Building European defense capabilities for a more volatile and uncertain world

After a period of relative stability, the world is becoming more volatile and uncertain. Pillars of stability in Europe such as resilient economies, robust public institutions, and energy security are being challenged, and recent changes in US foreign policy have thrown long-established alliances into question.

This change has major implications for European defense and security institutions—including ministries of defense (MoDs) and alliances such as NATO—as well as for defense contractors, which must shift from discretionary operations to heightened readiness.

Given these shifts, MoDs will have to adjust their risk appetite and become more agile and proactive. This includes a greater willingness to share both upside and downside risk with contractors, particularly when it comes to innovation and new commercial models.

Challenges in six areas

Defense enterprises face six broad challenges in adapting to the current environment:

1.      Lack of inoperability among Allied Nations. In a high-performing alliance, each party plays to its strengths and collaborates to build capabilities for the overall group. But countries inevitably have their own agendas, which compete against the strategic objectives of the alliance. One consequence is that many defense platforms have national variants that increase complexity without yielding advantages in the field.

2.      Insufficient coordination between government and industry. In Europe, many MoDs are not equipped to coordinate with industry on defense priorities and funding—mainly because of a fractured strategic planning process, volatile budgets, and poorly developed and communicated military requirements.

3.      Weak coordination among nations. European nations face significant challenges in coordinating their defense strategies, both within NATO and at the regional level. A complex web of more than 80 active alliances and defense cooperation agreements, each involving at least one European nation, only adds to the difficulty of forging a unified approach. This has led to fragmented and decentralized procurement in major defense programs.

4.      Minimal insight into current readiness levels. Military and government leaders often have limited awareness of current readiness levels, leaving them unable to spot or rectify emerging issues. Some national and regional initiatives are in place to create greater transparency, but many countries still lack integrated systems to provide real-time, granular information about current defense capabilities.

5.      Inflexible industrial supply base. In many European countries, defense manufacturers do not have the kind of flexible production lines that would allow them to scale up in response to new threats. This is exacerbated by the lack of government–industry coordination. The problem of inflexible capacity is particularly acute when new defense programs are ramping up into full production. As a result, more than 75% of aerospace and defense programs exceed scheduled timelines, and more than 40% run over budget.

6.      Lengthy and incremental innovation cycles. Many European nations are failing to keep pace with rapid changes in the threat environment. Lengthy development cycles are a result of issues across the entire innovation process, including limited coordination with suppliers and fragmented funding.

Three priorities to improve European defense capabilities

1.      Strengthen strategic command and coordination.

Industry and government must collaborate more effectively, sharing performance data and insights and aligning on overall strategic and tactical goals—with military capabilities as the primary objective:

• Establish a centralized control point to provide MoDs and industry with a view of baseline data—such as mission-capable rates, production rates, stock levels, and other key metrics—that can inform decision making.

• Develop long-term defense budget plans that include a baseline funding level, along with a supplemental amount that can be adjusted according to economic conditions and political priorities.

• Design procurement models that can enhance coordination between MoDs and industry.

2.      Boost industrial capacity.

Across alliances and nations, leaders can take several steps to boost industrial capacity in a coordinated, interoperable way:

• Set a North Star production target at the platform or submodule level, and continuously measure progress.

• Adopt best practices from the private sector to enhance agility.

• Integrate suppliers to meet evolving requirements.

• Secure a resilient supply chain for critical components by consolidating lists of high-performing suppliers and establishing contingency plans (such as call- or option-like agreements).

3.      Accelerate the pace of innovation where it matters most.

While the importance of innovation is growing, European defense entities have not been able to innovate effectively, primarily because processes tend to be slow and incremental. Defense contractors should be embracing new business models. Other measures to accelerate innovation include the following:

• Give startups and small and medium-sized enterprises better access to MoD programs.

• Tap into—and learn from—the venture capital industry.

• Where applicable, increase risk appetite to speed innovation—such as by removing obstacles to the acceleration of product development timelines.