Findings and recommendations for supporting measures for SMEs 22 October 2009 Berlin Dagmar Metzger H1- Defence, Ae

2. Difficult environment for SMEs Currently no European Defence Market Difficult for newcomers to get access to well established existing supply chains Lack of awareness about contract opportunities Lack of sufficient communication Financial crisis Financial crisis: difficult for SMEs to access credit on affordable terms or at all Financial crisis: difficult for SMEs to access credit on affordable terms or at all

4. Directive on Defence Procurement new rules adapted to the specificities of defence, also applicable to sensitive contracts in the field of non-military security Article 21: sub-contracting published on 20 August 2009 in the EU Official Journal MS have 2 years for national implementation EU Commission will pro-actively support the implementation process

5. Directive on Intra-community Transfers of Defence Goods Facilitating intra-community transfers of goods Global and general licensing, individual licences shall be exemption. Published on 12 June 2009 in EU Official Journal MS have 2 years for the implementation plus 1 year for the full application ures: About 12000 applications for an intra-community transfer per year. In 2004: No single application was denied. In 2005: no single application was denied. In 2006 only 3 applications have been refused.ures: About 12000 applications for an intra-community transfer per year. In 2004: No single application was denied. In 2005: no single application was denied. In 2006 only 3 applications have been refused.

6. Advantages for SMEs of the two new directives On ICT: no longer time consuming and bureaucratic procedures to apply for an individual licence On Procurement: more advertised contract opportunities, new sub-contracting rules, new supply chains

7. A strategy for a stronger and more competitive European defence industry 1. Sets out the Commission's overall industrial policy for the sector 2. Highlights future workstrands Pooling research and demand Control of assets Security of Information European Defence Standardisation Handbook Relations with non-EU partners Opportunities for SMEs

8. Current Commission activities for SMEs in the defence sector- study Study on the competitiveness of European SMEs in the defence sector 10 months study Divided into two parts (mapping and statistics- recommendations for policies and measures) results delivered on 30 September 2009 aim to get better overview on SMEs in the defence sector and to receive recommendations for further measures/policies For example: Mapping of European SMEs in the defence sector, principal barriers- if any- existing for SMEs in the defence sector to participate efficiently in the Eruopean market (IPR, participation to Public Private Partnership, long-term contracts with international defence companies), situation of SMEs in competing with regard to non EU countires, measures undertaken by MS to support SMEs, 2)a) do SMEs operate on a level playing field(access to information on published procurement tenders, with regard to involvment in supply chains, to technological capabilities��) b) Supply chain analysis: impact of contractual clauses that force the prime contractor to have fair and open competition in supply chain, percentage of subsidiaries of large companies that compete as SMEs in the defence sector, percentage of SMEs operating in the 1st, 2nd and 3rd tier of supply chain levels c) Geographical aspects: mapping of the geographical distribution of SMEs, and analysis in particular whether geographic proximity to the system integrator is an important factor for business, analysis why most of the European defence production is in six countries (LOI nations) and not more widespread. 2nd part: Recommendation for measures on a national as well as on a European basis Improvement of competition in the supply chain Encouragement of prime contractors to organize the supply chain in such a way to widen the geographical distribution of work in more MS Improved access for SMEs to European defence equipment procurement procedures Improved awareness of sub-contract opportunities and the availablity of more information aim to get better overview on SMEs in the defence sector and to receive recommendations for further measures/policies For example: Mapping of European SMEs in the defence sector, principal barriers- if any- existing for SMEs in the defence sector to participate efficiently in the Eruopean market (IPR, participation to Public Private Partnership, long-term contracts with international defence companies), situation of SMEs in competing with regard to non EU countires, measures undertaken by MS to support SMEs, 2)a) do SMEs operate on a level playing field(access to information on published procurement tenders, with regard to involvment in supply chains, to technological capabilities��) b) Supply chain analysis: impact of contractual clauses that force the prime contractor to have fair and open competition in supply chain, percentage of subsidiaries of large companies that compete as SMEs in the defence sector, percentage of SMEs operating in the 1st, 2nd and 3rd tier of supply chain levels c) Geographical aspects: mapping of the geographical distribution of SMEs, and analysis in particular whether geographic proximity to the system integrator is an important factor for business, analysis why most of the European defence production is in six countries (LOI nations) and not more widespread. 2nd part: Recommendation for measures on a national as well as on a European basis Improvement of competition in the supply chain Encouragement of prime contractors to organize the supply chain in such a way to widen the geographical distribution of work in more MS Improved access for SMEs to European defence equipment procurement procedures Improved awareness of sub-contract opportunities and the availablity of more information

9. Methodology of the contractor Six case studies, one on each country: France, Italy, the Netherlands, Poland, Romania and the UK Examined: The national economy The nature of the defence industries within the country Defence-related SMEs in the country Conducted using desk-based research

10. Methodology of the contractor Seven interviews with TAs from: France Italy Poland UK Three Prime interviews covering all the following areas: Electronics Land Air

11. Problems/Challenges for the contractor Difficult to get reliable data Low answering rate; � questionnaire fatigue� Focus on 6 MS- not a full picture of SMEs in Europe EDA CoC and EC Defence Package �too early� for assessment Data gathering: Statistically speaking there is no such entity as the �defence sector� hence there are no relevant official data on ist turnover, exports or imports. Also the membership of trade associations that are known to have interests in defence is not sufficient for further assessment. There were limitations on open source data on defence in many MS and a lack of information available from certain trade associations. Some NDIAS do not know enough the industrial landscape of their country. Focus on 6 MS: we therefore decided to have the conference and workshops in other than the selected countries EDA CoC: 1 July 2006 Defence Package: December 2007Data gathering: Statistically speaking there is no such entity as the �defence sector� hence there are no relevant official data on ist turnover, exports or imports. Also the membership of trade associations that are known to have interests in defence is not sufficient for further assessment. There were limitations on open source data on defence in many MS and a lack of information available from certain trade associations. Some NDIAS do not know enough the industrial landscape of their country. Focus on 6 MS: we therefore decided to have the conference and workshops in other than the selected countries EDA CoC: 1 July 2006 Defence Package: December 2007

12. Findings of the contractor Limited knowledge about defence SMEs European dimension (LoI = 87% of EU defence production, but only 52% of defence SMEs) Lower market share than in entire manufacturing (11 � 17% vs. 39%) Generally, rather high level of satisfaction in SME community

13. Factors affecting the competitiveness of defence-related SMEs Lack of accessible information and potential clients: SMEs less aware of future capability requirements and upcoming business opportunities Regulatory failure: offset policies and export regulations that favour domestic SMEs, excessive administrative burdens, costs associated with IPR protection and user rights create inefficiencies in the defence market independent SMEs appear to be at a clear disadvantage to subsidiaries Prime and Tier 1 companies find it difficult to identify reliable suppliers, resulting in preference for existing suppliers, subsidiaries or possibly suppliers located close to the contractor independent SMEs appear to be at a clear disadvantage to subsidiaries Prime and Tier 1 companies find it difficult to identify reliable suppliers, resulting in preference for existing suppliers, subsidiaries or possibly suppliers located close to the contractor

14. Conclusions of the contractor Barriers to entry: Defence supply chains dominated by well-established relationships insiders are rather secure Access to foreign markets: tendency to think national rather than to think EU or to think global, offset policy, lack of awareness about opportunities in foreign markets and by export regulations Figures: 20% of contracts published in the EDA Electronic Bulletin Board were won by a foreign bidder. But of the contracts that were won by SMEs this proportion was only 7%.Figures: 20% of contracts published in the EDA Electronic Bulletin Board were won by a foreign bidder. But of the contracts that were won by SMEs this proportion was only 7%.

15. Conclusions of the contractor Access to finance: Not raised as a major problem Upfront costs and the size of contracts: appear to be more important challenges for relatively intensive R&D companies the size of contracts is only a concern for the independent SMEs. No evidence that accessing finance any worse for SMEs operating in defence than SMEs in other sectors

16. Strengths of defence related SMEs: Flexibility and speed Inventiveness Specialised knowledge (i.e. manufacturing processes such as precision machining or electronics) Established position within supply chain; enjoying positions of trust and valued by their customers SWOT analysis: strengths, weaknesses, opportunities and threatsSWOT analysis: strengths, weaknesses, opportunities and threats

17. Weaknesses: Not in position to develop, manufacture and provide through-life support for complete defence system Cannot export sub-assemblies independently of the primes Delay between investment in R&D and achieving return can create cash flow problems Insufficient capital may limit their scope to establish positions in export markets

18. Opportunities: Might be able to develop an international position by exploiting their specialised knowledge and skills Create opportunities to collaborate with SMEs from other countries Might enable them to exploit more of the economies of scale available in defence equipment industry

19. Threats: In a more integrated EU defence market their primes may lose market share or be acquired They could lose their place in supply chains as EU market opens up, or because of offset agreements

20. Recommendations of the contractor At EU level EDA and ASD: coordinating activities of the national and sectoral trade associations to ensure - dissemination of best practice - more effectively use of these channels to disperse information across the whole of the EU should play a greater role in coordinating the activities of the national and sectoral trade associations to ensure the dissemination of best practice as well as to ensure that these channels are used more effectively to disperse information across the whole of the EU.should play a greater role in coordinating the activities of the national and sectoral trade associations to ensure the dissemination of best practice as well as to ensure that these channels are used more effectively to disperse information across the whole of the EU.

21. Recommendations of the contractor At national level Defence authorities: improve information dissemination regarding future capability requirements to SMEs - through promotion of, and active engagement with, trade associations - through direct interaction with SMEs. should improve information disswemination regarding future capability requirements to SMEs, through the promotion of, and active engangement with, trade associations and through direct interaction with SMEs. should improve information disswemination regarding future capability requirements to SMEs, through the promotion of, and active engangement with, trade associations and through direct interaction with SMEs.

22. Recommendations of the contractor For trade associations Monitoring and providing a picture of numbers and nature of SMEs operating in the defence sector Improving information dissemination regarding public procurement opportunities for SMEs

23. Recommendations of the contractor For trade associations Facilitating interactions between companies to help identify subcontractors opportunities with Primes Offering support and advice on procurement processes and administrative and legal issues

24. Summary of the proposals from participants Creating a level playing field without subsidies Sufficient financing instruments in times of financial crisis Strengthen R&D and innovation Special contract for SMEs that reduce their financial risks

25. Summary of the proposals from participants Primes should be directed to create work shares for SMEs at the very beginning of a project Support of participation in the standardisation process Better involvement in research projects Regular roundtables between governments and industry Governments should define their role as service providers and not only customers.Governments should define their role as service providers and not only customers.

26. Summary of the proposals from participants Timely payments for SMEs (max 30 days after invoice) More transparency of tenders �Codex of behaviour on offset� as EU legislation Public data base with list of SMEs and their capabilities Bidding process with a minimum of paper

27. Summary of the proposals from participants Harmonisation of export regulations Establishing permanent contacts to other stakeholders Training qualified and competent employees in the sector Governments should review regulations for defence sector to involve SMEs in procurement and research

28. Thank you! Dagmar Metzger EU Commission DG Enterprise and Industry Dagmar.Metzger@ec.europa.eu