COVID-19 has caused the prices of critical materials and transportation capabilities used by the defense sector to skyrocket, just as multiple European nations have pledged to boost their military spending — demanding faster delivery times and increasing order rates.
Meanwhile, the economic sanctions imposed on Russia upon its invasion of Ukraine mean companies must perform a thorough inspection of their supply chains to ensure they are not using sanctioned firms or products.
These events have prompted defense contractors in Europe to develop new strategies to keep their products flowing through evermore uncertain times. Finnish defense manufacturer Patria has felt the squeeze of increased component prices and accelerated delivery schedules over the past couple of years, said Jukka Holkeri, executive vice president of Patria’s global division.
Since the pandemic began, delivery times for components used to build Patria’s equipment — be it armored vehicles or defense electronic systems — have grown longer, Holkeri said in an interview with Defense News.
On top of that, the cost of certain components, from semiconductors to armored steel, has risen over the past couple of years — both due to the lower availability of parts as well as increased transportation costs.
“Everybody seems to be wanting to have armored steel, and the production just seemingly cannot cope with that,” he said.
French defense industry leaders recently called on the nation’s delegates to do more to help keep critical materials and components flowing in the short and medium term. Speaking during a March 30 hearing before the National Assembly’s defense committee, the three chairmen of France’s aerospace, land forces and naval forces industry associations warned they will need to begin stockpiling critical supplies such as steel, titanium, nickel and aluminum to fill orders in the short term.
In the medium term, new suppliers will require requalification, which could take one to two years, warned Eric Trappier, CEO of Dassault Aviation and chairman of the French Aerospace Industries Association.
For shipyards in particular, the low availability and high cost of steel is a fast-growing problem. Steel and aluminum can make up to 60% of the cost of a small ship, said Pierre-Eric Pommellet, president of Naval Group and chairman of the French Marine Industry Group.
The naval industry is “absolutely” witnessing price increases for steel of 40-60%, Pommelet told delegates. “The supply of steel becomes problematic and can create enormous difficulties for our companies.”
While these supply chain issues began during the COVID-19 pandemic, they were exacerbated in the lead-up to the Russian invasion of Ukraine.
“Countries started to raise their defense budgets, which leads to procurements, which leads to companies starting to prepare for bigger production, and that leads them to ordering long-lead items and materials,” Holkeri said.
European officials welcomed these defense spending announcements, but “quick decisions should not mean hasty and thoughtless decisions,” warned European Defence Agency Chief Executive Jiří Šedivý.
“We need to coordinate ourselves better on the demand side before making capability expenditures, avoid fragmentation, and use this new defense spending opportunity for a more collaborative approach,” he told Defense News in an email.
The surge of demand may well crash against the defense-industrial production capacities, which were hampered by the shortage of raw material and components since the pandemic began. “The war in Ukraine is only sharpening this crisis of supply chains. So already in the short term, we should avoid an intra-European ‘arms race’ amongst the member states, by better coordinating on the industrial supply side as well,” Šedivý said.
Defense industry leaders did reaffirm their support for the sanctions imposed against Russia. But those economic measures mean it will take companies even longer to find new suppliers for critical materials that previously came from Russia, Trappier noted. Moreover, the ongoing deliberations over whether Europe will cut off Russian gas will affect how defense businesses power their factories and build systems, he added.
The defense-industrial base is trying to ensure it can fulfill the equipment requests and sped-up delivery times in the short term. But executives see the Russian invasion leading to a full update of their business strategies.
“Updating the strategy is approaching, but it seems more that companies are working to cope with the current situation — both pandemic and the Ukraine war — rather than updating the strategies more fully,” Holkeri said.
Supply chain woes in the defense industry are also a global problem. In the United States, the Biden administration has made supply resiliency a priority for the Pentagon.
Officials have begun to identify and patch holes in the system, orchestrated by a set of road maps to be released soon by the Defense Department, said Andrew Hunter, who is the U.S. Air Force acquisition chief and currently acting in that capacity for all of the Pentagon.
“I think it’s important and significant that we can do it together with our allies,” he said April 1 at the Norwegian-American Defense Conference in Arlington, Virginia.
For example, Hunter said, he learned in a recent conversation with his Norwegian counterpart, Morten Tiller, that Oslo’s M72 anti-tank weapons, donated to Ukraine, are produced in the United States. Nammo’s U.S. subsidiary makes the shoulder-fired weapons at its plant in Mesa, Arizona.
“When I heard that, I thought to myself: ‘Hmm, I wonder if our supply chains have the same challenges?’ ” Hunter said.
The pandemic’s economic toll was in many ways a wake-up call for the Pentagon. While the prevailing wisdom was that prime contractors had a good grip on the business of sourcing vital components for their products, the dynamics have turned out to be more risky, Hunter said.
“That remains true, but what [we] learned is that it’s a more challenging problem than we appreciated, and there are more overlaps and dependencies within the supply chain than we appreciated,” he said. “COVID brought many of these to light, and we saw delays and gaps develop over time.”
Sebastian Sprenger in Washington contributed to this report.
Vivienne Machi is a reporter based in Stuttgart, Germany, contributing to Defense News' European coverage. She previously reported for National Defense Magazine, Defense Daily, Via Satellite, Foreign Policy and the Dayton Daily News. She was named the Defence Media Awards' best young defense journalist in 2020.