Breaking Through the European DefenceTech Bottleneck: How EU Startups are Leading the Way

According to reports, Europe’s weapons factories are expanding at three times the rate they did in peacetime, covering some 7 million square metres of new industrial development. This, the report goes on, “represents rearmament on a historic scale”.

Indeed, around the world, governments are investing a fortune in building the manufacturing capacity for critical technologies such as advanced semiconductors. Yet they are making the mistake of assuming that supply chains scale in proportion to manufacturing; in other words, that if they build more factories, the firms supplying those factories will automatically expand at the same rate.

This assumption can spell trouble for DefenceTech startups and scale-ups. A company may raise money, win orders and increase its production capacity, only to find that a single scarce component prevents it from delivering.

The reality is that advanced industries often reach a point where demand for critical parts, materials or skills outstrips supply. A factory may therefore be ready to ramp up production while still waiting months for a specialist chip or component.

Building factories isn’t enough if the parts come from elsewhere or if only one or two companies make them. A whole industrial base must exist to support those factories if they’re to keep producing the final technology at scale.

Not all markets scale in the same way

What might a sound industrial policy look like? That depends on the kind of market involved. Broadly, there are at least three categories.

In mature industries, companies represent only a tiny share of an established market, and supply chains naturally absorb additional demand. Suppliers already serve many customers and production methods are well understood. Standard mechanical parts are a good example.

In developing markets, supply can expand alongside manufacturers, but only if there is coordination and certainty about the future. Governments may need to coordinate orders or make long-term commitments so that suppliers can justify investing.

In emerging strategic technology markets, companies are scaling the market rather than scaling within it. SpaceX is one such example. Many DefenceTech startups and scale-ups face this problem, only on a smaller scale.

A fast-growing manufacturer can demand parts in quantities that the wider market has never had to supply. There may be few alternative vendors and little spare capacity. In practice, the ability to scale rests not only on the quality of the technology involved or the size of the order book, but on whether the supply base can grow with the company.

This poses a different kind of challenge, one that requires policymakers to think hard about the suppliers that feed the factories.

The missing supplier base

The problem at the moment is that many governments continue to see every manufacturing project as though it belongs to the second category. They assume that, given enough orders, suppliers will expand alongside the main manufacturer.

But many critical defence industries, including advanced semiconductors, quantum technologies and other emerging systems, belong to the third category. The market either does not yet exist or certainly does not exist at the scale at which demand and supply can increase together.

Suppliers may lack the capital, equipment or confidence to expand before demand is guaranteed. Promising scale-ups then find themselves caught between high customer demand and inadequate industrial supply.

This is why governments need to think about how supplier capacity, manufacturing know-how, dual-sourcing and industrial resilience can develop side by side with raw production capacity. That may mean supporting second suppliers, funding shared facilities or placing longer-term orders. It may also mean tailoring procurement and financing schemes to the needs of young companies whose suppliers cannot yet afford to expand.

Resilience is component-specific

Moreover, policymakers need to stop thinking of “the supply chain” as though it were a single entity. This is too simple. Every advanced system is made up of components at different stages of industrial maturity.

An advanced sensor system, for instance, might combine standard mechanical parts sourced from mature global markets, specialist electronic equipment produced by a small supplier base and highly specialised components that belong to an emerging market.

Each of these three classes of components requires a different approach to sourcing and poses different obstacles to scaling. Standard parts may be easy to replace; specialist equipment may come from only a handful of companies; emerging components may have no real substitute at all.

The right policy has to be component-specific. Governments should work out which components can be bought freely, which require long-term coordination and which need an industrial base to be created almost from nothing.

Startups, scale-ups and their investors need to do something similar, since the weakest link in the supply chain can be the deciding factor in whether a company can turn a successful prototype into something that can be mass-produced.

Here is the dilemma: Europe is building more weapons factories, but factories alone don’t guarantee more weapons. A factory can only produce as fast as its suppliers can provide chips, machinery, materials, components and skilled workers.

Therefore, rather than gauging industrial success by the number of factories built or due to be built, governments should ask the far more difficult question of whether the supply base behind those factories can support sustained production, including during a crisis.

This should, at least to some extent, shape how Europe thinks about its DefenceTech companies. A startup is not scalable just because demand for its products exists, or because money is available.

It is scalable only if the suppliers, skills and know-how that enable it to do what it does can develop too.

These invisible networks are becoming one of the main constraints on defence-industrial growth.

The Importance of Understanding Resilience in New Factory Development

It is crucial for governments to grasp the difference between creating new factories and building true resilience in their economies. Without this understanding, the mere presence of new factories may give the illusion of resilience, when in reality, achieving genuine resilience is still a distant goal.

When governments fail to recognize this crucial distinction, they risk overlooking the holistic approach needed to truly fortify their economies against various challenges and uncertainties.

Creating new factories can undoubtedly boost economic activity and create jobs, but without a comprehensive strategy focused on resilience, these gains may be short-lived and vulnerable to external shocks.

Resilience goes beyond mere infrastructure development; it involves building a robust and adaptive economic framework that can withstand disruptions and adapt to changing circumstances effectively.

Therefore, policymakers must prioritize resilience-building measures alongside industrial expansion to ensure long-term sustainability and stability in the face of evolving economic landscapes.