revenue growth for European defense companies, we recommend the following four actions:

  • Take a pan-European approach to make the most of defense spending
  • Broaden cooperation between suppliers
  • Take an agile approach to contracting and performance
  • Make spending more targeted and productive

Both governments and the defense industry in Europe are facing an imperative to work in a new and more collaborative way. For nations, a homegrown defense industry is essential in order to meet the sovereign security responsibilities of individual countries, the EU and the region as a whole. For companies, the high number of manufacturers providing individual country-specific military platforms is preventing the industry from benefiting from higher government spending, holding back economies of scale and acting as a brake on information sharing and technological progress.

Contact us

Dr. Jan H. Wille

Dr. Jan H. Wille

Partner, Strategy& Germany

Dr. Hans-Jörg Kutschera

Dr. Hans-Jörg Kutschera

Partner, Strategy& Germany

Albert Zimmermann

Albert Zimmermann

Partner, Strategy& Germany