The European defence industry is a vital economical aspect of the European industry. Within the spectrum of the aforementioned industry Small and Medium-sized Enterprises (SMEs) play an important role and are of critical importance to the supply chain.

Recognizing the importance of SMEs the European Commission published in December 2007 a Defence Package containing a communication which highlighted measurers and policies to achieve a stronger and more competitive European Defence industry in a number of areas. Additionally, the European Commission adopted on 19 June 2008, the European Small Business Act (SBA) which has as a purpose to support European SMEs in all industrial sectors including defence.

European defence SMEs has significant operational advantages which can be summarized to the following: flexibility and speed, inventiveness, specialised knowledge, a well-established position within the national supply chain and finally a well-trusted and respected relationship with their customers. Under this framework defence SMEs should be able to develop an international position by exploiting their specialised knowledge and skills and through this procedure expand their potentiality by creating opportunities to collaborate with SMEs from other countries.

In 2009 the commission signed two directives that would potentially reinforce the position of SMEs in the national and international market. The new Directive 2009/43/EC on intra-EU transfers of defence products, aims to facilitate transfers by eliminating unnecessary paperwork. This will have as a direct effect the reducing of license application costs something that will increase opportunities for competitive Small and Medium-sized Enterprises (SMEs). Additionally, the directive 2009/81/EC on defence procurement amongst others foresees the allocation of 30% of a defense contract to the European Defense industry through an open European competitive procedure, something that will increase competition and transparency and therefore aid SMEs to find, and bid for sub-contracts on a European base.

It is rather difficult to measure the exact impact that SMEs have in the European Defence industry as it is complicated to find the corresponding finance figures that highlight this impact. The main reason is that the vastness of the goods and services supplied to defence are supplier by companies operating in both civil and military markets. Nevertheless, a survey contacted by DG Enterprise concluded that SMEs account for between 11 and 17 per cent of the EU’s estimated sales of defence equipment. Additionally, the core source of income for SMEs is subcontracting in the domestic market, rather than supplying national defence authorities directly. 

Despite the fact that several steps have been done towards the strengthening of European Defence SMEs they still face a number of problems. One of the most important is the fragmentation of the European defence market. Contracts for defence goods and services are often awarded nationally which restricts cross-border competition. This situation makes it difficult for SMEs to compete with companies of other countries.

In addition, SMEs face informational problems. Several times SMEs are not aware of future capability requirements and upcoming business opportunities that could match their business profile and especially in other states. Furthermore it is difficult to raise awareness of their products and services. This is further reinforced by the fact that Prime and Tier 1 companies find it difficult to identify reliable suppliers, and therefore prefer existing suppliers, subsidiaries or suppliers located close to the contractor. However, currently there are some European initiatives, private and public, such as Epicos that are designed to support SMEs in the informational sector.

Another important problem is financing. Many defence-related SMEs have particular difficulty accessing finance something that can create a number of problems. Probably the most important of them is that insufficient capital may limit their scope to establish positions in export markets. Moreover, cash flow problems can limit the possibility that the company can have in Research and Development, as the delay between investment in Research and Development and achieving return can be a serious problem for the companies.

European defence SMEs have a significant effect for both local economies and the European defence market. Therefore, several European organizations, such as the European Commission and the European Defence Agency are taking important initiatives in order to strengthen the potentiality of European SMEs and supporting them to become an important pylon of the European Defence Industry.

Kyriazis Vasileios,

Epicos Newsletter Head Editor