“Hey, real quick: what’s a good way to think about value chains in Defense in Europe?”
Oh boy. Defense is not an industry or a sector. And it depends to whom your talking: Various detailed segmentations are often used by defense ministries, procurement agencies (e.g., OCCAR, NSPA), and trade associations like ASD Europe. But here is an outline of commonly used value chain segmentations relevant to investors, strategists, and policymakers. And to make things simple, I added some larger European industrial players that you should feel free to disrupt .. or work for 😉
Upstream (Subsystems & Components)
This is where dual-use innovation often thrives.
- Materials & Metallurgy: High-performance alloys, ceramics, composites, armor plating; Companies like Saab’s Barracuda specialize in advanced camouflage systems using multispectral materials to reduce detectability, and MP Materials has their own mines and produces high-performance magnets
- Electronics & Embedded Systems: RF components, radar front-ends, EW modules, avionics, flight control computers; Thales Group develops avionics suites for both commercial and military aircraft, integrating flight control computers and navigation systems
- Propulsion & Power Systems: Jet turbines, diesel-electric hybrids, power distribution for naval and land platforms
- Sensor Systems: EO/IR systems, LIDAR, sonar arrays, targeting pods, battlefield sensors; Hensoldt offers the ARGOS-II HD electro-optical/infrared (EO/IR) system for airborne surveillance, applicable in both defense and civilian contexts
- Communication & C2: Software-defined radios, battlefield routers, tactical datalinks (e.g., Link 16, ESSOR); Leonardo provides software-defined radios (SDRs) that ensure secure and interoperable communications across various platforms
Platform-Level Manufacturing
This is typically capital-intensive and highly regulated.
- Ground Vehicles: Tanks, IFVs, MRAPs, UGVs — e.g., KNDS, Rheinmetall, Patria
- Naval Vessels: Submarines, frigates, OPVs, autonomous surface vessels
- Aircraft & UAVs: Fighters, MALE UAVs, tactical drones — e.g., Eurofighter, nEUROn, Leonardo’s Falco
- Missiles & Munitions: PGMs, air-to-air/ground-to-ground missiles, loitering munitions (e.g., MBDA, Nammo)
Integration & Final Assembly
Where system-level architecture and mission configurations are done.
- Mission Systems Integration: Combat management systems (CMS), fire control, BMS; BAE Systems integrates the BAE Systems CMS-1, a combat management system used in naval vessels
- Platform Customization: Country-specific modifications for export clients; Airbus Defence and Space offers tailored configurations of the A330 Multi Role Tanker Transport (MRTT) aircraft to meet specific national requirements
- System of Systems Engineering: Interoperability protocols, NATO standardization (STANAG), multi-domain readiness; Indra works on interoperability solutions ensuring that various defense systems can operate cohesively within NATO frameworks
Support & Sustainment
A fast-growing segment, especially in hybrid warfare environments.
- Maintenance, Repair & Overhaul (MRO): Lifecycle support, in-field upgrades, depot-level services; Lufthansa Technik provides MRO services for military aircraft, including the Panavia Tornado
- Training & Simulation: Virtual environments, XR-based combat training, synthetic flight trainers; CAE offers flight simulators and training programs for military pilots worldwide
- Software Support & Cybersecurity: Patch management, hardened OS, red-teaming for battlefield networks; Thales delivers cybersecurity solutions to protect defense communication networks
- Spare Parts & Logistics Services: Often provided by OEMs under multi-year performance-based logistics (PBL) contracts; Leonardo manages logistics and supply chain services for various defense platforms, ensuring operational readiness
Digital & Data-Driven Defense Layers
Sometimes accelerated by NATO DIANA and EDF initiatives.
- AI/ML for C4ISR: Automated target recognition, sensor fusion, predictive logistics; Palantir Technologies provides data analytics platforms that enhance intelligence and reconnaissance operations
- Cyber Defense Infrastructure: Enclave protections, zero-trust architectures, digital twin security; BAE Systems develops solutions to safeguard critical defense infrastructure from cyber threats
- Autonomy & Swarm Control: Middleware layers enabling UGV/UAV/USV coordination; QinetiQ is involved in the development of autonomous systems and swarm technologies for unmanned vehicles
- Space-based ISR & PNT Services: EO satellites, dual-use GNSS augmentation, tactical LEO constellations; OHB SE, a European space technology company, works on satellite systems for intelligence, surveillance, and reconnaissance (ISR)