2 The role of the defence industry in defence and security policy

2.1 Production capacity in the defence industry

In the past 30 years most European countries have downscaled their defence industry production capacity. Military contingency stockpiles have also been reduced as a result of the decreased security tensions in Europe since the end of the Cold War.

Russia’s war against Ukraine has increased the demand for defence materiel both directly and indirectly. There is a direct demand for all types of defence materiel, in particular for air defence systems and associated missiles and artillery ammunition. In general, the volume of materiel needed to support Ukraine in its battle to defend itself is enormous. There is also a widespread need for cutting-edge technologies. At the same time, there is an indirect increase in demand because the Allies and partners are having to replace donated equipment and expand contingency stocks as part of the effort to strengthen their overall defence capabilities in light of the irrevocable change in the security landscape.

As a result of the changed security landscape, Norway and other European countries must establish new and higher target figures for their national production and stocks. Expanding defence industrial production capacity is key to building up new contingency stocks.

The Norwegian defence industry has already invested in expanding its production capacity due to changes in the market. In conventional markets, an increase in demand leads to an increase in supply. The defence market differs from typical commercial markets in that suppliers of defence materiel are dependent on government contracts. Although most NATO countries are increasing their defence budgets, there is uncertainty in the market about how long the heightened demand will last. While there will be a need to replenish stockpiles irrespective of Russia’s war against Ukraine, there are concerns in the market that a likely decline in demand could in the long term lead to a risk of overcapacity before the investments yield a return.

Production to maintain military preparedness is essential and differs from purely commercial production. The government authorities are normally expected to bear the cost of ensuring preparedness, but at the same time, private investors must be willing to put up risk capital. Maintaining military preparedness thus requires the market and the authorities to work together.

As a rule, investments in increasing production are made once contracts have been signed. Under normal circumstances, the lapse of time between contract-signing and the expansion in capacity does not present a major problem. In today’s security situation, where there is significant time pressure, it is crucial to expand production capacity as rapidly as possible. This urgency is due to the critical importance of meeting Ukrainian, Norwegian and Allied needs given the changed security landscape.

Defence procurement is normally carried out through major long-term contracts that can be time-consuming to negotiate. Procurement of advanced defence materiel is costly and delivery times are long. In addition, except in the case of dual-use goods, it is not normally possible for suppliers to modify production processes to serve the civilian market in the event the demand for military equipment declines.

Norway’s national defence industrial strategy, the white paper Cooperation for Security (Meld. St. 17 (2020–2021)), sets the framework for the Government’s efforts relating to the defence industry. The focus is on maintaining and strengthening an internationally competitive Norwegian defence industry capable of developing, producing and supporting military equipment, systems and services in priority areas. However, lessons learned from the war in Ukraine, where defence production capacity is a crucial factor, are not reflected in the white paper. The wide range of equipment donated to Ukraine by Norway and its Allies must be replaced. At the same time, due to the deteriorating security situation, Norway and other Allied countries are having to increase their contingency stocks. The Government has therefore decided to draw up this roadmap to identify and coordinate existing and new measures in order to strengthen production capacity in the Norwegian defence industry.

2.2 What is needed to increase production capacity?

In the view of the Government, there are compelling reasons relating to security and defence policy for increasing production capacity in the Norwegian defence industry. Between 2022 and 2024 the authorities and the industry took decisions and implemented measures that will more than double production by Norwegian companies of explosives, propulsion systems and long-range missiles over the next two to three years. The companies report that current demand for these products is several times greater than can be accommodated under the planned production increases. Investments in the Norwegian Armed Forces under the Long-term Defence Plan are further driving national demand. The rise in international demand is also helping to strengthen the Norwegian defence industry.

The Government maintains an ongoing dialogue with the Norwegian defence industry. According to defence suppliers, inadequate access to capital, regulatory challenges, value-chain bottlenecks and a lack of trained personnel pose the greatest obstacles to scaling up production capacity. This is a multifaceted industry, however, so there is a need for customised solutions tailored to the individual companies. At the same time, the heightened demand for production inputs makes it imperative to begin scaling up capacity as rapidly as possible. To be effective, the relevant policy instruments and measures must be coordinated across sectors. The multinational nature of value chains makes it difficult to boost production using national measures alone, and this roadmap therefore identifies both international and national tools for expanding production capacity.

Norway is well positioned not only to continue scaling up its production of explosives, missiles, air defence systems, but also to increase production of potentially groundbreaking technology as well as artillery ammunition and other products. At the same time, there are some Norwegian defence companies that supply components that are not readily available otherwise on the market. The crucial importance both of the specialised expertise required for the production of these products and the specialised facilities and licences involved mean that the Norwegian defence industry has a competitive advantage and in some cases status as sole supplier. In this context it is important to prevent, as far as possible, Norwegian production capacity from becoming a bottleneck. To achieve this the Government will implement a range of coordinated measures to support and sustain increased production capacity. This will require the introduction of new policy instruments and measures and improvement of those that are already in place.

Insufficient access to capital is one of the challenges identified by various defence companies, but the companies report differing needs. The problem for some is that the commercial basis for investment is inadequate. Others have a need for early-stage capital in the form of R&D funding, subordinated loans or advance payments in connection with procurement by the Armed Forces. For certain small and medium-sized technology companies, it is difficult to acquire the capital required both to carry out R&D activities and to industrialise the products or components they have developed.

Some companies also point to regulatory obstacles that prevent them from rapidly scaling up production capacity. The regulatory issues that pose the greatest challenges vary from company to company and from product to product. Some companies report a lack of flexibility in how the authorities interpret applicable rules while others point to challenges associated with having to deal with multiple regulatory authorities. The latter is perhaps particularly problematic for small and medium-sized companies.

In the defence industry, just as in other industries, access to raw materials and components from international value chains is one of the factors limiting expansion of production capacity. Inadequate access to inputs from international value chains is a problem the companies have little control over. It may be difficult to obtain certain components and raw materials used in weapons systems and ammunition, such as explosives, semiconductors, special surface treatments and electronics. Various companies also report a shortage of, and long delivery times for, production equipment. The production of modern, advanced defence materiel requires inputs from multiple countries. The Norwegian defence industry’s value chains are closely intertwined with those of suppliers and customers in Europe and the US, for example. The value chains that Norwegian defence production is part of are vulnerable, and in some cases Norwegian defence production is essential to Allied production of key defence materiel.

Most of the companies also report a long-term need for better access to skills and qualified labour. In their dialogue with the Ministry of Defence, some parts of the industry have pointed in particular to the need for access to highly qualified personnel with expertise in science, technology, engineering and mathematics who are eligible to receive security clearance. While the need for such personnel is not unique to defence industry, it could be a limiting factor for expanding production in the long term. There will be a need to recruit many people rapidly in certain housing and labour market regions.

The Norwegian Defence and Security Industries Association (FSi) estimates that about 80 % of products and services produced by the Norwegian defence industry go to customers outside Norway. The remainder are provided to the Norwegian Armed Forces or are part of transactions between Norwegian producers. Norwegian defence companies are therefore dependent on long-term, predictable contracts with customers both in Norway and in Allied countries.

In order to meet Norway’s own needs for military equipment and components, it is crucial that production capacity is expanded among major suppliers to the Norwegian Armed Forces, whether they are located in Norway or another country. The Armed Forces will make active use of its procurement power to stimulate increased production capacity. However, there is also a clear expectation within NATO and between Allies that each country is responsible for expanding its national industrial base to meet the needs of Ukraine and the Alliance. This was a key point in the declaration issued at the NATO Washington Summit on 10 July 2024.

2.3 Priority measures

Some of the products manufactured by the Norwegian defence industry are either critical weapons systems in their own right or key components of other important Western weapons systems. The most prominent examples of the former are the NASAMS air defence system and the Naval Strike Missile/Joint Strike Missile (NSM/JSM), which are produced by Kongsberg Defence & Aerospace (KDA). Examples of the latter are rocket motors produced by Nammo and military high explosives produced by Chemring Nobel. These key Norwegian production lines form an integral part of vital international value chains for defence materiel.

The NASAMS air defence system is the most advanced complete weapons system produced by the Norwegian defence industry. The US company Raytheon produces missiles and radars for the system while KDA produces fire distribution centres and canister launchers. KDA is a systems integrator and primarily assembles components produced by its subcontractors. KDA also produces NOMADS (the National Manoeuvre Air Defence System), a key element in the Norwegian Army’s air defence capabilities. The Norwegian Armed Forces are already using these systems, and the new Long-term Defence Plan calls for stocks of both systems to be increased significantly. Strengthening Norwegian air defence will provide major benefits to Norway as a whole. The conceptual decision-making process for Norwegian air defence has incorporated both the NASAMS and the NOMADS systems, and stocks will now be increased. Steps will be taken to assess how to exploit the opportunities available in state and defence-sector project models to accelerate the procurement processes for these air defence systems as much as possible.

High explosives are essential in the production of most modern weapons systems and ammunition types. The traditional high explosive TNT is still in use. In addition, modern explosives such as HMX, RDX and NTO, which have higher explosive power and a number of other advantages, are being used. Chemring Nobel is one of two major European producers of HMX, RDX and NTO. European production of high explosives, especially HMX, falls far short of current needs. Production capacity at Chemring Nobel is set to more than double in the next two to three years with the help of support from the EU and the Norwegian authorities and financing provided by the company itself. Even so, there will be a much larger need that will remain difficult to meet due to the highly specialised expertise and production facilities required, particularly in relation to HMX.

The propulsion system is a crucial component of both air defence missiles and missiles designed for use against land and sea targets. In Russia’s war against Ukraine, the extensive use of drones has led to a dramatic increase in the prevalence of air attacks against military forces, civilian infrastructure and populations. This is the kind of attack that all countries will have to defend themselves against in future conflicts. Nammo supplies rocket motors for many of the critical air defence missiles manufactured in Europe and the US. Support from the EU and the Norwegian authorities together with financing from Nammo itself will enable the company to expand its rocket motor production capacity by about 150 % by 2027. Given the demand for rocket motors, however, it is likely that this increase will be insufficient and that production will have to be scaled up further. The Government will therefore consider additional measures to support further expansion of Nammo’s rocket motor production capacity.