Challenges for Europe's Small Defence Companies

By Michael Kahn and Jan Lopatka

PRAGUE (Reuters) – Europe’s small and medium-sized defence companies are facing significant challenges in securing financing necessary for innovation and production growth, amidst an increase in demand driven by the war in Ukraine and other conflicts.

Financial Hindrances

Public funding access is limited, and bureaucratic red tape combined with banks' reluctance to lend due to fears surrounding environmental, social, and governance (ESG) regulations is hindering growth.

Global military expenditure has reached an all time high of $2.44 trillion in 2023, increasing 6.8% from the previous year, as reported by the Stockholm International Peace Research Institute.

Industry Insights

Jiri Hynek, Managing Director of the Defence and Security Industry Association of the Czech Republic, noted that problems have persisted and worsened for the defence sector.

One firearms manufacturer described the financial crunch impacting product sales and participation in government tenders, making it hard to expand operations. He reported difficulties in obtaining down payments from governments, leading to increased costs.

Need for Government Support

A recent European Commission report highlighted a debt financing gap for small and medium-sized enterprises (SMEs) in the EU's defence sector, ranging between €1 billion to €2 billion, stifling business growth and compelling firms to seek funding outside the EU.

Overly cautious interpretations of ESG criteria lead to exclusion policies from banks and investors, suggesting that clarity on sustainability risks could improve access to financing.

Venture Capital Comparison

Recent efforts by the Czech government to co-finance small enterprises face an uphill battle against the larger venture capital resources available in the U.S., which holds an 83% share of defence-related venture funding among NATO allies since 2018.

U.S. defence spending offers a strong market signal, encouraging investment in projects. Czech officials have intervened in specific cases to assist companies facing financial obstacles, but systematic change in banking practices is needed.

The difficulties in financing coincide with Ukraine's ongoing struggle to secure munitions amid Russian advancements in eastern Ukraine. A survey indicates that small and medium firms face persistent issues securing bank loans and payments from foreign clients.

Market Disparity

Fenella McGerty, a defence spending expert at the International Institute for Strategic Studies, noted that while larger companies can benefit from global demand, smaller, specialized companies find it harder to secure funding due to perceived risks.

The EU report called for financial support to bolster the bloc's defence industry and recommended easing restrictions on access to EU-funded financial instruments.

One CEO disclosed that his company faced banking issues after selling rifles to Ukraine, with personal accounts unexpectedly canceled.

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