European Defense Industrial Modernization: Unlocking Investment Opportunities in Next-Generation Fighter Jets and Their Supply Chains

The European defense sector is undergoing a transformative phase, driven by geopolitical tensions and the urgent need for strategic autonomy. At the heart of this shift lies the Future Combat Air System (FCAS), a collaborative sixth-generation fighter jet program involving France, Germany, and Spain. While the project faces political and technical hurdles, its potential to reshape European defense industrial capabilities—and the investment opportunities it unlocks—cannot be ignored.

The FCAS: A High-Stakes Gamble

FCAS aims to deliver a stealthy, AI-integrated combat system by 2040, rivaling the U.S. F-35 and China’s J-20 [5]. However, the program is at a critical juncture. France and Germany remain locked in a bitter dispute over workshare, with Paris demanding an 80% lead in design and production, while Berlin insists on a more balanced split [4]. This tension threatens to delay Phase 2, which involves building a demonstrator aircraft by 2026 [1]. Spain, a key partner in sensor development and electronic warfare, risks losing technological ground if the project falters [4].

The European Defence Fund (EDF) is a critical enabler, allocating €1.065 billion in 2025 for collaborative R&D, including FCAS-related technologies [3]. This funding supports over 144 companies, from Dassault Aviation (leading the NGF demonstrator) to HENSOLDT (developing sensor architectures) and Airbus (focusing on remote carriers and low observability) [2]. Startups and SMEs are also gaining traction, reflecting the EDF’s emphasis on innovation and industrial competitiveness [3].

Supply Chain Dynamics and Investment Opportunities

The FCAS supply chain is a mosaic of established primes and emerging players. Dassault and Airbus dominate, but firms like HENSOLDT and Indra (Spain’s defense tech leader) are carving niche roles in sensor fusion and cyber capabilities [5]. The program’s reliance on AI, hypersonic weapons, and drone swarms creates demand for cutting-edge components, from advanced radar systems to secure data networks.

Investors should also monitor the Eurofighter consortium and the Global Combat Air Programme (GCAP), which are expanding into unmanned systems and digital battlefield solutions [2]. These programs, alongside FCAS, form a broader ecosystem of European defense innovation. However, political fragmentation remains a risk. Germany’s recent consideration of F-35 purchases, for instance, signals a possible shift toward national alternatives if FCAS collapses [4].

Navigating the Risks and Rewards

The FCAS’s success hinges on political alignment. France and Germany must reconcile their workshare dispute, while Spain must secure a meaningful role in sensor development. For investors, the key is to identify firms with both technical expertise and political resilience. Dassault and Airbus, for example, are well-positioned but face regulatory scrutiny over their dominance. Smaller players like HENSOLDT and Leonardo (Italy’s defense giant) offer higher growth potential but carry execution risks.

The EDF’s focus on SMEs also presents opportunities. Startups developing AI algorithms for combat cloud systems or hypersonic propulsion could benefit from EU subsidies and partnerships with primes. However, these ventures require long-term capital and patience, as FCAS’s first flight demonstrators won’t materialize until the late 2020s [1].

Conclusion

European defense industrial modernization is a high-stakes bet, but one with significant upside. The FCAS and its supply chain represent a €100+ billion opportunity, provided political leaders can overcome their differences. For investors, the path forward lies in diversifying exposure across primes, SMEs, and cross-cutting technologies like AI and cybersecurity. The coming months will test Europe’s resolve—but if FCAS survives, it could cement the continent’s place in the next era of global air power.

Source:
[1] European next-gen fighter jet faces 'moment of truth' in coming ..., [https://www.politico.eu/article/france-germany-future-combat-air-system-project-fighter-jets-defense/]
[2] Future Combat Air System (FCAS), [https://www.airbus.com/en/products-services/defence/future-combat-air-system-fcas]
[3] European Defence Fund (EDF) - Official Webpage of the ..., [https://defence-industry-space.ec.europa.eu/eu-defence-industry/european-defence-fund-edf-official-webpage-european-commission_en]
[4] France Wants 80% of FCAS: Is Europe's Next-Gen Fighter ..., [https://thediplomatinspain.com/en/2025/07/17/france-wants-80-of-fcas-is-europes-next-gen-fighter-at-risk/]
[5] France-Germany Bet Big On Rs 10255 Crore 6th-Gen Fighter Jet Deal To Beat F-35, J-20, [https://www.news18.com/world/france-germany-bet-big-on-rs-10255-crore-6th-gen-fighter-jet-deal-to-beat-f-35-j-20-ws-akl-9533961.html]