Long-term challenges ahead for Europe’s defence industry

Defence24 Days, the largest security conference in Central and Eastern Europe, held in Warsaw on 6–7 May, offered a unique opportunity for defence industry representatives from the region to gather and discuss the daunting challenges ahead. The discussion culminated in a dedicated panel on Central Europe’s defence industry in European security and global industrial cooperation, bringing together key industry, financial, and government representatives from across the continent.

The problem, speakers agreed, no longer resides in a lack of funding, which had been a chronic issue for many years, but rather in its opposite: an abundance of national financing. Paradoxically, this may prove suboptimal if it fuels overinvestment in selected areas. As Robert Sochacki, vice-president of Bank Pekao SA, warned, defence manufacturers could expand production capacities that later prove unnecessary, exposing them to financial strain or even bankruptcy.

The long list of long-term challenges

As always, and rightly so, duplication and fragmentation in military systems repeatedly emerged as major barriers to scaling up production and reducing costs. Particular emphasis was placed on standardisation, especially in digital infrastructure. Oliver Harry of the UK Ministry of Defence argued that digital infrastructure offers the most natural starting point for such efforts. Andrzej Raszewski, CEO of Rheinmetall Polska, in turn, said the industry’s objective should be to ”deliver security for a reasonable price”, which is the only viable long-term approach.

However, the greatest concern for many defence firms today is the growing mismatch between long-term financing and short-term contracting. Companies face ever-larger public orders, particularly for munitions, missiles, and unmanned systems, which require vast investments in industrial capacity. Yet there is no guarantee that, after a few years, the boom will not end for fiscal, political, or security reasons, leaving firms with overcapacity and costly infrastructure unable to generate the revenues needed to repay the loans taken to build it.

This is why building and sustaining long-term profitability is so important. According to the speakers, this can be achieved through several complementary models, including dual-use solutions, standardisation, pooling, import, and security-as-a-service. At the same time, companies must keep pace with accelerating innovation cycles by „embracing innovation through solving military problems”, as Dennis Hedström of the Swedish Ministry of Defence put it. Speakers also pointed to more financially sustainable and flexible contracting models, which would allow industry to rapidly expand production capacity when needed, rather than produce continuously at high cost.

Equally important for the sector is long-term predictability beyond the 2030 horizon, especially the assurance that contracts will continue to flow rather than abruptly stop and leave companies exposed. This should be accompanied by a more distributed and resilient approach to risk management, in which all stakeholders, including defence firms, the military, banks, investors, and government, share not only the profits, but also the risks. Today, according to industry representatives, the burden of investment still rests almost entirely on companies themselves. This is why they underlined the importance of a finance-industrial symbiosis in defence, with banks and investors not only providing capital, but also assuming part of the responsibility and flexibility required to become genuine actors in the national security ecosystem.

Lastly, there is the issue of securing complete and reliable supply chains, which for many manufacturers is still not the case. The ability to rapidly scale up production depends not only on expanding one’s own capacity, but also on access to the necessary resources, from raw materials to hardware supplied by subcontractors, who may themselves be unable to scale. Identifying and closing such bottlenecks should therefore become a priority, especially through deeper supplier mapping, industrial localisation, derisking, and diversification.

Ensuring sustainable expansion and stabilisation

Central Europe’s defence industry has undergone major expansion since 2022. Record defence spending and Ukraine’s wartime needs have driven new investments and orders, especially in the region’s two major powers — Germany and Poland. In Poland, the state-owned Polish Armaments Group is currently focused primarily on meeting the needs of the Polish Armed Forces, while gradually expanding its presence on international markets. As Mateusz Roszkiewicz, Director at PGZ S.A., noted, ”the only resource that we do not control is time” — time to satisfy current needs and develop new solutions. He added that PGZ is eager to explore new forms of cooperation with both domestic and international partners.

German arms exports have increased by 50% since 2022, making the country the world’s fourth-largest arms exporter, while its leading manufacturers, including Rheinmetall, Hensoldt and Renk, have experienced spectacular growth. A similar trend can be observed among Polish producers, such as PGZ, MESKO and WB Group, which have received major state contracts. Particularly striking is the rise of the Czech Czechoslovak Group, which tripled its arms revenues in just one year, entering the world’s top 50 defence companies.

However, as representatives of several of these companies noted, major challenges still remain before the region’s defence industry can fully unleash its potential. The key question now is whether governments and the financial sector will respond to these calls by supporting the adequate expansion and stabilisation of the defence industry into a sector capable not only of meeting immediate national security needs, but also of sustaining itself over the long term.