The security environment in Europe changed drastically on 24 February 2022 with Russia’s full-scale and brutal invasion of Ukraine. This led NATO to reassess its deterrence and defence posture. In July of the same year, Allied Heads of State and Government adopted a new Strategic Concept at the 2022 Madrid Summit. NATO’s Strategic Concepts are capstone critical documents, informing NATO’s strategic direction and policies; historically they are published once in every ten years. The 2022 Strategic Concept set out NATO’s main threat vectors and agreed that although the Euro-Atlantic area is not at war, it is not at peace either.
Summary
• NATO Heads of State and Government have agreed new and ambitious Capability Targets and a new defence investment pledge of 5% of Gross Domestic Production (GDP) in June 2025.
• The new Capability Targets agreed by NATO defence ministers will create a long-term increase in demand for defence industrial production.
• The Alliance needs a robust defence industrial base, supported by the exchange of best practices between Allies; identifying options for financial risk-sharing; reducing barriers to cooperation; expanding multinational procurement; improving standardisation and interoperability; and expanding cooperation with partners, including Ukraine, the Indo-Pacific partners, and the European Union (EU).
At the NATO Summit in The Hague, NATO leaders recognised that in order to deter any future military conflict, Allies will have to pledge to spending 5% of their GDP to defence (of which up to 1.5% may be spent on defence-related investments). This has created the conditions for Allies to channel robust funding into governmental contracts with the defence industry in order to meet the new Capability Targets that are assigned for each Ally to generate collective effect. To meet these targets and acquire capabilities at pace, NATO now has to greatly increase and optimise the capacity of its defence industrial base. The updated Defence Production Action Plan, publicly released at the Summit in The Hague presents a concrete programme to optimise and strengthen the Allied defence industry, maximise its outcomes and increase Allies’ return on investment.
The current state of the defence industrial base
Decades of perceived low threat levels diverted NATO Allies’ resources away from core defence expenditures. Yet as the world becomes more dangerous and unpredictable, they have now dramatically increased their defence spending, breaking with sixty years of progressive decline (Graphic 1). But they must now account for an undersized industrial base: the result of decades of underinvestment.
At the end of the Cold War, many Allies reoriented their economies from defence spending to other areas, such as social welfare, resulting in only three Allies (Greece, the United Kingdom and the United States) spending two percent or more of their GDP on defence in 2014. This so-called “peace dividend”, combined with the professionalisation of armed forces and the end of conscription in most nations, reduced the size of conventional armies across the Alliance. Cyclical and periodic disturbances, such as the financial recession of 2008, further shrank government budgets allocated to defence. The lack of investment in key capability areas during these years led inevitably to the contraction of defence industrial bases. Equally, the large-scale provision of military equipment to Ukraine since 2022 has further depleted arsenals and munition stockpiles.
Faced with a rapidly diminishing volume of activity, Allied defence companies on both sides of the Atlantic underwent a series of mergers and acquisitions, which sometimes led to a considerable consolidation of the defence sector. For example, in the United States, the 51 companies producing defence equipment at the end of the Cold War merged into the “Big Five” (Lockheed Martin, RTX, General Dynamics, Boeing, and Northrop Grumman). Supported by a large and sustained national budget and continuous export order stream, US companies were able to maintain greater capacity to develop and produce advanced and interoperable systems across all domains, supported by multiple prime contractors and reliable supply chains.
On the other side of the Atlantic, European defence industrial bases, while still fragmented across state lines, saw the emergence of multinational primes such as MBDA or Airbus. While reducing the volume of their total output, European companies maintained cutting edge capabilities across the spectrum of capabilitiesrequirements, and developed export-oriented models built around technological excellence.
Despite a gradual decrease in the size of the defence sector since the 1990s, Allied defence companies maintained their edge in international defence markets, leading the global competition in most rankings throughout the 2000s. As of 2024, companies from NATO nations occupied seven spots out of the top 10 biggest defence companies globally.
The surge in defence spending since 2022 has reopened questions surrounding the resilience and capacity of the defence industrial base across the Alliance. To be effective, the expenditure will require a paradigm shift in the way Allies and the defence industry address challenges such as access to raw materials, workforce management and delays in delivery. The delivering of key capabilities, such as air and missile defence systems, armoured vehicles and tanks, artillery shells, and enabling capabilities will require sustained effort as Allies already spent more than twice as much on defence equipment in 2024 than they did in 2014 (Graphic 2). This requirement for Allies to return to a Cold War-level of defence expenditure - and therefore rapidly invest in critical capabilities - sets the scene for a prolonged expansion of industrialy capacity.
How NATO has strengthened the defence industrial base since 2022
Through its work under the National Armaments Directors, NATO has been working to strengthen defence across the Alliance through multiple activities focusing on the development, production, procurement, and sustainment of defence capabilities. Since 2022, NATO has created a range of new initiatives and sub-structures to achieve its goals, including the updated Defence Production Action Plan just published at the Summit in The Hague. These instruments will now be used to assist Allies in fulfilling the new Capability Targets.
At the NATO Summit in Vilnius in July 2023, Allies first agreed on the Defence Production Action Plan, which was updated in February 2025. At the same time in 2024, leaders adopted the NATO Industrial Capacity Expansion Pledge, which further reinforced the Allied commitment to prioritise its defence industrial base.
This revised focus along with concrete initiatives, aims to create predictable conditions and provide Allies with opportunities to identify common gaps in key capability areas and work together to place joint orders.
In the updated Defence Production Action Plan NATO and Allies set out to:
Identify new opportunities for multinational cooperation, including multiyear procurement contracts, and present options, including to expand existing efforts to aggregate demand.
Build a clearer understanding of defence production and industrial capacity in peacetime, crisis and conflict.
Protect defence-critical supply chains.
Take forward the work of the Defence Industrial Production Board.
Take a more systemic approach to defence industrial development.
Support Allied engagements with industry.
Conduct dialogue to identify, reduce and eliminate obstacles to the transfer of capabilities and munitions between Allies, as appropriate.
Improve and streamline NATO munitions interchangeability regimes.
When the Defence Production Action Plan was initially launched in 2023, a key initiative was the aggregation of demand to facilitate rapid joint procurement – this activity proved successful and is being strengthenedfurther institutionalised. As NATO is now moving toward meeting its long-term demand requirements, the importance of defence-critical supply chains, defence production capacity and cooperation with industry has grown. In this new environment of strategic competition, access to defence-critical raw materials and uninterrupted supply lines is just as important as the production capacity of the defence companies itself.
The new initiatives are supported through structural changes. NATO established a new Defence Industrial Production Board (DIPB) following a tasking from the Defence Production Action Plan to provide a platform to exchange best practices, provide advice, make recommendations on defence industrial planning and procurement issues, and foster guidance in support of the delivery of NATO and Allied defence capability targets. The DIPB addresses challenges related to defence industrial capacity and production surge potential, the integration of defence industrial aspects into defence planning, and addressing broader obstacles to defence industrial cooperation. The DIPB’s work has enabled the Alliance to understand challenges in industrial production, develop recommendations on the level of industrial capacity needed to meet more ambitious capability requirements, and further its situational awareness of threats to supply chain vulnerabilities.
Taking forward NATO’s long-term capability demand and collaboration with key strategic partners
One of the key challenges for the defence industry has been the absence of robust and aggregated demand signals, which contribute to providing the incentive for industries to expand their production capacities. The new Capability Targets, linked to the Alliance’s operational requirements, will offer a strong demand indication upon which industry partners can plan their long-term production. To create more favourable procurement options, Allies will now be able to explore joint procurement as a signal for aggregating demand, as it indicates an Alliance-wide interest in defence capabilities and a long-term commitment to working with the defence industry. NATO’s initiatives leading to co-investment, co-development, and co-production have potential to reduce costs through economies of scale, and increase standardizsation and interoperability of equipment.
While expanding the Allied industrial base is vital, NATO partners in regions such as the Indo-Pacific four (IP4) partners – Australia, Japan, the Republic of Korea and New Zealand – possess extensive and innovative defence industries, presenting major opportunities for cooperation. To that end, NATO has expanded its collaboration with its IP4 partners, exploring the options for cooperation through a variety of joint projects and NATO committees aimed at fostering interoperability, standardisation and enhanced industrial collaboration. Between 2014 and 2024, participation of the Indo-Pacific partners in various NATO committees has, on average, increased almost tenfold – a clear signal of commitment to enhanced cooperation. In the coming years, NATO and Allies will continue to take forward defence industrial cooperation with Ukraine, alongside providing them with the tools to defend themselves now and in the future.
Another strategic partner of NATO – the European Union (EU) – has become increasingly significant for defence production capacity. Allied defence companies, particularly those who are based in EU Member States, can now more freely use the EU’s financial instruments, including through the Security Action for Europe (SAFE) regulation and the Defence Omnibus Simplification. NATO is working towards achieving more coherence between NATO and the EU in a complementary manner, as well as staff-level collaboration on capability development within the EU’s defence initiatives.
A way forward
The degraded security environment in Europe and an alarming rise in geopolitical tensions globally requires a generational response from NATO. Since 2022, Allies have already taken important steps to turn the tide on defence production and provide the conditions for a stronger and more resilient defence industrial base. At the NATO Summit in The Hague, Allied Heads of State and Government have increased their commitment to strengthening our NATO’s deterrence and defence posture by committing to 5% of GDP for defence and defence-related expenditure in order to meet the Alliance’s ambitious new Capability Targets. A stronger and fairer NATO relies on an even stronger defence industry. Initiatives like the updated Defence Production Action Plan play an essential role in enabling collaboration and interoperability, protecting defence-critical supply chains, and providing long-term aggregated demand signals to the defence industrial base. Strengthening the Allied defence industry not only enhances our security, but brings tangible economic benefits and employment opportunities. Ultimately, it will help to make our Alliance more capable, and better able to deliver on its core task to defend one billion people across Europe and North America.
Kaja Karlson, Andreas Paraskevopoulos and Adam Dudas are employees of the NATO International Staff’s Defence Investment Division.
| Date Taken: |
06.26.2025 |
| Date Posted: |
06.26.2025 05:26 |
| Story ID: |
501544 |
| Location: |
BRUSSELS, BE |
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