The Defence Industry in Spain. Strategy and innovation

A few weeks ago, journalist Lucía Gómez published in "elEconomista.es" that the Russian invasion of Ukraine "has turned upside down" the geopolitical chessboard in Europe and, at the same time, has brought the debate on defence investment in member states, both NATO and the EU, and also, logically, in Spain, back to the forefront. At a recent forum to discuss defence, they called for a spending programming law with a minimum term of ten years in order to have a clear strategy and be able to plan investments.

In this respect, Ricardo Martí Fluxa, president of TEDAE - the sector's employers' association - points out that "the Versailles Agenda represents a before and after for Europe with a strategic agenda in terms of actions and resources". "We have to be very aware of the importance of the defence industry," he admits, recalling the need to reach a state pact between all the political parties to avoid annual budgets and to gain certainty and visibility regarding medium- and long-term investments.

For his part, Luis Furnells, executive president of the Oesía Group, affirmed that "high technology cannot be improvised", "it requires knowing what we want to do and having the visibility to make the right investments". For companies, which play a fundamental role in this industry, having a public investment guide also allows them to select the necessary talent for each project and invest in training. 
State of play.

A country's defence industry is only possible if state leaders are strategically minded. This includes, among other things, identifying national interests and how to safeguard them in the face of perceived and anticipated threats. Therefore, military capabilities required by the armed forces must be designed and built up. Only in this way could a defence industry be conceived. This means that the user-supplier relationship is a living one, the public budget is the accounting expression of the political priorities assigned to national needs and, if it turns out that Defence has a low political priority, as has traditionally been the case in Spain, there is a structural problem.

It is clear that the importance of Spain's geopolitical situation does not correspond to its Defence Policy, and this is not circumstantial. The exercise of power in the international sphere cannot be delegated and a weak strategic posture has important political repercussions in the Defence Industry. The questions are: what military capabilities does Spain need, or, in other words, what is the Force Design necessary to adapt to the Operational Concept?  It must be borne in mind that military capabilities are based on weapons systems. Thus, if the Operational Concept requires naval air capability, the necessary weapons systems will have to be obtained.

A question of innovation.

The essence of the process described above is innovation, which is not about implementing ideas, but about taking steps to make good ideas happen and to make the organisation fit for purpose. If a new idea or process is new to the organisation and is effective, wherever it comes from, it must be accepted as an innovative subject.

As a result: does a joint Armed Forces-Industry innovation strategy exist in Spain, what weapons systems would be necessary, and what would be the best way to achieve it? ..... For the answers, collaboration between the Armed Forces and the Directorate General of Armaments and Material and companies is essential, or in other words: demand-production-supply. The relationship must be permanent, sequential and dynamic.  

All this is happening as the global defence market is evolving rapidly, including in the space sector. More and more countries are investing to develop their own world-class defence industries. Even when importing high-end military systems, many foreign governments are applying increasingly stringent technology and work-sharing requirements, making exports a much more challenging proposition for Spanish and Western defence companies. These trends are giving rise to new global competitors such as South Korea, Turkey, Israel, Greece and other countries, while Chinese and Russian companies are looking to break into buyers who previously favoured mainly Western sources.

Greece: a clarifying example 

To some, the phrase 'Greek defence industry' might seem an oxymoron. Greece would hardly be associated with high-tech weaponry that can be exported. From 2007 to 2012, Greece was the EU's largest arms importer, according to SIPRI online data. During the debt crisis (2009-18), the country's bankrupt state defence industries became a source of discord between the Troika and Athens.

Before the debt crisis, the Greek defence industry was a microcosm of the country's systemic and chronic malaise. Meanwhile, governments supported state-owned companies with "quick fixes", i.e. state subsidies. Their private competitors faced excessive taxation, indifference and/or bureaucracy. 

Surprisingly, the Greek defence industry executed a "pass" in 2020. From a state of decline, the sector moved to a state of stabilisation. Despite fierce competition against European defence giants, Greek companies, most of them privately owned, captured almost a third of the EU's upcoming PESCO programmes.

They will participate in five of the 16 European Defence Industrial Development Programme (EDIDP) projects alongside more than 180 participants from other EU countries.  They will also participate in one of the eight research projects in the context of the Preparatory Action on Defence Research (PADR): PRIVILEGE (encryption of sensitive military data). These Greek defence companies not only competed successfully against much stronger counterparts, but also achieved important industrial synergies with the latter, which may prove invaluable for the Greek defence ecosystem.

The situation in state-owned enterprises was not as dynamic, but much better than in recent years. Civilian and military vehicle manufacturer ΕΛΛΒΟ was auctioned to an Israeli consortium after three unsuccessful privatisation attempts since 2015. The EAΣ company recorded zero losses after almost 17 (!) years and EAB will benefit from the deepening cooperation between Abu Dhabi and Athens. ENAE, Greece's most important and troubled shipyard, was finally privatised in July 2021 after a years-long effort to be rescued.

There is a caveat to the Greek defence ecosystem: the vast majority of defence industries specialise in new technologies of the Fourth Industrial Revolution (e.g. cyber defence or drones). In a computer analogy, most of these companies produce the software, not the hardware, of weapon systems. Because Greece intends to become a major hub for digital in the Balkans and the Eastern Mediterranean, the growth of the start-up ecosystem in Greece could also have a positive impact on the expansion of the Defence industry.

One example to consider. 

The Greek defence ecosystem, after several years of decline, entered a phase of stabilisation and cautious development. Greek Defence industries supplied the Greek Armed Forces with high-tech weapons manufactured in Greece or signed new export agreements for their products in the first half of 2021.

Greece's rearmament programme in the face of the perceived Turkish threat (which may exceed 11.5 billion euros by 2025) will offer Greek defence industries new contracts from the Ministry of Defence and, more importantly, open the door to collaborations between Greek and foreign defence industries. Such synergies with Western defence giants will only be deepened by the Greek defence ecosystem's involvement in one third of EU arms programmes.

Another potential benefit could arise from negotiating defence agreements with allies, both old and new. For example, the United Arab Emirates invested in ΕΑΒ in the context of strategic cooperation between Athens and Abu Dhabi. Similarly, Washington could offer Athens critical trade-offs for the use of Greek military bases, for example, the inclusion of the Greek defence industry in the F-35 manufacturing consortium.

An inescapable necessity.

The stakes for Spain's national security could not be higher. Having a financially successful proactive Defence industry is fundamental to Spain's ability to innovate Defence solutions in accordance with a National Security Strategy of a strategic actor and to advance Spain's technological level. Such a category should be reflected in the Budget. 

It is useful to draw on recent wars to deduce important insights or fundamentals for Force Design, but extracting the right insights requires more than simply thinking about the recent past. It must look to an increasingly complex world, one in which technological, social and economic change continually produces new contexts. The military must strive to explore history in order to learn lessons, but also to be able to recognise when changes in context have rendered present doctrine and practice obsolete.

Enrique Fojón, Marine Colonel (ret.)