European defence market: Trends

Publication date: 2007

The European defence market is constantly evolving but can be characterised by the following six general trends:

1. Diversification
2. Modernisation and Professionalisation
3. Merging of Defence and Homeland Security Requirements
4. Increased Competition
5. Uneven Procurement Reform
6. Increased Sensitivity to Costs

National defence industries are moving toward greater diversification, with the application of greater technology, and the need for more nuanced products such as less-than-lethals, more effective body-armors, and greater communications. At the same time, the international defence industry is seeing greater intra-industry integration as companies seek to leverage the opportunities niche competitors bring through acquisition, and access markets that were traditionally off-limits by finding partnerships and subsidiaries through M&A.

Defence forces across Europe are moving toward more professional and technologically advanced forces. Systems of particular interest to many of these modernising forces include: soldier systems and components; and Command, Control, Communication, Computers and Intelligence (C4I) systems and components as forces attempt to develop smaller, leaner, rapidly deployable and more networked militaries. While the upfront cost of moving from conscript forces to more professional and technologically advanced services can be high, the long-term benefit for national militaries, both in terms of operational effectiveness and long-term cost, will be considerable.

As the security and threat perceptions of states shift and increasingly focus on the threats posed by insurgencies, transnational criminal organizations, piracy, and terrorism, homeland security requirements are not only becoming more prominent, but are often intersecting and merging with broader defence and border security requirements. Defence service and product providers will be required to examine both the growing homeland security market and the traditional defence markets. Additionally, they may consider seeking ways to tweak existing product lines to meet the specific operational needs of the homeland security markets.

On the whole, the international defence market is becoming more competitive for two primary reasons. First, many states with even marginal domestic defence industries are implementing stringent procurement practices and policies that either require or strongly recommend that foreign firms partner with local firms in order to help build a more robust indigenous industry. This trend will lead to more competition within states as foreign prime contractors jockey for positioning to partner with local firms. In addition, there will be more international firms competing to penetrate these increasingly competitive markets. Second, many US companies have come to the recognition that the US defence budget is unlikely to grow to the degree that it has since the start of the 21st century and have accepted that they are vulnerable to downturns in the US homeland security and defence budgets. Thus, more US defence service and platform providers are explicitly exploring the markets in other parts of the world, particularly the nascent markets of Eastern and Central Europe. Finally, the intersection of the homeland security and defence markets, as well as the increasing demand for technologically advanced and effective solutions, have brought well-known but traditionally non-defence-related firms, such as Microsoft and Cisco, into the marketplace.

Procurement reform is far from uniform across the European defence market, however, it is increasingly a priority of several key states. The establishment of the European Defence Agency (EDA) brings a more structured process to European procurement and establishes a framework through which foreign companies can sell and market their platforms and services.

Cost has long been a factor in defence and security procurement initiatives and certainly that is the case today. Compounding normal cost sensitivities are growing domestic pressures to address non-defence requirements. While these trends have impacted budget formulation to a lesser extent in recent years, due to renewed concerns over transnational threats such as terrorism, long term cost sensitivities will continue to increase as domestic requirements grow. Historically, militaries were afforded a degree of leeway in regards to costs as it was seen as critical to maintain a strong defence posture. However, it remains likely that these rapidly increasing domestic pressures could begin to erode the historical cushion militaries have possessed, in turn, making cost sensitivity one of the leading characteristics of future military spending. Cost is likely to become a much greater factor in the procurement and acquisition assessment process, particularly as more countries seek to tighten their procurement practices.

Source: T. Nurkin - Jane's
Publication date: 2007

Related Defence Supplier Guidance

• The new EDA European defence equipment market

To find out how your company can successfully compete for procurement opportunities with European defence ministries and prime contractors, contact Jeffrey Strategic.