More and more budget is rapidly becoming available for defence, at both the national and the European level. But that only translates into more security if those pennies are spent more efficiently than hitherto. This calls for expenditures that are no longer primarily driven by national industrial interests. This requires Dutch industry to specialise in sub-areas of the defence value chain. However, the latter can only invest in this if long-term prospects are offered.
Source: Berenschot report ‘Realising high growth expectations requires agile defence industry’.
Dutch defence industry: long-term prospects first, then specialise
Instead of striving for more OEMs, the Netherlands should focus more on becoming an important part of the international chain, and GKN Fokker is a key case in point; not an OEM but definitely an important part of the F35 chain, constituting a a major source of employment. For example, the Netherlands has a key position in the international chip industry with ASML, while most major chip manufacturers are based elsewhere. That strategy can generate considerable growth. This is the opinion of Maarten Tossings, Chief Operating Officer of TNO, cited by research firm Berenschot in its report ‘Realising high growth expectations requires agile defence industry’, which the firm published late last year. The Dutch Defence Industrial Strategy launched in 2018 also explicitly selects a limited number of areas in which the Netherlands should seek ‘strategic autonomy’, areas in which it truly excels internationally such as the ‘maritime domain’ and all manner of radar and sensor systems whose manufacturers are companies such as Nedinsco, Robin Radar and Thales.
Rapidly growing budgets
The latest research on the Dutch defence Industry by Berenschot, commissioned by the Ministry of Economic Affairs and Climate and published in early April, shows that that industry comprises about a thousand companies that record 15 per cent of their turnover in the military domain, accounting for about 22,000 jobs. It also shows that defence budgets in the Netherlands are growing rapidly: from 5 billion euros in 2021 to about 7 billion last year. ‘This year, that amount could well rise towards 10 billion euros’, Berenschot researcher Luddo Oh expects. Europe is also showing similar increases in defence spending. According to NATO figures, all European NATO countries combined are spending 380 billion dollars on defence this year (representing 2 per cent of their total GDP). That is already more than the Russian war economy.
Better cooperation
But for more security for Europe, money alone is not enough. Better cooperation is also needed. Due to national industrial interests, that European budget is fragmented across many different arms systems, all of which are developed, produced and maintained separately, and they are not even interchangeable. Clearly, all that money is not being spent very efficiently. Much more joint and European procurement is needed, the European Commission reported in its first European Defence Industrial Strategy, published in early March. The aim is that by 2030, EU countries will buy at least 40 per cent of their defence equipment together and at least half of that spending will be done within Europe, which is double the amount currently being spent in the EU. By 2035, it should be as high as 60 per cent. Now the lion’s share of the defence budget is spent on major American OEMs such as Lockheed Martin, Raytheon and Boeing, which together account for more than half of what is turned over in military equipment worldwide, said Luddo Oh.
More strategic and European procurement will create room for an innovative European defence value chain, where Dutch industry can take charge of some important links.
Solve an old problem
More budget and better coordination and cooperation between different European countries would open up prospects for the Dutch defence industry. But if the Ministry of Defence wants to elicit long-term investment from that knowledge-intensive high-tech industry (where as much as 11 per cent of turnover is spent on R&D), an old problem must finally be solved, according to Berenschot researcher Luddo Oh. ‘It is common practice that European tenders are invited for the development of a new arms system. However, once the party winning that tender has delivered its development work to the Ministry of Defence, the latter issues a another call for tenders, this time for production. The developer may then join the queue. Whereas, of course, it would be much more attractive for the companies involved if they knew in advance that they can also take on the production.’
Ánd maintenance. ‘In the case of awarding the contract for the four submarines (in March, the Netherlands placed the order for this with the French Naval, ed.), for example, the question of who can take care of maintenance throughout the 30-year life cycle is perhaps even more interesting than who will take care of construction. For if Saab Damen had been selected, much of the production work might have ended up at Damen in Romania. Now a great deal of manufacturing as well as maintenance work can land at Naval partner IHC or other Dutch suppliers.’
Link magazine special 2024: The Dutch High-Tech Industry and the European Ecosystem: stronger together. Read this edition digital.
Article 346
Also, the Dutch Ministry of Defence could make much more use than it currently does of the space that European regulations – Article 346 of the Treaty on the Functioning of the European Union – definitely allow for one-to-one outsourcing for truly innovative things, without tendering, according to Oh.
Hans Huigen. Photo: NIDV
That lack of long-term prospects is a major problem for the Dutch defence industry. ‘Production lines for military equipment are by no means always available for dual use, i.e. also for civilian purposes. But if that – often small – series for the Dutch Ministry of Defence is then built on it and no follow-up orders come in, how do you recoup the investment in that line? The big defence companies can afford that investment, but the Dutch defence industry is largely comprised of SMEs that, because of those sizeable investments and relatively high uncertainty, do not go all out on military products.’
The 2018 Dutch Defence Industrial Strategy identifies plenty of ideas for offering prospects, but companies report that these have, however, not yet been sufficiently turned into action.
Long procurement processes force the Dutch defence industry to have a long-term focus
The procurement policies of governments, to which defence industry companies generally supply, usually require complex procurement processes. Pathways are lengthy and require large investments. It can often take some time to win a contract. The long procurement processes and high requirements for quality and security mean that these companies have a longer strategy horizon. For example, 68 percent of companies in the defence industry have a term focus of more than three years compared to 45 percent in industry.
Asked about defence policy, Hans Huigen, director of branch association NIDV (The Netherlands Industries for Defence and Security), indicated that the Dutch Defence Industry Strategy is not yet adequately reflected. The current policy does not yet stimulate the defence industry sufficiently. For instance, launching customership, in which Defence is a company’s first customer and thus drives innovation and gives companies a chance, is important for companies to become stronger on the export market. Indeed, having the Dutch Ministry of Defence as a customer creates trust with potential international customers. Too little is still being done with this. In doing so, ‘the trick is to take part in European programmes’, said Huigen in the Berenschot report ‘Realising high growth expectations requires agile defence industry’.
