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The next industrial (r)evolution: What implications for the security and defence sector?

Brussels - 03 May, 2016

The following article is part of a comprehensive dossier focused on new trends related to European defence innovation and R&T which appeared in the 10th edition of European Defence Matters, the EDA’s official magazine, which is available now.

European Defence Matters 10

In times of ever faster technological change and constant emergence of new innovation and business models, the European defence sector has to adapt quickly if it wants to remain relevant.

In 2016, more than ever, Europe needs to respond to short and longer-term security challenges both on its territory and beyond. The forthcoming EU Global Strategy will inevitably consider those developments, setting out European interests. Notably, for Europe’s security and defence sector this means preparing for an age of relative uncertainty that is prone to strategic surprises: at the level of threats that have become increasingly diverse, hybrid and versatile; and at the level of emerging technologies that, beyond inducing new vulnerabilities, may well require the defence sector to adapt to changing innovation patterns, new mind-sets and corporate cultures.

In this strategic context, an innovative and competitive European Defence Technological and Industrial Base (EDTIB) is a strategic asset that supports the implementation of a credible and effective EU Global Strategy. “The industrial and technological dimension is not a mere enabler, it is at the core of any security and defence-related capability”, says Jorge Domecq, the Chief Executive of the European Defence Agency (EDA). This is why the so-called ‘Key Strategic Activities‘, be they specific technologies, skills or industrial manufacturing capabilities, will also have to be supported at the EU level if Europe wants to retain the necessary freedom of action, be interoperable with key Allies, and participate in global standard setting.

As early as 2003, the Thessaloniki European Council underlined that the EDA was to aim at “promoting, in liaison with the Community’s research activities where appropriate, research aimed at leadership in strategic technologies for future defence and security capabilities, thereby strengthening Europe’s industrial potential in this domain.” Today, the question of how to achieve or safeguard leadership in strategic technologies is more pressing than ever. EDA has enabled close to € 700 million of investment in defence R&T projects, it has established synergies with the EU’s Horizon 2020 Framework Programme, and it has participated in the identification of critical defence technologies, key enabling technologies and space technologies for European non-dependence.

And there is more to come: the preparation of the forthcoming Preparatory Action for CSDP-related research and potential defence research programme that may follow within the next EU budgetary cycle may signal a paradigm shift. EDA is playing its part by shaping the content, setting priorities and preparing for the implementation of future defence-related research at the EU level. The European Defence Action Plan announced by the European Commission for the end of 2016 provides a further opportunity to reflect on how Europe will capture future innovation and drive leap-ahead technologies rather than be taken by surprise by disruptive technologies emerging elsewhere.


Changing innovation patterns?

For Europe to successfully spearhead innovation, it has to deal with at least four accelerating trends: (i) global competition for the lead in technology; (ii) emerging knowledge domains and technology convergence; (iii) increasingly faster innovation loops; and (iv) the growing importance of private investment in support of innovation. Each of these factors taken alone may hardly seem revolutionary, yet any combination and convergence of them in a fast-paced environment may prove to be so. The defence industrial and technological base is indeed part of a wider industrial and technological ‘ecosystem’ that is about to change dramatically, and this may lead to the disruption and far-reaching adaptation of public policy and traditional business models and practices. What has been qualified as a possible ‘third industrial revolution‘ by 2030 is characterised by an ever-accelerating speed of technological change and the ‘digitalisation of world markets’. The mastery, application and development of digital technologies and big data management will be a key ingredient of economic and industrial competitiveness. Already today US digital exports are estimated at € 500 billion a year, and Europe is the main customer. 4% of US GDP is estimated to be related to the Internet and associated business opportunities. Global revenues related to the ‘Internet of things‘ (big data and data-mining, cloud computing and super computers) are estimated in the order of USD 14 trillion between 2013 to 2022. ICT technology in particular will help to catalyse innovative applications in the area of human/machines, human/human and machine/machine interfaces, in addition to the expected convergence of bio-, nano-, and information technologies, robotics, artificial intelligence, materials and energy over the 2025-2050 time horizon.


New players are emerging

Based on such convergence, disruptive applications are expected to emerge from highly innovative start-ups and fast growing players that are modelled on today’s success of the so-called ‘GAFA‘ (Google, Apple, Facebook, Amazon…). These players will share important characteristics. R&T spending levels will be high (20% and more of annual turnover). They will embrace a risk culture and have access to venture capital. They will focus on prototyping, test and experiment with ‘rapid prototyping‘, ‘lean start-up‘, ‘minimal viable products‘ and spiral development, all with reduced procurement cycles and manufacturing lead times. From Silicon Valley and ‘Silicon Wadi’ in Israel to Bangalore, “access to finance, R&D investment and flexible and fast development and production are the ingredients of ever-fiercer competition among global innovation centres”, stresses Mr Domecq. The innovation models and philosophy of those commercial companies and start-ups has little in common with a highly regulated sector such as defence, which is characterized by the need for reliable, robust and complex systems, long-development cycles, public funding and a focus on quality control through customer engagement in design, production and servicing.

Yet, it is with these emerging players that both governments and defence companies will have to interact to stay ahead. Beyond defence-specific R&T, there will be increasing spin-in from commercial technologies being developed by highly specialised SMEs or start-ups. Today, such companies may not even be thinking of interacting with the defence sector. Connected technologies will be among the most decisive factors in the development of security and defence-related technologies. “Robotics, automation, supercomputing, synthetic biology, data analytics and deep learning will play a growing role”, according to Michael Simm, EDA Project Officer. Private actors will bear important responsibilities as to cyber security. This also implies a new way of looking at how drones and robots are networked with the increased integration among human and technological factors. Keeping a highly competitive defence industrial base with highly skilled workers will be all the more crucial if innovation is to translate into cutting-edge defence capabilities.

“The key challenge for defence will therefore be to find a modus vivendi with this ‘new economy‘, and to effectively integrate future innovations into defence development and production cycles”, Mr Simm states. It will be key for the defence sector to: (i) gain awareness of emerging leap-ahead technologies; (ii) effectively get access to non-traditional sources of innovation; and (iii) ensure the reliability of trusted supply chains. Overall, the challenge is for governments to be able to counter threats and increase society’s resilience while ensuring that the defence technological and industrial base remains a smart integrator of highly innovative products and technologies.


A matter of resources and prioritisation…

Innovation does not come for free. The sharp drop in defence-related R&T in recent years puts Europe’s standing at risk: the investment ratios in certain key domains such as electronic components being about 1:15 when compared to the US clearly endanger Europe’s status as a ‘smart follower‘. More investment, more cooperative investment and clear prioritisation in resource allocation are clear answers to that trend. Yet, more than today, an emphasis will also need to be put on ‘whole-of-government approaches‘ and cross-sectorial technological and industrial strategies that strike the right balance and allow for a mutually beneficial relation between the defence and the civilian dimension.

Some of the more recently published national defence-related strategy documents indicate a growing awareness and provide inspiration regarding the need for increased foresight activities and refined analysis of innovation cycles; the need to craft industrial policies that are supporting key areas of security of supply with regard to industrial manufacturing capabilities, skills and critical technologies; or the need to launch defence-related innovation initiatives. As the UK Strategic Defence & Security Review (2015) recognises:

“… to secure operational advantage and control our costs into the future, we need to recognise and respond quickly to transformative ideas and technologies. These will come from outside the traditional national security field, […] we must find, listen to and work effectively with new partners. We must test unconventional ideas rigorously against traditional ones, and be prepared to take risks […] we do not have all the answers, but continuing with our traditional mindset will not work”.

In the case of the UK, this assessment is supported by the creation of a national cross-government Emerging Technology and Innovation Analysis Cell and the establishment of a defence and security accelerator for government to help the private sector turn ideas into innovative equipment and services for national security users.

Inn a similar fashion, the US Third Offset Strategy recognises that many of the technologies that are potential game changers are no longer in the domain of DoD development pipelines or traditional defence contractors. Indeed, the DoD risks no longer having exclusive access to neither the most cutting-edge technologies nor the ability to control the development of them. This insight has led US officials to seek proposals from the private sector, including from firms and academic institutions outside the DoD’s traditional orbit. Robotics in particular is seen as an area where commercial investment outpaces military spending. The DoD’s ability to rapidly scout for and import commercial sector innovations and quickly develop new concepts of operation and doctrine is seen to be key. Numerous partnerships between the commercial sector and the US military, research and innovation centres, intelligence and law enforcement agencies exist to date. The creation of a permanent DoD office - called ‘Defence Innovation Unit X‘ - is part of this approach as is investment in promising technologies through a dedicated investment fund. Additionally, in March 2016 the US DoD announced the establishment of a Defense Innovation Advisory Board. The new board aims to enhance the DoD’s culture, organisation and processes by tapping innovators from the private sector. DoD will also further implement its ‘Better Buying Power Initiative‘ aiming, among others, at easing procurement procedures.


… but even more of changing mindsets

Yet innovation is not a mere matter of resources and stated policy objectives. It ultimately requires both the demand and supply side to have a capacity of early adoption of innovation.

As far as the demand side is concerned, the new environment may have an impact on acquisition choices and investment decisions and the defence customer will have to adapt to much higher innovation rates and to potentially shorter life-cycles for equipment. The new environment may increase the need for plug-and-play systems, be a strain on obsolescence management or even change the type and way of procuring defence-related equipment and services. Modular Open System Architectures (MOSA) could be utilised to enable rapid incorporation of innovative upgrades throughout system lifecycles. A stronger focus on prototyping and experimentation may be a corollary to this approach. “The fact that innovation will increasingly flow from the civil to the defence sector does not mean that the defence sector should refrain from heavily investing in exploration, testing, adapting and integrating relevant innovations”, insists Mr Domecq.

Prototyping and experimentation can allow the defence sector to keep pace with technology, to partner with industry and maintain critical industrial capabilities. Such efforts would help contextualise current capabilities in light of requirements and technical feasibility of future acquisition programmes. An innovative and adaptive approach may also impact on wider operational concepts, interoperability with partners and standard-setting. “Ultimately, MoDs will have to constantly adapt their in-house skills base and working practices in order to interface with the commercial sector”, explains Mr Simm. MoDs may also have to adapt procurement schemes (i.e. fast-track contracting vehicles), introduce more flexibility, shorten decision-making cycles and address certain perceived ‘costs‘ (i.e. administrative burdens and IPR regimes), which may dissuade high-tech commercial firms from engaging with the defence sector.

Regarding the supply side, the change may be less fundamental and rather signal an acceleration of a longer-term trend. For some time now, the most innovative components have been generated by SMEs. While traditional defence companies are likely to continue playing the role of intermediary towards governments, they will nevertheless increasingly rely on the ability to integrate technologies according to a non-linear open innovation model based on a combination of internal and external knowledge, iterative shorter innovation loops and adding reliability and resilience to commercial technologies. This will mean to increasingly monitor cross-domain technology development. The role of a firm’s internal ‘gatekeepers‘ or ‘boundary spanners‘ able to understand and adapt technological innovation will rise.


New partnerships, joint ventures

For example, with the aim of capitalizing on transformative technologies and business models in the high-tech sector, a big European Group has followed US defence industrial players in establishing a ‘Technology and Business Innovation Center’ in Silicon Valley. In parallel, the company has established a venture capital fund worth an initial US $ 150 million in order to invest in promising, disruptive and innovative businesses generated around the globe. More widely, cooperation with non-traditional industrial players may take the form of partnering with high-tech companies in the ICT sector, joint business incubators or joint ventures according to the ‘make, team or buy‘ paradigm. This may alter the very fabric of industry, leading to more complex supply chain management and, ultimately, requiring increased flexibility and fluid cooperation between primes, SMEs and entrepreneurs across sectors. At the same time, one may have to deal with some side-effects. Indeed, the defence industry could be facing additional pressures on prices and margins, unexpected forms of competition, plus a growing mismatch in skills.

Overall, both the demand and supply side, will have to develop a whole new risk culture: on the one hand, taking on more risk through a steady investment in expensive but potentially game-changing technologies; on the other hand, ensuring reliance on fully trusted and secure supply chains up in the context of a globalised and digitalised economy. It may imply changes to how one conceives of dual-use export (and import) control and the protection of sensitive technologies. The predominance of non-European and commercial software companies, clouds and cyber networks that are supposed to generate, manage and control big data may actually increase the vulnerability of European digital networks. The globalisation of R&T and commercial innovation is within the reach of players who can transform them into military relevant capabilities. This risk needs to be counterbalanced by capability development focused on resilience such as ‘rapid network recomposability’ technologies or ‘split fabrication’ (i.e. ICT building blocks that are designed, developed, manufactured in Europe). This is all the more important in the context of heightened hybrid threats, which may target the wider defence supply chain e.g. in terms of hostile takeovers (foreign investment), saturation of production capacities or second-round effect industrial sabotage (compromising single components or production processes).


Think big – act smart

Some of the aforementioned trends will develop, others may not. Yet, by failing to prepare for a potentially game-changing (r)evolution, one may well be preparing to fail. “When putting its Global Strategy into action, Europe requires a long-term vision and effective technological and industrial policy that supports its freedom of action”, underlines Mr Domecq. As with any other player in the world, Europe needs to acknowledge its industrial base as a strategic and economic asset alike, a cornerstone for safeguarding its influence and interests. This also means injecting the ‘whole-of-government‘ concept with real content, notably in support of guaranteed security of supply and autonomy in areas deemed critical. There is a need for systematic technology foresight, more dual-use innovation clusters and technology incubators and long-term spiral development programmes. As competition for and access to cutting-edge technologies will increasingly be done across globalised and non-defence specific supply chains, both the ‘E‘ (European) and the ‘D‘ (Defence) dimension of the EDTIB may increasingly vanish. “This raises an essential question: how does Europe want to ensure mastery over technologies that will be critical in the future? This is not a question of industrial competitiveness alone but of Europe remaining among the most capable defence players”, insists Mr Domecq.

EDA can contribute by raising awareness, being a platform for exchange and building concrete tools when it comes to identifying Key Strategic Activities to be supported by available European funding tools, supporting longer-term security of supply and European non-dependence. On-going work developed inside the EDA together with Member States on critical defence technologies, Technology Watch, strategic research agendas or key skills and competences contribute to this effort. The support provided to innovative dual-use SMEs in accessing European Structural and Investment Funds is a further key work strand. EDA can also further provide a platform for innovative industry to engage with defence stakeholders on concrete projects, to present ideas and to understand defence-specific requirements.

In order to move to the next level, however, Member States should also make systematic use of the programmatic, financial and policy instruments offered by the EU. These instruments can support defence research, identify key enabling technologies and support their testing & experimentation in view of potential uptake in defence products. The forthcoming European Defence Action Plan should make a strong plea for a credible defence-related research programme within the next Multiannual Financial Framework. This should be further supported by a wider European Defence Innovation Initiative that facilitates the scouting of emerging technologies for defence, increases interaction between the defence community and commercial communities and promotes innovative SMEs. One will also have to move towards a careful mapping of critical and cross-sector supply chains. Increasing the resilience and security of related key technological and industrial assets that are considered as genuinely critical infrastructure may also be required.

As the defence sector will have increasingly to interact with players, processes and innovation models outside the traditional remit of defence, it will be all the more important to mainstream the defence dimension across available industrial policy tools, be they at the national or EU level. 2016 should provide ample opportunity to move ahead in this direction.

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