All the challenges for the Italian defense industry

16 August 20239 months ago babelfish

De-globalization is changing the Italian defense industry. That's how. The article by Giuseppe Cossiga , president of Aiad , the federation of Italian aerospace, defense and security companies, in the Start Magazine

The national defense industry is an economic subject – or, if you prefer, an actor – divided into multiple business realities (over 180 those federated in AIAD), each structured to create products and services for national and foreign armed forces in compliance of the rules governing the production and export of military supplies. It is an industrial reality at the service of the country's political guidelines in terms of defense and security.

This meager definition, widely applicable also to homologous realities in Western countries, is useful in order to include in the field of analysis some of the challenges and opportunities, evoked in the title, which would risk remaining on the margins if attention were focused only on the impacts of the large and complex processes taking place in the reference scenario.

To this end, it is also worth reflecting on the meaning of globalization . The term, established since the 1990s to define the process of integration of economies following the fall of political barriers and the extraordinary technological development, was actually born with a completely different meaning between the end of the 19th century and the early twentieth century to identify a specific infantile cognitive process, on the basis of which the child learns syncretically, i.e. not in detail, but globally and in a generic way, and only then focuses on the detailed elements.

This clarification helps to understand – even more usefully now that we hear of de-globalization – that the realities represented in a syncretic way must be read and interpreted also considering the detailed aspects that compose them and the dynamics that these details link. For a long time there has been a lack of awareness of how the globalization process has been inspired and guided almost exclusively by commercial logic and laws that Western governments have supported because they are functional to the growth of their GDP, considered an undisputed parameter of a country's power (“Pushkin's Silence”, Limes 2/2022).

The distorting effects of this approach appear evident today, as are the negative repercussions that these effects have had on the defense industry.

THE CONSEQUENCES OF THE PANDEMIC AND WAR IN UKRAINE

It is worth mentioning how first the Covid pandemic crisis and then the war in Ukraine have brought to light details that the globalization process, however studied and represented, had veiled. First of all, think of the concentration of defined productions or specific components in certain geographical areas (such as semiconductors or, more simply, masks in the health sector in China), a choice related to the well-known advantages in production costs. In this case, in the words of Thomas Friedberger, Co-Chief Investment Officer and Chief Executive Officer of Tikehau Investment Management, globalization has proved synonymous with fragility

Therefore, if we look at the reality of the Aiad federated defense companies, in particular that of the SMEs operating in the munitions sector, the Russian-Ukrainian conflict has led to an increase in demand which, failing to find direct and corresponding growth in supply – concentrated in a few geographically defined production units – has generated an inevitable tension on procurement times (results from two to four times higher than the ordinary), on production times, and therefore on costs and, inevitably, on prices.

This is a case which, starting from the complex economic-commercial data, highlights the need for an approach from a political-strategic perspective to favor supply agreements that allow for the use of alternative sources, as well as medium-long term demand planning, on which base set any industrial investment decisions aimed at increasing capacity.

Where possible, the process of differentiating the sources of supply determines the overcoming of the dynamics of concentration of suppliers, characteristics of the globalized market. In fact, in this sense – especially at the macro level – we are beginning to think in terms of de-globalization or regionalization of the economy.

HOW THE DEFENSE INDUSTRY WILL CHANGE

Basically, in the face of geopolitical turbulence such as those generated by the Russian-Ukrainian conflict and the US-China tensions, the need to rebalance the complex relationship between economic-commercial and political-strategic reasons is perceived, within the ambit of a process aimed at consolidating the resilience of national systems.

In particular, the defense industry is hit by all these phenomena also and above all because of its peculiar nature: while retaining the form of company and therefore subjection to the rules of the market, it cannot escape from being a participant in the political guidelines of security and defense and foreign policy that come from the government and parliament.

After the Cold War, a widespread sentiment against the defense industry had gradually matured, for which it was conventionally preferred to represent it through the characteristics most connected to the economic dimension: a driving force for the country's technological growth, a sector characterized by the high income multiplier capacity product, strong contributor to export.

The sudden turn we are experiencing, marked by the invasion of Ukraine, has definitively set aside the long-cherished illusion of the eternity of the Pax Europaea . Today, even the world of finance, as highlighted in the recent study by Mediobanca ("World industrial multinationals: sectoral analysis and focus on defence", 4 April 2023) looks "at the world of defense with different eyes, including among the evaluation factors also the security in the broadest sense, i.e. the protection of democratic values".

If finance comes to consider and evaluate non-financial factors for the purposes of its investment parameters, such as the defense and security of a country or an entire area, it appears crucial that in the appropriate institutional forums they express themselves towards this industrial sector guidelines that guarantee appropriate support for investment choices and strategic alliances. It is a change of pace which, also taking into account the short and medium-long term needs in the context of national defense policy, favors participation in the consolidation process of an integrated industrial base of a European dimension. Only in this perspective can the (immanent) danger of remaining marginalized both in economic-financial and political-strategic terms be avoided.

On the other hand, it is not out of place to state that belonging to NATO, which accounts for around 55% of world defense spending, requires equal spending levels between the various countries, to allow adequate participation in the defensive standard of the North Atlantic Alliance.

FAST AND EFFECTIVE

In other respects, the real challenge today is to be able to be faster and more effective, achieving that margin of qualitative advantage that new technologies will allow in the various areas of the five domains of operations (land, sea, air, space, cybernetic) . To this end, it is also essential to define the priorities to create industrial skills and capabilities necessary for the strategic and technological autonomy of the sector, starting from:

security of supply / storage of long-lead components;
expansion of design and production capacity and related human resources / skills with long-term sustainability and new contractual models;
new enabling technologies to be correlated to common operational needs between MS;
predisposition to ramp-up ;
expansion and acceleration of logistics support with new role for the industry.

The foregoing considerations, however, must take into account the objective difficulties, increased by the ongoing conflict, of obtaining import authorisations.

There is a widespread understanding that strategic and technological autonomy, also in the light of the lessons learned of the conflict in Ukraine, must be sought primarily and some countries are already oriented towards aligning national technological and capacitive priorities with European ones. Furthermore, precisely in Europe, the operations of the EDF and EDF have also begun to propose the issues of export authorizations. By virtue of the fact that projects/programmes supported with European funds could, on the basis of an inertial practice, be subject to differentiated criteria on a national basis, discussions are held on any potential distortive effects that could derive from this and on any measures that can be adopted to avoid them. This is the framework in which AIAD will have to consciously carry forward the requests of associated industries.

(The article was published in the latest issue of the quarterly Start Magazine , "A certain idea of defense")

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/industria-difesa-italiana-globalizzazione-cossiga-aiad/ on Fri, 04 Aug 2023 10:06:06 +0000.