Defence industry’s business model transformed by war, says German contractor

The business model of the defence industry has been transformed by the war in Ukraine and the growing threat of conflict in the world, according to the head of one of Germany’s big contractors in the sector.

Arms manufacturers are now producing weapons and equipment without pre-orders because of booming demand, Hensoldt chief executive Thomas Müller told the Financial Times.

It means companies can get defence technology and products “almost like in the supermarket”, he added.

Many defence contractors would avoid producing arms without pre-orders due to the cost of manufacturing, which often runs into several millions of euros per unit, leading to long waiting lists for advanced equipment.

“Usually we had to have firm orders and a down payment on the table. [But] from April, we will be able to deliver one radar per month, even if we don’t know yet to whom,” Müller said, speaking about the company’s ground-based air defence radar TRML-4D.

Growing geopolitical instability in recent years has led to several countries such as Germany ramping up military spending.

This was most notable following Russia’s invasion of Ukraine in February, which prompted investors to flock to companies such as Hensoldt, which specialises in missile-detecting radars.

The company also makes the optronics system for the Leopard 2 tank that Germany is under pressure to send to Ukraine. Optronics systems are used for surveillance and navigation.

In Germany, the invasion caused a historic shift in the country’s defence policy, which has for decades invoked its second world war legacy as a reason to keep its military lean.

German chancellor Olaf Scholz, who visited Hensoldt this week — his first to a defence group as the country’s leader — last year promised to spend €100bn to modernise the military, after years of pressure from Nato allies.

Although it is not clear where the money will be invested, Hensoldt is likely to enjoy a jump in orders from the German government, which already makes up roughly 40 per cent of its sales.

“We were profiting from rising budgets, even prior to the Ukrainian war. But after the war, we’re seeing a more sustainable growth in the next decade, if not to say the decades to come,” Müller said.

“We have so many potential customers in the pipeline, and they are so happy that they can get [air defence radars] almost like in the supermarket,” he added, pointing out that it takes roughly a month to manufacture some of the company’s larger radars.

“Other defence contractors are doing the same thing, especially in the ammunition sector, because demand is growing so much.”

This demand has lifted shares in defence groups. The stock of Hensoldt, which listed in Frankfurt nearly three years ago, is up nearly 90 per cent since Russia’s invasion of Ukraine.

The share price of Rheinmetall, Germany’s largest defence contractor, has jumped nearly 140 per cent in the past year.

Growing geopolitical instability, including the Ukraine war, has also helped boost the finances of defence groups. Hensoldt, which made €1.47bn in revenues in 2021, in December raised its full-year sales growth guidance for 2022.

The company made €261mn in adjusted earnings before interest, taxes, depreciation and amortisation in 2021, its last reported full financial year.

Source link

We will be happy to hear your thoughts

Leave a reply