Etude

War In Ukraine is Shifting Priorities in Aerospace and Defense

As NATO and the EU bolster defense arsenals, industry leaders face urgent new demands and challenges.

Par Clark Herndon, Holger Lipowsky, Pierluigi Serlenga, et Katherine Kajzer-Hughes

First published on mai 11, 2022
min


The Russian invasion of Ukraine is a humanitarian tragedy. NATO and European country leaders, stunned by Russia’s determination to subjugate an independent country on Europe’s eastern flank, rapidly overhauled their defense policies and increased long-term defense budgets. Germany will nearly double defense spending for the next 10–30 years. Altogether, European NATO defense outlays are likely to rise by $50–$75 billion (see Figure 1). Figure 1 NATO and European countries are increasing defense spending by $50 to $75 billion following Russia’s invasion of Ukraine The fundamental shift in NATO and European defense policy has immediate and long-term ramifications for the industry. Leadership teams must cope with a sudden, unexpected surge in international demand for equipment and disruptions to supply chains. At the same time, they need to respond to decisions by defense ministries to modernize their arsenals at a faster pace. Key challenges For decades, defense spending has been a steady, predictable business. The Ukraine war has required leadership teams to abruptly adapt their operations and strategy to a new set of priorities. As they do that, three key challenges loom large: managing supply chains strained by global supply disruptions and increased procurement volume; expanding the services side of the business; and expediting investment in R&D. Supply chain management. The US and European countries are placing urgent orders for equipment and weapons to support Ukraine and to replenish depleted stockpiles in neighboring nations. One defense CEO compared the pressing demand for defense equipment to the scramble for personal protective gear during the early days of the Covid-19 pandemic: Military customers are asking for all available equipment as quickly as possible. Meeting that demand is doubly challenging since global supply chains already are strained by geopolitical tensions and pandemic disruptions. Leading companies are redoubling efforts to improve supply chain resilience through stringent supplier monitoring and agile decisions to improve supply flexibility where possible. Expanding service capacity. As companies deploy more equipment, the demand for service, training, and operations support will grow significantly and exceed firms’ capacity. Leading companies are adding talent, infrastructure, and capabilities to ensure they can meet long-term service requirements. Germany’s purchase of F-35 combat aircraft, for example, is expected to require training, support, and maintenance for years to come. Canadian orders for the same aircraft will add to that demand. Accelerating R&D investment. To modernize their armed forces for the next generation of threats, the US and the European Union (EU) are rethinking which technologies and systems to prioritize. In response, leading aerospace and defense companies are accelerating development of integrated and autonomous systems, precision-guided missiles and missile defense, cyber and digital capabilities, and hypersonic weapons. While the invasion of Ukraine has boosted demand sharply, it has not altered defense officials’ thinking about the key technologies European and NATO countries need to respond to current and future threats. In most cases, US and European defense spending priorities are not changing dramatically. However, defense companies need to respond rapidly to rising orders for equipment, new investments in force readiness, and the strengthening of a pan-European defense collaboration. Increased spending in the near term, however, will not necessarily resolve critical EU competitions to determine preferred technologies and programs for the future. As budgets grow, so will funding for competing solutions and extensions or adaptations of legacy programs, and that may delay decisions. Some industry leaders expect both Airbus’s Future Combat Air System (FCAS) and BAE’s Tempest fighter jet to receive extended development funding. Procurement officials may ask rivals to collaborate more closely with an aim of future convergence. But resolving the fighter jet competition may now take longer than previously anticipated. In addition to those challenges, US and European companies face new operational and strategic issues specific to their region. Pan-European collaboration European defense agencies are likely to seek greater pan-European aerospace and defense collaboration in the next decade. For example, the EU’s recent authorization of the Strategic Compass program creates a rapid deployment force of 5,000 EU troops, deployable within 30 days, and further advances the EU’s strategy for space, cyber defense, and intelligence sharing. Partnerships and alliances will be better positioned to win large contracts spanning different geographies and to support an increasingly coordinated EU defense strategy. Although EU defense collaboration will grow, individual governments will continue to maintain a strong national industrial defense base. We do not expect a major wave of defense consolidation in Europe, but rather continued national focus on specific areas of domain expertise. Accelerated near-term defense spending is not likely to undermine long-running development programs. We do, however, expect procurement agencies to push to rapidly modify existing legacy platforms and simplify procurement cycles. The conflict in Ukraine has shown that even dated technology is an effective deterrent. That may encourage governments to fund retrofits and modifications to existing equipment—particularly given pressure on supply chains and the long duration of traditional development programs. Take the case of the Eurofighter program. Even though the German government has committed to buy F-35s, there is an expectation that it will continue long-term funding for the Eurofighter program. Speeding US sales to Europe US contractors face a key challenge in speeding the deployment of US technology to European allies. To expedite the process, defense firms can work with the US government to simplify foreign military sales and direct commercial sales. The war in Ukraine also has elevated the need for US contractors to maintain a robust international footprint and for greater alignment with allied European defense ministries. As the push for commonality and interoperability grows, US aerospace and defense firms may find that they have viable off-the-shelf solutions that can be deployed rapidly in Europe. Growing European demand for US defense equipment has prompted leading US contractors to prepare for offsets and industrial investments on the ground to ensure long-term operations and maintenance support. A sharp increase in European defense outlays may improve the viability of equipment and systems that previously didn’t seem to make sense. Contractors everywhere should reevaluate the business case and scenario planning for their entire portfolio. Europe has entered a new era of defense policy and defense spending. War in Ukraine has prompted an industry-wide surge in demand. It also has galvanized NATO countries to rapidly modernize defense systems and equipment—a move unprecedented since the end of World War II. Leading suppliers are adjusting swiftly to meet new priorities and starting to lay the foundation for a more integrated, high-performing US-European defense landscape.

The Russian invasion of Ukraine is a humanitarian tragedy. NATO and European country leaders, stunned by Russia’s determination to subjugate an independent country on Europe’s eastern flank, rapidly overhauled their defense policies and increased long-term defense budgets. Germany will nearly double defense spending for the next 10–30 years. Altogether, European NATO defense outlays are likely to rise by $50–$75 billion (see Figure 1).

NATO and European countries are increasing defense spending by $50 to $75 billion following Russia’s invasion of Ukraine

The fundamental shift in NATO and European defense policy has immediate and long-term ramifications for the industry. Leadership teams must cope with a sudden, unexpected surge in international demand for equipment and disruptions to supply chains. At the same time, they need to respond to decisions by defense ministries to modernize their arsenals at a faster pace.

Key challenges

For decades, defense spending has been a steady, predictable business. The Ukraine war has required leadership teams to abruptly adapt their operations and strategy to a new set of priorities. As they do that, three key challenges loom large: managing supply chains strained by global supply disruptions and increased procurement volume; expanding the services side of the business; and expediting investment in R&D.

Supply chain management. The US and European countries are placing urgent orders for equipment and weapons to support Ukraine and to replenish depleted stockpiles in neighboring nations. One defense CEO compared the pressing demand for defense equipment to the scramble for personal protective gear during the early days of the Covid-19 pandemic: Military customers are asking for all available equipment as quickly as possible. Meeting that demand is doubly challenging since global supply chains already are strained by geopolitical tensions and pandemic disruptions. Leading companies are redoubling efforts to improve supply chain resilience through stringent supplier monitoring and agile decisions to improve supply flexibility where possible.

Expanding service capacity. As companies deploy more equipment, the demand for service, training, and operations support will grow significantly and exceed firms’ capacity. Leading companies are adding talent, infrastructure, and capabilities to ensure they can meet long-term service requirements. Germany’s purchase of F-35 combat aircraft, for example, is expected to require training, support, and maintenance for years to come. Canadian orders for the same aircraft will add to that demand.

Accelerating R&D investment. To modernize their armed forces for the next generation of threats, the US and the European Union (EU) are rethinking which technologies and systems to prioritize. In response, leading aerospace and defense companies are accelerating development of integrated and autonomous systems, precision-guided missiles and missile defense, cyber and digital capabilities, and hypersonic weapons.

While the invasion of Ukraine has boosted demand sharply, it has not altered defense officials’ thinking about the key technologies European and NATO countries need to respond to current and future threats. In most cases, US and European defense spending priorities are not changing dramatically. However, defense companies need to respond rapidly to rising orders for equipment, new investments in force readiness, and the strengthening of a pan-European defense collaboration.

Increased spending in the near term, however, will not necessarily resolve critical EU competitions to determine preferred technologies and programs for the future. As budgets grow, so will funding for competing solutions and extensions or adaptations of legacy programs, and that may delay decisions. Some industry leaders expect both Airbus’s Future Combat Air System (FCAS) and BAE’s Tempest fighter jet to receive extended development funding. Procurement officials may ask rivals to collaborate more closely with an aim of future convergence. But resolving the fighter jet competition may now take longer than previously anticipated.

In addition to those challenges, US and European companies face new operational and strategic issues specific to their region.

Pan-European collaboration

European defense agencies are likely to seek greater pan-European aerospace and defense collaboration in the next decade. For example, the EU’s recent authorization of the Strategic Compass program creates a rapid deployment force of 5,000 EU troops, deployable within 30 days, and further advances the EU’s strategy for space, cyber defense, and intelligence sharing. Partnerships and alliances will be better positioned to win large contracts spanning different geographies and to support an increasingly coordinated EU defense strategy.

Although EU defense collaboration will grow, individual governments will continue to maintain a strong national industrial defense base. We do not expect a major wave of defense consolidation in Europe, but rather continued national focus on specific areas of domain expertise.

Accelerated near-term defense spending is not likely to undermine long-running development programs. We do, however, expect procurement agencies to push to rapidly modify existing legacy platforms and simplify procurement cycles. The conflict in Ukraine has shown that even dated technology is an effective deterrent. That may encourage governments to fund retrofits and modifications to existing equipment—particularly given pressure on supply chains and the long duration of traditional development programs. Take the case of the Eurofighter program. Even though the German government has committed to buy F-35s, there is an expectation that it will continue long-term funding for the Eurofighter program.

Speeding US sales to Europe

US contractors face a key challenge in speeding the deployment of US technology to European allies. To expedite the process, defense firms can work with the US government to simplify foreign military sales and direct commercial sales.

The war in Ukraine also has elevated the need for US contractors to maintain a robust international footprint and for greater alignment with allied European defense ministries. As the push for commonality and interoperability grows, US aerospace and defense firms may find that they have viable off-the-shelf solutions that can be deployed rapidly in Europe. Growing European demand for US defense equipment has prompted leading US contractors to prepare for offsets and industrial investments on the ground to ensure long-term operations and maintenance support.

A sharp increase in European defense outlays may improve the viability of equipment and systems that previously didn’t seem to make sense. Contractors everywhere should reevaluate the business case and scenario planning for their entire portfolio.

Europe has entered a new era of defense policy and defense spending. War in Ukraine has prompted an industry-wide surge in demand. It also has galvanized NATO countries to rapidly modernize defense systems and equipment—a move unprecedented since the end of World War II. Leading suppliers are adjusting swiftly to meet new priorities and starting to lay the foundation for a more integrated, high-performing US-European defense landscape.