- 4 months ago
Europe is investing heavily in its defense future, with governments rapidly expanding budgets and actively seeking innovative technologies from the private sector. From agile startups to global corporations, companies are being presented with significant strategic and economic opportunities, the chance to scale innovation, secure high-value contracts, and establish a foothold in a rapidly growing defense market. In this session, Cesare Battaglia will explore how these government-industry engagements are shaping corporate strategy and redefining the competitive landscape of European defense innovation.
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TechTranscript
00:53Good morning, everyone.
00:56Let's allow us to introduce Cesar Batalla.
00:59I'm a partner of the Italian firm of PwC, leading aerospace and defense sector on the Italian side and at
01:08the mail level,
01:08with more than 20 years plus of huge corporation expertise coming from the industrial side.
01:17Stéphane, to you.
01:18And Stéphane Roche.
01:19I'm a partner procurement supply chain, also having, I would say, over 25 years of experience in aerospace and defense
01:26with several roles in the industry.
01:30What we're going to talk is very much linked to the previous session, because we were discussing the previous session
01:37about, I mean, how to become more agile, spend more money, opening up.
01:43And this is exactly what we are going to share in terms of what the defense ecosystem is facing in
01:50terms of challenges.
01:52And the meaning that defense acquired over the last years that is no longer military, but it's much more tech
01:59-related, resilience-related, autonomy, sovereignty, and so on and so forth.
02:04And so what is the opportunities for a symposium and a fair like that with tech and technology companies?
02:13So let's start from where we are.
02:18Here you can see plotted the military expenditure over the next years by 2035, with a significant increase of spending
02:29also on infrastructure, networks, preparedness, innovation, and defense industrial base.
02:37So it's not just limited to military defense, as I was saying before, but it's much more to innovation and
02:44resilience.
02:45So this is basically huge opportunities for new markets, for new companies, including tech.
02:56If we move to this slide, why we see these opportunities.
03:04For the first time ever, the defense ecosystem is facing a change of parity.
03:10In which sense?
03:12In the sense that basically the historical players are no longer able to fully answer in due time in the
03:22right mode to the challenges and requests from the defense ecosystem.
03:26So that means that there is a change of bid, change of scale, that open up to other sectors in
03:34providing their contribution.
03:36The challenges that we see on the left side is the one that the historical players are facing and the
03:42overall ecosystem is facing.
03:44So limited industrial capacities, because in the last two years, we've experienced a significant increase in the volumes, one to
03:56order of magnitude with respect to the 70 years in the past.
04:00Fragmented procurement, slow technology adoption, supply chain dependency, especially on very strategic suppliers, and specialist skill shortage.
04:15Stefan, if you want to comment on that.
04:17It's actually interesting, because as you're saying, today we're seeing an important growth in aerospace and defense that they cannot
04:24take.
04:24But then for the civil industry, it's an amazing opportunity.
04:28So a bit like we've seen during COVID, where we were adapting our manufacturing units to support the crisis, it's
04:36a bit the same thing today.
04:37You can adapt your product, you can adapt your infrastructures and people to support a bit better the defense industry.
04:44And you will see, and what we will present up front, that there's a lot of areas where it makes
04:51total sense to go in the defense industry as well.
04:54Yeah, here important is because before we talked in the previous session also about companies that are entering into the
05:03defense, expanding to the dual use.
05:06What we see on the market is not just dual use products, that is quite, I mean, long story now
05:12since at least 10 years, but we see dual use asset.
05:16So industrial plants that are where it co-exist civil and military defense products with a specific split on that.
05:27So there are also opportunities of partially diversify the industrial asset and the associated workforce in order to enter in
05:36that domain.
05:37And it's also the same thing for technologies, for example, and technologies, it's, you need to adapt it a little
05:43bit.
05:43Of course, there's requirements as you go in the defense industry.
05:46We're talking about sovereignty, resiliences, making sure it's more local, but definitely major opportunities.
05:52And this industry needs a lot of expertise as well that we can get from other areas where we're suffering
06:01a little bit more from a growth perspective.
06:04So what we are talking about now is not something that is a trend that we see, it's something that
06:12is already happening.
06:13Okay, so with defense budget surging, many companies coming from other sectors are diversifying.
06:20Here we reported some public press, mainly auto-related because it was the easy move, but there are many others
06:30on the telco.
06:31We can obviously share the Telefonica, Orange, Vodafone, FastWeb, Deutsche Telekom, and there are many others.
06:41On the pharma side, there are pharmaceutical companies that are collaborating in terms of bioprinciples, Vax, Lifesaver, Medical.
06:57So basically, there's already significant amount of companies that are entering into the defense arena,
07:05obviously considering the different constraints, the different regulations, also the procurement cycle and the bureaucracy that also in the previous
07:16session they discussed.
07:18But this is something that is getting quicker and quicker, faster and faster, and bigger and bigger in terms of
07:24many players entering into this context.
07:29So question on our side, if you are considering, you or your company are considering diversifying your business into defense
07:41with the exception of resilience, security, autonomy,
07:47how many of you raise your hands up just to one, two, three, five, more or less.
07:55Okay.
07:57So here is a picture.
07:59Stefan, you want to comment?
08:00Yeah, it's actually interesting.
08:02As I said in the last session, it's the first time since Second World War that we're investing so much
08:07in defense.
08:08The market has changed.
08:10We're seeing more and more companies that want to enter because, of course, the global geopolitical context is making an
08:19important demand, and we see it.
08:20So, of course, there's the natural players like aerospace and defense.
08:24You can see in Europe, 22% of them wants to invest more, more capex, more investment.
08:30But a lot of other segments are also looking to invest.
08:35You just talked about health.
08:37There's real estate.
08:38Real estate, you will say, why?
08:40Well, you need to build a lot of assets.
08:41It's an ecosystem we're building, so it's not only weapons or whatever.
08:45You need to bring different assets from different industries.
08:50Of course, services are getting more involved.
08:52I think we're a good example.
08:53We're investing massively in aerospace and defense and talents.
08:58And, of course, you can see the technology as well that are seeing defense as a big growth area.
09:04So, I comment on my side here is interesting because, for the first time ever, other CEOs of different companies
09:13declared quite clearly that they are evaluating some kind of move in the next three years in the aerospace and
09:21defense sectors.
09:21And this is the first time that there's basically this relative first place on a quite niche sector.
09:30That means that, obviously, follow the money is the golden rule of the business.
09:36So, there's lots of money that is going there.
09:38But there's also significant understanding of what defense now means in terms of technological spillover, direct and indirect impact on
09:49the real economy,
09:50new skills, new technologies, development, and so on and so forth.
09:54So, this is quite interesting.
09:56So, out of five in the room, basically, we say that 22%, so one out of five in the huge
10:06corporation is evaluating some kind of move.
10:08And here we've put different segments.
10:11But, of course, as we were in the other slide, we had in the other slide, the auto industry is
10:16looking massively.
10:16But also, all this supply chain that used to support that auto industry is looking to say, how can I
10:22adapt my production to this aerospace and defense sector?
10:27Moving on, here we try to summarize what are the kind of considerations that companies need to do in order
10:38to evaluate how to enter.
10:39So, the first question that every CEO that we discuss with posed to himself and to his top team is
10:47if the sector that they operate is relevant for defense market in terms of answering it to some specific unaddressable
10:56need.
11:00The second one is what are the main approach that they can pursue in terms of way to play.
11:06Are they going to provide directly to armed forces?
11:09Are they going to insert in the supply chain?
11:13Are they going to co-develop some new products or technologies?
11:16And this is the interesting part.
11:18There's very much co-design and co-creation willingness and eager from the military ecosystem with respect to the past.
11:31That is opportunities from tech that are basically quite used to having a fast pace in developing, testing, adapting.
11:40And the third one, obviously, is very much defense-related in terms of key challenges, regulation, qualification, very long processes
11:52cycle.
11:52That is no longer the case.
11:54If you consider that just to go on a parallel on Ukraine side, they started a few years ago when
12:01the conflict starts with some tens of drones per month.
12:06And now they are producing more or less 4 million per year.
12:11So they were able to completely change the scale, adopting new technologies, making ecosystem with the civil society and with
12:22the tech company as well as with the startup.
12:27And you see this transition in all the industries and each of them as important assets, benefit that they can
12:36leverage as they are trying to evolve into this defense industry.
12:40For example, I'm going to pick a few.
12:43Like the automotive industry, you can adapt existing platform and say, oh, how can I leverage that asset?
12:50These machines is everything I had to go and support new products in the defense industry.
12:56We're talking about drones.
12:57We're talking about different type of drones.
12:58It seems to be very intuitive to take these assets and transfer them.
13:03I've talked before about this manufacturing ecosystem that I've seen an important reduction.
13:10Actually, I'm going to take again the auto industry, but other industries as well.
13:13And these suppliers, we talk about castings, forgings, electronic components, harnesses.
13:21It's easy to evolve as well into the defense industry.
13:26Of course, requirements are a bit more stringent, a bit more complex.
13:29You talked about complexity of qualifications, but at the end, the processes are there, the equipments are there, so it's
13:37only to adapt.
13:38So it's a small delta that you can do to grow into this market.
13:44And same thing with electronics.
13:46Of course, we don't have the same volume in aerospace that you are seeing in other industries,
13:51but complex sensors, chips, AI capabilities is what we need more and more in this industry that is becoming autonomous,
13:59complex.
14:00We're selling global ecosystems to our clients now, so we need to have this communication between the equipments.
14:08And that's where it's interesting, and there's a big bridge between what you were doing before and what you can
14:14do in the defense industry.
14:16Cesare, if you want to...
14:17Yeah, picking up some others, so, I mean, if you see these sectors that are just few of the potential
14:24interested ones in entering into the defense,
14:27basically every of them can play one or many different way to play in providing a specific contribution.
14:37So automotive can contribute, obviously, with products that can be adapted, but also with the scale, with the agility in
14:45relocating supply chain.
14:47Manufacturing can provide as well specific technologies, additive manufacturing, or specific products adapted with a very high tolerance machining process.
14:58Chemical is very much critical and strategic to Europe right now for critical raw material,
15:09for rare arts, that are very much used in the base chemical, intermediate one.
15:16If we go to the electronics already, Stefan talked about it, but it's more and more kind of interconnected specific
15:28communication operations,
15:30so there's a need for scaling up also chips, motherboard, optotronics, so very advanced on electronics, textile, that can seem
15:43not very close to
15:45I mean, in addition to the standard uniform, there are very much high-tech, textile, that can start in co
15:53-developing fabric and not interceptable infrared or not a thermicolor scannable.
16:02And the tech and telco is the one that is playing a major role, so in developing specific technologies
16:10and creating a new integrated network, multi-domain, and interoperable.
16:18And if I want to finish on textile, it's nice because it was a dying industry in our countries for
16:25years,
16:26and as you are developing these new body armor or technical textiles, well, you don't need to have them done
16:35in Asia now.
16:36You can recreate industries locally, and we've seen that with suppliers actually in Canada right now that are getting integrated
16:43with the Canadian government to support.
16:45So it's nice to see that this new movement is also re-energizing industries that have been moving to Asia
16:54in the past 40 years.
16:55Yeah, obviously there's nearsuring, reassuring opportunities, and I mean, the instrument and the money is already on the ground, is
17:05coming more and more,
17:07but there are already instruments that will allow specific industries to enter and diversify into this context.
17:15So going to the different pathways, the different companies, I anticipated a little bit before,
17:25so there's obviously the most immediate one, dual-use products, so basically civil and military existing product use and entering
17:34it there.
17:34Then there's capability upgrade from product and asset standpoint, so adapting something that was for outdoor manufacturing heavy goods in
17:45support of specific needs,
17:47as well as either reconversion or coexistence in an existing plant for starting and producing something new in support of
17:59the security and defense ecosystem,
18:01as well as re-qualifying workforce, so up-skilling, re-skilling workforce of some sectors that are either distressed or
18:13are facing quite strong headwinds.
18:17M&A is another, obviously, pathway, is a little bit longer, because it's required to identify the target and then
18:26acquiring the capabilities or capacity.
18:29And then there's all the innovation ecosystem in terms of startup partnership, joint venturing, tech, that is required, is very
18:40much required in terms of opening quite traditional sectors that until yesterday have lived according to the peace dividend.
18:53And then now Europe just woke up during the last two, three years, so that needs to cope with all
18:58the different challenges and gaps that occurred over the last 70 years.
19:04And then there's the public and funding, public funding and programs.
19:07So we have European defense fund, European defense industrial programs, so that are all mechanisms that incentivize the kind of
19:16collaboration, and not only on military base, but also with other sectors.
19:22And as you can see, there's different steps to get into that, but if you go to the next slide,
19:28Cesare, of course you can have different strategies to get into the defense industry, but at the end it's a
19:37very complex decision.
19:38And it's not something you can take quickly, because the barrier of entries are important.
19:46You know, we're talking about defense, or we're talking about cybersecurity, we're talking about a lot of things that you
19:52need to control, put in place, to ensure that you're able to get into that market.
19:57And we see it in three main areas, well, from a top line perspective, you need your product to meet
20:04the needs.
20:05It seems kind of obvious, but of course you need to work with people that understand the segments, that you
20:12can co-design, because if you're just trying to do it on your own and trying to go to the
20:16market, it's going to be kind of difficult.
20:18So you need to orchestrate very early with the public sector, making sure that there's a demand for your product
20:25and that you can see how to get access to support to do it.
20:30The execution, by definition, is the same thing like any major project.
20:35Can it be feasible? Do we have the capabilities?
20:38And here we're talking about resources technically, money, infrastructure.
20:44So you want to ensure that you embed the compliance and the design, because when you go more in the
20:50aerospace and defense industry, airworthiness is important, but also other aspects of it.
20:56And you need long cycle times of investment.
21:00That's important to understand.
21:01You cannot do that in six months.
21:03There's a long process of qualification to get there.
21:07And finally, it's all creating a new ecosystem, if you're not in that sector, is how do you connect with
21:14this global structure?
21:16How do you manage ESG, your reputation?
21:19Does it fit in your portfolio?
21:21You need to think about that.
21:22And bring these skill sets as well that will help you to get into that market.
21:27So shape the storyline with your board to ensure that the mindset, the culture, everything you have in your company
21:36makes sense to go in that industry and build the talent, the assets to be able to go there.
21:44If I may comment on that, the key takeaway on that is basically that it's not an opportunistic move.
21:52What has been clarified in all the discussion that we have and our clients had also at the European level,
21:59but also on national, international level, was that with respect to the past, where basically, yes, defense was quite niche.
22:08And sometimes there was some funding, some money on the market, but a very opportunistic one.
22:15So entering, dropping the money, developing something, but then getting out.
22:19Now the request and the opportunities in any case is to take a strategic move.
22:26So it's a strategic choice that needs to be done very much upfront, taking into consideration what we were discussing
22:34before.
22:35So there's obviously opportunities in terms of co-designing, something new that is expected by all the different member states.
22:46If we look at the European level, but also from NATO perspective, the NATO China Command, just open up different
22:53industries.
22:54They're asking for specific solutions.
22:57There's the long cycle process that Stefan was discussing, but there's also very much strong discussion how to shorten this,
23:08because we do not have that time.
23:10If you consider that the backlog of a standard company is in the round of seven years, and we cannot
23:17face this kind of backlog for longer time.
23:21So we need to shorten, figure out the different agile model of collaboration, leveraging on transitory specific external industrial capacity,
23:30as well as the overall ecosystem.
23:33So that is very much looking to innovate, digitalizing, leveraging on the startup.
23:44Starting from venture capital that was historical, a very weak point on the huge OEM.
23:52They were not used in investing in venture capital, and now they start more and more, because they understood that
24:00basically there's a different loop in the game in order to develop specific products.
24:07And I think you've seen it last week with SpaceX and other industries that are coming from the technology investing.
24:13It's a game changer.
24:14So you can go faster, but of course you need to prepare yourself to do it as well.
24:19So the key takeaways to close this session.
24:25Opportunity window is open, but it's open now.
24:28I mean, we have in front of us 12 to 18, 24 months in order to position.
24:35So basically the need and the challenges will be in the stable and structure for 10 to 15 years.
24:42But the move has to be done now just because the first mover is getting significant advantage with respect to
24:51others.
24:51So early movers will have a competitive and strategic advantage.
24:55Second one, defense is becoming a strategic growth arena for companies, for innovation ecosystem, for technologies, companies, and so on.
25:06Just because he's no longer able to properly address their needs based on leveraging on the historical traditional player.
25:18And public and private dialogue is key.
25:21It's key because we discussed also in the previous session that there was needs to have a public onboard government
25:29finding different solution how to build up a PPP in order to managing the defense entry complexity.
25:38Any other questions?
25:39No, very good.
25:40Cesare, thank you.
25:41Sum it up.
25:42Thank you guys for listening.
25:43I hope it was interesting.
25:45Yeah.
25:45So just this one as last remark and then leaving the floor to the questions.
25:55So basically what we see is first, assessing the market.
26:00Second, assessing capabilities that every player may have in terms of workforce, industrial capability, products, tech, way of working or
26:12supply chain.
26:13Go to market model.
26:16And then obviously classical stuff from consulting side.
26:22I think that we end up.
26:26Any space for questions?
26:30Tom.
26:31Alex.
26:38We can do it.
26:42Entering into the defense space if you are a startup working in the dual use or commercial sector means that
26:53there are much longer procurement cycles.
26:57So how do you kind of prepare for that as a startup entering the space?
27:06Yeah.
27:07As you know, there are significant discussions at the European level in order to review the procurement process.
27:16There are also some instruments that are quite innovative and also the different roles of all the different players at
27:25European level are reviewed.
27:26Yeah.
27:27I reviewed.
27:28So in order to allow exactly what you are pointing out.
27:31So attraction of a startup and accelerating the process that are shortening already now by half, but we need to
27:39significantly improve.
27:42Thank you all.
27:42Thank you all.
27:43Thank you all.