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From Crisis To Opportunity: Europe’s Defense Industry Transformation In The Post-Ukraine Crisis

Author: Aja Melville, Dan Darling, Derek Bisaccio

August 02 2023

German soldiers assigned to the 93 Armored Demonstration
Battalion, 9th Panzerlehr Brigade, 1st Panzer Division, advance
a Leopard 2A6 tank into firing position during a combined live-fire
exercise at Bemowo Piskie in northeastern Poland, on April 4, 2023.

The onset of the Russian invasion of Ukraine in February 2022 awoke Europe from its post-Cold War slumber. Within a matter of months, countries across Europe reconsidered their defense postures, calling for a near doubling of defense budgets and bringing long-time military non-aligned states to seek NATO membership.

Plans for increased defense spending escalated into force structure overhaul and expedited equipment modernization programs. Military aid and financial support for Ukraine soon outpaced the annual defense expenditures of all European nations excluding Britain, France, Germany and Italy.

Uniquely, the drive for support in Ukraine has opened up opportunities for NATO and EU member states to rapidly modernize their military arsenals. An FDD analysis published in January 2023 pointed to around $21.7 billion in notional sales opportunities arising from the transfer of military equipment to Ukraine.

Former Warsaw Pact countries donated their Cold War-era machinery in droves, including T-72 tanks, S-300 air defense systems and BMP-1 armored personnel carriers (APCs). These secondhand donations created capability and capacity gaps. NATO members including the Czech Republic, Estonia, Latvia and Poland are among the top European countries looking to quickly replace these systems. 

Increased demand for NATO-interoperable equipment has strained defense manufacturers, with Lockheed Martin and Northrop Grumman quoting delivery dates for backlogged orders at over a year. This, in turn, has opened the door for European manufacturers to fill the immediate needs of these countries. 

These shifts in demand are reflective of an evolving security landscape, one that is moving away from American dominance and toward diversity in production, materials and technology.

Changes in Procurement Attitudes
Between 2015 and 2019, the Eurofighter Typhoon, Dassault Rafale, P-8 Poseidon aircraft, SAMP/T anti-aircraft weapon, NASAMS ground-based air defense system and Leopard 2A tank were among the most sought after equipment by European countries. Post 2022, Europe has turned its focus to hypersonic weapons, vertical takeoff and landing (VTOL) aircraft, uncrewed aerial vehicles (UAVs) and next-generation nuclear naval assets. 

This shift from land-focused attack equipment to more versatile long-range and reconnaissance  equipment is indicative of increased concerns regarding overseas warfare. 

Notable defense procurement programs have emerged in response to the security situation. Several countries have expedited the acquisition of military equipment and platforms, focusing on enhancing their land, air, and naval forces’ readiness and modernization. Recently, the European Union announced plans to propose a dedicated fund of up to 20 billion euros (US$22 billion) to support Ukraine’s military for the next four years.  Rather than directly funding Ukraine’s weapons, the fund aids countries in covering the costs of purchasing and donating equipment. 

The proposal represents a major shift in the European Union's approach, as it aims to show long-term commitment to Ukraine’s defense. The E.U. plans to discuss adopting the proposal during a meeting in Brussels in the fall of 2023.

Depleted Stockpiles and Technologies
Ukraine’s partners have collectively committed over US$81 billion in military assistance (May 31, 2023 data) since the war began. Washington accounts for over half of this figure, but other significant contributors  include the U.K., Germany and Poland. 

Estonia, Latvia and Lithuania have provided the largest military assistance relative to their economies, demonstrating lingering fears of Moscow’s designs on their territory – even after joining the NATO alliance. The supply of Soviet-origin weapons to Ukraine serves a strategic purpose as it allows for the eventual replacement of these platforms with NATO-interoperable hardware, thereby advancing national security objectives and enhancing alliance coordination.

Even so, there is a limit to how much these militaries can send, considering their small size and proximity to Russia. Recognizing the dilemma facing these countries, and grappling with their own questions of how to adequately source support for Ukraine, the large NATO powers began arranging agreements to incentivize and backfill donations of military equipment to Ukraine. Separately, the alliance also deployed additional systems to those states that had transferred their own.

These initiatives have helped partner countries rush armaments to the battlefield without sacrificing their defensive posture or upending long-standing procurement plans. NATO’s eastern members, in particular, have accelerated their modernization timelines, jettisoning their aging Soviet stock to make way for new NATO-standard materiel.   

Implications for Czech Republic
The Czech Republic presents a compelling example of a European state embarking on a comprehensive transformation of its military equipment. The Russian invasion of Ukraine played a pivotal role in removing any lingering political obstacles among major Czech political parties, leading to unanimous support for the ongoing modernization of the Czech army. This marks a significant departure from the situation that persisted for decades when the military suffered from neglect, resulting in a severely depleted force that was repeatedly downsized and devoid of modern, NATO-standard hardware.

On Jan. 4, the Czech government approved a bill to align the defense budget with the NATO standard of 2 percent of GDP by 2024. Parliament gave its approval to the legislation three months after the initial approval.

The additional funding will enable Prague to move forward on a purchase of 24 F-35A combat aircraft, the sale of which was approved by the U.S. State Dept. on June 29 at an estimated cost of US$5.62 billion.

In the meantime, the Czech army awaits delivery of 10 UH-1Y Venom utility and 10 AH-1Z Viper attack helicopters to replace its Russian legacy inventory of Mi-24/35 attack helicopters, plus four batteries of Israeli-produced short-range/medium-range Spyder anti-air systems to replace its Soviet-era SA-6 mobile air defense systems.

On the European side of the Czech acquisition are 14 Leopard 2A4 main battle tanks delivered from surplus Bundeswehr stocks via Germany’s “Ringtausch” arrangement to backfill a gap created by donations of its remaining T-72s to Ukraine. Additionally, Prague is eyeing a potential buy of 70 Leopard tanks in the latest 2A8 variant.

Also on their way are 246 CV 90 Mk IV tracked armored vehicles from Sweden ordered on May 24 under a contract valued at US$2.2 billion.

These procurements indicate a concentrated effort to upgrade Czech army capabilities via off-the-shelf solutions from a variety of suppliers.

For the Czech Republic, the war in Ukraine has served as both a warning shot and an opportunity – a warning shot in that it presented a reminder that the country remains vulnerable militarily, and an opportunity in that it created a pretense for emptying out its outdated arsenal and expediting the modernization process via necessary recapitalization.

Backlogs Drive Foreign Competition
As the U.S. prioritizes supplying its own armed forces and supporting its allies in response to global security challenges, some countries have experienced delays in receiving requested military systems. This situation has prompted nations like South Korea, Germany and Israel to step in and offer indigenous products to replace U.S. systems.

Poland opted to procure 288 South Korean-made K-239 Chunmoo multiple rocket launchers under the WR-300 Homar program, responding to concerns over production issues with the M142 HIMARS systems. 

Israel responded to the demand for advanced weapon systems by offering its own domestic military equipment. Elbit Systems secured a $305 million deal with the Netherlands, providing 20 Precise and Universal Launching Systems (PULS) integrated on the COMMIT truck. This deal aims to replenish the Netherlands’ stockpile following donations of various military equipment to Ukraine. Furthermore, Elbit was in negotiations in January 2023 to deliver 19 Autonomous Truck Mounted Ordnance Systems (ATMOS) and eight PULS to Denmark after the Danish army donated 19 CAESAR self-propelled howitzers to Ukraine.

Diversification of suppliers and increased production lines will drive unit costs lower, benefiting NATO’s eastern members as they pursue their military modernization objectives.

***

The war in Ukraine and the resulting backlog in U.S. military equipment procurement have created significant opportunities for European and other defense manufacturers to fill the void. Looking ahead, the defense industry is likely to witness a continued diversification of suppliers and a growing emphasis on self-reliance among European nations. The disruptions caused by the U.S. backlog have catalyzed a transformation in Europe’s approach to defense procurement, with increased investments in indigenous development and collaboration with like-minded partners. While the U.S. will remain a crucial defense partner for Europe, this shift signifies a strategic hedging approach by European countries to ensure continuity in their military readiness and to foster greater autonomy in critical areas of defense technology and capability.

Sources:

“Ukraine Support Tracker Data,” Kiel Institute For The World Economy, July 20223; “More Than $3 Billion in Additional Security Assistance for Ukraine,” Dept. of Defense, Jan. 6, 2023; “Slovakia to Supply S-300 Air Defense System to Ukraine,” Dept. of Defense, April 8, 2022; “British Challenger 2 tanks arrive in Poland,” Dylan Malyasov, Defence Blog, July 8, 2022; “Czechs backfill Ukraine donations with German Leopards,” Flavia Camargos Pereira, Shephard News, May 19, 2022; “Database: Replacing Weapons NATO Allies Sent to Ukraine Could Yield $21.7 Billion in U.S. Sales,” Ryan Brobst and Bradley Bowman, FDD Visuals, Jan. 20, 2023; “Poland- M1A2 SEPV3 Main Battle Tank,” U.S. Defense Security Cooperation Agency, Feb. 17, 2022; “Estonia buys 12 more howitzers amid ‘lessons from Ukraine’,” Jaroslaw Adamowski, Defense News, Jan. 17, 2023; “Czech lawmakers pass law requiring 2% of GDP spending on defence,” Reuters, April 21, 2023; “Czech Request for F-35A Combat Aircraft Gets U.S. Approval,” Dan Darling, Forecast International Defense and Security Monitor, June 30, 2023.

“Czech Republic – F-35 Aircraft and Munitions,” Defense Security Cooperation Agency, June 29, 2023; “Czech Republic to Receive Donated Attack/Utility Helicopters from U.S.,” Dan Darling, Forecast International Defense and Security Monitor, Aug. 22, 2022; “Czech Republic buys Israeli Spyder air-defense weapon for $627 million,” Jaroslaw Adamowski, Defense News, Sept. 28, 2021; “Czechs drop $2.2B on CV 90 infantry fighting vehicles; Ukraine ‘days’ from getting them,” Andrew White, Breaking Defense, May 26, 2023; “Czech Republic to Procure Approximately 70 Leopard 2A8s,” European Security and Defense, May 25, 2023; “Netherlands procures $305m supply of PULS rocket systems,” John Hill, Army Technology, May 18, 2023; “Denmark replacing donated Caesar howitzers with Israeli ATMOS, PLUS MLRS combo,” Defense Brief, Jan. 27, 2023; “EU plans €20B fund to stock Ukraine’s military for years,” Jacopo Barigazzi, Politico, July 18, 2023.

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