Western defence companies scale up production, but Gaza moves goalpost

Robert Wall

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The Ukraine war has driven high demand for more artillery shells and other military equipment, prompting Western defence companies to ramp up. The Hamas–Israel war has made keeping pace with demand only more challenging.

Western defence companies are starting to enjoy higher financial returns from scaling up production in response to Russia’s full-scale invasion of Ukraine. But the Hamas–Israel war has made meeting demand even more challenging and highlighted the need for a sustained effort to address industrial-capacity shortages.

Companies began increasing production of artillery ammunition and other items last year after European countries and the United States provided military assistance to Kyiv, which quickly exposed how much inventories and production depth had atrophied. Although output has started to increase, NATO Secretary General Jens Stoltenberg said at an Alliance-defence industry forum on 25 October: ‘We need to ramp up production. To meet Ukraine’s needs, but also to strengthen our own deterrence and defence.’

General Dynamics said that it now makes about 20,000 artillery rounds per month, up from 14,000. ‘We’re working ahead of schedule to accelerate that production capacity up to 85,000, even as high as 100,000 rounds per month, and I think the Israel situation is only going to put upward pressure on that demand’, the company’s finance chief, Jason Aiken, said on a 25 October earnings call.

Ramping up

A day later, Saab Chief Executive Micael Johansson said that European companies ‘are working hard, not only Saab, to boost capacity’. The company has expanded output in Sweden and India and is looking to do so in the US, he said, as Saab reported third-quarter earnings.

Other efforts include Norway’s Kongsberg building a second missile factory, with plans for four Naval Strike Missile production lines globally. In France, Minister of the Armed Forces Sébastien Lecornu said that production of CAESAR artillery systems, which Paris has provided Ukraine, has increased to six per month from two, with delivery times halved to 15 months. France would be able to triple ammunition deliveries to Ukraine to 3,000 shells per month in January 2024 from 1,000 shells at the start of this year, he said during a site visit at KNDS’s French arm Nexter. Production of Mistral air-defence missiles by MBDA has doubled, he said, to 40 missiles per month.

Gaza effect

The fighting in the wake of Hamas’s 7 October attack on Israel has added to supply challenges. The Israel Defense Forces (IDF) has used artillery and guided bombs to strike targets in Gaza and expended Iron Dome interceptors at a rapid pace to counter some of the thousands of rockets fired at Israel. To help keep the IDF resupplied, the Pentagon said some 155mm ammunition it had withdrawn from reserve stockpiles in Israel to replenish its inventory in Europe – diminished because of assistance to Ukraine – was being redirected back for IDF use. The US is also providing other equipment to Israel, such as Small Diameter Bombs and Joint Direct Attack Munition tail kits. Two Iron Dome systems the US acquired are also being transferred to Israel.

The Israel–Hamas fighting could hamper production ramp-up efforts, Saab’s CEO indicated. ‘We have some companies in Israel supporting us in the supply chain’, Johannson said, with Saab looking into the effects and possibly mitigation actions, such as identifying backup suppliers.

Bottom line

The demand surge has started boosting company balance sheets. General Dynamics posted a 24.4% increase in sales from the year-ago period, driven in part by contracts to increase artillery production. Saab reported that order bookings for the Dynamics business more than doubled over the first nine months of the year from the 2022 figure.

Germany’s Rheinmetall in October booked a contract with the German military to supply over 150,000 additional artillery rounds, all earmarked for Ukraine. The contract is part of a EUR1.3 billion (USD1.41bn) framework deal the company signed with Germany in July. Rheinmetall expanded production capacity by acquiring Spanish firm EXPAL Systems in July as it seeks to increase output from 450,000 rounds per year to 600,000 by the end of 2024.

The White House on 20 October asked Congress for USD106bn in emergency supplemental funding. The money, in part, would replenish US stocks, as well as provide weapons to Ukraine, such as missile systems, and to Israel, including for its Iron Dome and David’s Sling air-defence systems.

Despite European Union (EU), NATO and national efforts to produce more, some defence planners worry that the history of governments reversing course on demand has made companies cautious. ‘Almost every time after a crisis is over – usually two to three years after the crisis, after demand peaks – demand sharply drops, the industrial base cuts core competencies and workforce, people are laid off and production lines are stopped. This has happened about four times in the past 30 years’, Pentagon acquisition chief William LaPlante said late last month, adding, ‘we’re trying to stop that’.

Europe remains far short of being able to meet its needs, Norwegian ammunition maker Nammo told lawmakers in Oslo. The company estimates Europe would need around 20 million shells for about a month of combat operations, with industrial capacity in the region at less than half a million shells.

The lack of pace in boosting output has frustrated some. Lithuanian foreign minister Gabrielius Landsbergis recently lamented that ‘The EU promised Ukraine 1,000,000 artillery rounds. So far, we have delivered only 300,000. Meanwhile, North Korea delivered 350,000 to Russia. We surely have the resources to outperform North Korea. We should stop being frozen in the headlights while brave Ukrainians die.’