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European arms manufacturers are having a hard time keeping up with orders. And not just because of high demand

The European concern MBDA, which produces the Storm Shadow/Scalp and Aster cruise missiles, has invested heavily in new equipment and added hundreds of workers over the past three years, but is unable to fulfill orders. And the reason is not just the record high demand. This was reported by the Financial Times, Komersant ukrainskyi informs.

As the article notes, MBDA’s order book has grown to 37 billion euros, and it will take about seven years to fulfill it at the current rate. At the same time, the manufacturer is unable to expand production quickly due to inefficient production processes and difficulties with supply chains.

What’s wrong with production processes

As an illustrative example, the Financial Times cites the complex production process of MBDA’s Aster missile.

For example, unfinished weapons are transported across the Alps between France and Italy several times. This movement is associated with different stages of production that take place in different locations. All of this logistics takes months and yields only minor industrial benefits.

Such problems would be “fairly easy to solve” if MBDA were a regular company. But things are much more complicated for the cross-border defense group, as it needs to balance the interests of its shareholders – Airbus and Britain’s BAE Systems each have 37.5% in the company, and Italy’s Leonardo has 25% – as well as the military it serves.

MBDA CEO Eric Beranger proposed last year to simplify the production process, but France rejected the proposal, seeing the reorganization as a threat to its leadership in the group.

The United Kingdom was also not particularly supportive of the proposal, as, like France, it saw it as more favorable to Italy.

European defense industry finds it difficult to find support from banks

In Europe, defense companies have faced the fact that banks are refusing to provide them with financing due to “internal rules.”

As Bloomberg explained, the European banking industry is accustomed to treating arms manufacturers according to reputational responsibility norms, thanks to rules designed to weed out high-risk customers or prevent lending to sectors that are not in line with ESG (environmental, social and governance) indicators. And, accordingly, the banking sector still views investments in arms production as not entirely acceptable.

According to Bloomberg, only well-known companies, such as the German concern Rheinmetall AG, whose relations with banks predate the introduction of ESG rules, do not have problems with banks. However, for smaller companies, securing financing is still a challenge.

Fabrizio Campelli, a top executive at Germany’s largest lender, Deutsche Bank AG, said at a recent conference in Frankfurt: “Unless a number of tangible levers are put in place,” Europe will find it difficult to finance a new wave of defense growth.

What the EU should do to boost arms production

Europe needs to “simplify and harmonize” some definitions of sustainable financing to make defense a “more acceptable” sector. This is the opinion of Fabrizio Campelli, a top manager at Germany’s largest lender, Deutsche Bank AG.

According to Bloomberg, this refers to the European Investment Bank expanding its mandate to gain more freedom to finance military projects.

To recap, the European Union has prepared a plan to “rearm Europe” with new financial instruments. The plan envisages mobilizing 800 billion euros and includes 150 billion euros in loans for defense. And the European Investment Bank has a key role to play here.

Changes in approaches for the European Investment Bank pave the way for lending to large-scale strategic projects: land border protection, military mobility, critical infrastructure, demining and decontamination, space, cybersecurity, jamming technology, military equipment and facilities, drones, biohazard protection and seabed infrastructure, critical raw materials, and research.

The EIB’s new approach should also send a signal to investors and other banks that security and defense are public goods worth supporting.

KfW, Germany’s state-owned development bank, has already responded to the challenge.

“Companies in the defense sector can apply for funding provided under KfW’s general programs,” the bank said. They assured that “the federal government can invest in defense companies at any time through allocations made by KfW.”

In the US, arms manufacturers and banks have long found a common language

While Europe is trying to create the financial conditions for a thriving defense industry, the picture in the United States is quite different. According to data compiled by Bloomberg, after Russia’s invasion of Ukraine in February 2022, the largest suppliers of bonds and syndicated loans to the defense industry are US banks.

JPMorgan Chase & Co. leads the Bloomberg ranking, having provided more than $28 billion in loans to defense companies since February 2022.

It is followed by Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley.

According to these data, the highest European bank in the ranking is BNP Paribas SA, which is ranked ninth.