The Italian Aerospace, Defence and Security industry

A study carried out by The European House – Ambrosetti in collaboration with Leonardo

A study carried out by The European House – Ambrosetti in collaboration with Leonardo.

Roma  09 September 2018

Does Italy need a competitive national Aerospace, Defence and Security industry? What is the relevance of having a strong supply chain? Is it important to be a global player in this industry? . The study assesses Leonardo’s role in the expanded AD&S sector, and identifies how the company can act as a catalyst and accelerator for the industrial and technological development of the country. The study, “The Italian Aerospace, Defence and Security industry. How to create industrial development, new technological capabilities and economic growth for the country”, has been carried out by The European House - Ambrosetti in collaboration with Leonardo and the main results  were presented during the 44th edition of the Forum “Intelligence on the World, Europe, and Italy”, which took place at Villa D’Este in Cernobbio (Italy) on 7-9 September 2018. 

The study gives six main reasons to explain the strategic relevance of the AD&S industry:

  1. Defence of the country and security of citizens, companies, critical infrastructures and the territory.
  2. Instrument of geopolitical influence and promotion of the images of the countries in the world. 
  3. Support for exports and for the country's internationalisation strategies.
  4. Triggering of important investments in R&D and skilled employment. 
  5. Support for growth, with a supply chain of specialised SMEs and large global and high-tech players.
  6. Development of technologies and products with dual applications that transfer benefits in other sectors.
In addition to illustrating the actual positioning in the industry and measuring Leonardo’s contribution to territorial capital (economic, social, cognitive and environmental) through the application of The European House – Ambrosetti’s “4 Capitals” model, the study also offers 9 directions to  fully exploit the AD&S industry in Italy and internationally, consolidating its structure and preparing for the challenges of the future:
  1. Promotion of a proactive role for Italy in the integration and collaboration between the European systems of AD&S.
  2. Adoption of a long-term strategic multi-annual vision for public investments in Defence and Security.
  3. Support for the internationalisation of the AD&S sector.
  4. Identification and strategic management of the priority areas of technological expertise for Defence and Security.
  5. Adoption of “service-supply” approach in the AD&S sector.
  6. Integration and aggregation of expertise and creation of critical mass for the Italian AD&S supply chain and related coordination.
  7. Open innovation and venture capital as instruments for stimulating technological innovation and for supporting investments.
  8. Attraction of talents and creation of new skills for the AD&S sector.
  9. Increase the awareness of the country on cybersecurity themes.
Fig. 1 - Overview of the 9 guidelines and proposals for the A&DS industry in Italy and the connection with the strategic role of the sector: The European House - Ambrosetti elaboration, 2018

The following proposals have been developed starting from the recognition of the strategic importance of the AD&S sector to the national economy. Italy is one of the few countries that presents a solid AD&S sector with a long tradition which, with a turnover of 13.5 billion euros in 2016, takes up a position among the global top 10. The Italian AD&S supply chain is made up of big multinationals, a dense network of small and medium-sized enterprises, research centres and outstanding universities spread throughout the national territory that constitute the distinctive characteristic and strength of the sector. Our country is also fifth in the OECD area by R&D spending in relation to the total value added (21.9%).

The fragmented nature of the sector nonetheless exposes Europe and Italy to a position of weakness in comparison to the United States or some other emerging countries, increasingly competitive.

To maintain the capacities and expertise built up over time, the country is therefore called upon to adopt an outlook beyond national borders, which can find adequate support only through the participation in multilateral cooperation programmes, in the European area especially (e.g. PESCO, European Defence Agency, European Space Agency). Constant, adequate investment is also required to fuel research activity and the culture of innovation.

“The detailed analysis provided by this study of the Italian AD&S supply chain confirms the key role of our Group, as a catalyst and accelerator of technological and industrial growth  for the  country”, comments Leonardo’s CEO Alessandro Profumo in the preface of the volume. Every 100 Leonardo employees triggers 260 jobs nationally, and with the 4,000 suppliers based in Italy (70% of which SMEs), effectively means that the AD&S sector is second only to automotive in terms of overall dimensions. Leonardo alone contributes to approximately a quarter of high-tech manufacturing exports.

10 Key points of the study


1) The Aerospace, Defence and Security (AD&S) sector is strategic for each country

The AD&S sector performs a fundamental role in key areas for the functioning and
development of each territorial system, because it sets the conditions for its
security, stability and growth. In particular, there are six reasons why the AD&S
sector is strategic:

A. It guarantees, through its products and solutions, the defence of the country and the security of citizens, companies, critical infrastructures and the territory, ensuring the continuity of the economic activity and the prevention and management of emergencies.

B. Acting as an instrument of geopolitical influence, it promotes the image and the reputation of the country and encourages sales and international cooperation agreements with other governments.

C. It supports exports to foreign markets and the country’s strategies of internationalisation.

D. It is an “innovation driven” industry with high-intensity of knowledge, capital and technology which stimulates important investments in Research and Development and skilled employment.

E. It is a significant industrial sector, supporting growth with an integrated supply chain of specialised SMEs and large global and high-tech players that are highly interrelated and with effects on different sectors of the economy.

F. It develops technologies and products with dual applications, enabling transfer mechanisms and widespread benefits in other sectors.


2) The AD&S sector generates important economic/social and scientific/technological value

At the global level, the AD&S industry generates revenues of 925.7 billion euros, with the United States and Europe together contributing almost 70% of the total. In Europe alone, the AD&S sector employs approximately 862,000 persons, an average annual increase of 2.7% between 2008 and 2017, alongside a 5.5% growth of revenues in the same period.

The sector substantially contributes to scientific progress, classified among the top 10 industrial sectors for investments in Research and Development worldwide: numerous innovations and technological solutions initially introduced in Defence have found widespread application in various fields of everyday life, facilitating and improving various activities that presently characterise our way of life. Moreover, Aerospace is the leading sector by ratio of R&D to value added (18.2%) in the OECD countries, ahead of Electronics and Optics and Pharmaceuticals.


3) Three global megatrends will support the development of the AD&S sector in the coming years:

  • Security and geopolitics: growing geopolitical instability in various areas of the world (Middle East, North Africa and Sub-Saharan Africa) with a number of international immigrants that has reached a historic record of 258 million persons in 2017 (+50% compared to 2000).
  • Globalisation of the economy: all areas of the world are going through a sustained growth phase, and the level of globalisation is increasing in terms of flows of persons and goods.
  • New technologies: the AD&S industry is influenced by the introduction of new technologies and, more than others, lends itself to adopt cutting-edge innovations to be applied to other sectors.

These dynamics are inducing the majority of countries to increase budgets allocated for Defence (in particular in Asia, Africa and the Middle East). Also Europe has provided for an increase in investments for enhancing the AD&S sector, allocating, for the 2021-2027 period, additional resources to those of the Member States, for example, with a doubling of the Fund for Internal Security (2.5 billion euros) and allocations for the European Fund for Defence (13 billion euros) and the new European Space Programme (16 billion euros).


4) Italy holds a position of prestige in the global AD&S sector, thanks to the industrial and technological capacity of a national supply chain which expresses an important strategic value

The Italian AD&S sector is among the top 10 in the world and has permitted the country to achieve leadership in several important areas at the international level (1st country in the world to have a tilt-rotor aircraft for civil use under certification and among the first countries to perform joint operational activities between aerial vehicles and uncrewed aerial vehicles; 3rd country in the world to launch a satellite into orbit; over 50% of the pressurised volume of the international module of the International Space Station was produced in Italy).

In 2016, the turnover of the AD&S sector in Italy was over 13.5 billion euros, with 69.4% destined for export, and with a contribution to the national value added of approximately 4.4 billion euros. The Italian AD&S industry employs 45,000 persons and, taking into consideration also indirect and allied-industry employment, involves over 159,000 persons.

Maintaining a developed supply chain, with a prominent leading company in the global AD&S sector, represents a fundamental strategic value because:

  • It contributes to representing the country at the international level and facilitates geopolitical alliances in sensitive and critical areas of the world.
  • It increases the development of strategic technological expertise in the territory by activation of a highly qualified international network.
  • It is a fundamental asset for guaranteeing the security of the territory, managing emergencies and monitoring critical infrastructures.

5) Leonardo is among the leading manufacturing companies in Italy and in the global AD&S sector and generates value for the country, enabling an important supply chain of companies throughout the national territory

Leonardo is the leading company of the AD&S sector in Italy, 10th at the global level and 5th in Europe. Furthermore, it is one of the main industrial operators in the country: with revenues of 11.5 billion euros in 2017, the group is positioned 2nd among the manufacturing companies and 5th among the industrial and service companies of Italy.

The international dimension is fundamental for the development of the Group, which contributes in a significant manner to the trade surplus of the country thanks to exports of high technological content. With 78% of the value of production in Italy exported, Leonardo generates 18% of the manufactured high-tech exports of the country and contributes 1.3% to national exports.

The Group contributes to the industrial fabric of the country, creating a supply chain made up of 4,000 companies, of which about 70% are SMEs with sales of 3.7 billion euros in 2017.

Leonardo is also one of the top spenders in R&D: in 2017, it invested over 1.5 billion euros (of which 1.2 in Italy), positioning it in 4th place in the international AD&S sector and in 1st place among Italian manufacturing companies.


6) Leonardo contributes, thanks to its own technological solutions, to the improvement of the security of people and to the activation of high-skilled employment with high levels of technological expertise

The technological offering of Leonardo makes it possible to enhance the security of people and guarantee the defence of the territory and its key players, to prevent and manage emergencies and to guarantee the security of critical infrastructures.

As of 2017, Leonardo has 45,134 employees, of which 28,892 are in Italy (equal to 64% of the total), which positions it as the 2nd manufacturing company by contribution to employment on a national basis. Of them, 71% have a degree in a STEM disciplines (Science, Technology, Engineering and Mathematics), a value almost 3.5 times greater than the Italian average (20.2%).

At a national level, the activities of Leonardo are distributed over 48 industrial sites mainly concentrated in seven Italian Regions (Lombardia, Lazio, Campania, Piemonte, Puglia, Liguria e Toscana), with almost 54% of Leonardo employees located in the south-central Italy. The ratio of Leonardo employees to the total of employees in high technology manufacturing is particularly high in Italy (especially in the South, where the percentage reaches almost 29%).


7) Leonardo contributes to the enhancement of the Italian innovation ecosystem through investments in R&D and the utilisation of talent resources with a high level of scientific preparation

In 2018, Leonardo employed 9,000 people in R&D activity, equal to about 20% of all employees. Of these, 6,200 are based in Italy and represent nearly 7% of the R&D employees in the Italian manufacturing sector and about 10% of employees employed in the medium-high technology industries operating within the national territory. Furthermore, in 2017 the Group invested 1.5 billion euros in R&D activities (13.4% of Group revenues), of which 1.2 in Italy (15.2% of the revenues of Leonardo S.p.A.).

Leonardo has developed a solid network with research institutions, universities and SMEs and is increasingly oriented toward an “ecosystem of innovation” based on the implementation of technological Research and Development initiatives focused on Open Innovation: the company has started over 200 projects and established research partnerships with 93 universities and research centres all over the world, of which 48 are in Italy (approximately 40% of Italian universities).


8) Leonardo is committed to limiting the direct impacts of its own economic activity on the environmental ecosystem in which it operates and is developing technological solutions capable of generating environmental benefits

In line with its own company values and with the objectives defined by recent environmental policies, Leonardo has improved its own direct environmental performance with 54 million in environment-related investments in 2017 and about 100 million euros in environment-related projects in the 2015-2017 period in Italy. In particular:

  • Reduction of energy consumption (-0.2% compared to 2016) and of electricity (-1.1%, in contrast with the average of the national manufacturing sector) and increase in energy used originating from renewable sources (at Group level, from 0% to 35.4% of total energy consumption between 2010 and 2017).
  • Reduction of CO2 emissions by 45% at Group level in the last 8 years (2010-2017), compared to -21% recorded by Italian manufacturing as a whole. Only in the two-year period 2016-2017 has this made it possible to avoid economic damages (social costs) valued between 1 million euros to 5.8 million euros caused by the negative externalities of CO2. Reduction of waste products (-11.5% compared to 2016) and an increase in recycled waste (+16.5%), equal to 50.4% of the total.
  • Reduction of water consumption (-12.6% from 2015 to 2017) and improvement in the water efficiency (-1.5% of water withdrawal volumes over production value from 2015 to 2017) at Group level.

Leonardo has also developed solutions that lead to environmental benefits, including: a) efficient technologies that reduce the environmental impact in the use phase by the customer (for example, carbon fibre aerostructure); b) initiatives to reduce the use of products with a high environmental impact through a transition from product to service (for example, virtual training programmes) ;c) technologies that enable the management of climate change (for example, terrestrial and meteorological monitoring); d) innovations that extend the life cycle of products (for example, upgrading of on-board systems).


9) The main countries active in the AD&S sector have defined strategies and policies for sustaining and creating a solid base for the development of the sector in the coming years

The AD&S industry expresses a value that goes beyond that which is purely economic for the industrial system of a country, but it also assumes a strong geopolitical and strategic value, enabling the development of solid long-term relationships with other countries. For this reason, the main developed and developing countries have adopted specific policies to guarantee their own defence capacity in the future, to develop national industry and maintain (or create from scratch) distinctive expertise in several fields of the AD&S sector, defining in some cases a specific medium- to long-term vision.

The analysis of 15 countries worldwide shows several unchanging elements based on the national strategies for supporting the AD&S industry:

  1. Government-to-Government agreements (G2G), which are instruments for supporting exports of equipment for Defence and for the creation of long-term strategic relationships between countries.
  2. Research and development programmes as instruments to incentivise training in new areas of strategic technological expertise.
  3. Long-term strategic vision on the part of national Governments, taking into account the needs of industry in the process of defining the future development of the AD&S sector.
  4. International collaborations as preferred channel for the development of products and solutions with high technological and innovative content.

10) There are 9 courses of action and proposals for strengthening the AD&S sector in Italy and preparing it for future global challenges

1. Promote a proactive role for Italy in integration and collaboration between the European systems of AD&S.
2. Adopt a long-term, strategic, multi-annual vision for public investments in Defence and Security.
3. Support the internationalisation of the AD&S sector.
4. Identify and manage the priority areas of technological expertise for Defence and Security at the strategic level.
5. Adopt a “service-supply” approach in the AD&S sector.
6. Integrate and aggregate the areas of expertise, create a critical mass of the Italian AD&S supply chain and guarantee its coordination.
7. Adopt Open Innovation and Venture Capital as tools for stimulating technological innovation and supporting investment.
8. Attract talents and create new skills for the AD&S sector.
9. Increase the awareness of the country on cybersecurity themes.

  READ THE STUDY (Executive summary)