Europe's defense industry is growing – but new suppliers must overcome these hurdles

From mechanical engineering to defense: How companies can successfully enter the multi-billion dollar market

The European arms boom is not a sure thing: How companies can grow sustainably

Europe's defense spending is rising, and with it comes increasing pressure to expand production capacity, secure supply chains, and accelerate the deployment of new technologies. This presents opportunities for industrial companies, software providers, and specialized service providers – but no guaranteed revenue. Between political announcements and a profitable contract lie technical requirements, lengthy qualification processes, limited production volumes, and significant upfront investments. Therefore, anyone wanting to enter or expand into the defense industry must offer more than just a good product: reliable delivery capability, clear customer benefits, and financing that can withstand extended start-up times are essential. The crucial factor is not how large the market appears on paper, but rather which specific bottleneck a company can reliably address – and whether a viable business can be developed from that.

The arms boom is not a business model: How companies in the European defense industry can grow sustainably

The European defense industry is undergoing a profound economic transformation. Rising military spending, a changing security environment, and the political desire for greater strategic autonomy are creating additional demand. This is generating new business opportunities for industrial companies, software providers, and specialized service providers. However, a challenging task lies between a growing defense budget and a profitable supply business: political needs must be translated into funded programs, technical requirements, reliable supply relationships, and services that are actually paid for.

The scale of this change is considerable. According to calculations by the Stockholm International Peace Research Institute (SIPRI), Europe's military spending reached approximately US$864 billion in 2025. This represented a real increase of 14 percent compared to the previous year. However, this geographical analysis also includes Russia and should therefore not be confused with the market volume of the European Union. The European NATO members together spent around US$559 billion. This sum, too, is not directly available revenue for arms manufacturers, as it includes personnel, operations, infrastructure, and administration, among other things.

The crucial business question is therefore not whether more money is spent on defense overall. The crucial question is what portion of that money is achievable through one's own performance, how long access takes, what preliminary investments are necessary, and whether the business remains viable even with declining growth momentum.

A successful market entry therefore does not begin with a contact list or a trade fair booth. It begins with a sober analysis of one's own capabilities, the specific industrial bottlenecks, and the economic conditions under which a company can reliably deliver.

Why higher defense spending doesn't automatically mean higher supplier revenues

Several filters exist between public spending and industrial value creation. Some additional budget funds are needed for soldiers, training, fuel, maintenance, or construction. Another portion flows into imported systems. Still other funds finance long-term projects whose industrial implementation only begins years later.

Even if an additional euro is earmarked directly for equipment, it doesn't necessarily mean a new European supplier will emerge. Initially, existing contracts can be extended, inventories replenished, or already qualified supply chains utilized more effectively. New suppliers only benefit when they can meet a specific need better, faster, or more economically than the available alternatives.

The European market structure also makes it difficult to simply equate budget growth with business opportunity. National requirements, differing system landscapes, and limited standardization divide demand into numerous submarkets. Larger, shared needs could enable longer production runs and lower costs. Conversely, uncoordinated national demand often results in smaller batch sizes, additional variants, and reduced investment security.

For companies, this means that the relevant market size is not the entire defense budget. It is derived from the technically addressable demand, the actually accessible customer base, and the realistically achievable market share. Those who fail to differentiate between these levels quickly overestimate their revenue potential and underestimate the effort required to secure the first firm order.

The real industrial challenge lies between the workshop and mass production

The common description of the defense industry as purely manufacturing captures an important part of its production reality, but is too broad a generalization. It is more precise to distinguish between different manufacturing environments. Large platforms, complex sensor systems, and customer-specific subsystems follow different quantity and cost logics than ammunition, standardized electronics, or certain unmanned systems.

Especially with complex military products, a few hundred units can represent an economically significant program. Compared to mass production in the automotive industry, such quantities remain small. At the same time, these products are often technically sophisticated, highly variable, and require long-term support.

This changes the meaning of industrial efficiency. A highly automated production line can offer significant advantages for large production runs. However, for small batch sizes, it can be more difficult to distribute the investment costs across individual products. In such cases, flexible systems, short setup times, modular fixtures, and well-documented workflows become increasingly important.

From an economic perspective, this relationship can be easily explained: Unit costs consist not only of materials and processing. They also include proportionate development, testing, qualification, and setup costs. The smaller the quantity, the more these fixed expenses burden each individual part.

A supplier should therefore not only ask whether it can manufacture a component. It must clarify whether its production structure is suitable for the expected batch sizes, change cycles, and documentation requirements. A company that relies solely on high capacity utilization through large production runs risks failing economically in a technically attractive defense project.

The surge in demand is exposing the weaknesses of established supply chains

The current expansion is impacting supply chains that are not consistently designed for rapid and widespread capacity expansion. More orders require additional machinery, skilled workers, intermediate products, testing capacity, and financial resources. These resources cannot be arbitrarily increased simultaneously.

Furthermore, a bottleneck in the supply of a small component can limit the output of a significantly larger system. A missing special cable, an unapproved electronic component, or delayed test documentation can delay delivery just as much as a shortage of large assemblies.

The ability to expand production therefore does not depend solely on final assembly. Crucially, the entire supply chain must be able to grow together. European studies cite, among other things, skills shortages, financing problems, uncertain contract prospects, and supply chain strains as key obstacles for smaller defense companies.

This creates a differentiated opportunity for new suppliers. They don't necessarily have to develop a revolutionary product. Reliably eliminating an existing bottleneck can be particularly valuable from an economic perspective: through additional processing capacity, improved quality assurance, shorter replenishment times, or a second reliable source of supply.

The real benefit then lies not in the isolated component price, but in the contribution to the delivery capability of the overall system.

Why overburdened purchasing departments are not open gateways

From the perspective of new suppliers, the situation often seems contradictory. The industry is looking for additional capacity, yet attempts to make contact go unanswered. Companies register on supplier portals, send presentations, and still receive no concrete inquiries.

This can be partly explained by the way industrial purchasing organizations work. Those who need to procure more goods at short notice don't automatically have more time to vet unknown suppliers. Additional staffing can initially even exacerbate the situation, because new employees need to be trained.

The notion that increased demand automatically leads to greater openness to every new supplier is therefore too simplistic. For purchasing departments, switching suppliers involves effort and risk. Technical suitability, quality, financial stability, information security, and delivery capability must all be assessed. With existing, functioning sources of supply, it may initially be easier to expand existing relationships.

The comparison, sometimes made, between preparation times that used to last several years and those that now take only a few months vividly illustrates the pressure to accelerate development. However, this is not a universally applicable industry standard. Development and qualification times vary considerably depending on the product and application.

New providers should draw a practical conclusion from this: A general company presentation is rarely sufficient. A precise description of the problem being solved, available capacity, existing evidence, and a low-risk initial deployment approach is more helpful.

Established system integrators and young technology providers need different answers

The European defense industry does not consist of a single type of customer. An established systems integrator like Rheinmetall or Hensoldt operates under different organizational conditions than a young technology company in the field of unmanned systems, autonomous applications, or software-based defense.

Companies like Quantum Systems, Helsing, and Stark exemplify a new generation of suppliers whose public perception is heavily influenced by technological development and rapid growth. However, this does not allow for general conclusions about their specific purchasing practices or organizational quality.

For market development, the structural distinction is more important. Established manufacturers typically have well-developed processes and existing supplier networks. This can make access more difficult, but once successfully established, it offers the opportunity for long-term, clearly structured collaboration.

Young companies can make decisions faster and adopt new technological approaches more quickly. At the same time, high growth can lead to processes, documentation, and supply chain management being developed only in parallel with product development.

A supplier must therefore recognize what contribution each customer actually requires. For an established manufacturer, a fully qualified backup supplier can be particularly valuable. For a rapidly growing technology provider, the strength may lie in transferring a prototype into reproducible production.

Neither the size nor the youth of a company guarantees economically sound customer relationships. What remains crucial are solvency, technical clarity, decision-making quality, and the distribution of development risks.

Industrial maturity is often more valuable than the most spectacular innovation

New platforms, autonomous systems, and artificial intelligence dominate the public image. However, in everyday industrial practice, a significant portion of the economic benefits arise from less visible achievements.

This includes robust connectors, reproducible manufacturing processes, thermal management, test automation, secure software maintenance, reliable spare parts supply, and comprehensive documentation. A product is not usable simply because it functions under favorable conditions. It must operate reliably under defined loads and subsequently be serviceable, repairable, or upgradable.

This opens up an important perspective for suppliers. Their own market opportunity may lie precisely where technological innovations meet still insufficiently developed industrial processes. Those who reduce fluctuations, lower testing costs, or increase availability create quantifiable customer benefits.

Companies should not confuse technical superiority with economic superiority. Improved performance is only valuable if it is relevant to the application. A simpler component can be more advantageous if it is available more quickly, easier to replace, or requires less integration effort.

The crucial question, therefore, is not which product appears more impressive. The decisive factor is which solution makes the overall system more economical and reliable under realistic conditions.

Entering the market via industrial customers lowers barriers, but creates new dependencies

For many companies outside the military sector, doing business with other companies is a more plausible entry point than selling directly to armed forces. An industrial partner can integrate their own services into an existing system and handle some of the coordination with the end user.

This B2B approach, however, does not eliminate all difficulties. Industrial customers also have requirements regarding quality, documentation, deadlines, and financial stability. Furthermore, the dependency shifts: instead of many potential end customers, a supplier may only have a few relevant system integrators.

Direct business with government users can be attractive in the long term, but it requires different organizational preparation. The application context, operating conditions, lifecycle support, and government decision-making structures must be understood. For independent, clearly defined services, direct access can certainly be beneficial. Therefore, a general rule stating that B2G is inherently unsuitable would be just as inaccurate as expecting easy market entry.

A tiered approach makes economic sense. The more a service is embedded in a complex overall system, the more important integration partners become. The more independent and easily definable the application is, the more readily direct access can be considered.

The quality of the business is not determined by the supposed proximity to the end customer, but by the achievable margin in relation to effort, risk and capital commitment.

Contacts open doors to conversations, but not to viable business models

Personal relationships can help in understanding responsibilities and finding the right contact person. However, they do not replace technical competence or a plausible performance promise.

The idea that a single contact can trigger a large order underestimates the number of functions involved. Purchasing, development, quality assurance, production, information security, and potentially the end user all view the same offering from different perspectives.

A viable market entry requires reconciling these perspectives. Procurement is interested in costs and security of supply. Development examines interfaces and performance data. Production needs stable processes. Quality assurance demands reliable documentation. A single point of contact cannot meet these requirements alone.

Good contacts are therefore primarily an informational advantage. They can help to identify unsuitable approaches early on and to align an offer with an actual need. Problems arise when access is sold as a substitute for service.

Equally important is a professional presentation. Approaching potential customers with inappropriate country references, incorrect operational assumptions, or arbitrary military imagery signals a lack of preparation. Such mistakes don't necessarily lead to final exclusion, but in a concentrated market, they can unnecessarily cost trust and time.

Hub for Security and Defense - Image: Xpert.Digital

The Security and Defence Hub offers expert advice and up-to-date information to effectively support companies and organizations in strengthening their role in European security and defence policy. Working closely with the SME Connect Defence Working Group, it particularly promotes small and medium-sized enterprises (SMEs) that wish to further develop their innovative capacity and competitiveness in the defence sector. As a central point of contact, the Hub thus creates a crucial bridge between SMEs and European defence strategy.

Related to this:

• The SME Connect Defence Working Group – Strengthening SMEs in European Defence

Trade fairs are learning spaces and accelerators, not sales machines

A large exhibition stand generates visibility, but not necessarily demand. Specialized suppliers, in particular, can easily get lost among vehicles, aircraft, or weapon systems at broad defense trade fairs.

This does not mean that industry events are economically useless. Their value depends on the objective. For a new market entrant, the initial focus may be on orientation: What product groups exist? Which companies are integrating which technologies? Which requirements are repeatedly mentioned? Where are there identifiable bottlenecks?

Later events can serve to deepen contacts that have already been established. Then it's no longer about random attention, but about concrete discussions with known issues.

Having your own booth makes the most sense if your target audience, value proposition, and follow-up plan are already clearly defined. Otherwise, you risk an expensive form of non-committal presence. The costs include not only booth rental and setup, but also preparation, travel, time spent, and subsequent follow-up.

The same applies to forums, regional networking events, and industry platforms. Their quality cannot be measured solely by the number of participants or prominent speakers. What matters is whether relevant information is gained and qualified relationships are developed.

For some companies, internal training involving management, engineering, sales, and marketing can initially deliver a higher economic return. A shared understanding of the market prevents each department from working with a different perception of the target customer.

Technical sales must translate customer benefits, not replace engineering knowledge

The assertion that German companies generally have weak sales cannot be generalized from individual company experiences. Nevertheless, it describes a plausible risk: Technologically strong companies may focus their market approach too heavily on existing demand and too little on systematically acquiring new customers.

Handling inquiries is an important business activity. However, it does not replace actively developing new business opportunities. Anyone entering a new market must identify suitable customers, understand applications, and clearly articulate their own value proposition.

Technical sales expertise is not an obstacle, but often indispensable. It only becomes problematic when technical details are presented without reference to the customer's business objectives.

High accuracy, reduced weight, or a special material property should therefore be translated into their consequences. Does the property reduce maintenance requirements? Does it extend the service life? Does it facilitate integration? Does it shorten testing times? Does it reduce the risk of failure?

The saying "people buy from people" only explains part of the reality. Trust is important, but industrial decisions must be technically and economically sound. Relationships, technical substance, and organizational reliability complement each other. None of these levels can permanently replace the others.

A professional sales approach makes these connections visible without promising services that the company itself cannot yet provide.

Invisible market leaders don't need to be louder, but more understandable

A company can be exceptionally well-positioned in a specialized civilian field and yet be virtually unknown in the defense industry. This is not a contradiction. Brand awareness is always tied to specific markets, applications, and decision-makers.

For such companies, the task is not to completely rebrand their identity as defensive. They need to explain why their existing expertise is relevant to a new application context.

A general description of vertical integration and machinery is often insufficient. Clearly defined capabilities are more informative: Which materials are handled? Which tolerances are reproducible? Which tests are possible? How quickly can changes be implemented? What quantities can be delivered under which conditions?

In this context, visibility means being easily found with relevant, expert information. A decision-maker should be able to quickly determine whether further investigation is worthwhile. This includes clear application descriptions, reliable performance data, and easily identifiable contacts.

Confidentiality sets limits. Not every reference project can be presented publicly. Nevertheless, methods, process expertise, and quality characteristics can often be described without disclosing protected information.

The best positioning is therefore neither advertising exaggeration nor demonstrative secrecy. It is a precise, verifiable representation of what a company can actually deliver.

Dual use strengthens the economic base, but does not eliminate regulation

Combining civilian and military applications can be a particularly viable way to tap into new demand without abandoning existing business. Many smaller European defense companies operate as suppliers, serving both civilian and defense-related markets with their technologies.

The economic advantage lies in the potential for sharing development, personnel, facilities, and core technologies. When the same expertise is needed in different markets, this can reduce dependence on individual programs.

However, two meanings must be distinguished. In general business usage, "dual use" refers to civilian and military applicability. In export control law, the term is more narrowly defined and tied to specific goods, technologies, uses, and legal requirements. Therefore, not every versatile product automatically falls under the same rules.

Similarly, a civilian origin does not mean that a military application can be adopted without further review. Resilience, information security, supply chain requirements, and documentation may differ.

The economically compelling strategy therefore often consists of a common technological core with specifically adapted variants. This allows synergies to be leveraged without artificially equating different requirements.

Dual use is therefore not a simple label, but a task for product architecture and corporate management.

Qualifications and credentials must match the actual job

When entering the defense industry, expectations often fluctuate between two extremes. Some anticipate an almost insurmountable mountain of certifications. Others believe that good civilian quality is generally sufficient.

Both statements are too general. Requirements depend on the product, its safety relevance, the customer, and the intended use. A general industrial service provider faces different verification challenges than a company that supplies safety-critical electronics or an aviation-related system.

For business planning, a concrete gap analysis is therefore crucial. What skills are already in place? What evidence is missing? What additional processes does the target customer actually require? And which investments would merely be precautionary, without creating any foreseeable benefit?

Potential requirements include traceable manufacturing documentation, change management, traceability, regulated approvals, and the protection of sensitive information. Depending on the activity, further legal or security-related obligations may apply.

The burden of differing regulations and verification systems is economically significant for smaller companies. European studies explicitly identify administrative requirements, certifications, and cross-border permitting issues as potential barriers to entry.

Proper preparation therefore avoids both underinvestment and over-fulfillment. Not every available certificate creates a market advantage. What matters is the alignment between actual customer needs and proven in-house capabilities.

Growth can put a greater strain on liquidity than a decline in sales

A full order backlog is often seen as a clear sign of economic strength. However, for growing suppliers, it can initially trigger additional financing needs.

Materials must be procured, staff paid, and capacity built up before the customer pays for the finished product or service. Development, initial samples, testing, and documentation may also be required. The longer the period between these expenditures and receipt of payment, the more liquidity is tied up.

A simplified calculation illustrates the relationship. With an additional annual turnover of twelve million euros, two months' turnover corresponds to approximately two million euros. If the financing-relevant period extends by this amount, a significant additional liquidity requirement can arise. The actual amount depends, among other things, on material costs, advance payments, supplier credit, and payment schedules.

Therefore, companies must calculate not only the profit margin but also the cash flow. A seemingly lucrative contract can become problematic if extensive upfront costs are demanded without adequate safeguards.

Smaller companies in particular are burdened by long decision-making cycles, high initial costs, and delayed payments. Access to financing therefore remains a crucial factor in industrial ramp-up.

Sustainable growth therefore requires a financing strategy that fits the production and payment cycle.

Capacity without safeguards is a bet on political longevity

One of the most difficult decisions concerns additional production facilities and new employees. A company cannot grow without expanding its capacity. However, building capacity too early can become a permanent cost burden.

The quality of demand is crucial. A non-binding forecast, a general expression of need, and a binding contractual purchase commitment do not have the same economic value.

The investment decision should therefore consider several scenarios. In the baseline scenario, demand develops as expected. A less favorable scenario takes into account delays or smaller quantities. A stress scenario examines what happens in the event of a significant decline in the program.

Particularly valuable are systems that can be used for different customers and applications. The more specifically an investment is tailored to a single program, the more important contractual safeguards and appropriate financial compensation become.

Pricing and capacity reservation are also interconnected. If a customer demands rapid availability, the reserved capacity incurs costs, even if it remains unused for a period of time.

The central question is therefore not just whether there is demand. It is who bears the risk if expected quantities are not subsequently called upon.

Drones and artificial intelligence are changing the system, not just individual products

New technologies create opportunities, but also lead to oversimplified market interpretations. This becomes particularly clear when comparing drones and traditional platforms.

The growing importance of unmanned systems does not automatically mean that other capabilities become economically or militarily irrelevant. Rather, technologies change the requirements for the overall system: reconnaissance, communication, protection, disruption, power supply, software, and maintenance must all work together.

For companies, a functional approach is therefore more helpful than focusing on individual buzzwords. Those solely seeking entry into the drone market may overlook more attractive applications of their expertise in test benches, sensor technology, data processing, or component manufacturing.

Equally important is the relationship between the speed of innovation and technological obsolescence. In dynamic sectors, requirements can change before a complex production line is fully utilized. Modularity and short development cycles therefore gain in economic significance.

With software, the service doesn't end with the initial delivery. Maintenance, security updates, interfaces, and long-term responsibilities all impact the overall cost.

A robust business model should therefore not depend solely on a currently highly visible product. It should be based on a capability that will also be required when technological solutions change.

Europe's fragmentation increases production costs and limits economies of scale

The European defense industry is both large and highly fragmented. Differing national requirements can lead to similar capabilities being developed, tested, and supported in multiple variations.

This results in additional fixed costs for the industry. Development expenses, documentation, spare parts inventory, and technical support are spread across smaller quantities. This makes economies of scale more difficult and can increase market access costs for smaller suppliers.

More common requirements and the recognition of appropriate evidence could reduce these costs. At the same time, a complete focus on a few suppliers would also be problematic. It could increase dependencies and reduce the resilience of the supply.

The economic policy challenge therefore lies in striking a balance: sufficient standardization for larger production runs and more efficient integration, while at the same time ensuring sufficient competition and supplier diversity for innovation and security of supply.

This results in a clear perspective for individual companies. Solutions that can be integrated into multiple system landscapes without having to be completely redeveloped for each customer are particularly attractive.

Open interfaces, transparent documentation, and modular products can create economic advantages. While they don't automatically lower every barrier to entry, they improve the conditions for repeatable business rather than exclusively project-specific transactions.

A viable entry strategy begins with justified exclusions

A successful market entry doesn't necessarily require pursuing as many applications as possible simultaneously. Often, economic clarity arises precisely from the decision to initially leave certain areas untouched.

A company should know which technical risks it can manage, which upfront investments it can finance, and which customer structure suits its size. A small software company has different requirements than a medium-sized precision manufacturer or a large automotive supplier.

The market can then be developed step by step. First, a specific application is identified. Next, its technical suitability and economic benefits are examined. This is followed by a limited project to test collaboration, documentation, and delivery capabilities. Only on this basis does a larger expansion make sense.

Success measurement should also reflect this process. The number of business cards collected says little about the quality of the market entry. More meaningful are qualified conversations, concrete technical tests, verifiable customer needs, and economically realistic next steps.

A company should define early on the conditions under which it will not pursue a project. Unclear responsibilities, persistently unfunded development work, or unrealistic delivery expectations can be reasons to reject a seemingly attractive opportunity.

Discipline in market entry does not mean a lack of ambition. It conserves resources for opportunities where technical strength can actually be translated into sustainable returns.

The industrial winner delivers not only more, but more reliably

The European arms boom opens up real opportunities, but it does not solve the fundamental problems of industrial economics. Even in a rapidly growing market, productivity, capital discipline, quality, customer value, and reliable processes are crucial.

The most significant change lies in the increased focus on security of supply and rapid industrial scaling. This allows capabilities already developed in other industries to become more valuable: flexible manufacturing, automated testing, clean data structures, robust change management, and systematic supplier development.

However, a successful entry requires a willingness to adapt. Civilian experience must be transferred to the new application context without ignoring the differences in volumes, risks, and life cycles.

The sound economic outlook is therefore neither euphoric nor fundamentally skeptical. The market offers additional demand and a need for structural renewal. At the same time, concentrated customer structures, fragmented requirements, and scarce resources limit the speed at which new providers can benefit.

Companies that address a clear bottleneck, realistically demonstrate their capabilities, and financially secure their growth are particularly well-positioned. Those who rely solely on industry affiliation, prominent contacts, or political support, on the other hand, mistake favorable conditions for a viable business model.

Markus Becker

I would be happy to serve as your personal advisor.

Head of Business Development

Chairman SME Connect Defense Working Group

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Konrad Wolfenstein

I would be happy to serve as your personal advisor.

You can contact me at wolfenstein∂xpert.digital or

Just call me on +49 7348 4088 965 .

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