Key Takeaways:
- Geopolitical Shifts Driving Defence Demand: Europe’s response to conflicts and security threats has accelerated investment in defence, prompting a pivot from sectors like automotive into military manufacturing
- Industrial and Supply Chain Transformation: Automotive firms and SMEs are repurposing capacity for defence, but fragmented procurement models, regulation and certification requirements remain major barriers
- Procurement’s Critical Role in Adaptation: Flexible sourcing, supplier qualification and risk management are now central to balancing agility with compliance and ensuring long-term resilience in defence supply chains
In recent years, Europe has faced significant market fluctuations, driven by the lasting impacts of COVID-19 and the economic shocks stemming from the Russia–Ukraine and Israel–Iran conflicts. These geopolitical and economic shocks have also shifted demand across core industrial sectors, particularly defence. For instance, the escalation of the Russia–Ukraine conflict exposed critical gaps in Europe’s defence manufacturing capabilities. At the outset of the war, Germany had only two days’ worth of ammunition, and France had just 80 artillery vehicles available, revealing a stark lack of preparedness. This vulnerability alarmed national governments and international institutions, prompting European policymakers to prioritise increased defence spending and industrial readiness.
In response to these challenges, the EU launched the European Defence Industrial Strategy (EDIS) and proposed the European Defence Industry Programme (EDIP) in 2024 as a long-term financial initiative. Together, these programmes represent a significant shift in Europe’s approach to defence spending and industrial capacity. EDIP alone allocates €500 billion to support long-term intra-EU defence projects, signalling a broader revival of interest in defence manufacturing. Likewise, non-EU countries such as the UK and Norway have ramped up their defence spending, underscoring common strategic priorities.
The renewed emphasis on defence and industrial resilience politically has also prompted a strategic reassessment of national manufacturing focus across Europe. In the subsequent sections, we will analyse how individual countries are addressing these developments, the supply chain challenges encountered during this transition, and the emerging opportunities for innovation driven by evolving defence and industrial requirements. Finally, we will outline Procurato’s perspective and how we address this change with our clients.
An Industrial Shift, From Automotive to Defence
Germany, Europe’s largest economy and home to both a world-class automotive sector and several key defence firms, is a clear example of the continent’s strategic shift towards rearmament in industrial manufacturing. In 2023, the German Security and Defence Industry Association (BDSV) proposed repurposing idle automobile factories to produce military equipment, aiming to address bottlenecks in arms production while stimulating economic growth. According to the proposal, facilities and workers previously dedicated to manufacturing cars and car parts could be redirected to produce armoured vehicles, munitions, and other defence materials. This idea has gained significant traction alongside sharp increases in defence funding at both national and European Union levels. For example, Germany approved a €100 billion defence fund in 2022. Additionally, initiatives such as the European Defence Industrial Programme (EDIP), the European Defence Investment Strategy (EDIS), and the “ReArm Europe 2030” plan are channelling substantial investment into defence spending across the EU’s 27 member states. These measures reflect the scale of the EU’s commitment to long-term security and strategic autonomy.
These initiatives have been met with an equally decisive response from the private sector, as defence firms and automotive giants begin operationalising this pivot through workforce retraining and factory conversions. In mid-2024, automotive parts giant Continental and arms manufacturer Rheinmetall signed an agreement to retrain laid-off automotive workers within the defence sector. Rheinmetall also announced plans to convert two of its former car component factories into sites focused primarily on the production of military equipment. Similarly, Volkswagen has explored partnerships with defence contractors to adapt production lines for manufacturing military equipment, such as logistics vehicles and communication systems. These transformations underscore a significant shift in industrial strategy as companies quickly adapt to the increasing demand for military technologies.
Engrained Problems within the European Defence Industry
While the automotive sector offers a promising means of rapidly scaling up defence production, meeting Europe’s broader strategic requirements will require a substantial increase in the number and capacity of defence firms. Currently, the continent has relatively few major defence manufacturers, and these alone are insufficient to meet the sharp rise in demand. As of 2024, only 19 of the world’s top 100 defence companies were based in the European Union, compared to 48 in the United States. More strikingly, the combined annual revenue of the entire EU-based defence industry is roughly equivalent to that of a single U.S. firm—Lockheed Martin—highlighting Europe’s enduring post-Cold War reliance on a narrow base of specialised production.
Europe’s defence market remains fragmented along national lines, with countries often favouring domestic suppliers and pursuing bespoke military requirements. While this supports national industries, it limits economies of scale and discourages significant investments in production capacity. For instance, 27% of EU defence procurement is made through joint initiatives, compared to 61% in the U.S. The result is persistently high unit costs and limited peacetime output across key systems, such as tanks, artillery, aircraft, and ammunition, highlighting a fundamental weakness in the current model.
The need for European countries to adopt more efficient and generalised systems to bolster local resilience is underscored by the ongoing war in Ukraine. Confronted with high-intensity conflict nearby, European governments quickly found their defence industries unable to supply equipment at scale and speed. Between February 2022 and June 2023, 78% of EU defence procurement went to non-EU suppliers. This reliance emphasises the greater need for self-sufficiency and a more integrated European defence market. Joint procurement, industrial consolidation, and standardised orders are all seen as key to scaling production and cutting costs. The EU’s new Defence Industrial Strategy urges member states to buy “more, better, together, and European.” This aims to shift procurement towards domestic suppliers and strengthen strategic autonomy. In the short term, manufacturers are repurposing idle automotive plants and drawing on existing engineering expertise to meet urgent demand, closing capacity gaps and revitalising Europe’s industrial base. Long-term success, however, will depend on flexible procurement and responsive supply chains.
Procurement Complexities and Regulatory Barriers
However, entering the defence market or converting existing automotive plants to meet urgent product shortages also offers complex challenges. The defence sector is highly regulated, requiring new entrants to navigate stringent government procurement rules, compliance standards and often complex classification requirements tied to national defence obligations. For instance, in Germany, defence contractors must adhere to strict oversight by the Bundeswehr’s procurement office, meaning companies must document costs and comply with profit margins set by authorities. Likewise, European export control laws 1Compliance is required, as military goods cannot be freely sold or transferred without a license. Engaging in the defence sector involves significantly more regulatory complexity compared to the automotive and consumer manufacturing industries, resulting in higher barriers to entry and limited immediate returns.
An additional significant barrier to entry is the stringent quality and certification standards inherent to the defence sector. Military equipment must meet precise technical specifications and safety requirements that far exceed those of standard commercial products. Many smaller firms lack the necessary certifications or established procedures to obtain them, and addressing this gap often requires substantial time investment. Although governments have begun offering guidance and financial support to help adaptable SMEs obtain necessary certifications, the process remains lengthy and complex. Moreover, new defence suppliers must navigate contracting timelines that are typically more protracted and less predictable than those in commercial markets. As a result, production planning must be sufficiently flexible to accommodate sudden shifts in demand, posing distinct challenges for companies accustomed to more stable commercial environments.
Another substantial barrier to entry is the management of risk, both performance and financial-based. Defence contracts require absolute reliability, and failure to deliver on time or with defects can have life-or-death consequences. Governments, therefore, impose strict performance guarantees on contractors. Defence projects also often include heavy penalties for late delivery or non-performance, with milestones being closely monitored by contracting authorities. For example, a recent NATO defence contract with a major supplier included penalties for failure to meet milestones, sometimes amounting to 5% of total project cost per month of delay. Suppliers without a proven track record face industry scepticism, so they must persuade procurement officials that they can be managed effectively. This heightened scrutiny translates into a need for robust risk management practices among companies. These factors raise the bar for entry and certainly deter some potential participants. On the financial side, defence contracts often involve long development cycles or top-heavy investments, and smaller suppliers can struggle with cash flow while awaiting milestone payments. Traditional lenders have been hesitant to finance defence-related projects due to perceived political or ESG concerns, which compounds the challenge for SMEs seeking capital. It also means that firms venturing into the defence sector may need new types of insurance coverage. Collectively, these operational, financial, and reputational challenges make entry into the defence sector a highly demanding process—one that requires strategic resilience and long-term commitment.
Current Innovation and SME Participation in the Defence Industry
While heavy regulation and stringent quality standards pose significant challenges, the growing demand for defence products presents substantial opportunities for firms considering entry or expansion into the market. With Europe’s broader economy relatively stagnant, the defence sector is experiencing a marked boom. Between 2022 and 2024, defence spending across the EU increased by €72 billion, reaching 1.9% of the bloc’s total GDP. This surge, combined with rising geopolitical urgency, creates a strong case for companies in industries like automotive and electronics to consider pivoting toward defence.
European governments are encouraging new suppliers, particularly small to medium-sized enterprises to support defence requirements. Some of the most innovative technologies, including artificial intelligence and cybersecurity tools, often come from smaller firms. In response, both EU institutions and national governments have introduced initiatives such as the European Defence Industrial Strategy, designed to lower entry barriers and provide targeted support.
For companies capable of adapting, this shift presents an opportunity to diversify operations, leverage existing capabilities in a growing market, and address critical supply chain shortages. If managed effectively, this transition can also strengthen economic resilience. Skilled workers in fields like precision machining and advanced electronics can be retrained for defence production, helping to preserve industrial expertise while contributing to national and European security objectives.
Procurato’s Perspective on Industrial Rebalancing and how we address it
Europe’s shift towards increased defence manufacturing has far-reaching implications for procurement strategy and supply chain management. Scaling up production in this environment requires not only speed but also careful control of quality, cost, and risk. Governments and defence industries are having to rethink traditional contracting approaches, with a growing need to involve new suppliers, including SMEs, and to establish partnerships between defence manufacturers and civilian industries. This blending of industrial cultures—where commercial manufacturing practices meet the strict requirements of defence contracting—will test the adaptability of both sectors.
At Procurato, we see this shift as an opportunity to strengthen procurement and supply chain practices in ways that support resilience and long-term capability. We work with organisations to assess supply chain readiness, develop sourcing strategies that can flex with evolving demand, and put in place the right frameworks to manage performance and financial risks. Supporting the qualification of new suppliers and ensuring that procurement models can balance agility with governance are central to how we approach this challenge. As industries adjust to new expectations and responsibilities, we believe that a clear, structured procurement response will be essential to maintaining supply chain stability while meeting emerging national and European defence objectives.
Looking for support with procurement challenges in defence or beyond?
Receive our latest thinking on Procurement
