SOFF comments on WP by Commission for Economic Policy on ”A strong European defence industry”

1. What are the traditional barriers preventing start-ups and SMEs from entering the European defence industry’s supply chains?

Several barriers prevent start-ups and SMEs from entering the European defence industry’s supply chains:

– Complex regulatory environment: The defence sector is heavily regulated, with strict compliance requirements that can be difficult for smaller companies to navigate. This includes export controls, procurement rules, and security clearances, which can be very time-consuming and costly to obtain, to the point that both project schedules and/or budgets may become entirely undone.

– Long times to market: Defense contracts often involve long procurement cycles, requiring significant patience and resources from SMEs before they see any returns. This can severely strain or overburden their financial stability.

– High capital intensity: The defence industry is capital-intensive, making it difficult for smaller firms to compete or gain traction without significant upfront investment.

– Risk aversion: Larger companies and government entities may be risk-averse, favouring established suppliers with proven track records over newer, smaller companies.

– Limited access to business networks: Many SMEs lack the established networks or partnerships needed to become part of larger supply chains or consortiums, and they may not be aware of relevant opportunities.

– Limited access to end user networks: Many SMEs lack the established networks or contacts needed, both informally, to have the kind of creative dialogue with the end users that is necessary to foster innovation or bounce ideas in a conceptual phase, and more formally, to gain access to specific knowledge or experiences required to develop an idea.

– Unique market: The military environment, and combat in particular, has very specific requirements and conditions that need to be understood in some depth for actors to be able to develop innovations and solutions that provide operational utility for the end users. With a limited staff size, SMEs may not always find the people in their teams with the requisite experiences or skill sets to turn their innovations into technologies that provide tangible military utility.

– Procuring agencies with an established culture and processes to procure from large or at least already established and compliant defence companies.

– Lack of contact organisations and effective announcements that attract and is organised to handle spontaneous proposals or make effective calls for review of SMF new products, technologies or materials. The EU initiatives described in the Working Document introduction describes large and complicated initiatives often with a demand for multination and multi-industrial company clusters to apply or participate. The US DoD has several uncomplicated marketplaces (such as the Rapid Innovation Fund RIF and FCT the Foreign Comparative Testing office were small innovative US and foreign companies and startups in rather simple processes can propose, get initial funding and demonstrate its product, technology material with direct communication with the relevant defence force.

2. Do you think that the measures promoted by the EDF and this new EU strategy meet the challenges facing businesses? Are there any additional measures you consider necessary?

The measures promoted by the EDF and the new EU strategy do address many challenges faced by SMEs:

– Increased funding opportunities: The EDF provides significant financial backing, which is crucial for helping SMEs overcome capital barriers. This includes support for R&D and innovation, which is key to keeping the EU at the forefront of defence technologies.

– Encouraging cross-border collaboration: Initiatives to foster cross-border cooperation between SMEs and larger entities help reduce the isolation of smaller players and introduce them to bigger supply chains.

– Support for dual-use technologies: The focus on dual-use technologies (civilian and defence applications) creates additional pathways for SMEs to innovate and pivot into defence markets.

However, additional measures could further help:

– Simplification of administrative processes: The EDF could streamline its administrative burden to make it more accessible for SMEs, particularly in terms of navigating the complex proposal and project administration processes. Attracting and working with SMEs we suggest require separate and simpler, more focused and less time-consuming processes. Likely an organisational separation of large programs and those instruments aimed at SMEs will need to be separated to attract SMEs, startups and deep tech companies to demonstrate the effectiveness of their product, technology or material. Once initially verified in such an environment the results may be introduced for applications in larger supply chains or for improvement of effectiveness of the defence forces.

– Targeted support for product development: Beyond funding for innovation (TRL 1-4), measures to help SMEs bridge the gap between innovation and market entry are crucial — the TRL 5-7 “Valley of Death”. This could involve financial support for building demonstrators, sponsored access to test facilities and laboratories, support from military services with access to vehicle platforms, personnel, etc.- Enhanced mentorship and networking: Increased efforts to help associations and regional networks to connect SMEs with larger defence contractors and provide mentorship in navigating the defence sector would be highly beneficial.

– Targeted support for commercialisation: Beyond funding for R&D, measures to help SMEs bring their product from development to market (TRL 8-9) are crucial. This could involve more direct support for scaling up production capabilities and securing long-term contracts.

– Support for single-use technologies: The flip side of focusing solely on dual use technologies is that SMEs that develop single use military technologies may find it difficult to find funding. The EU and EDF measures should therefore be sector agnostic — Single and Dual Use technology SMEs should have access to and assistance from them on the same terms.

3. What measures do you think can be taken to ensure that SMEs fully participate in supply chains with a view to harnessing all their potential and expanding the defence industry’s industrial ecosystem?

To ensure that SMEs fully participate in supply chains and harness their potential, the following measures could be implemented:

– Dedicated SME consortia: Establishing consortiums specifically focused on SMEs, with a mix of larger firms that can mentor and integrate SMEs into larger supply chains.

– Financial incentives for prime contractors: Providing financial incentives to larger contractors that successfully integrate SMEs into their supply chains can increase the willingness of bigger players to collaborate with smaller firms.

– Capacity-building programs: Offering existing associations and regional networks funding for targeted training and capacity-building programs for SMEs to help them navigate the specificities of the defence market, including regulatory compliance and export controls.

– Establish working forums were defence forces and their end users can meet (after initial screening) companies to refine the understanding of the needs with the potential solution.

4. Do you think that these tools (EDF, EUDIS, HEDI, Horizon Europe) are targeted enough to support SMEs? Are there any approaches that should be added?

The tools in place are well-targeted and provide substantial support for SMEs in the defence sector, but there is room for improvement:

– Adjust and simplify the application processes and reduce the threshold and requirements for multinational and company clusters to team in a format that lower the threshold significantly for SMEs to apply.

– Increased focus on the commercialisation phase: While these tools are excellent for fostering innovation and R&D, more focus could be placed on supporting SMEs technical maturity and commercialisation phases to ensure that innovations are developed and eventually brought to market effectively.

– Sector-specific support: Tailoring some aspects of these programs to specific sub-sectors of defence technology could help SMEs that specialise in niche areas such as cybersecurity or AI. This would create more precise funding and collaboration opportunities.

– Support system accessibility: ASAP, DIANA, DIRB, EDA, EDF, EDIDP, EDIG, EDIP, EDIRPA, EDIS, EDTIB, EEN, EMSM, ENDR, EUDIS, FAST, HEDI, Horizon, NIF, NSPA, OCCAR, OCT, PESCO, SEAP, TSI… Guaranteed, there is not a single SME in the EU that is able to navigate that “letter salad”. Mapping it out and making it easily comprehensible, transparent, and accessible to those who are supposed to benefit from it is an absolute necessity. And no, a few of those aren’t EU organisations or programmes, but that doesn’t exactly simplify things.

5. What actions could help projects funded by the EDF or the Horizon Europe programme become a reality after the R&D phase?

To avoid the ”innovation/commercialization gap” after the R&D phase, the following actions could help:

– Prototype funding and testing facilities: Providing dedicated funding for building prototypes and giving SMEs access to shared testing facilities can help innovations move from the research phase to commercialisation.

– Targeted support for product development: Measures to help SMEs bridge the gap between innovation (EDF funding) and market entry (commercial revenue) — a.k.a. the TRL 5-7 “Valley of Death” — are critical. This could involve financial support for building demonstrators, sponsored access to test facilities and laboratories, support from military services with access to vehicle platforms, personnel, etc.

– Public procurement opportunities: Simplifying procurement processes, i.e. make the procurement regulation more flexible, can help SMEs gain market access.

6. How should the issue of the intellectual property of companies/technologies be handled?

Intellectual property (IP) should be handled with care to protect both commercial interests and national security concerns:

– Clear IP guidelines: Establishing clear, standardised guidelines for handling IP in dual-use projects funded by the EU would help companies navigate these issues confidently. – Establish resources and Point of Contacts to provide guidance and advice to SMEs on actual IP cases.

– Joint ownership models: In some cases, a joint IP ownership model, where the company retains commercial rights but shares defence-related applications with government entities, could work. This ensures that SMEs retain some control over their innovations while still contributing to defence needs.

– Ensuring IP Protection: EU bodies should ensure that IP developed under EU-funded programs is adequately protected against theft or infringement, especially given the sensitive nature of defence technologies.

– Caveat: While guarding IP and sensitive information is extremely important, it is also important to steer clear of bogging down SMEs with bureaucracy, security protocols, and mandatory security tools that they do not have the bandwidth or the funds to handle or acquire.

7. Do you think that the EU should opt for an ambitious and bigger budget, with ‘fresh money’, to support the defence industry in the budgets of the successors to both the EDF and the EDIP from 2028 onwards?

Yes!

Due to that the regulation aims to bridge the gap between the ending of the short-term emergency measures such as ASAP and EDIRPA and ensure the EU’s defence industrial readiness for the future, fresh money is extremely important to facilitate this goal.

Also, EDIP is a unique opportunity to put in place specific measures to address challenges faced by the European defence industry such as the security of the defence supply chain and the support of the Ukrainian defence industry, and in this case not least with the focus on SMEs.

8. How can regional and local organisations that support businesses, industry and innovation contribute to the DIRB/EDIG?

– Defence industry support: Remove all provisos that limit military applications, enabling them to support defence industries on the same terms as they do civilian enterprise.

9. How should local and regional authorities contribute to the EU’s strategic autonomy and technological sovereignty in the field of defence?

– EU’s strategic autonomy and technological sovereignty is due important; here can local and reginal industrial clusters play a central role to meet the local or national capability needs of the respective member state or states. These different needs do exist in regard to geography, topography and other local factors. This is then related to whole supply chain including SMEs.

– Advanced technology: To properly support the defence industry, Europe needs to achieve strategic autonomy in a much wider area of technologies than current policy prioritises. We need domestic sources on a very high technology level for advanced materials and component technologies far beyond what is contained in the EU Chips Act. Promoting and supporting all such industries at local, regional, and EU levels therefore needs to be a top priority.

– Mentorship and networking: Introduce directed efforts to help authorities connect SMEs with the military services and defence procurement organisations to provide mentorship in navigating the defence sector and understanding its unique requirements, both in general terms and in specific projects.

10. What role do universities play in promoting training/skills within local and regional ecosystems?

– STEM education: Defence industry is dependent on STEM; not only universities, but the entire education system (including its informal components) needs to encourage and promote students to engage specifically in Science, Technology, Engineering, and Mathematics subjects.

– Defence universities: Offer formal courses and curriculums specifically directed at enterprises — engineers, product developers, management — to boost martial competence in specific fields within the defence business community.

11. The defence industry ecosystem in your region — describe its features, policies and support initiatives and any other element you consider relevant.

– Single Use: Currently all innovation support initiatives exclusively admit Dual Use technology innovations, precluding subsidies to the Single Use military technologies necessary for actual battlefield supremacy.

– With this said, the defence industry ecosystem in Sweden and the Nordic region, is to a large part dependent on market access to other markets outside the Nordic region to facilitate national and regional capabilities regarding the first point under 9 above. This is not fully the case in some of the other regions of the EU. This meaning that initiatives, instruments and other actions needs to support and reflect this to be balanced regarding support initiatives and other elements brought forward.