BREAKINGVIEWS-Record backlogs signal defence industry fragility

By Pierre Briancon

BERLIN, May 9 (Reuters Breakingviews) - It has been another quarter of bumper results for Europe’s weapons makers. That should be no surprise for a sector in line to benefit from a commitment by NATO countries to boost military spending by 1% of the region’s GDP – up to 180 billion euros a year for the EU alone. The STOXX Europe index for aerospace and defence is already up around 35% this year after jumping 60% in 2024. Meanwhile, Europe’s eight largest defence groups saw the volume of received but not yet fulfilled orders grow by nearly 20% last year to a record 291 billion euros, according to Fitch Ratings.

Record high order backlogs may reinforce CEOs’ and investors’ confidence in the future, but have a flip side: they show an industry struggling to meet clients’ requests. Rheinmetall RHMG.DE, the 80 billion euro German ammunition maker, had a backlog of 63 billion euros at the end of the first quarter – more than five times its projected revenue for this year. Radar maker Hensoldt HAGG.DE this week flagged unfulfilled orders of nearly 7 billion euros, or three times its projected sales for 2025. And Thales TCFP.PA, the 50 billion euro French defence electronics group, had an order book at the end of 2024 that amounted to 2.5 times its revenue for that year.

Defence is not a consumer industry and its clients – governments – do not expect overnight deliveries. But increased backlogs reflect a deficit of industrial capacity accumulated during years of under-investment since the end of the Cold War. And these unfulfilled orders mean that whatever pledges politicians make today to boost spending may take many years to become reality. That should prompt governments to spend less time talking, and more helping companies boost capacity. That can mean both stimulating demand by placing concrete orders, and boosting supply, for example helping finance new investment.

Europe is so far missing in action. It has been waiting for NATO to meet next month and make official the target of increasing defence budgets to 3% of GDP. It has also been waiting for a German government to emerge from weeks of coalition talks. Friedrich Merz has now at least been appointed German chancellor. He could use his status to instil a sense of urgency in the European defence debate. Governments can push for more restructuring among the main manufacturing players to end the pursuit of competing projects, and send a signal that firm orders are forthcoming.

Europe faces a double emergency. It needs to increase the supply of weapons to Ukraine, to avoid a Russian victory if the United States withdraws its support. And it needs to build up sufficient military strength to deter Russia from invading another NATO country, which Moscow could be ready to do in as little as three years, analysts reckon. The healthy order books flaunted by Europe’s defence sector also betray its military fragility.

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CONTEXT NEWS

Defence Minister Boris Pistorius wants to increase Germany’s military budget for 2025 by up to 10 billion euros, to 63 billion euros, sources told Reuters.

Pistorius, the only minister to keep his job in the new government of Chancellor Friedrich Merz, has long advocated a significant boost of the country’s defence effort.

The German parliament earlier this year changed its constitution to exempt military spending from the country’s strict budget rules.

According to NATO, Germany spent 2.1% of its GDP on defence in 2024.

Hensoldt, the German radar maker, said on May 7 that its order backlog rose to 6.9 billion euros in the last quarter, an increase of 18% compared to a year ago. The group said it anticipated revenue of 2.5 billion euros to 2.6 billion euros this financial year.