European defense contractors have focused on producing their submarines and naval assets to meet growing demand for advanced underwater systems, amid geopolitical tensions spurring increased spending military.
European submarine manufacturers have benefited from the 6.8% annual increase in global military spending to $2.4 trillion in 2023. As geopolitical tensions escalate and priorities in defense changes, the global submarine market will reach $13.3 billion by 2029, up from $9.21 billion in 2024, according to a Mordor Intelligence report.
“Governments around the world are increasingly interested in advanced submarine systems,” Mordor Intelligence said. “Global demand for submarine systems is booming, particularly in roles such as naval intelligence and mine clearance operations.”
An increase in terrorism in international waters and the need for underwater reconnaissance in competing territories is also driving demand for naval assets, according to the Mordor report. “A notable trend is the adoption of unmanned submarines for enhanced threat detection,” he said.
The ongoing war in Ukraine and military strikes between Iran and Israel have boosted defense spending in Europe. They increased by 16% to reach 552 billion euros in 2023, according to the Stockholm International Peace Research Institute (SIPRI).
Increase in defense spending in Europe following pressure from Trump
Overall, NATO spending increased by 11% in 2024, compared to 3% in 2023, according to the International Institute for Strategic Studies. That growth was even stronger among NATO’s European members, which increased their overall military spending by 19% in real terms in 2024, he said.
NATO countries have accelerated their military spending to combat Russian threats in Eastern Europe. They acted after Donald J. Trump criticized them for failing to meet their defense spending commitments.
If the former president wins today’s U.S. election, NATO members would fear that Trump could take a hostile or isolationist approach if alliance member countries do not step up their military spending.
So far, the number of NATO members meeting the commitment to spend 2% of their GDP on defense spending has increased. Only four NATO members achieved this objective in 2017, compared to 23 expected this year.
To underline this European change, Germany and the United Kingdom signed a defense agreement on October 22 aimed at strengthening security in Europe “in the face of growing Russian aggression and growing threats.”
“We must not take security in Europe for granted,” said German Defense Minister Boris Pistorius. “With projects in air, space, sea and cyber, we will together strengthen our defense capabilities, thereby strengthening the European pillar within NATO.”
The Trinity House deal includes a Rheinmetall (OTC:RMBY) artillery gun factory using British steel produced by Sheffield Forgemasters, UK. It will support more than 400 jobs and represent a boost of almost half a billion pounds to the UK economy.
European spending on submarines increases in a dangerous world
The UK also boosted its defense investment with a £560 million contract to upgrade HMS Victorious, a Vanguard-class ballistic missile submarine, in March.
Awarded to Babcock International, a leading provider of naval support and ship maintenance, the investment supports the UK’s continuous sea deterrent, a vital part of its national security.
“In an increasingly dangerous world, we must continue to invest in one of our most important assets, our nuclear deterrent,” British Defense Secretary Grant Shapps said at the time of signing the agreement. ‘agreement.
Poland plans to allocate 4% of its GDP to military spending by 2024, focusing on the acquisition of new naval assets under the reconfigured Orka submarine program. This initiative aims to acquire up to four new submarines, with the South Korean group Hanwha and the British Babcock positioning themselves to meet Poland’s needs.
European defense contractors benefit from submarine spending
European defense contractors, such as Saab AB, BAE Systems and France’s Navel Group, benefit from the effort to develop European naval capabilities.
Saab (OTC:SAABF) forecasts organic sales growth of between 15% and 20% for the year, targeting the high end of the range in 2024. The company plans to double its production capacities by the end of 2025 and maintain positive operating cash flow by the end of next year.
Saab’s stock is up 43% since the start of the year, driven in part by strong demand for its Saab Kockums submarines and international partnerships.
“We have seen extreme interest in Saab Kockums fighting stars,” Chief Executive Officer Micael Johansson said during the third-quarter earnings call. “The mix is still good in Saab Kockums when it comes to surface activities, underwater activities, and of course, submarines.”
British defense giant BAE Systems (OTC:BAESY) will build Australia’s nuclear-powered submarines under the AUKUS partnership, alongside ASC Pty Ltd. BAE Systems signed a $92 million contract with the US Navy on October 3 for Virginia-class submarines.
Since the start of the year, BAE Systems stock is up about 13%.
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