Defence industrial policy: A potential new strand of Estonia’s ‘soft power’ within NATO and the EU?

In mid-February, the Estonian Ministry of Defence (MoD) rolled out its defence industrial policy for 2013-2022 – a document outlining the ends, means and ways of building a defence industrial base in Estonia. The document responded to the expectations of a number of enterprises seeking to develop products and services for the armed forces and for security organisations such as the police and the border guard. Commendably, and very much in the spirit of ’broad-based defence’ and comprehensive security, the strategy includes the Estonian Ministry of the Interior and its agencies as important stakeholders.

Estonia does not have defence industry in its full and proper sense. There are some companies which successfully adapted their products and services to meet the needs of military customers, foreign and domestic. The fact that an Estonian company specialising in information security and management, Cybernetica, managed to secure a contract with the U.S. Defense Advanced Research Projects Agency gives evidence of its technological competence. The MoD’s past investments in research and development (R&D) have also helped to prepare the ground for some commercial start-ups and spin-offs that are eager to conquer security and defence markets with their products – UAVs, jammers of improvised explosive devices, and surveillance sensors. But these are bits and pieces which do not amount to a defence industrial base of any significance.
There are great challenges that lie ahead in this direction. First and foremost, Estonia’s market is simply too small to achieve sustainable growth of revenues in the long term; so, companies have to pursue opportunities internationally. Indeed, most of them will have to set their eyes on international markets from the very outset, with Estonian governmental organisations serving, when necessary, only as initial ‘reference customers’. The new strategy rightly places emphasis on international competitiveness. However, Estonian industry and policymakers will have to acknowledge three important issues in this regard.
First, the country is not going to be able to design and build sophisticated platforms and systems – this is the preserve of the so-called defence ‘primes’. Instead, Estonian companies will have to focus on becoming an integral part of multinational supply chains, producing components, devices and, at most, subsystems for larger platforms and systems (i.e. being ‘third tier’ suppliers). Second, even to achieve that, they will have to vigorously seek international partnerships, to become part of knowledge networks spanning national borders and to accept that most of them will eventually be owned or partly-owned by larger foreign defence contractors (with the attendant risk of being acquired only for the purpose of ‘poaching’ their intellectual property). And, third, they will have to carve out and then focus on exploiting a few niches, building on particular areas of science and technology where Estonia demonstrates world-class excellence. Very few private and public stakeholders of the new policy are currently thinking along these lines.
The second big challenge will be how to connect defence R&D investments with commercial opportunities. The new policy, again, very rightly points out that industry and R&D have to be closely interlinked and that industry has to engage researchers and engineers early on in the innovation chain, so that new technologies do not end up in the technology ‘valley of death’. However, to start with, there must be a critical mass of R&D performed in key areas of specialisation. Much can and should be said about the attitude of various defence and security decision-makers towards the role and importance of R&D in general. At this point, it will suffice to say that with a meagre 0.37% of the defence budget spent on R&D in the area of defence investments – about five times less than the established EU and NATO benchmark for this field – and without the private sector’s input into defence-related R&D to match the state’s contribution, Estonia should forget about its own high-tech innovative and competitive defence industry. The nation will simply lack the knowledge base necessary for that. Even cyber security and cyber defence – which have now become Estonia’s distinct trademarks in security and defence policy within NATO and the EU – will eventually become just empty words if no corresponding investments are made in new applied knowledge and experimental technology development.
Companies will have to forge a very close partnership with the Estonian Defence Forces (EDF) and various civilian security organisations in order to ‘sense’ the needs of end-users, to get new ideas on how to serve them, to demonstrate and test their prototypes and to receive useful feedback. For that to happen, these organisations should themselves become reasonably good at concept development and experimentation, testing and evaluation, operational research and ‘lessons learned’ activities. In addition, they should be relatively competent in in-house technology management. (All this, I must underline, is crucial not only for interaction with defence industry, but also for capability growth and innovation in these organisations.) There is, however, much to be done in this regard, particularly in the civilian security agencies, but also in the EDF.
It is also impossible to commercialise R&D results without relevant financial inputs, part of which will be allocated from the public purse as a measure of risk-sharing and channelled through the established mechanisms of enterprise innovation support. The mechanisms will have to rely on solid and trusted sources of expertise about international security and defence markets if they are to adequately assess business plans of fledgling security and defence enterprises. It will be a challenge for organisations like EAS (Enterprise Estonia) and the Estonian Development Fund to develop such expertise, given that general understanding of those markets is rather thin in Estonia – be it in the governmental, public or private sectors. It is unclear how Estonia’s defence industrial policy will address this matter.
Last but not least, the nature of the markets is a challenge in itself. Purely defence-oriented markets and purely civilian security-oriented markets are becoming too limited, particularly because financial austerity acts as a powerful constraint on the purchasing power of various governmental organisations. So, it makes a lot of sense to try and develop products and services which serve the needs of both civil security and defence end-users, especially where the underlying (‘bridging’) technology is the same. On the other hand, defence customers differ from security customers in many ways. As pointed out in an ECORYS study , their planning cycles and horizons, capability development practices, the nature of operational and technical requirements, attitudes to cost-performance balance and their ways of managing relations with suppliers are often dissimilar. This means that marketing strategies and capabilities of enterprises have to be tailored to particular market segments, which is a difficult feat to accomplish for small and medium-sized enterprises with very limited resources.
So, considering the public interest, is it worth the hassle? After all, the Estonian end-users – the EDF, the police and the border guard plus other security and safety organisations – can survive perfectly and even prosper without an indigenous national industry because they can procure ‘off-the-shelf’ products through international tenders (by the way, it would be easier for these organisations to make smart choices in this field if they performed relevant applied research and possessed in-house technology competence). There is certainly no shortage of willing foreign suppliers, although even Estonia’s closest allies are not ready to fully share the most sensitive and advanced technology due to their national security concerns and problems with trust.
True, it is certainly beneficial to have nimble and trusted companies around, able to provide quick customised solutions – be it new computerised fire control systems for old artillery pieces, spare parts for vehicles no longer available from old suppliers (especially if Direct Digital Manufacturing takes off and starts to support defence logistics), UAVs with data-links that are compatible with national regulatory communications standards, or military apps for smart phones used by soldiers. But do such companies have to originate in Estonia? Would they always outperform foreign contractors if the latter are able to offer better prices and services? Does the Estonian government really want to see more fragmentation in European markets along national lines and more demand and supply side nationalism at a time when cross-border industrial collaboration and consolidation are sorely needed ?
At least from the defence policy perspective, there are two strategic reasons why a security and defence industry based in Estonia should be supported (not necessarily financially). A specialised sector with extensive know-how in some critical technology areas of high interest to the allies with respect to their security and defence policies would be instrumental in increasing Estonia’s visibility in NATO and in the EU, especially in armament and capability development communities. If a country can contribute to pan-European or transatlantic projects not only smart policy ideas and some money, but also novel technological solutions and relevant industrial capacities, its profile appears rather more impressive. This also enables us to strengthen our alliances.
Furthermore, national security is enhanced by a well-connected security and defence industry that is integrated into larger multinational defence technology ‘ecosystems’ or even receives long-term investments from the ‘primes’ (what a coup it would be if Boeing, BAE Systems, EADS or Lockheed Martin established a foothold here!). It fosters interdependence among influential players who have leverage over their own national governments – this would be a significant plus if allied solidarity needed a little bit of stimulation at some point in the future. There are many ways for accumulating and exercising ‘soft power’; being a visible and valuable (perhaps even indispensable) player in critical market niches of security and defence technologies, products and services is certainly one of them. Of course, this option would not be as potent as those at the disposal of, for instance, Berlin or Paris through their arms exports and technology transfers (a good article on the so-called ‘Merkel doctrine’ is here ), but it would still be handy if deftly used by Estonian defence policymakers in intra-alliance bargaining.
The new defence industrial policy is a good start, but it will take a lot of fine-tuning, patience, goodwill and smooth collaboration between all stakeholders to fulfil its promises. Estonia has already demonstrated that it is able to be a start-up lab for innovative companies in several sectors such as ICT and biotechnology. Now, this success must be extended to the field of security and defence products and services, and scaled up considerably – for the sake of national security and embedding Estonia deeper in the European and transatlantic security and defence structures as much as for the sake of new jobs and profits.