WEBVTT - Boston Consulting Group's Diana Dimitrova Talks European Defense

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<v Speaker 1>The war in Ukraine and the latest US decision on

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<v Speaker 1>long range weapons will be in focus as European foreign

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<v Speaker 1>ministers meet in Brussels today. They'll be discussing the situation

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<v Speaker 1>in Ukraine with the country's foreign minister and also relations

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<v Speaker 1>with the US ahead of Donald Trump taking office in

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<v Speaker 1>January and his uncertain support for Ukraine and NATO. The

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<v Speaker 1>Russia's invasion sparked a flurry of investment in defense, but

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<v Speaker 1>what capacity does Europe have now to produce the military

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<v Speaker 1>equipment it needs well. Joining us to discuss is Diana Demitrova,

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<v Speaker 1>who is managing director and partner at Boston Consulting Group.

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<v Speaker 1>You've recently published a report on this subject. Thank you

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<v Speaker 1>for joining us this morning. Diana, on the program, much

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<v Speaker 1>of Ukraine's battle with Russia has depended on weapons that

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<v Speaker 1>came from the US. We've been talking about some of

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<v Speaker 1>the rules around how those weapons can be used on

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<v Speaker 1>the program this morning. But how does that set us

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<v Speaker 1>up for what happens next and how much Europe can

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<v Speaker 1>step up to perhaps replace those weapons if US supplies

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<v Speaker 1>seem less certain in the future.

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<v Speaker 2>Be with you. I think in general, as we've seen

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<v Speaker 2>in kind of the political conversation, Europe will continue to

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<v Speaker 2>outspend what they have historically, will breach hopefully the two

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<v Speaker 2>percent level. And as we dar Anthem analysis, we saw

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<v Speaker 2>that China actually had crossed the barrier of how much

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<v Speaker 2>they spent versus US as Europeans. And when I say Europeans,

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<v Speaker 2>I mean France, Germany, Italy, Spain, in the United Kingdom

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<v Speaker 2>in about two thousand and seven, So they now spent

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<v Speaker 2>almost double what we spent on their military equipment. So

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<v Speaker 2>I think the call for action is clear also in

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<v Speaker 2>the context of the politics. But if we just look

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<v Speaker 2>at the wrong numbers, it indicates how much we need

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<v Speaker 2>to step up.

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<v Speaker 3>How much I suppose has that changed in the almost

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<v Speaker 3>thousand days that the war in Ukraine has been has

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<v Speaker 3>been happening. I mean, how much does the build up increase.

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<v Speaker 3>Europe's defense industry is still quite reliance on external supply chains.

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<v Speaker 2>External supply chains absolutely. And also if we look at

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<v Speaker 2>major program acquisition, Europeans take about forty percent of those

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<v Speaker 2>that spend goes outside of the European Union, whereas in

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<v Speaker 2>other countries like the United States, it's only about twenty

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<v Speaker 2>percent that goes externally. So we are a defense I'll

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<v Speaker 2>call it conglomerate that does look out more than others

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<v Speaker 2>in the context.

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<v Speaker 1>What's the risk if there are disruptions to trade. We're

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<v Speaker 1>of course thinking about the potential of trade tariffs from

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<v Speaker 1>the US under Donald Trump. What potential does that have

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<v Speaker 1>to disrupt that supply into Europe's defense industry.

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<v Speaker 2>Yeah, I think it's an opportunity. We do need to

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<v Speaker 2>reshow or think about how those supply chains come closer,

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<v Speaker 2>and we have clear provenance of them, and we expect

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<v Speaker 2>the Defense Review that hopefully will come out early next

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<v Speaker 2>year will also indicate in that on that trend and

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<v Speaker 2>in that direction. So we expect local OEMs, being German

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<v Speaker 2>or British will need to think about how their supply

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<v Speaker 2>chain comes closer to home.

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<v Speaker 3>How quickly did you think that might be built up?

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<v Speaker 3>Do you think that Europe might focus on a let's

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<v Speaker 3>say three percent of GDP goal for defense spending.

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<v Speaker 2>It's a great question. I think the exact target of

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<v Speaker 2>the spend will materialize is we start to realize how

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<v Speaker 2>much energy and effort it takes to build up those

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<v Speaker 2>supply chains locally to home, but also build up the

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<v Speaker 2>capacity in our respective nations. So For me, the percentage

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<v Speaker 2>is just the outcome. I actually think the journey to

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<v Speaker 2>get that closer to home needs to start now, because

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<v Speaker 2>it does take years to get the reliability of what

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<v Speaker 2>you need and also the specialization of what you need

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<v Speaker 2>much closer to your manufacturing facility on the European continent.

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<v Speaker 1>One of the issues that you've identified in your report

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<v Speaker 1>that's a challenge in this area is interoperationability. So how

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<v Speaker 1>I suppose things can be made in one country and

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<v Speaker 1>used in another, How quickly can that be resolved? What

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<v Speaker 1>is the best way for these countries to be able

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<v Speaker 1>to improve that transferability of technology among them.

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<v Speaker 2>Brilliant question, Stephen, And we think this is one of

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<v Speaker 2>the main root causes as to why our spend is

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<v Speaker 2>and perhaps as effective. When you think the America has

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<v Speaker 2>kind of one battle tank, Europe has seventeen. That's seventeen

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<v Speaker 2>different variants, seventeen different maintenance schedules, which makes everything much

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<v Speaker 2>more complex. And one of the things we call for

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<v Speaker 2>in our report is that coordination and coordination is twofold.

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<v Speaker 2>The coordination is with industry, between ministries of defense and industry,

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<v Speaker 2>but also amongst the nations themselves. And I think you

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<v Speaker 2>saw in our report in Europe we have eighty plus

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<v Speaker 2>kind of alliances in different conversation pockets. It's important to

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<v Speaker 2>start to bring that too much fewer such that we

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<v Speaker 2>can have that interoperability conversation, start to reduce the variance

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<v Speaker 2>of the programs we buy, and then we can optimize.

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<v Speaker 3>How I mean, we know that, but the European Foreign

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<v Speaker 3>ministers are meeting in Bossels latter's day. How receptive do

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<v Speaker 3>you think Europe is currently to that thinking? I mean,

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<v Speaker 3>certainly Manue and Macon Schultz, they are sort of deeply

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<v Speaker 3>involved in the issues with Ukraine. How responsive, how engaged

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<v Speaker 3>you think Europe actually is given that that Germany is

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<v Speaker 3>about to go to another election, Dvance's Macui is very

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<v Speaker 3>much weakened in his political position. What's your assessment of

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<v Speaker 3>how open and determined Europe is right now to do that?

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<v Speaker 2>Given where we are globally and the fact that geopolitics

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<v Speaker 2>considered continues to operate in a slightly kind of different tilt,

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<v Speaker 2>I think that they will see that this is the

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<v Speaker 2>only path forward in order to accelerate the pace at

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<v Speaker 2>which we manufacture a scale. So I think we'll see

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<v Speaker 2>a slight divorce of the politics to hopefully recognize that

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<v Speaker 2>you need to create a flywheel within defense such that

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<v Speaker 2>we can output much quicker given the fact we have

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<v Speaker 2>conflicts that are borders and other conflicts that are escalating glibally?

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<v Speaker 3>Is there one danger though, in the conversation around sort

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<v Speaker 3>of military build up, certainly one of our former defense ministers,

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<v Speaker 3>I think it was talked about the UK and Europe

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<v Speaker 3>now being in a pre war set up versus the

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<v Speaker 3>kind of post Second World War Cold War era? Is

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<v Speaker 3>there a kind of danger of us talking ourselves into

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<v Speaker 3>bigger and wider conflicts.

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<v Speaker 2>I don't yet see that danger materializing. I think what

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<v Speaker 2>we see as a re establishment of an independence in

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<v Speaker 2>the defense industry in Europe, also because we had tilted

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<v Speaker 2>the balance lately differently of World War two. I don't

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<v Speaker 2>know that that makes anybody any more considerate should it

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<v Speaker 2>come to having to escalate or continue conflict