The German defense industry at a crossroads

Necessary strategic direction decisions for needs-oriented and future-proof equipment of the armed forces

Print Friendly, PDF & Email

Since the NATO summit in Wales in 2014 rising in Germany and worldwide defense budgets and procurement volumes for new weapons systems. These develop in the course of digitalisation increasingly complex and procured multinational. To the challenges to cope in the face of a weak for many years home market and a strengthened international competition, the German defense industry needs to re-orient and develop sustainable business models. Despite currently well-filled order books, the industry is at a crossroads. Strategy & has identified in the study "The future of the German defense industry" in an exchange with senior decision makers from the industry four key challenges that companies must overcome to date, in order to increase their competitiveness and to secure their future.

Challenge 1: (re) building capacity and skills

Since the end of the Cold War, the German defense budget has shrunk massively in relation to gross domestic product. are subsequently had weapons systems and personnel reduced. So were lost skills.

Development of the defense budget and the staff of the Bundeswehr (Graphics: Bundeswehr)

The austerity also influenced the defense companies. This made their focus more on the development of existing systems or specific niche products. The major new developments since 2000 (for example, Euro Fighter, Puma infantry fighting vehicle) originate even during the Cold War or its foothills in the 1990s. The German defense industry and the armed forces were after decades of capacity reduction and loss of competence therefore in a weakened starting position, as after the summit of Wales in 2014 the signs were returned to growth. The endorsement of the two-percent target NATO marked a political as well as financial turnaround, defined in consequence of key technologies and highly complex, multinational weapon systems were required (eg multi-role combat ship 180, Future Combat Air System (FCAS), Main Ground Combat System).

The implementation of this turnaround is the Bundeswehr and industry but now the challenge is that the many years of shrunken industrial base is not sufficient to the large number of pending now complex development and procurement programs advance in full. There is a lack of resources for capacity building. Thus, there is a danger that international competitors will try to break into this gap. This would hinder the ability of growth in Germany over the long term.

Development of stocks of selected weapons systems of the Bundeswehr

Challenge 2: Declining exports by restrictive export policy

To cushion the shrinking after the end of the Cold War national market, many German defense company focused in recent years increasingly on exports and already delivered advanced products to EU, NATO and third countries. Looking at the newly opened markets, the increasingly restrictive export policies of the federal government, the industry, however, provide additional hurdles. Despite the first time rising individual licenses in the first half of 2019 (mainly driven by approvals to Hungary in the amount of 1.76 billion euros and to Egypt in the amount of 0.8 billion euros), remain Collection permits at a significantly lower level than in the years before 2016th

Arms export development since 2002

This export practice endangers international confidence in the German delivery. Here can only transnational successfully developed innovative, highly complex and internationally competitive weapon systems based on the required system capacity and marketed. Here it is important to reach the political level an EU-wide harmonization of export regulations and a sound export policy. Since offset and localization requirements export continue to be dominate, companies also need the Transfer of Technology to a robust export policy of the Federal Government can rely terms.

Challenge 3: consolidation pressure by international competition

In addition to the restrictions on the national level also represents the international industry structure, the German defense industry challenges. Funded by the demand for increasingly complex weapons systems are major international defense contractors such as Lockheed Martin, Boeing, Raytheon or Aviation Industry Corporation of China also grew both organically through mergers as massively in recent decades.

Global defense company by turnover in billion US dollars
1998 versus 2018

In contrast to this market consolidation in Germany are more medium-sized defense companies, however, been relatively small and have often dedicated to technology leadership in niche products to a relatively small market to operate. This development poses the risk that German companies will not provide the necessary scale and innovation performance in order to survive in the now imminent growth phase in international competition.

Challenge 4: digitization and networking

Also in view of the growing digitization of the German defense industry is asked to find answers to the new requirements for weapons systems - for example, together with partners. These requirements can no longer be isolated and considered independently of IT platforms. The future belongs cross- sectional information and active networks of all branches of the armed forces, organizational and Warfare areas away - including cyber. A good example of this is the German-French-Spanish program FCAS, the drones, fighter planes, satellites and command and control aircraft will connect with each other. The required system of systems capability, the German defense industry not currently in full and must do this in the course of upcoming major projects to build as soon as possible. In addition to the digitization of products and services of the defense company shows that even with the internal processes - as with most manufacturing companies in Germany - catching up towards the Internet of Things, Industry X.0 and cyber security is. In particular, the digital threat scenario are away to evaluate early stage of the value chain and to take appropriate action to protect the company.

Fields of action and strategies for the German defense industry

In order to continue to survive in the face of the challenges successfully in the market and grow a conscious alignment of corporate strategy and development of business models is necessary. We identify for two overarching areas of activity that are jointly tackle from industry and government:

Strengthening existing skills, capacities and partnerships

The planned increases in defense budgets (two per cent target NATO) and the definition of key technologies the cornerstone for the development of skills and capacity of the defense industry was laid. To be able to deliver at the upcoming major projects, it is now back up and expand on the industry, technological expertise and development and production capacities. This course requires planning certainty for the related investments. At the same time European cooperation have advanced and cost, and number of different weapon systems in the EU are significantly reduced. Strengthening existing skills and capacity can be supported by models of cooperation in the procurement and development. Consolidation may be a possible result of project and program cooperation here, but are not mandatory. From politicians to this process needs further enhanced through the promotion of research and technology, the Community actively supporting the export, the definition and calls of of leaderships in international programs as well as the specific allocation of projects to national champions.

Development of new skills in the process of digitalization

System capability has the German defense industry accelerate cooperation with established companies, start-ups as well as for building a system of research institutions. The aim of this cooperation and mergers is to play a leading role in future multinational defense projects. For that digitization must be the defense industry a part of the DNA. Only way to ensure that the company's new, innovative products with short development times and flexible, demand-driven business models can bring to the market. The Bundeswehr has opened with the establishment of the Cyber ​​Innovation Hub already for the start-up scene, enabling cooperation with innovative technology companies, for example in the area of ​​big data and artificial intelligence.

So far mainly such products and services were at the center of the value of the German defense company that built on a complex physical supply chain, as well as long-term planned and implemented developments. In the future, short development cycles and rapid adaptation to customer feedback or technological developments are needed. New business areas such as the sale of digital services and data based on the existing defense know-how can be so redeveloped. Accordingly, the mindset of the German defense industry needs to change and put on an agile development and project management.

Strategies for addressing the fields of action

While the policy addresses the areas of action by the adaptation of the framework and corresponding Regulatorik, the defense industry as part of our systematic strategy processes should deal with this, in order to provide the course for the coming years and decades. The basis for the development and adaptation of business strategies according to the strategy understanding of Strategy & the differentiating core competencies of a business.

Starting from a position determination of the present alignment of the company's analysis of the respective ability system provides the basis for the future strategic positioning. The following six basic strategic orientations are possible in principle. These result from the comparison with other industries and an analysis of strategic positions of defense companies in other countries.

global supplier

This strategy aims at global coverage verschiedenster markets and customers to support the use of the armed forces with integrated product and system solutions, focusing mainly on complex systems with system of systems capabilities. joint ventures are entered into for the necessary to establish or transfer of technologies and skills. The strategy includes the integration of complex supply chains as well as building a copyright in third countries in accordance with the applicable export regulations.

Focus on niche products

With this strategy, specific leading products and subsystems are developed. , A prerequisite is that companies hold in selected product segments, the technology leadership and operate in markets with selected customer relationships and comparable requirements. Each company profiled itself over the role as a supplier to the separately identifiable products and solutions and can reduce costs through economies of scale. Cooperation with EU and NATO partners provide access to new markets.

Geographical focus

This strategy lives from national public contracts and focuses on the increasing expenditure on procurement of the Bundeswehr and other emergency service. Accordingly, the associated business model is based primarily on identifying suitable areas of growth and take advantage of rising national budget. By focusing on customer relationships in the home market, the business management is strongly driven by the regulatory and administrative requirements of the client. The protection of existing and new, the construction business is done via the continuous improvement and expansion of the product portfolio as well as the advancement of technology to the next higher system level.

operator model

According to this strategy, the company uses its market opportunities through the efficient allocation of resources, whether in matters of management, know-how, equipment or personnel. The unique selling point of this strategy lies in the competitive value offerings for outsourced services such as the operation of infrastructure and platforms. The operating agreements are aligned normally long-term and are both handled independently and in cooperation with the public authorities, at their own or shared risk. New opportunities for this strategy resulting from the trend toward performance-based logistics in which the contracts are no longer defined on products themselves, but on the actual use of these products, eg flight hours or the availability of systems and spare parts.

Militarization of civilian products

This strategy focuses on the demand for individual products instead and transferred to comprehensive solutions for proven commercial technologies from the civilian to military use. Since the products and systems offered must not be developed from scratch, rapid development cycles and short-term adjustments to customer needs are possible. The market opportunities resulting from established products and services with a strong price-performance ratio, because usually economies of scale can be used.

disruptive innovator

Here, the company specializing in the replacement of traditional business models by serving existing and newly emerging needs with groundbreaking technology and alternative business models. The market entry is possible by digital products and services. The business model behind this strategy is based on the use of digital platforms wherever possible.

The course for the coming decades must be made now

The result of the strategy process implementation will be a strategic focus in pure form rare. Rather, these are combined in different forms and focus on the individual skills-based strategy. The future will mainly include companies that periodically check their core skills assess the current national and international market and technology environment and react to future developments at an early stage with a further development of the corporate strategy.

authors: Dr. Jan H. Wille and Dr. Hans-Jörg Kutschera are partners in PwC Strategy & Germany. Dr. Jörg Schweingruber Senior Advisor and André Keller Senior Manager at PwC Strategy & Germany.