European leaders agreed at a weekend summit that they must sharply increase defence spending to show US President Donald Trump that the continent can protect itself, igniting a major rally in European defence stocks on Monday.
As investors digested the astonishing pace of geopolitical changes, the sector rose for a second day after a US official said Trump had paused military aid to Ukraine following last week’s clash with its leader.
Shares in Thales reached an all-time high after forecast-beating earnings and sensor maker Hensoldt rose 16%, while other leading regional stocks posted single-digit gains.
Asked whether Europe’s companies could step up production quickly enough, Thales CEO Patrice Caine struck a cautious note.
“Does Europe have the necessary technology to produce the full spectrum of defence equipment that it needs? The answer is yes,” he told reporters, adding that France already supplied virtually all its own military needs.
However, he indicated that defence companies would be nervous about getting ahead of concrete spending plans.
“Production capacity adjusts naturally to the level of contracts. It is more a question for buyers, governments and armies. Will the declarations be backed by extra contracts?” Caine told reporters after posting annual Thales results.
“When the contracts come we will be ready, but there is no point in being ready too far in advance,” he told analysts.
There have been repeated complaints from the European defence industry that targets do not translate into orders, or else that higher spending fills the coffers of US rivals.
UK boost
Analysts too have been left pondering how quickly Europe can meet the challenge, given shortages in supply chains and labour capacity already felt broadly by defence and civil aerospace.
“Not immediately, not completely, but eventually possibly,” Agency Partners aerospace and defence analyst Sash Tusa said.
New European Union plans to increase military capabilities could mobilise close to €800 billion (US$841 billion), EU Commission President Ursula von der Leyen said on Tuesday.
After hosting the weekend summit, the UK on Sunday announced an order for 5,000 lightweight multirole missiles (LMM) from Thales UK for Ukraine, saying this would treble production at its Belfast factory. That follows an order for 650 of the air defence missiles for Ukraine last September.
“For Thales it represents the equivalent of about one year of revenues generated in the UK,” which is about £1.5 billion (US$1.91 billion) a year, Caine said.
Thales said it is in the process of tripling capacity for defensive radars as well as equipment for the Rafale fighter, while quadrupling the capacity for effectors or the core armament of a missile or weapons system excluding its sensors.
“The ramp-up is not that easy but you have seen our ability to grow our production capacity pretty quickly,” Thales CFO Pascal Bouchiat said.