Horváth Study: Companies from Industry and Services Seek Entry into the Defense Sector

  • Service companies expect higher medium-term revenue shares than manufacturers
  • Complex regulations are slowing market entry

  • Established defense companies fear energy shortages

     

The so-called defense boom is also impacting other sectors of the economy: Across industries, more than 30 percent of German companies are considering entering or expanding their presence in the defense market. Manufacturing industries in particular, but also service providers, see growth opportunities in the sector. In a volatile economic environment, defense is becoming an additional business pillar for these companies. These are findings from Horváth’s “Defense & Space 2026” study.

Since 2014, defense spending in Germany has more than doubled (+132 percent). This development is attracting the interest of numerous companies that have previously been active primarily in civilian markets. Within industry, companies from metal processing (72 percent), mechanical engineering (48 percent), and the automotive sector (38 percent) are most likely to plan entry into the defense market or expansion of their existing activities. Among service providers, companies in the public sector (56 percent), as well as software providers and consulting firms (54 percent), show the greatest interest.

“Companies in these industries already possess the manufacturing capabilities that the defense sector requires. Entering the market therefore would not be a leap into the unknown but rather a logical extension of their existing business,” says Ralf Gaydoul, Partner at Horváth. Nevertheless, manufacturing companies expect only single-digit revenue shares from defense activities by 2029, while software providers (18 percent) and energy suppliers (23 percent) expect significantly greater contributions. “Service providers benefit from the fact that regulatory and product-related requirements are much easier to meet at the service level than at the product level. Because their services are more broadly applicable than those of manufacturing companies, market entry becomes easier and interest correspondingly higher,” explains Ralf Gaydoul. What continues to hold many companies back are the strict regulatory requirements and compliance obligations within the defense sector.

 

Outlook for Continued Industry Growth

Established companies in the defense and aerospace sector expect continued growth in the future. 89 percent of surveyed executives believe that the war in Ukraine will continue to shape the industry for at least ten years beyond its end. The same percentage expects conventional weapons systems to be increasingly replaced by unmanned systems such as drones.

However, there are also concerns. 8 percent of respondents doubt that current investment levels are sufficient to modernize critical infrastructure and maintain competitiveness over the next three years. 42 percent of executives fear that bottlenecks could limit resilient energy supplies in times of crisis.

 

Talent, AI, and Supply Chain Constraints

In addition, demand for skilled professionals in AI, research and development, and cybersecurity continues to grow. At the same time, the industry faces challenges in its AI transformation. 82 percent of CxOs consider AI the most disruptive force in defense, but implementation remains difficult. 73 percent fear that unclear processes will delay AI adoption.

The industry is also divided when it comes to expanding production capacity across the supply chain. 51 percent of executives believe that dependencies on raw materials and intermediate products can be reduced over the next ten years through targeted diversification and investment. However, nearly as many respondents (47 percent) doubt that this can be achieved.

“The industry is facing practical questions that will determine whether the billions in investments ultimately lead to improved defense capabilities for Europe,” says Ralf Gaydoul, Partner at Horváth.

 

About the Study

For the Horváth study “Defense & Space” a representative sample of managers responsible for defense companies in Germany and across Europe was surveyed. The sample includes more than 60 CxOs who participated in in-depth personal interviews.