Meeting the call to grow and secure European defense manufacturing

The return of large-scale combat in Europe has spurred a new era of defense investment. At the 2025 NATO Summit, member nations aimed to increase defense spending targets to 5 percent of GDP—a level of commitment unseen since the Cold War. This generational opportunity for the European Defense Industrial Base (DIB) hinges on three core strategies: leveraging capital, forming strategic partnerships, and modernizing the digital tools to manage scaled-up production.

By Chris Morton, Global Director for Aerospace and Defense at IFS

Chris Morton, Global Director for Aerospace and Defense at IFS

Current European defense spending is simply no longer sustainable in today’s geopolitical climate. Recent statements from UK and German defense ministers signal a clear political will for sustained, long-term investment. The UK is committed to raising its defense spending to 2.6 percent of GDP by 2027, with an ambition to reach 3 percent by 2030, while Germany's defense minister suggests a potential rise to 3.5 percent of economic output by 2029. These commitments, combined with NATO's 2025 recommendation, create a favorable environment for the European Defense Industrial Base to capitalize on increased spending.

A perfect geopolitical storm opens the door for defense manufacturing industry growth

The conflict in Ukraine and a more supportive political climate across Europe have prompted EU member states to significantly increase defense spending. The war is also serving as a crucial testing ground for new military capabilities. This shift is already influencing defense manufacturing market changes, as seen with Rheinmetall, the German defense giant, which has now surpassed Volkswagen in market value due to a surge in investor interest. Similarly, Türkiye is rapidly advancing its defense manufacturing output, boosted by increased domestic spending and a chance to test these new capabilities in real combat situations.

The EU multiannual financial framework (MFF) 2012-2027 has long included funding for cooperation on defense-related activities, but the EU Commission has now unveiled its plans for European Defense, known as ‘Readiness 2030’. This initiative provides a financial lever for EU Member States to drive an investment surge for defense capabilities. Readiness 2030 includes a new financial instrument called SAFE (Security Action for Europe) to support investment in domestic European defense manufacturing that includes incentives for securing domestic supply chains.

Time is of the essence – opportunities are already being grasped

As the immediate demand for enhanced defense capabilities grows to deter future conflict, domestic European defense manufacturers must prepare now for this surge. There is little time to wait for traditional business cycles.

One way to short-circuit organic growth to support increased demand is through acquisitions and partnerships with well-established adjacent players in the market. This is already happening with traditional giants such as General Dynamics European Land Systems partnering with Rheinmetall to provide the German Army with 256 Piranha 5 vehicles.

Non-traditional defense manufacturers are also entering the market, shifting their production capacity from strictly commercial to a mix of commercial and defense-related products. ICEYE Ltd., a Finnish microsatellite manufacturer, builds synthetic-aperture radar used to monitor pack ice. But now their technology is used for battlefield real-time imaging. There are many more examples like ICEYE Ltd., but this type of reindustrialization will only accelerate.

Even so, increasing opportunity and demand may not be sufficient to force an immediate shift. In the United States, despite the urgency of the COVID-19 pandemic, the federal government stepped in and invoked the Defense Production Act in conjunction with emergency contracts to spur manufacturers to prioritize mechanical ventilators over the goods they normally produced. While European nations have not yet matched this scalable action, governments could certainly employ such strategies if the industrial base finds itself unable to be as responsive as it should be or if the war in Ukraine grows hotter – or gets closer to home.

The funding incentives are in place – business strategies must adapt

At the end of the day, individual or mid-sized manufacturers cannot force governmental action and may not be able to leverage partnerships or acquisitions. But all is not lost. Companies that lack scale or influence (and frankly, even the ones that do) should focus on three areas:  leveraging governmental and investor capital, pursuing talent to exploit the opportunity, and employing technology for agility and scale.

To meet production goals, manufacturers should first leverage funding incentives before the geopolitical truth changes and public sentiment wanes. While these programs are generational opportunities, it does not mean the money will last for generations. In addition to the obvious capital benefits for manufacturers leveraging these programs, they also encourage cross-border partnerships. The European Defense Fund, which encourages cooperation between EU defense companies, allocates £5.3 billion of its total fund for collaborative capability development projects. NATO-friendly cooperation is simply a necessity for smaller individual domestic manufacturing bases of EU nations because justifying homegrown manufactured assets is frequently impractical. When added to the recent investor frenzy in the market, the defense industry finds itself with a truly unique opportunity.

Next, the defense manufacturing industry across Europe is facing a major labor and skill shortage due to underinvestment in new defense programs, a lack of appeal to new workers, and an ageing workforce crisis. To combat this challenge, organizations must utilize increased investment to re- and upskill their talent so they can build the capabilities they need to match the expanded work volume. Burgeoning demand for skilled manufacturing talent in the defense space is frequently transferable to the commercial sector – a haven for talent should the growth in the DIB slow.

Lastly, the digital world has a vast toolkit of software applications to help solve logistical and process issues. Modern enterprise business solutions, the proliferation of AI applications, and connected workforce solutions help companies overcome skilled labor shortages. However, legacy software applications were simply not architected for today’s speed of innovation, demand for scalability, or disruptive technological change. As such, defense companies would do well to leverage some of the increased availability of capital to invest in disruptive technologies and bring the rest of their business systems up to date. In fact, the question isn’t if defense companies will need these capabilities to keep up, it’s simply when.

Digital tools for a modern defense industrial base

There are three powerful digital tools defense manufacturers should consider as the EU ramps up spending:

1.       Optimize an understaffed workforce through dynamic scheduling

Constraint-based AI algorithms can optimize workflow. For example, if there’s a shop-floor issue, dynamic scheduling optimization will reprioritize workflows over waiting for human input. This enables manufacturers to maximise the deployment of their current talent based on workflow parameters, including shift patterns, SLAs, travel time, and skills to increase workforce efficiency. With labor shortages what they are, keeping those skilled associates focused on their work – rather than waiting for reprioritization meetings – can have an outsized impact on volumes over time.

2.       Build operational resilience: expect and plan for disruptions

Disruptions to operations when demand is pressing can be disastrous. Organizations must leverage simulations, which give them an opportunity to develop contingency plans on the shelf to execute. Volatility in raw material sourcing, surges in demand, and even disaster recovery plans should be simulated so contingency planning isn’t happening while the event is happening which is much too late. These actions future-proof defense manufacturers, allowing them to build in operational resilience to best respond to future disruption.

3.       AI is the next frontier for the defense industrial base

AI continues to mature as a technology offering and frequently isn’t a perfect match – but defense manufacturers shouldn’t let perfect be the enemy of good. Program management is an area primed for better productivity enabled by AI applications. Understanding, planning, executing, and reporting on government programs within the four walls of a manufacturing operation is incredibly complex, with loads of manual, low-value work underpinning program management. Even if the tech can’t quite provide everything a program manager needs, the act of leveraging this advanced technology will train and develop the people in this new paradigm of work.

Program management isn’t the only potential use case. Preconfigured contextualized AI-copilots with baked-in compliance can identify suppliers based on regulations, cost, time, and availability when sourcing new parts. The use cases are many, and the organizations that can deploy them effectively as they mature will be ready to leverage AI in a disruptive way as the technology evolves.

The call to action for European defense manufacturing

This period of historic defense investment across Europe, a level not seen since the Cold War, presents a generational opportunity for the DIB. By focusing on workforce upskilling, leveraging new capital, forging strategic partnerships, and adopting modern digital tools—manufacturers can tap into rising demand. Seizing this initiative will not only drive growth and revenue but, more importantly, strengthen European security.