Italy's Leonardo CEO: 'We're Almost in a War Economy'

Summary

This interview explores the evolving landscape of European defense, focusing on the increasing investment in both traditional and non-traditional defense systems. The speaker emphasizes the need for greater unity in Europe’s defense efforts, highlighting joint ventures like the collaboration with Rheinmetall and the push for consolidation in the defense industry. The conversation touches on the geopolitical implications of the situation in Ukraine, the role of digital infrastructure and AI in modern defense, and the strategic importance of the U.S. market. Personal reflections on the challenges of leading in the defense sector provide additional insight into the human side of the industry.

Takeaways

• 😀 Defense expenditure in Europe is increasing, with forecasts showing a rise from 32 billion to 36 billion this year, although the 2% target remains gradual.
• 😀 There is an ongoing discussion about investing approximately 150 billion from existing funds, with an additional 600 billion under consideration for defense.
• 😀 Despite growing demand for new defense systems, it's too early to draw definitive conclusions about the impact on the defense industry and market.
• 😀 Leonardo's orders have increased by over 20% year-on-year, signaling growth in the defense sector due to higher demand.
• 😀 A shift in defense investment is expected, with increasing emphasis on digital infrastructure, AI, cybersecurity, space, and supercomputing, rather than just weapons and armored systems.
• 😀 The Russian invasion of Ukraine highlighted Europe's fragmentation, with 27 separate armies and insufficient unity in defense efforts.
• 😀 Europe needs to enhance collaboration between defense companies and potentially create larger defense giants to compete with U.S. and Chinese companies.
• 😀 While major mergers and acquisitions (M&A) in the defense sector are on the horizon, Europe will need to gradually build mutual trust and cultural alignment before such moves can occur.
• 😀 The joint venture between Leonardo and Rheinmetall makes sense due to complementary technologies, offering a strong future in land defense markets, including the potential to enter global markets.
• 😀 Europe faces challenges in the space sector due to fragmentation, but joint ventures are being discussed to improve competitiveness in space exploration.
• 😀 Leonardo's involvement in U.S. defense programs, particularly through its DRS unit, is significant, and there are no immediate plans to alter this relationship despite the rapidly changing defense landscape.

Q & A

What is the expected increase in defense expenditure at the domestic level?

The expected increase in defense expenditure at the domestic level is from 32 billion to 36 billion, which represents a significant rise, though it is still below the target of 2% of GDP.

What is the planned European investment in defense, and how will it be managed?

Europe plans to invest approximately 150 billion from existing funds, such as cohesion funds, in defense. There is ongoing discussion about an additional 600 billion, but the specifics regarding its sourcing and management are still under discussion.

How is the defense industry responding to the increasing demand for defense systems?

The defense industry is experiencing increased demand for new defense systems, which has resulted in a rise in orders and revenues for companies like Leonardo. However, it is still early to make definitive conclusions as the numbers are still evolving.

What are some of the non-traditional areas being included in defense investments?

Non-traditional areas such as digital infrastructure, artificial intelligence, cybersecurity, supercomputing, cloud technologies, and space are increasingly being integrated into defense investments, alongside more conventional systems like weapons and armored vehicles.

Does the CEO believe that President Trump's actions are beneficial to Europe’s defense efforts?

The CEO does not think anyone is doing favors for others in the current situation. While there are overlaps between economic, financial, and defense issues, the war in Ukraine has highlighted Europe’s fragmented defense capabilities, which have accelerated the push for stronger collaboration.

What is the main issue with the fragmentation of European defense capabilities?

The main issue with the fragmentation is that Europe has 27 separate armies and defense platforms, which leads to inefficiency and a lack of cohesion. This makes it difficult for Europe to effectively respond to threats like the invasion of Ukraine.

What role does aggregation play in improving European defense?

Aggregation, such as joint ventures between companies like Rheinmetall and Leonardo, is seen as a way to boost European defense by creating synergies and stronger, more competitive platforms. This collaboration helps combine complementary technologies, creating more effective defense systems.

Is the CEO optimistic about mergers and acquisitions in the European defense sector?

The CEO believes that major mergers and acquisitions in European defense may happen in the future, but this will be a gradual process due to the cultural and political differences among European countries. For now, joint ventures and partnerships are seen as more immediate steps.

What challenges does Europe face in the space defense sector?

Europe is struggling with fragmentation in the space defense sector, which has caused it to fall behind countries like India and China. While Europe is attempting to collaborate and move forward, there is a need for stronger institutional support and better coordination to remain competitive.

What is the current status of the European fighter jet collaboration between Germany, France, and other countries?

There is ongoing work on the sixth-generation fighter program in Europe, with collaboration between countries like the UK, Italy, and Japan. However, France and Germany are also pursuing their own fighter initiatives. The CEO suggests that future collaboration might be more likely for these advanced programs, though it is still early to determine the exact path.

How important is the US market to the CEO’s company, and is there any plan to reduce their stake there?

The US market is crucial to the CEO’s company, especially in sectors like helicopters, cybersecurity, and defense technology. Currently, there are no plans to reduce their stake or change their presence in the US, as the company is satisfied with its performance there and sees it as a key market for growth.

How has the CEO’s personal life been affected by the security concerns in the defense industry?

The CEO acknowledges that, as a father of three, the ongoing conflicts, especially in Ukraine, have a personal impact. The security measures around him, such as escorts and armored cars, reflect the heightened risks, though he accepts these as part of his role. Despite the challenges, he feels a sense of responsibility to manage the company through these times.