Defense Industry Risks

"A stock market listing means more transparency, and potential shareholders and market observers can benefit from this even before the listing. This is exemplified in the prospectus of Thyssenkrupp's marine division, TKMS, which is scheduled to be listed independently on the Frankfurt Stock Exchange starting Monday.  ​​In the prospectus, the company is required to warn of a variety of risks, which is intended to enable informed investment decisions. The probability of these risks materializing is often low. Nevertheless, the reports are helpful because companies have to be "honest" in the best sense of the word, and with a clarity that CEOs rarely demonstrate otherwise.

 

In the case of TKMS, the list of risks sheds light on the uncertainties of German defense policy and the current state of its defense capabilities.  The prospectus reveals, for example, that an average tender process for a submarine takes three to five years, and the production time can take another ten years. Regarding the procurement process for the German armed forces, with its stages in the Bundestag's budget committee, the bureaucratic hurdles at the procurement office, and the ministries involved, the prospectus states: "This process can be lengthy and difficult to predict due to the differing priorities of the actors involved." In addition, there are operational risks, such as intense competition from numerous suppliers or the shortage of skilled workers.

 

None of this is surprising, but it is nevertheless noteworthy—and not only for potential TKMS shareholders.

 

It shows that rearmament is not a foregone conclusion.

 

And even if the TKMS IPO coincides with a time when increased defense spending is fueling growth expectations among shareholders, the tide can quickly turn.

 

TKMS itself writes that it is still uncertain how much funding will ultimately benefit the German Navy. As unlikely as a reversal of policy may seem at present, there is no guarantee that the high levels of defense spending will be maintained. Especially if conflicts calm down, relations normalize and international alliances improve, national governments might reconsider whether they shouldn't cut their high defense spending. The next crisis that needs to be financed is sure to come.” [1]