War changed defense industry’s business model, says German contractor

The war in Ukraine and the increased threat of world conflict have changed the business model of the defense industry, according to the head of one of the largest contractors in the German defense industry.

Hensoldt chief executive Thomas Müller told the Financial Times that arms manufacturers are now producing weapons and equipment without booking due to high demand.

That means companies can get defense technology and products “almost like in a supermarket,” he added.

Many defense contractors avoid producing weapons without pre-orders due to manufacturing costs, which often run into millions of euros per piece, resulting in long waiting lists for advanced equipment.

“Usually we have to have firm orders and advance payments. [But] Starting in April, we will be able to deliver one radar per month, even if we don’t know to whom yet,” Mueller said of the company’s ground-based air defense radar, the TRML-4D.

But heightened geopolitical instability in recent years has led several countries, including Germany, to increase military spending.

That was most notable after Russia’s invasion of Ukraine in February, prompting investors to flock to companies like Hensoldt, which specializes in missile-detection radar.

The company also manufactures optoelectronic systems for Leopard 2 tanks that Germany is pressured to ship to Ukraine. Electro-optical systems are used for surveillance and navigation.

In Germany, the invasion led to a historic shift in the country’s defense policy, which for decades has cited its World War II legacy as justification for keeping its army lean.

German Chancellor Olaf Schulz visited Hensoldt this week – his first visit to a defense organization as the country’s leader – amid years of pressure from NATO allies after he pledged last year to spend 100 billion euros to modernize the army .

While it’s unclear where the money will go, Hensoldt is likely to enjoy a surge in orders from the German government, which already account for about 40% of its sales.

“Even before the war in Ukraine, we were profiting from a growing budget. But after the war, we will see more sustainable growth over the next decade, if not decades,” says Müller.

“We have a lot of potential clients in the pipeline who are excited to get [air defence radars] It’s almost like being in a supermarket,” he added, noting that it takes about a month to manufacture some of the company’s large radars.

“Other defense contractors are doing the same thing, especially in ammunition, because demand is growing so fast.”

That demand has boosted shares of the defense group. Shares in Hensoldt, listed in Frankfurt nearly three years ago, are up nearly 90 percent since Russia invaded Ukraine.

Shares in Rheinmetall, Germany’s largest defense contractor, have risen nearly 140% in the past year.

Rising geopolitical instability, including the war in Ukraine, is also helping to boost the defense group’s finances. With revenue of 1.47 billion euros in 2021, Hensoldt raised its full-year sales growth target for 2022 in December last year.

The company reported adjusted EBITDA of 261 million euros in 2021, its last reported full financial year.

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