Surge in Defense Orders for European Electronics Manufacturers

Orders Growing

In a climate where European electronics suppliers are feeling the economic pinch, an uptick in defense industry inquiries offers a glimmer of hope. Markus Aschenbrenner, CEO of Zollner Elektronik AG, noted a significant rise in inquiries and orders from the defense sector, signaling a potential shift in the company's focus. Zollner, a family-owned company, is Europe's largest provider of Electronic Manufacturing Services (EMS). Based in Bavaria, it produces electronics and complete devices for various industrial clients. However, European EMS firms like Zollner face stiff competition from global giants such as Taiwan's Foxconn, which reported a revenue of €58 billion in the last quarter alone, thanks largely to its production of iPhones for Apple and AI systems for Nvidia.

While companies like Zollner and GPV primarily serve industries like machinery, medical technology, and automotive suppliers, they are now looking to expand into defense. This shift is critical as these firms have been impacted by the struggles of major German automotive suppliers like Bosch and ZF. The revenue for Zollner dropped by about 15% in 2024 compared to its record year in 2023, and similarly, GPV's revenue also saw a decline. If this trend persists, European customers might become overly reliant on EMS providers from Asia and America. European electronics manufacturers are now focusing on defense contracts, even though Zollner currently derives only 4% of its revenue from the defense and aerospace sectors.

Martin Eisenhart, head of this division at Zollner, anticipates that this figure could double. The defense sector offers lucrative opportunities, with German Defense Minister Boris Pistorius announcing plans to invest €35 billion in space projects by 2030. Electronics account for about 20% of defense equipment, and this percentage could be even higher in space projects.

Market Analysis

Despite the potential, the defense business is slow to start for European EMS providers, largely due to their inexperience in outsourcing production to EMS companies. Franz-Xaver Feiner, Zollner's sales director, emphasizes that outsourcing is crucial for scaling production rapidly, a requirement frequently highlighted by policymakers. Bo Lybæk, CEO of GPV, points out that most defense contracts are still awarded to national suppliers, and the process of bidding for these contracts is both time-consuming and bureaucratically burdensome. According to a survey by ZVEI, 60% of the German electronics industry hasn't engaged with the defense sector, emphasizing the need for streamlined procurement processes within the Bundeswehr.

European EMS providers, despite being fragmented, with about 2,350 firms often generating only a few million euros in revenue, have the advantage of handling smaller, customized orders. This capability aligns well with the defense industry's needs, where products like fighter jets are produced in far smaller quantities than consumer electronics like smartphones. Zollner and GPV, with their multiple production sites across Europe, could indeed become viable options for defense contracts as they are well-suited to manufacturing small batches with high manual input. Zollner's manager Eisenhart states that the company is prepared to manufacture small quantities over extended periods, ensuring consistent production methods and component availability.

The future looks promising for European electronics manufacturers in the defense sector, with Aschenbrenner expressing optimism about quicker decision-making on orders. Lybæk also anticipates growth in GPV's defense business. **Further Reading:** Learn how Infineon profits from its China operations, generating $1,300 per vehicle.