European defense companies are entering a historic period of expansion, with significant revenue growth expected over the next decade. According to a report by financial research firm Rothschild & Co.
Redburn, these companies could increase their revenues from European clients by an average of 10.5% to 11.5% annually as countries commit to meeting NATO spending targets by 2035.
Analysts Olivier Brochet and Joe Orchard note that the fastest growth is expected in countries that previously spent below recommended levels, such as Germany, and in regions “uncomfortably close” to perceived Russian threats.
Military budgets rising, boosting orders
EU countries increased defense spending by 19% to a record €343 billion in 2024, with an expected rise to €381 billion in 2025, according to the European Defence Agency. This growth has already had a “significant impact” on order books, which have not yet fully translated into financial results and profitability.
Based on a projected defense spending of 3.5% of GDP in 2035, with 35–40% allocated to equipment, European investment in defense equipment could reach 1.2–1.4% of GDP — more than double current levels. Europe is expected to surpass the United States, which plans to maintain defense acquisitions at around 1% of GDP.
Industry revenues could triple by 2035
Currently, European defense companies fulfill approximately 30% of their order books, a figure expected to return to historical levels as production capacity expands. Redburn’s analysis of 11 major Western European companies between 2013 and 2024 shows that defense procurement typically converts into industrial orders within a year. Therefore, the budget increases in 2024–2025 are likely to materialize as actual orders in 2025–2026.
The average order book for these companies grew to the equivalent of 3.9 years of sales in 2023–2024, up from three years in 2013–2021. In 2024, about 65% of defense company sales came from Europe, with Naval Group and Rheinmetall having a higher share, and BAE Systems a lower one.
Investment priorities and technological innovation
European investments will focus on air defense, ground equipment such as tanks and artillery, deep strike capabilities, air superiority, drones and counter-drone technologies, naval and space domains.
Although drone technology is still “far from mature,” counter-drone capabilities have become as important as the drones themselves. The Ukrainian conflict shows that countermeasures can be developed in roughly three months, which may discourage large drone orders if perceived threats are not immediate.
Local strategies and international partnerships
Local companies disproportionately benefit from rising defense budgets, as states prefer to reinvest taxpayer money domestically, particularly visible in Germany and Eastern Europe.
Combined sales of the six main German companies — Rheinmetall, KNDS, Hensoldt, TKMS, Diehl, and Renk — grew 16% annually from 2020–2024, while six Eastern European companies — PGZ, CSG, Colt CZ, VMZ, Romarm, and WB Group — grew 33%, including significant mergers and acquisitions.
Active partnership and M&A strategies allow agile companies to capture a larger share of increasing budgets. Rheinmetall and Leonardo are notable examples, while Thales and BAE Systems strengthen their local presence. U.S. companies also collaborate with Europeans: Anduril with Rheinmetall, Kratos with Airbus, Lockheed Martin with Rheinmetall, and RTX with MBDA.
Risks and challenges
Public support for Europe’s rearmament cannot be guaranteed, especially if it involves sacrificing social security. Upcoming elections may test voters’ resolve, and regime changes could affect investment plans.
Another risk is downward pressure on prices if Russia’s war in Ukraine ends, potentially flooding the market with battle-tested products such as drones and munitions at low prices. Diversified groups like Thales and BAE Systems, and Rheinmetall’s investments in rockets, satellites, and naval construction, could help companies withstand post-conflict pressures.
The European defense industry is thus experiencing unprecedented expansion, with potential revenue growth of up to three times by 2035, but also facing financing, geopolitical, and technological challenges.
