Direct supply, a prime partnership, and a joint venture divide delivery responsibility, capital and technology rights in different ways. The better starting point is the capability the customer must hold, followed by the economics of providing it.
Andy Demir · 17 October 2026 · 15 min read
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Executive Summary
European defence market entry becomes more precise when localisation is broken down into the capabilities it actually comprises: production, systems integration, design adaptation, maintenance, and support. Sweden's four French-built frigates, Poland's SAN counter-drone consortium and the planned EuroPULS joint venture allocate those responsibilities differently. Public announcements cannot show which arrangement earns the best margin, but they do show that the location of final assembly is an incomplete guide to what the customer values. Recent McKinsey analysis adds a financial dimension: fewer than 20% of tier-two to tier-four defence suppliers receive advance payments on most of their contracts, against 45% of primes and tier-one companies, so a localisation promise can move pre-funding onto the firms least able to carry it. The opportunity for a supplier lies in sequencing: using established production where delivery confidence matters, building the local integration and support capability the customer needs, and committing deeper capital where eligibility rules or sovereign requirements make it essential. Through October 2027, I expect differentiated work packages of this kind to remain a common route into cross-border European procurement, with funded work, and not announcements, as the test.
In This Essay
- A French production line, a Swedish capability
- Localisation contains several different decisions
- Eligibility comes before commercial preference
- The route changes the economics of the programme
- Sovereignty has a strong economic case
- The next year will test the work packages
- A practical comparison before commitment
- The discussion worth adding to the investment paper
- Questions for the C-Suite and the Board
- References
- About Andy Demir
A French production line, a Swedish capability
On 1 October 2026, Naval Group cut the first steel for Luleå, the first of four defence and intervention frigates (FDI) ordered by Sweden, at its shipyard in Lorient. The contract had been signed in Stockholm on 31 August, less than four months after the Swedish government selected the design, and the first delivery is scheduled for 2030. Naval Group says the Lorient line is configured to deliver two FDI a year and that 13 have now been ordered by three NATO navies. Steel cutting a month after signature is encouraging evidence of mobilisation; integration, delivery and acceptance still lie ahead (Naval Group, 2026b, 2026d).
The Swedish proposition is more interesting than the construction site. The government's announcement of 19 May explained that delivery time and the reliability of delivering a complete ship system with its air-defence capability had weighed heavily, and that the shortest delivery required a design already developed and in production. The same announcement listed the Swedish subsystems the ships will carry: Saab's Torped 47, the RBS 15 anti-ship missile, the G1X radar and the Trackfire close-in system, together with 57 mm and 40 mm guns from BAE Systems Bofors. According to FMV's account of the contract, as reported by Navy Lookout, Naval Group acts as overall system integrator and delivers the ships ready for operational use. Support runs on its own track: in February Naval Group signed a memorandum of understanding with Oresund Drydocks to develop a frigate maintenance facility in Sweden, and on 12 October it signed a research agreement with the Marine Technology Centre of Sweden (Regeringskansliet, 2026; Navy Lookout, 2026; Naval Group, 2026a, 2026e).
French hulls, Swedish weapons and sensors, French integration and a planned Swedish support base therefore sit inside one programme. The published material does not disclose every contractual responsibility or technology right, and a memorandum of understanding is not yet a funded support contract. The pattern is still clear enough to reframe the question a supplier should ask before entering a European defence market. My reading is that the commercial question starts with what the customer must be able to do with the capability: field it, integrate it into national systems, sustain it and adapt it under the conditions that matter. This assessment rests on public evidence; my own operating experience in the sector predates 2022, and I use it to frame questions about the evidence, never to answer them.
For a supplier considering a new market, the Swedish case shows that established international production and national industrial participation perform different roles within the same procurement. The opportunity is to identify those jobs before choosing the corporate structure through which to deliver them, because a factory, a consortium and a support agreement each solve a different problem.
Localisation contains several different decisions
Manufacturing location is visible, so it tends to dominate the discussion, yet it reveals only part of how capability is allocated. Systems integration determines whether equipment works inside the customer's architecture. Design rights determine who can authorise changes and under which restrictions. Maintenance capability determines what can be repaired in-country, what technical data is available, and which spares are available. These responsibilities can sit in different places, and the contractual connection between them matters as much as their physical proximity.
Poland's SAN counter-drone programme illustrates the value of complementary capability. The contracts signed with the Armament Agency on 30 January 2026 name Polska Grupa Zbrojeniowa (PGZ) as consortium leader and Kongsberg Defence & Aerospace as partner, with the Polish company Advanced Protection Systems (APS) as a key subcontractor. Kongsberg describes the programme as 18 counter-drone batteries and values its own share at about NOK 16 billion. It says the APS command-and-control architecture will tie the sensors and effectors together and integrate SAN with Polish national air defence, and that it is preparing to invest in manufacturing capacity in Poland (Polish Ministry of National Defence, 2026; Kongsberg, 2026).
The commercial significance lies in where the integration task sits. A national partner here provides an operational capability the customer needs, which is far more than a local address. That changes how a foreign supplier should value the partner's share of the economics, because the contribution is measured against the programme responsibility it carries. Public announcements establish the intended architecture, though, and say nothing about profitability, delivery performance or the complete division of intellectual property.
EuroPULS shows a different structure. In March 2026, KNDS and Elbit Systems Land agreed to establish EuroPULS GmbH, a planned 50:50 joint venture headquartered in Kassel, to market the rocket-artillery system to European forces. KNDS describes Elbit contributing its PULS launcher and KNDS its fire-control technology and European customer base. This is evidence of an intended shared commercial structure, and it is not yet proof of completed industrial integration or realised returns (KNDS, 2026).
These cases suggest a more useful order of comparison. First identify the activity that requires local competence, then the rights needed to perform it, then the investment needed to make it dependable. Only after that does it make sense to ask whether a contract, a consortium, a licence or shared ownership provides the strongest arrangement. Shared ownership suits partners who need continuing joint investment and joint decisions; it also creates governance and exit obligations that a narrower work-package agreement avoids.
Eligibility comes before commercial preference
Sometimes the industrial structure is a choice among feasible alternatives, and sometimes the funding route constrains it from the start. The EU's Security Action for Europe (SAFE), adopted in May 2025, offers up to €150 billion in loans for defence procurement. In SAFE-funded contracts, components originating outside the EU, the EEA-EFTA states and Ukraine may account for no more than 35% of the estimated cost of the end product's components. For the second category of products, which includes air and missile defence, maritime capabilities, drones, and counter-drone systems, the contractor must also be able to decide on the definition, adaptation, and evolution of the design. A European corporate presence alone cannot establish that an offer qualifies (Council of the European Union, 2025). SwissTechnic has examined how the SAFE, EDIP and origin rules reshape access in an earlier essay on the defence capacity Europe is prepared to reward; the point here is narrower.
SAFE is one funding framework and not the rulebook for every European defence purchase, and none of the programmes discussed here should be assumed to use it. The consequence for a supplier is still direct. The funding route, the procurement conditions, and the actual distribution of rights belong in the feasibility assessment before a preferred partner is chosen, because a structure that looks commercially attractive may need to be redesigned once those conditions are examined. It is worth noting that the stricter design-control test applies to precisely the kinds of capability the SAN and Luleå programmes involve.
This is also an exercise in clarity with the prospective partner. Both sides need to know which requirements come from the funding instrument, which from the national customer and which from their own appetite for risk. Without that separation, a broad commitment to local participation can acquire obligations nobody priced. A precise statement of the capability to be delivered gives engineering, finance and commercial teams something concrete to assess.
The route changes the economics of the programme
A direct contract keeps the supplier close to the customer and preserves a larger share of system revenue. It also places responsibility for integration, acceptance, warranty, and support on the supplier's side of the table. Selling through an established prime reduces some of that exposure and gives access to a programme architecture the customer already understands. The price is a smaller share of margin, less information about the end customer and less freedom in later negotiations.
A local industrial partnership adds its own questions. Who pays for tooling, qualification and the first stock of spares? Which party carries inventory while the customer completes acceptance? Who funds an engineering change, and who earns the revenue it creates? A joint venture gives these activities a shared corporate home without settling them, and until the underlying obligations are written down, an ownership percentage says little about the cash burden.
McKinsey's analysis published for ILA in June 2026 shows why that burden deserves attention. The demand impulse, it reports, is reaching primes and tier-one suppliers, while tier-two to tier-four companies report weaker order visibility and more cautious investment plans. Fewer than 20% of those deeper-tier suppliers receive advance payments on most of their defence contracts, compared with 45% of primes and tier-one firms, leaving smaller companies to pre-finance more of the ramp-up with less certainty in planning. The press release does not set out the sample behind these figures, so they describe a reported pattern across the supply base and cannot speak to any particular bidder (McKinsey & Company, 2026).
The second-order effect is easy to miss. A localisation commitment can place new qualification and capacity obligations on the industrial system least able to fund them ahead of firm orders. If the prime's customer milestones and the local partner's spending schedule diverge, the structure that solves an access problem may create a financing problem. Earlier subcontract awards, paid engineering milestones or customer-funded tooling can improve the proposition without changing its sovereign purpose.
Lifecycle arrangements change the calculation again. Local support can reduce the customer's dependence on distant repair capacity while creating recurring work for the local partner, but the original supplier still has to understand its obligations on technical data, upgrades, obsolescence and parts. Public announcements rarely reveal enough to compare lifetime margin across routes. The useful management exercise is therefore a programme-specific model of cash and responsibility, since a general claim that one structure is more profitable will not survive contact with a real contract.
Sovereignty has a strong economic case
The strongest argument for deeper localisation is the option it preserves when normal cooperation becomes difficult. A state may reasonably pay for domestic repair capability, engineering knowledge or production capacity that peacetime unit cost alone would not justify. Access to another country's efficient factory does not by itself confer the ability to act independently in a crisis, and that ability has value even when it is rarely used.
The Netherlands provides a counterweight to a purely delivery-led argument. Its Industrial Cooperation Agreement with Naval Group, signed in September 2024 for the Orka-class submarine programme, commits the company to working with Dutch companies and knowledge institutes over the next twenty years to strengthen long-term Dutch autonomy in submarine maintenance and future upgrades. An amendment signed on 17 July 2026, after the June contract for F21 heavyweight torpedoes, allows Naval Group to bring new Dutch companies into the manufacture of the submarines and the torpedoes. Here, the link between industrial cooperation and capability retained over decades is embedded in the arrangement itself (Naval Group, 2026c).
Sweden made a different trade, and explained it openly. Its government chose a design already in production because delivery time and certainty weighed most heavily in a serious security situation, and it secured national content in areas where Swedish industry already leads, weapons, sensors, and torpedoes, while the hulls are built in France (Regeringskansliet, 2026). A Swedish-built ship would have kept more shipbuilding work at home; the government judged delivery speed worth more for this capability. Neither choice is correct in general. Each reflects how a particular state values time against independence for a particular capability.
A selective approach to localisation therefore needs a serious account of dependency. Final assembly in-country does not establish the ability to redesign, repair, or secure replacement parts. Equally, a modest physical footprint, backed by useful rights, qualified people, and reliable support, may provide substantial capability. The appropriate comparison asks how the system behaves when supply is interrupted, a modification is urgent or the original partner cannot respond.
The durable choice is how much independence to build into each activity, at what cost and over which period. That may favour deeper local production in one programme and established foreign production with national integration and sustainment in another. Thinking this way is useful because it makes those differences explicit; it would lose its value if it were used to argue for minimising local participation regardless of the customer's security requirements.
The next year will test the work packages
Through October 2027, I expect differentiated industrial arrangements to remain an important route into cross-border European defence programmes. I think it is more likely than not that suppliers will continue to combine established production assets with national integration, support, and selected technology participation, and that the stronger propositions will be those that show how these elements work together under the customer's procurement and operational conditions. This is a judgement about the direction of contracting and not a prediction that any named bidder will win.
Three kinds of evidence would strengthen that view: new contracts that allocate production and national support separately, paid work packages that turn announced partnerships into activity, and procurement documents that define the control required over adaptation or sustainment. The Oresund Drydocks memorandum is a useful test case. If it becomes a funded support arrangement with defined repair scope and data access as Luleå's delivery approaches, the selective model is maturing; if it remains an intention, the Swedish arrangement will rest more heavily on France than its announcement suggests.
There is also a dated programme checkpoint. Under a government-to-government agreement between the Netherlands and Israel, Germany has ordered five initial EuroPULS launchers, with delivery and qualification scheduled for 2027. Those milestones will show whether the promised responsibilities are observable, although a launcher's delivery alone cannot establish the commercial performance of the proposed joint venture (KNDS, 2026).
The view would weaken if urgent procurements increasingly required comprehensive domestic production despite available international capacity, or if selective arrangements repeatedly failed to provide acceptable availability and adaptation rights. Either outcome would strengthen the case for a more integrated local industrial base. Under my central expectation, bargaining power accrues to partners that can demonstrate qualified integration, support or design capability, while a local presence with little operational contribution holds a weaker economic position.
A practical comparison before commitment
The comparison can begin with three tests: eligibility, delivery and control. Eligibility determines which structures can participate under the actual procurement and funding conditions. Delivery examines the credible route to qualified, accepted capability. Control identifies the rights and national competences the customer needs during service. Commercial leaders can run these tests with programme, engineering and legal colleagues before finance evaluates the investment case.
Only feasible alternatives belong in the financial comparison, and a cheap route that cannot meet eligibility or acceptance requirements is no baseline at all. Among the feasible routes, the model should follow cash through bid preparation, engineering, tooling, production, acceptance and support. It should also identify who owns the customer interface, who can approve changes and what happens if a partner withdraws or a licence becomes unavailable.
Timing deserves its own treatment. Some commitments are needed before award because they establish credibility or qualification; others can sensibly wait for a funded milestone. Staging is valuable only where the customer accepts it, and the supplier can still meet the delivery schedule. The aim is to make each commitment early enough to provide capability, on evidence sufficient to justify the capital at risk.
The discussion worth adding to the investment paper
Were I part of this discussion, the option I would suggest minuting is a comparison of one material European opportunity through three routes: direct supply, supply through an established prime or industrial partner, and shared ownership where that is genuinely feasible. It would replace a general ambition for European market presence with a decision on a single opportunity the board can pursue. The commercial lead could own the work, with programme and engineering colleagues defining the capability, finance mapping cash exposure, and legal and security specialists checking rights and restrictions. The first output would be a single statement of requirements, because different departments often evaluate different versions of the same deal.
In the first 90 days, the team would use existing customer documentation and permitted clarification channels to establish which national capabilities are essential, which are valued and which remain uncertain. Each route would then show its production source, integration responsibility, support model and proposed rights, work a Director or programme leader can start within their own remit. By six months, decisions about facilities, equity or significant technology commitments could reach the board with a concrete comparison behind them. By twelve months, the measure is contractual: a signed work share, a support agreement with defined scope, or a documented reason to step back.
The financial model would attach expenditure and receipts to milestones, including a delayed-award case. It would ask what remains useful if the opportunity moves, shrinks or disappears: qualified people, tooling usable on other programmes, support capacity or rights that can serve other customers. Where an investment has little alternative use, firmer contractual support deserves particular attention, whether through paid milestones, advance payments or customer-funded tooling. Given how rarely deeper-tier suppliers receive advance payments today, that question belongs in the term sheet from the first draft.
Partner discussions then become more productive. Instead of opening with an ownership ratio, the parties can open with the work, decisions and risks each performs well. A systems integrator may need access to information without owning every underlying technology. A maintenance partner may need repair data, training and spares commitments. A production partner may need an order horizon and funding sufficient to qualify capacity. The detailed answers differ by programme, but they can be negotiated against a shared account of customer value.
The improvement to expect is a more credible bid and a clearer view of cash, margin and recurring support revenue, tracked through indicators a CFO can follow: cash committed before the first customer payment, the share of the pipeline with a defined route and work package, and conversion from partnership announcement to funded work. It also provides the customer with a clearer explanation of how industrial participation supports operational capability. Waiting mostly narrows options, since partners and work shares settled in the coming months tend to stay for the life of a programme, and a supplier that arrives later usually joins on terms set by someone else. The trade-off is effort. Preparing several feasible structures takes scarce commercial and engineering time, and some pre-award investment may still be needed. I would concentrate that effort where the commitment is material and the choice of structure can change the outcome, and where a supplier already holds a product in demand with documented origin and design control, I would move faster and treat the comparison as a check on the decision, never a brake on it.
Luleå's first steel was cut in France, and its contribution to Swedish capability will be judged across the ship's service life. For a supplier preparing its next European defence proposition, that is the perspective worth keeping. The route to market decides who can deliver, who can sustain, who can adapt and who pays for the capacity to do so, and those responsibilities, far more than the address of the factory, are the substance of the industrial commitment.
Questions for the C-Suite and the Board
Which customer capability determines our feasible routes? For the CCO and the programme lead, separating eligibility, integration, delivery, adaptation and sustainment requirements shows which uncertainties the team can resolve itself and which need an answer from the customer.
What does the prospective partner contribute that we cannot readily provide? Naming the qualified capability, rights, capacity or programme responsibility that earns the partner's share makes partner selection specific and the division of obligations workable.
Where would revised payment milestones improve delivery confidence? A CFO can test whether engineering, tooling and qualification spending arises ahead of funded orders, and whether paid milestones would relieve the deeper-tier suppliers on whom the ramp-up depends.
Which technology and information rights does the proposed work actually need? Comparing access, use, modification, and onward-supply rights separately allows the CTO and legal team to escalate company-wide intellectual-property decisions with the relevant activity and customer requirement clearly defined.
How does the investment remain useful if the award moves? Testing delayed demand, smaller volumes and alternative programmes shows which commitments keep their value and which need firmer contractual support before capital is allocated.
What evidence would justify a deeper local commitment? Agreeing in advance the customer, funding, qualification or support milestone that would make expansion sensible lets the board keep its flexibility while the programme stays ready to act.
References
Council of the European Union. (2025, May 27). SAFE: Council adopts €150 billion boost for joint procurement on European security and defence [Press release]. https://www.consilium.europa.eu/en/press/press-releases/2025/05/27/safe-council-adopts-150-billion-boost-for-joint-procurement-on-european-security-and-defence/
KNDS. (2026, March 26). KNDS and Elbit Systems launch EuroPULS joint venture [Press release]. https://knds.com/en/press-releases/knds-and-elbit-systems-launch-euro-puls-joint-venture
Kongsberg. (2026, January 30). KONGSBERG wins NOK 16 billion contract to deliver Counter-UAS solutions in Poland [Press release]. https://www.kongsberg.com/news/news-archive/2026/kongsberg-wins-nok-16-billion-contract-to-deliver-counter-uas-solutions-in-poland/
McKinsey & Company. (2026, June 9). Auftragsbücher wachsen, Lieferfähigkeit entscheidet: Europa muss Verteidigung und Raumfahrt schneller industrialisieren [Press release]. https://www.mckinsey.com/de/news/presse/2026_06_09_ila
Naval Group. (2026a, February 10). Naval Group signs strategic partnership agreement with Swedish shipyard Oresund Drydocks AB [Press release]. https://www.naval-group.com/sites/default/files/2026-02/20260210%20Press%20release_Naval%20Group%20signs%20strategic%20partnership%20agreement%20with%20Swedish%20shipyard%20Oresund%20Drydocks%20AB.pdf
Naval Group. (2026b, August 31). Naval Group sign a contract with Sweden for the delivery of four defence and intervention frigates (FDI) [Press release]. https://www.naval-group.com/en/naval-group-sign-contract-sweden-delivery-four-defense-and-intervention-frigates-fdi
Naval Group. (2026c, September 15). The Netherlands and Naval Group extend the Industrial Cooperation Agreement [Press release]. https://www.naval-group.com/en/netherlands-and-naval-group-extend-industrial-cooperation-agreement
Naval Group. (2026d, October 2). Naval Group holds the steel-cutting ceremony of the first FDI frigate for the Royal Swedish Navy [Press release]. https://www.naval-group.com/en/naval-group-holds-steel-cutting-ceremony-first-fdi-frigate-royal-swedish-navy
Naval Group. (2026e, October 13). Naval Group and Marine Technology Centre of Sweden strengthen French-Swedish naval research cooperation [Press release]. https://www.naval-group.com/en/naval-group-and-marine-technology-center-sweden-strengthen-french-swedish-naval-research
Navy Lookout. (2026, September 1). Sweden orders four heavily armed FDI frigates from France. https://www.navylookout.com/sweden-orders-four-heavily-armed-fdi-frigates-from-france/
Polish Ministry of National Defence. (2026). System SAN. https://www.gov.pl/web/obrona-narodowa/system-san
Regeringskansliet. (2026, May 19). Beslut om förhandling med Frankrike om luftförsvarsfregatt av Luleåklass [Decision to negotiate with France on Luleå-class air-defence frigates] [Press release]. https://www.regeringen.se/pressmeddelanden/2026/05/beslut-om-forhandling-med-frankrike-om-luftforsvarsfregatt-av-luleaklass/
About Andy Demir
Andy Demir is the editor of SwissTechnic and writes on strategy, international growth and capital in aerospace, defence, space and advanced technology. Drawing on a career in commercial leadership, the analysis examines how technology, sovereignty and industrial capability shape competitive power and long-term value.
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