Illustration © Osorio
Interview with General Walter Arnaud, Deputy Director, Industrial Affairs and Economic Intelligence Department, French Ministry of the Armed Forces By Hawa-Léa Sougouna
HLS: General, you have a background in land equipment and are currently the deputy director of the S2IE (for “ Service des affaires industrielles et de l’intelligence économique”), i.e. the department of the French Ministry of Armed Forces that oversees the Defence Technological and Industrial Base (DTIB). Previously, you also were a supply chain manager for the French Army and engaged in several military operations in Afghanistan, Iraq, and Africa.
How does the policy of “war economy” set in motion by President Macron in his speech last year at Eurosatory 2022, especially with regards to munitions and in terms of spending for example?
General Arnaud : Before explaining the term “war economy”, I would like to start with a brief introduction to share with you the position of the French ministry of the Armed Forces on this issue and more broadly on the French defense economy.
We have had – and we still have – to deal with two crises over the last three years. The first one was related to COVID-19 of course, and the second one to the current conflict in Ukraine. These two crises highlighted the need to monitor the defense industry and support it to meet new and urgent needs. Within the French Ministry of Armed Forces, the Industrial Affairs and Economic Intelligence Department, S2IE, has developed quite a unique experience and best practices to advise, support and follow the estimated four thousand industrial companies which belong to the DTIB.
We are engaged in a national effort to switch from a defense industry that has been till now rightsized, to a defense industry adapted to a war economy. Such a decision to revive a war economy stems from both the long-term strategic thinking about high intensity conflicts and lessons learned from the conflict in Ukraine. The defense industry needs to be able to sustain a long-term war effort if necessary, not only to support French armed forces, but also the ones of an allied country.
To define the meaning of war economy and translate it into action constitute a challenge: a challenge for the industry as it has to be able to produce more and faster to face the increased demand for equipment, ammunition, and spare parts necessary to recomplete the stockpiles if high intensity was to become the norm. It is also a challenge for the Armament Direction (DGA for “ Direction générale de l’armement”) and the DTIB as a whole as they need to find the ways and means to make it happen.
Small volume and quantity of orders lead of course to the downsizing of the production capacity and capability. The priority of armament programs was till recently to focus on research and development, while the French defense industry may have appeared to some investors and young talents as the fading remnants of the past.
The supply of raw material was dimensioned based on peacetime requirements, which meant very few quantities of raw material, as well as little time to acquire them. In addition, stockpiling has been reduced to the minimum following the best practices of the civilian sector and thanks to the low cost of foreign resources. Till the recent crises occured, the ideal goal was zero stockpile, lean management, Six Sigma, and so on.
If we have in France an innovative, robust, and competitive DTIB covering most sectors in defense, we do not have, however, enough capacities to satisfy the current demand, especially regarding ammunition. Among the reasons, defense industries do not have enough fallback options if their usual supplier fails to deliver (for example as far as Asian suppliers are concerned). This creates bottlenecks for the supply chain which make it more difficult to quickly increase production. The situation is even more complicated at a time when access to raw material may be limited, for example because of sanctions.
Another reason has to do with the fact that the defense sector suffers from a lack of qualified personnel, while the smaller ones have trouble accessing private financing both because of a certain antagonism towards defense in general, but also because of its specificities in terms of investment time, export license, foreign investment control, national sovereignty, etc.
So, what are the concrete actions we took at DGA and the Ministry of Armed Forces in response (and this is no lecture as each nation’s experience is very specific!)?
The French president’s speech established many goals and many action were deployed within the Ministry of Armed Forces, but also with defense companies, small and big, in France to build and develop solutions. Here are some examples of actions that have already been taken.
• First, France has been working on adapting its multiyear military program law (LPM 2024-2030) to take into consideration the new security environment we live in. It is also meant to provide a much-needed long-term visibility to industry and investors to allow long term investment in their production capabilities. This law should allocate, if voted by the Parliament, €413 billion over seven years.
• Second, we have identified a list of first-necessity equipment that would be needed the most in case of a high intensity conflict. Air defense and long-range artillery have been for instance identified as priorities in light of the Ukrainian war.
• Third, we have tried to adjust, and when it is possible to simplify, our technical specificities on the basis of a better evaluation of the time necessary for equipment production, as well as to adopt fast-track administrative processes.
• Finally, we must secure the supply chain or reduce the supply delays when it is possible. Our director at S2EI, general Alexandre Lahousse, said that “sovereignty is not autarky”. We are trying to find the balance between necessary and useful foreign sourcing and encouraging the security and the global economic benefits of European production and critical resources. For example, we are working with industry to identify and solve bottlenecks in their supply chain. The French Observatory of Mineral Resources for industrial sectors (OFREMI) was inaugurated in November 2022. Its mission is to analyze supply chain dependencies and identify secure supply alternatives for strategic minerals. Providing raw materials to produce powder and ammunition is crucial, because as we all know, succeeding is not only a question of money, but also depends on the strength of the supply chain and raw materials’ availability.
• We also try to increase recruitment and retention rate of personnel to maintain the proficient level of excellence of our industries and we are also talking about a reserve force for the armament industry. Such a reserve of the armament industry will be providing people to enhance production.
• We must also secure access to private financing for the DTIB to foster an appropriate level of investment since the public sector only represents about 10 or 15% of the mass of investment needed by the industry. So, without private financing this will become an issue. Finally, we must maintain the mainstream action of controlling foreign investment in the DTIB and, more than ever, stimulate innovative solutions.
– La France soutient activement tous les efforts déployés au niveau européen pour résoudre les problèmes liés à la chaîne d’approvisionnement et à la fourniture de matières premières, tels que le règlement européen sur les semi-conducteurs (« European Chips Act ») ou la législation sur les matières premières critiques (« European Critical Raw Materials Act »). Europe has a role to play on the matter of supply chain ammunition as it has a financial power to support and strengthen the French and European DTIB, for example, by increasing investment.
• And because we are also a member of NATO, we also think that NATO has a role to play in the current context, as a complement to Europe, not as a competitor. NATO countries and European members probably have the same difficulties: access to raw materials, supply chain management and military stockpile production. Même si les Etats-Unis ont beaucoup de moyens et de capacités, je pense qu’il est nécessaire d’explorer d’autres coopérations pour éviter la saturation et les pénuries.
HLS: I think everyone within the defense sector agrees that supply chain issues and the way to deal with raw materials are impacting defense industries and military program laws all around the world. But how do you deal with the issue of reversibility if the war in Ukraine stops (and we certainly hope this will happen rapidly)? How would the government and industry change their approach and program?
On the other hand, if another conflict arises and if France or another European country must go back to high intensity, how would it unfold for France, which is one of the few countries to rely on a multiyear military program law, one of the biggest strengths in its relations with the DTIB? What kind of answer would you give to some private sector companies, banking, and investment organizations, that are still today quite reluctant to financing the defense sector?
General Arnault: One should not forget that twenty years ago, the situation was the complete opposite. We were operating in a war economy because of the tension with the Soviet Union. . When the Cold War ended and when the War on Terror after 9/11 started, we did not need as many battle tanks or aircraft carriers, but we focused more on special forces for instance.
To get back in a war economy, of course we must produce for a long time because we must imagine that the war will have long term consequences. However, we also must prepare a scenario where the war stops. I think everybody here is advocating for this war to stop as soon as possible. Therefore, every action taken regarding the war economy includes reversibility mechanisms.
The end of the war in Ukraine is the optimistic scenario, but another situation is indeed also possible. For example, we are following very closely the situation in Taiwan.
Even if Ukraine turns out to be a long war, we decided not to focus only on air and land systems. We also promote many actions for naval systems as well as aircraft combat systems because we are not sure that another conflict which could be aerial or naval could not happen in the world. For obvious reasons, today’s efforts are on land defense systems and ammunition, but we also prepared some capabilities .
Guaranteeing reversibility is also the reason why, as far as qualified human resources are concerned, we chose a reserve-based mechanism. Because it means that in case of a high-level demand, we can recruit many reservists, while if such a high demand stops, we can reduce the number of days they are mobilized.
It is also true regarding financing issues. We must give incentives to the private sector to finance the DTIB, small and big companies, but also anticipate a reversibility mechanism. We must produce more and faster, but we must also prepare all the means and mechanisms to reduce production if necessary depending on the international situation.
Indeed, banks and investments companies are facing the same problem we do. They must follow compliance rules. They are also subject to reputational attacks of non-profit organizations, but I do not believe the banking system does not want to invest in the defense and armament industry. We must however make an effort in favor of banks, through associations such as COGES and GICAT, to convince people that they are making a mistake by using name shaming techniques against the defense industry.
Today, peace in Europe is guaranteed by a high level of armed forces by all members. IIt is a long-time effort, to change the mind of many citizens by convincing them that the defense sector is something important for peace and stability in Europe and, at the end of the day, for the finance sector as well.
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