Rene Ehasalu, Cluster Manager of the Estonian Defence and Aerospace Industry Association, writes that in today’s complex situation, the Estonian defence industry has a unique window of opportunity to actively sell its products at the European level. However, the end of the war in Ukraine and Europe’s expected inability to entirely avoid protectionist developments may soon close this window, if not shut it completely.

The international security situation is increasingly tense at the beginning of the year, and news of wars and conflicts fills our news feeds. Against the backdrop of real military conflicts and their consequences, various long-term processes are unfolding that are reshaping the world order we are accustomed to living in.

“The economy can function in a secure environment, so in my opinion, building Europe’s independent defence capabilities is the number one priority.”
Rene Ehasalu, Cluster Manager of the Estonian Defence and Aerospace Industry Association

For example, we recently read the views of Alexander Stubb, President of our northern neighbours, on the coming decades, in which he outlines three different scenarios for the future as the world order changes. The most positive of these scenarios considers both the interests of the major powers and the shared values of the West.

Europe’s growing importance

The consensus among Stubb and many other commentators is that, although the international order that has remained in place for nearly 70 years is transforming, the fundamental values that have shaped and continue to shape relations within the global West and cooperation with other blocs should remain intact, even if regional and national interests are becoming more prominent alongside value-based discussions. Western countries need to work together more effectively than before to preserve their traditional value space.

For Europe, the changing environment logically means a need to increase its capacity for independent action in terms of both defence and economic competitiveness. The economy can function in a secure environment, so in my opinion, building Europe’s independent defence capabilities is the number one priority.

Against a tense geopolitical backdrop, developments are already quietly taking place that will increase confidence in the long term: the long-awaited European “awakening” is underway – in 2024, European defence spending grew by 17%, compared to 9% globally. The turnover of the European defence and aerospace industry grew by more than 10% last year, with the defence sector alone growing by 13.8% in Europe, reaching nearly €183.4 billion.

“Against a tense geopolitical backdrop, developments are already quietly taking place that will increase confidence in the long term: the long-awaited European “awakening” is underway – in 2024, European defence spending grew by 17%, compared to 9% globally.”
Rene Ehasalu, Cluster Manager of the Estonian Defence and Aerospace Industry Association

At the same time, joint efforts are being made to ensure that equipment procurement, supply chains, and capability development do not depend solely on a few large countries or external suppliers – flexibility, diversity, and the avoidance of fragmentation are needed as much as possible. This is also reflected in the strategic framework Readiness 2030 and the ReArm Europe plan based on it: more common procurement principles, support for innovation, and rapid adaptation to the changing security situation.

The star of the new era is Germany, where a mental shift has taken place very quickly, which is also reflected in the real political will to start increasing defence capabilities at a record pace. Some plans even talk about half a trillion euros being spent on increasing Germany’s defence capabilities in the coming years. Germany is also an extremely important partner for Estonia, and we are focusing much of our attention on supporting our companies there.

Opportunities for the Estonian defence industry

The trend is clear: the defence industry is booming. But does this boom only benefit traditional large-scale industries, or does it also open up opportunities for smaller, agile players? I believe that in today’s economic climate, there are opportunities for everyone. Hundreds of billions are flowing into the sector, and Estonia’s smart defence industry players are well positioned to benefit from this.

“The keywords for the Estonian defence industry are drones, anti-drone defence, electronic warfare, sensor technology, situational awareness, AI-based information analysis, and cyber security.”
Rene Ehasalu, Cluster Manager of the Estonian Defence and Aerospace Industry Association

Compared to the US, Europe has been rather traditional in the defence industry: a lot of money has gone into traditional military equipment, tanks, ships, and infantry equipment. Innovation has remained secondary. In order to increase Europe’s ability to defend itself without US support, this must change, and it is already changing. This is where the opportunity lies for Estonian companies: although our industry is a niche player at the European level, we are flexible and focus on product development and innovation. These are precisely the areas where Europeans are struggling.

The keywords for the Estonian defence industry are drones, anti-drone defence, electronic warfare, sensor technology, situational awareness, AI-based information analysis, and cyber security. We have rapidly increased our development capabilities in these areas and gained real-world experience on the battlefield in Ukraine. It is also important to note that the majority of solutions developed in Estonia are dual-use products that combine civilian applications and defence technologies. This allows us to offer cheaper, more flexible, and at the same time high-quality technological solutions with lower development costs, as it provides opportunities for wider use beyond the battlefield.

“It is important to be at the right door at the right time. In the defence sector, it often takes 3-5 years from the first contact to the actual sale, because, as a rule, public money is involved in large European procurements.”
Rene Ehasalu, Cluster Manager of the Estonian Defence and Aerospace Industry Association

It is important to be at the right door at the right time. In the defence sector, it often takes 3-5 years from the first contact to the actual sale, because, as a rule, public money is involved in large European procurements. There is a delay in the use of taxpayer money, and large sums are often spread over several years. The tricky part for Estonian companies is therefore positioning themselves correctly: how to be in the right place at the right time with the right contacts in the right information field.

Much depends on the outcome of the war in Ukraine

The outcome of the war will have a major impact on our future sense of security and way of life. Among other things, the outcome of the war will also determine the future of Estonia’s defence industry. In general, two major developments are likely to occur.

First, whenever peace is achieved, there is a momentary shock reaction in the industry, and some procurements and processes may be postponed or temporarily suspended. There may be a standstill, but it will probably pass quickly, as no one is under any illusions that our part of the world can continue to sleep peacefully in the same spirit.

Secondly, the Ukrainian defence industry, which has now reached peace, will offer fierce competition in the future, as many of these companies have gone through actual war. This will significantly increase competition in Europe and the wider world. For example, when peace negotiations began, Rheinmetall’s share price fell by 25% in a week, even though there was no real reason for this.

Protectionism is difficult to avoid

Everyone understands that in order to successfully defend Europe and our values, we need to work together and avoid fragmentation and protectionism as much as possible. This is a well-known weakness of Europe, but also, to a certain extent, an inevitability that is essentially impossible to avoid or eradicate in our confederation of nation states. At the same time, awareness helps to control it to a certain extent. This fragmentation is the main reason why Europe is not yet able to achieve the same high-tech capabilities as the US and the independent defence capabilities that come with them.

“Our bread and butter are smart niche solutions, but through cooperation we can contribute to greater defence capabilities.”
Rene Ehasalu, Cluster Manager of the Estonian Defence and Aerospace Industry Association

As a small country, we naturally seek greater synergy and opportunities for cooperation with larger countries. Our bread and butter are smart niche solutions, but through cooperation we can contribute to greater defence capabilities. We must take into account that at some point, local taxpayers will start to look into where defence money is going, and there will be pressure to keep a significant portion of the money at home.

We are therefore currently in a kind of unique window of opportunity, where flexible companies from small countries can more easily participate in larger EU-wide joint projects, consciously anticipating the rise of protectionism. Estonian companies are doing their utmost to make the most of this opportunity.

This content is funded by the European Union – NextGenerationEU.

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