Defense Industrial Reshoring and European Sovereignty in Missile Production

The European defense landscape is undergoing a seismic shift as nations prioritize strategic autonomy in missile production, driven by geopolitical tensions, supply chain vulnerabilities, and the urgent need to meet NATO stockpile requirements. This reshoring movement, anchored by cross-border collaborations between defense OEMs, presents a compelling investment thesis for companies capable of scaling advanced manufacturing capabilities while navigating regulatory and industrial fragmentation.

The Reshoring Imperative: From Dependency to Self-Reliance

The war in Ukraine has accelerated Europe's pivot toward self-sufficiency in critical defense systems. According to a report by Breaking Defense, Lockheed Martin and Rheinmetall's joint “center of excellence” in Germany exemplifies this trend, with co-production agreements for PAC-3 missiles, GMLRS rockets, and Javelin systems spanning Germany, Poland, and RomaniaEuropean companies are jumping on the defense spending boom^[1]. Such partnerships not only localize production but also reduce reliance on U.S. facilities, aligning with the EU's broader goal of strategic autonomy.

MBDA, a European leader in missile systems, is doubling down on this shift. The company plans to double its missile output by 2025, backed by a €2.4 billion investment in next-generation technologies like hypersonics and AI-driven defense systemsEurope Missiles And Missile Defense Systems Market^[4]. This expansion is critical as European defense budgets surge: NATO-Europe's average defense spending hit 2.2% of GDP in 2024, with nations like Poland and Estonia committing to exceed 4.5% by 2025European companies are jumping on the defense spending boom^[1].

Financial Momentum in Defense OEMs

The financial performance of key players underscores the sector's resilience. Rheinmetall, a cornerstone of Germany's rearmament agenda, reported a 24% year-over-year sales increase to €4.7 billion in H1 2025, with a record €63 billion order backlogEuropean companies are jumping on the defense spending boom^[1]. Similarly, MBDA's order book swelled to €37 billion in 2024, driven by contracts for ASTER missiles and next-generation systemsEurope Missiles And Missile Defense Systems Market^[4]. These figures reflect not only strong demand but also the structural shift toward long-term defense procurement.

Investor sentiment is equally robust. The Stoxx Aerospace and Defense index has surged over 50% since early 2025, outpacing broader market indicesEuropean companies are jumping on the defense spending boom^[1]. Morningstar projects European defense budgets to grow at a 6.8% annual rate through 2035, creating a $5.06 billion missile and missile defense market by 2030Europe Missiles And Missile Defense Systems Market^[4]. For investors, this translates to sustained revenue visibility and margin expansion for OEMs with diversified cross-border capabilities.

Strategic Cross-Border Collaborations: A Dual-Edge Sword

While collaborations like Lockheed Martin's European ventures enhance production scalability, they also highlight the EU's industrial challenges. Goldman Sachs notes that fragmented capital markets and regulatory barriers hinder a unified defense industrial baseThe Future of European Defense - Goldman Sachs^[3]. However, initiatives like the European Defence Industry Programme (EDIP)—a €1.5 billion fund to integrate SMEs into defense contracts—aim to mitigate these gapsThe Future of European Defense - Goldman Sachs^[3].

The interplay between U.S. and European firms further complicates the landscape. While U.S. OEMs like Lockheed Martin benefit from European spending waves, the EU's push for strategic autonomy risks creating friction. For instance, the ReArm EU initiative allocates €150 billion in loans for European-made systems, prioritizing local content in procurementEurope Rearms: What Defense Spending Means for Markets^[2]. This policy favors OEMs like Rheinmetall and MBDA, which have embedded cross-border supply chains, over non-EU competitors.

Investment Opportunities and Risks

For investors, the key lies in identifying OEMs with both technological edge and geopolitical alignment. Rheinmetall's dominance in 155mm artillery and missile launchers, coupled with its €63 billion backlog, positions it as a core holdingEuropean companies are jumping on the defense spending boom^[1]. MBDA's focus on hypersonic and AI-driven systems offers exposure to high-growth segments, while Saab's expansion in missile defense (with orders through 2026) adds diversificationEurope Missiles And Missile Defense Systems Market^[4].

However, risks persist. Supply bottlenecks for advanced systems like SAMP/T interceptors and reliance on non-EU suppliers for critical components could delay production timelinesThe Future of European Defense - Goldman Sachs^[3]. Additionally, fiscal constraints in Southern Europe may temper long-term spending growth.

Conclusion: A Defensible Long-Term Bet

The reshoring of European missile production is not merely a response to immediate security needs but a strategic repositioning for the 21st century. While challenges like industrial fragmentation remain, the combination of rising budgets, cross-border collaborations, and technological innovation creates a durable tailwind for defense OEMs. For investors, prioritizing firms with scalable, sovereign-aligned manufacturing capabilities—such as Rheinmetall, MBDA, and Saab—offers exposure to a sector poised for sustained growth.