ANALYSES

EU Should Become a Full Stakeholder in Defence Innovation

All major disruptive defence applications stem from the private sector which means that open cooperation with civil tech companies is indispensable for military innovation in the future. Are Europe’s national MoD ready for that?

What EU Member States’ MoD and armed forces are seeking, above all else, is technological superiority that will give them an edge over the enemy. If this superiority can be gained through innovation produced by companies in the civil sector, there is nothing against using these companies. Besides, today we’re seeing a number of Member States trying to open up defence markets to civil companies – SMEs and start-ups in particular – to gain access to these innovations. A growing number of labs are being set up within the armed forces to encourage these companies to come and pitch their innovations. The only specific requirement placed on companies from the civil sector is the military-grade ruggedness stipulated by the armed forces. This is true in defence electronics in particular: in the armed forces’ digitalisation programmes, products have to be protected against cyberattacks and jamming. Quite often we can’t simply transpose an innovation from the civil field: it has to be adapted to meet military requirements.

Where do you see the main stumbling blocks for Member States’ militaries to embrace that new kind of ‘open innovation’?

First, there must be the assurance that the innovations are operational. That means that products from the civil sector must be made absolutely secure, as mentioned earlier. This is a precondition stipulated by the military if they want to use innovations from the civil sector. They also have to be tested under operational conditions. One of the main challenges stems from the fact that defence ministries have to adapt their structures so that the military can test these innovations from the civil sector. This can only be done if there’s close coordination with the procurement agencies or the structures involved in conducting arms programmes, such as the DGA in France. Besides, the defence innovation agencies we’ve seen spring up in recent years, first in the US then in the UK and in France too, include the various innovation stakeholders in these new structures. That includes the structures that conduct and purchase arms programmes, the end-users – namely the military – but also, when possible, people from academia or the business sector. So the military need to test these innovations a lot further upstream, using labs that are part of these defence innovation agencies, or labs that report directly to a particular army. If the outcomes are to live up to the expectations, we need to be able to network more in structures that include the various stakeholders – which is a challenge in itself.

Open innovation is also likely to reshape the innovation governance in the development and production of military capabilities, both nationally and at European level. What can be expected in this respect?

Open innovation implies major adjustments to the structure of innovation governance and this is a real challenge.

First of all, we need to be able to attract the companies that develop innovations, which were often designed primarily, if not exclusively, for the civil market. That is no simple matter. The defence market is not like any other market. For security reasons, information is classified. There are generally steep barriers to entry and European defence markets are still nowhere near open enough. For a company operating in the civil sector, adapting the product to supply a military client entails additional costs, the quantities of products sold are always small and the prospects of picking up other military contracts are quite limited. Lastly, reputational damage is becoming a major issue today. Companies are contending with a growing body of corporate social responsibility obligations and banks are reluctant to finance products for military use.

Today it is the defence ministries who are seeking to attract SMEs and start-ups with potentially useful technologies for the military, not the companies who are seeking to enter the military market. The French and British MoDs have decided to increase the share of direct purchases from SMEs and start-ups with a view to capturing these new technologies developed by the civil world. However, prime contractors are also seeking out these companies because they are developing technologies and products that, as a main system manufacturer, they will be able to incorporate. This last solution, which entails inclusion in the prime contractors’ supply chain, is probably the most promising one.

And at EU level?

The European Defence Fund (EDF) may be a useful tool for establishing this new defence innovation ecosystem, given that prime contractors from a limited number of EU Member States will have to partner with innovative SMEs and start-ups from other EU Member States in order to submit competitive bids in EDF’s tender calls. So the EDF may be a good opportunity to encourage efforts to eliminate the distinction between the civil and military communities.

Top-notch defence technologies are crucial but probably not sufficient on their own. What additional innovative approaches and processes are required to ensure successful military innovation in Europe?

The first thing to bear in mind is that, for a long time yet, the burden of financing defence innovation will fall primarily to the Member States, since there is not really a European defence market, even if we are seeing a partial removal of the barriers between EU national defence markets. As a result, companies are understandably reluctant to finance defence innovation. Today, defence research and technology funding represents 12.7 billion euros a year in the US, as against just over 1.6 billion euros within the EU. The US is therefore spending nearly eight times more than Europeans on its defence research, and few countries attain the target set by PESCO, namely to devote 2% of their defence budget to research and technology. So the EUMembers States must, as a matter of priority, raise their defence R&T budget.

The second is to align the management of arms programmes on the pace of innovation in the civil sector. Forty years may pass between the time an armament programme is launched and the time the armaments are decommissioned. The pace of innovation in the civil domain is often far swifter: sometimes under two years, particularly in the area of digitalisation. This is why the management of arms programmes needs to be adjusted so that these innovations can be taken on board in real time. Weapons systems must have open architectures and program managers mustn’t hesitate to freeze an item’s specifications in order to speed up the go-live, while at the same time making provisions for equipment upgrades over time. This means that subsequent versions of the Rafale and the Eurofighter will reap the benefits of work on the FCAS and the Tempest programme.

Lastly, we must eliminate any partitioning of innovation that comes from the civil world and innovation from defence. The Action Plan on synergies between civil, defence and space industries released by the European Commission in February 2021 is a step in that direction, though it remains to put the EU communication guidelines into practice. Doing so will necessitate synergy and coordination between European research programmes in the civil, space and defence domain. This is not as easy as it may seem, given that the programme governance systems are not the same, nor are the rules for protecting technology and intellectual property rights. This synergy is nevertheless a key to success, because it will enable us to more effectively rationalise the use of public funding. The European Defence Agency has a role to play here.

Is enhanced defence cooperation, i.e. the systematic use by Member States of existing EU tools such as the CARD, PESCO and the European Defence Fund, not the most efficient innovation model of all for Europe?

The CARD, PESCO and the European Defence Fund have driven us to cooperate more closely at European level. This is essential because we have scarce defence funding and we need greater interoperability in our equipment, less fragmentation of the defence industry, fewer silo effects between civil space and defence industries, and ultimately a more competitive EU Defence Technological and Industrial Base (EDTIB).

However, cooperating more does not necessarily mean cooperating more effectively. There is a risk in the current path of reform of national defence innovation models: that of creating models that are incompatible with each other. Between those who will have reformed their innovation model by eliminating the separation from the civil world and opening it to SMEs and start-ups, and those who will continue to maintain the barriers in place between defence innovation systems and civil innovation systems and, in so doing, potentially stunt the technological capacities of future arms systems.

So we need to talk about the reform of the defence innovation model at the European level, otherwise we will have difficulty cooperating within a European framework. The defence ministries need to talk to each other about the issue and the EU can arrange this dialogue. Maybe the EU should become a fully-fledged stakeholder in defence innovation rather than simply putting up the funds, as the European Commission will do with the European Defence Fund. Maybe it should become a true client and structure the shape this innovation will take. If we decide to go ahead with this change, the EDA will have a role to play.

What about national defence industries? How will they be affected by the new innovation models emerging throughout Europe?

Defence companies apply three strategies to take into account this blurring of the barrier between civil and defence innovation.

The first strategy consists in broadening the scope of their action to include the field of technologies that come from the civil world, particularly with regard to digitalisation or artificial intelligence. We can already see this strategy playing out, particularly in companies in the defence electronics industry. Generally speaking, there are only a handful of companies left today that operate solely in the defence field. Companies are seeking to embed their strategy in sectors where there are synergies between products for the civil market and those for the defence market. By doing so, they can rationalise their investments and not depend on one market only.

There are drawbacks to the former strategy: companies can’t become a player in digitalisation or artificial intelligence from one day to the next. Sometimes they need to be able to forge partnerships with companies that have a real grip on these technologies. However that involves a risk: that of becoming dependent on these partners and endangering the security of supply. The so-called GAFAM (Google, Amazon, Facebook, Apple, Microsoft) are not European and if we work with these companies, we create a critical dependency for the years to come.

The third strategy is to include in the innovation and supply chain SMEs and start-ups that do business in innovative technologies. In that case, we need to open up the supply chains to this type of company. In this respect, the launch of the EDF couldn’t come at a better time. The rules by which this fund operates allow for partitioning to be removed at several levels: between civil and military innovation, but also between the EDTIBs, since the prime contractors will feel free to choose SMEs and start-ups from other European Member States. We may then be able to start consolidating defence industries from the bottom up by creating synergies between European supply chains.

With national defence budgets under serious constraints, new innovative financing models might be needed to ensure sufficient investment in defence research and capability development. What do you expect there?

One of the problems the defence industry will have to contend with in the future is that of investments and financing for this industry sector. We are seeing private equity funds and even banks gradually pulling out of this industry due to ethical considerations, and a return to public financing or even public shareholding in order to buoy up a defence eco-system that is essential to the development of the weapons of the future. Public financing, be it national or European, is essential therefore to support this eco-system of innovative SMEs with a dual business focus. Setting up accelerators by networking innovation stakeholders from different backgrounds, university laboratories, companies and public funding bodies on a given programme may enable these SMEs and start-ups to grow and become part of a network of innovation for the defence community. But to achieve real development, the sector will also need to work on improving citizens’ everyday life and well-being, work for other sectors such as healthcare, and assume a fully-fledged role in a strategy of energy transition and decarbonisation. It must be able to attract investors, not deter them. This should encourage them to keep a low profile when communicating about the « defence » component of these companies’ business, while at the same time pursuing the public policy objective to draw them into the defence sector.

Can Europeans learn anything from the successful US defence innovation strategy?

It is true that the Americans were the first to see the benefits to be gained by leveraging innovations from the civil business sector, especially as they have an established ecosystem in the digital and artificial intelligence industry that is extremely well-developed and undoubtedly the best in the world. This move to break down the partitions between the civil and defence sectors dates from 2014 and what was known at the time as the third offset strategy. This policy was also a way of responding to China’s particularly intensive work on artificial intelligence. As a result, many European Member States are adjusting their model of defence innovation, based on what they were able to analyse of the reform carried out in the US. However, there is no call for vacuous, naive admiration of the American model. The US’ third offset strategy was also one of the responses to a defence procurement model that the US armed forces themselves considered particularly inefficient. There is no need to feel inferior to the Americans: we just need to trust in European engineers.

 

Interviewed by European Defence Matters.
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