Lessons on Boosting Production from the German Defence-Industrial Strategy

The German Security and Defence Industrial Strategy from December 2024 is a response to the war in Ukraine and the need to quickly equip the Bundeswehr to better standards and replenish its stockpiles. The strategy makes several proposals to achieve its objective of having a defence industry that can cope with ‘all challenges’ and that is ‘dynamic and scalable, responsive and resilient, competitive, innovative and adaptive’. These proposals warrant some attention, as boosting defence production is a pressing concern across Europe and the US. 

Demand Certainty is Industry's Basis for Investments

The German defence industrial strategy recognises that governments must give industry sufficient confidence to invest in additional production and development when it sees future demand. The strategy proposes two key instruments to provide the industry with this long-term demand security: multiannual funding and defining ‘key technologies’ that it wants to procure from national industry. 

Multiannual funding enables the government to commit to its fleets of platforms long-term. Fleets are the government's main instruments for maintaining production capabilities. Regular platform updates ensure that engineering expertise around a platform and its parts survives long-term. Operating platforms to maximum life expectancy and hesitantly investing in upgrades only leads to having to redevelop expertise at great cost when upgrades or replacements eventually become necessary. To avoid this, governments need to adopt fleet regeneration cycles to maintain production and maintenance capability. In such a cycle, the government continuously introduces upgrades and replaces platforms. These long-term commitments enable industry to invest in new programmes and production. The German strategy seeks to achieve this through multiannual funding. Yet, it only pledges to ‘examine the extent to which orders for the Bundeswehr [...] can be made in advance for the next ten years and beyond’. The difficulty is that the budgetary planning cycle requires annual parliamentary approval and the spending of approved funds. Thus, the success of the strategy’s commendable ambition depends on stakeholders challenging established orthodoxies in processes and rules. 

The strategy also singles out ‘key technologies’ that the government wants to retain in Germany based on what the military needs – rather than what the country’s industry is good at. This approach, established during former Defence Minister Ursula von der Leyen's tenure, lets military planners decide which technologies to buy from national companies, European partners, or the global market. In this sense, the ‘key technologies’ could also serve as a demand indicator for industry. 

However, they lack sufficient detail to be useful in that capacity. For example, the ‘ammunition’ category spans all three tiers, but the strategy does not specify why. The reason for this can easily be guessed: Unlike 45mm ammunition, a cruise missile requires technological expertise and integration with other sensitive technology, such as electronic warfare capabilities, satellite and geological data and fuse programming. But the strategy does not specify this. Furthermore, the list of key technologies includes entire platform types such as ‘protected/armoured vehicles’ without any further specification. Allowing for more transparency in the detailed definition of the ‘key technologies’ may help the German government build capacity. A more detailed complementary publication, like the US Department of Defense's ‘Implementation Plans’ or the UK's sector-specific strategies, could clarify the German government’s demands for its industrial base. Strategy needs policy detail to be effective. 

Once demand certainty is established, the German strategy acknowledges that industry needs to have access to capital for its investments. The strategy states that it seeks to adjust environmental, social and governance (ESG) guidelines so that insurance companies and other institutional investors do not shy away from making their capital available to defence. This is a worthwhile effort. 

European Potential and Embracing Exports 

Another objective of the strategy is to enable greater economies of scale in defence. The strategy points to Europe to achieve this, where strengthened cooperation increases demand and justifies bigger production lines. It makes sense to look to Europe. The capabilities needed by other countries across the continent are similar because of the comparable geopolitical situation. Europe is also a politically comfortable market with little need to legitimise exports. 

Key Technologies

However, the European market is still highly heterogeneous in supply and demand. European forces often formulate different capability requirements. Members often prefer national industry or do not buy European. Poland recently bought tanks, howitzers and aircraft from South Korea. The German-French initiative to develop and build a new main ground combat system is not open to other EU partners. Meanwhile, Italy is developing its own concept with Rheinmetall as a core partner. The German strategy itself does not clarify how exactly it seeks to reconcile its key technologies concept with the aim of increased European cooperation. This loss of European scale increases per-item development and production costs and, as a result, decreases the overall production capacity. Aiming to aggregate EU demand is a good long-term initiative, but is unlikely to bear fruit soon. 

Additionally, Germany should not rely only on Europe to fund the extra production capacity that military planners appear to be targeting, but should aim to export more to other markets. Germany has recently appeared more lenient on the subject of exports, agreeing to the sale of Eurofighter Typhoons to Saudi Arabia. But the new strategy should also embrace export-orientated Bundeswehr procurement. 

Whatever the Bundeswehr buys is the German industry's reference point for its foreign sales. Yet, exportability does not constitute a key variable in formulating capability requirements. As a result, products are often too specific to German needs, with little market potential elsewhere. Instead, an export potential analysis should inform the Bundeswehr's Customer Product Management and help it calculate how realising that potential would impact programme costs and maintaining vital industrial capacities. Industry and government have different resources for this analysis, ranging from business development activities in other countries and information obtained through diplomatic channels to intelligence. The UK, for example, has established a joint analytical facility, the Defence Solutions Centre, with experts from industry, government and academia whom the government consults on national demand, global markets and competitors to inform procurement decisions and facilitate exports. Strategies need to lead to reorganised bureaucratic priorities, processes, and structures to be effective.

Fund Surge Capacity Selectively 

Another of the strategy's proposals is to pay producers to maintain extra capacity. Surge capacities are only possible in some areas of the defence sector. For instance, the production lines for ammunition require little labour and continuous engineering work; the only real requirements are the material to feed the machines and the energy that powers them. Companies can run automated production lines at different speeds or turn them on and off as demand requires. Such production lines require an advance investment to design the production line, build the factory and buy machines. But after this upfront investment, costs are relatively low. In such a case, if the government sees a short-term need, the production is run at full capacity. At other times, it must pay for the additional investment required to build and maintain that capacity. The currently used framework contracts do not provide the securities that would allow such investments to be made. Thus, the idea of paying for extra capacity makes sense.

However, even in the consumables segment, materials like gun cotton are not widely available, posing challenges to a viable surge capacity. In other sectors, scalability is impossible. For complex platforms, suppliers make every part to order. Specialists assemble the final product. Industry cannot quickly increase the supply of parts, and the availability of skilled labour is limited. Efforts to increase production of the Rafale and F35 ran into problems because of this. 

Of course, companies can build new factories, contract new suppliers, and train new workers. But this takes time and is expensive. While the Bundeswehr received €100 billion euros in funding due to the Zeitenwende, this is now committed. Unless the new government makes structural changes to the federal budget, it will have few additional funding options left. This fiscal position is probably also why the strategy remains vague in its commitments to any additional funding – it only pledges to ‘examine the possibility of reserve capacity payments’. Limiting these payments to specific sub-sectors could make the pledge more fiscally feasible and valuable for industry as an indication of demand. Feasibility plays a key role in translating strategy into effective policy.

A Good Starting Point

To conclude, boosting defence-industrial production makes sense in Europe's new geopolitical environment. The German approach highlights key lessons in how governments should go about achieving this: successful reforms require challenging established orthodoxies to have real impact; strategy needs policy detail to be effective; and feasibility is crucial in translating ambition into action. Europeanisation remains a long-term goal, but exports offer a more immediate path for scaling production. Selectively funding surge capacity can make fiscal commitments more viable. The strategy is a step forward, but its impact will depend on turning these lessons into concrete policies.

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