Study - Between Billion-Euro Orders and Supply Constraints: Suppliers Become the Bottleneck in Defense Production

  • Supply chain resilience is one of the most important strategic issues in the defense industry
  • Nearly all companies say supplier capacity expansion is critical to achieving their own goals
  • Many raw materials in the supply chain carry a high supply risk

For 89 percent of defense executives, supply chain resilience is a central strategic priority for securing growth. Alongside cybersecurity and development, the supply chain ranks among the industry’s top three priorities. While efficiency and capital resources used to be the decisive factors, the key question today is whether companies can reliably produce at all. These are findings from Horváth’s “Aerospace & Defense” study, for which senior executives from the aerospace and defense industry were surveyed.

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Europe’s changed security environment and the need to ensure defense readiness are filling order books across the defense industry. Yet companies can only ramp up production with the support of their suppliers. “Investing in defense technology today does not automatically mean securing supply. Without reliable suppliers, every capacity expansion remains theoretical,” says Ralf Gaydoul, Partner at Horváth. Companies therefore need to critically review dependencies and supply gaps. Already, 94 percent of executives consider the pace at which suppliers can expand their capacities decisive for achieving their own goals.

Raw materials as a production risk

Raw material procurement is becoming a particular focus for companies. Materials such as graphite and yttrium, for example, are needed in aircraft production. According to NATO assessments, they are considered especially high-risk because they are primarily mined in China. “Even the best additional production line is of little use if, in the end, a single metal is missing that can only be supplied from a few locations worldwide. Many procurement departments are only now becoming aware of this issue,” explains the Horváth expert.

Nearly half of the executives surveyed also expect that dependence on raw materials and intermediate products will not decline significantly over the next ten years. In the industry, that period represents an entire procurement and modernization cycle.

Regulation slows joint procurement in the EU

In addition, parliamentary approval processes and inconsistent national procurement rules slow many projects for years. Today, only 18 percent of EU procurement is conducted jointly, well below the European Defence Agency’s target of 35 percent. Seventy-eight percent of EU defense purchases come from outside the Union, the majority from the United States.

The European Defence Industry Programme (EDIP) and the EU Defense Readiness Omnibus are intended to improve joint procurement approaches among European countries. So far, however, the two initiatives have largely operated independently of each other. “The programs are moving in the right direction, but they are two separate construction sites,” says Ralf Gaydoul. “EDIP provides the funding for joint procurement, while the Omnibus simplifies the related procedures. For real change to happen, the two programs need to work together. Otherwise, each country will ultimately continue to pursue its own procurement.”

About the study
For Horváth’s “Aerospace & Defense” study, a representative selection of responsible managers from defense companies in Germany and Europe was surveyed. The sample comprises more than 60 CxOs, with whom in-depth personal interviews were conducted.