Defense Technology and Innovation in Germany

by Sven Weizenegger

Introduction

Innovation in defense technology is a cornerstone of national security and military superiority. For Germany, a country with a complex historical and geopolitical backdrop, the impetus to innovate within its armed forces has never been more pressing. Today’s security environment, characterized by rapid technological advancements and asymmetric threats, necessitates a robust and agile approach to defense innovation.

As the demands on German foreign and security policy rise amidst a Europe plagued by multiple crises, so too do the demands on the German Armed Forces. To enhance the Bundeswehr’s assertiveness and effectiveness as a deterrent, despite constraints such as personnel and equipment shortages, it must rapidly and extensively adopt new technologies. The quicker and more effectively these technologies are utilized, the greater the advantages they will provide on the battlefield.

The current political drive for change, spurred by Russia’s war of aggression against Ukraine and its threat to NATO allies, along with the pressure to adapt to the new security landscape and the increase in financial resources, is creating an unprecedented momentum.

How effective this momentum will play out depends on how general obstacles, such as government funding gaps, a risk averse procurement bureaucracy and legal frameworks, can be tackled.

This paper explores the critical aspects of defense technology and innovation within the German Armed Forces, detailing the necessity for innovation, the role of defense innovation hubs (specifically the Bundeswehr Cyber Innovation Hub CIHBw), the significance of software-defined defense, the contribution of venture capitalists, and the importance of a supportive legal framework.

1. Armed Forces‘ Need for Innovation

The need for innovation in the armed forces arises from several critical factors: the evolving nature of warfare, the rise of new and advanced technologies, and the necessity to maintain a strategic advantage. In today’s interconnected world, conventional methods of warfare are increasingly supplemented by cyber warfare, unmanned systems, and artificial intelligence (AI).

Evolving Nature of Warfare

In the public eye and within decision-making processes regarding the armament of the Bundeswehr, the focus tends to be on large, expensive weapons systems such as fighter aircraft, frigates, and tanks. As a result, smaller armament projects that lack sufficient funding or personnel, are often neglected. However, these smaller systems are essential for integrating reconnaissance, command, and control resources, thereby establishing uniform situational awareness. While tanks and ships remain important on the battlefield, recent acquisitions of these „monolithic systems“ represent only a small fraction of the necessary changes within the German Armed Forces. The decisive factor in the outcome of a war is not a single weapon system, but the coordinated and effective use of all available resources in a network. Achieving this requires a balance between spending on monolithic systems and on interfaces, decision accelerators, and coordination elements in the operation and deployment of the armed forces [1].

Modern conflicts often involve state and non-state actors employing unconventional tactics. For instance, cyber-attacks can cripple national infrastructure without a single shot being fired. The German Armed Forces, or Bundeswehr, must adapt to such hybrid threats by integrating cutting-edge technologies into their operational framework [2].

Traditional battlefields have been supplanted by digital landscapes where cyber warfare, electronic warfare, and information operations play a pivotal role.

Germany has witnessed the growing importance of cyber capabilities in both offensive and defensive operations. The establishment of the Cyber and Information Domain Service (CIR) in 2017 and its launch as a new military branch within the Bundeswehr in 2024 underscores this shift, emphasizing the need to safeguard critical infrastructure and ensure operational integrity in the face of cyber threats [3].

Rise of New and Advanced Technologies

Technological advancements such as AI, machine learning, autonomous systems, unmanned teaming, laser light modules (LLM), responsive space, LEO, AR, VR, XR, data fusion and loitering munition offer transformative potential for military operations [4]. The Bundeswehr’s adoption of these technologies is vital for enhancing decision-making, improving situational awareness, and increasing operational efficiency.

AI and machine learning, for instance, have revolutionized data analysis, enabling real-time processing of vast amounts of information to support tactical and strategic decisions [5].

Autonomous systems, such as unmanned aerial vehicles (UAVs) and ground robots, enhance reconnaissance, surveillance, and logistical support, reducing risks to personnel and increasing operational reach, as seen in Ukraine. The Ukrainian battlespace features the most intensive use of drones in a military conflict in history, marking a shift in warfare tactics and technology and reaching unprecedented levels. According to the Royal United Services Institute, Ukraine is losing approximately 10,000 drones each month, highlighting the extensive deployment of these devices. With aerial defense systems significantly diminishing the effectiveness of manned aviation, unmanned systems have become especially crucial [6].

In many ways, the war in Ukraine reflects the critical importance of innovation in building resilience in military conflicts, and how urgency can fast-track innovations and their procurement. The Ukrainian government and its military have adapted quickly to the Russian onslaught by incorporating various innovations in their troops. Their approach should serve as an example for Germany and NATO partners.

Maintaining a Strategic Advantage

To remain competitive on the global stage, Germany must invest in innovative defense technologies – now. This includes the development of next-generation weapon systems, advanced communication networks, and sophisticated surveillance and reconnaissance capabilities.

Maintaining a technological edge is crucial in an era in which geopolitical tensions and military advancements by other nations pose significant challenges.

2. Defense Innovation Hubs: Crucial Collaboration Points

Defense innovation hubs serve as critical nodes for collaboration between the military, academia, and industry. These hubs are instrumental in fostering a culture of innovation and ensuring that cutting-edge technology is seamlessly integrated into military applications.

Role and Importance

Innovation hubs act as drivers for new ideas, facilitating the rapid prototyping and testing of novel technologies. They provide a collaborative environment where military needs can be directly addressed by technological solutions developed by startups and industry experts [7].

The importance of innovation hubs lies in their ability to bridge the gap between theoretical research and practical application. By bringing together diverse stakeholders, including defense personnel, scientists, engineers, and entrepreneurs, these hubs create a dynamic ecosystem that accelerates the development of innovative solutions.

Bundeswehr Cyber Innovation Hub

In Germany, the Bundeswehr Cyber Innovation Hub (CIHBw) is a prime example of such a key player. Established to drive digital transformation and innovation within the armed forces, the CIHBw focuses on mostly software-defined emerging technologies, developing defense systems to bolster the Bundeswehr’s resilience. It collaborates with startups, venture capitalists and established companies to accelerate the development and deployment of innovative solutions [8].

User centered solutions – defined by impact

The determining factor of innovation is time. A high pace of innovation is therefore critical for the CIHBw – and the Bundeswehr. For this reason, the CIHBw follows a Minimum Viable4 Product (MVP) approach. These prototype software solutions are continuously improved and expanded by the CIHBw. In its projects, the CIHBw focuses primarily on solutions that can be implemented quickly. The defining matter is impact. This also includes dual-use solutions – civilian software or startup products already available on the market which the CIHBw identifies, adapts, and makes usable for military systems. This approach is particularly cost-efficient, and by focusing on market availability, the CIHBw ensures short innovation cycles and a high pace of innovation, as lengthy procurement processes can be avoided. The triad of MVP, market availability, and impact is the key to a modern procurement process.

The goal is to bring innovation projects from the initial idea into the hands of soldiers within 180 days. The determining factor for every innovation project developed by the CIHBw is the user’s need. The solutions developed by the CIHBw always address specific problems faced by the troops. Therefore, the users are always involved in the innovation projects from the very beginning.

It is not left to chance whether a mere idea becomes a real solution. The process of the innovation project does not function like a linear assembly line but is iterative. This process allows for flexible responses to changes and feedback. Instead of a rigid process, it is important to quickly test existing solutions that are useful to the Bundeswehr. This is why it is crucial that the users of the solution – that is, soldiers or other members of the Bundeswehr – are involved in the innovation development from the very beginning.

Benefits of Collaboration

Collaboration within the CIHBw leads to a more agile and responsive defense ecosystem. It enables the military to leverage the latest technological advancements and ensures that defense projects remain at the forefront of innovation. Furthermore, the hub helps mitigate the risk of obsolescence and reduce the time required to bring new technologies from the laboratory to the battlefield.

The collaborative approach also encourages cross-disciplinary research and development, resulting in holistic solutions that address complex defense challenges. By engaging with a wide range of stakeholders, including international partners, Germany can tap into a global pool of knowledge and expertise, enhancing its defense capabilities and strategic resilience.

3. Software-Defined Defense: Key to Success

Software-defined defense refers to the use of software to manage and control military systems and operations. This paradigm shift from hardware-centric to software-centric approaches offers significant advantages in terms of flexibility, scalability, and cost-effectiveness.

Flexibility and Adaptability

Software-defined systems can be easily updated and reconfigured to meet evolving operational requirements. This flexibility is crucial in responding to new threats and incorporating emerging technologies without the need for extensive hardware modifications. The ability to rapidly update and deploy software patches ensures that military systems remain resilient against evolving cyber threats. This adaptability extends to mission planning and execution, where software-defined platforms can be reprogrammed to address specific operational needs, enhancing impact and overall mission effectiveness [9].

Enhanced Capabilities

Software-defined solutions enable the integration of AI and machine learning algorithms, enhancing the capabilities of military systems. For example, autonomous vehicles and drones can be equipped with AI-based navigation and targeting systems, improving their effectiveness in complex environments [10].

Moreover, software-defined networks (SDNs) provide enhanced communication and data-sharing capabilities, facilitating seamless interoperability between different military units and platforms. This interconnectedness enables real-time situational awareness and coordinated responses which are critical in modern warfare.

Cost-Effectiveness

Germany is facing major budgetary challenges in restoring its military capabilities. The German Economic Institute (IW) estimates that the historic underfunding of the Bundeswehr relative to NATO standards is at least €394 billion [11]. It is inevitable that government spending on the Bundeswehr will have to increase. At the same time even more funding is needed to update Bundeswehr’s technological infrastructure.

By transitioning to software-defined systems and thereby reducing the dependency on specialized hardware, the Bundeswehr can allocate resources more efficiently and ensure that its technological infrastructure remains up-to-date. Simultaneously, it frees up financial resources for further investments.

The cost-effectiveness of software-defined defense is particularly evident in the context of lifecycle management. Unlike hardware-centric systems that require costly upgrades and replacements, software-defined platforms can be continuously improved through software updates, extending their operational lifespan and reducing maintenance costs [12].

4. Venture Capitalists: Working Capital to bridge the „Valley of Death“

Worldwide, more money is flowing into defense than ever before. This is the result of regular surveys conducted by the Stockholm International Peace Research Institute (SIPRI). The largest increase in spending is in Europe [13]. However, large corporations and startups benefit from this in different ways: While the DAX-listed company Rheinmetall experienced a record number of orders last year due to increased demand for tanks and ammunition, investments in defense startups stagnated. So far, the significantly increased government spending on the military sector has not trickled down to young companies.

In 2023, investors in Europe put only around $300 million in venture capital into defense startups. That was no more than in the previous year. By comparison, Rheinmetall alone invested €370 million in research and development. In total, about $45 billion was invested in startups in Europe last year [14].

The main reason for the lack of investments in defense startups in Europe and especially in Germany are the venture capitalists’ LP agreements, due to regulations of the European Investment Bank (EIB). So far, the EIB mandate currently prohibits investment in the manufacture of weapons or ammunition only, and instead requires that dual-use projects derive more than 50% of their expected revenues from civilian use. And even the one-billion-euro NATO Innovation Fund has only been allowed to invest in „dual-use“ technologies.

In addition, there is a limited number of LPs from which Venture Capitalists investing in defense can raise capital – primarily family offices and high net-worth individuals.

The „Valley of Death“

The „valley of death“ refers to the challenging period between technological development and commercialization, where many promising innovations fail due to a lack of funding [15]. Especially in defense, where procurement processes can take years, a robust funding is crucial.

Lack of funding is a major reason why defense tech startups fall short.

Venture capitalists could play a crucial role in bridging this gap by providing the necessary financial support to bring innovative defense technologies to market. But, as noted above, so far investment regulations prevent venture capitalists from investing.

Importance of Venture Capital

Venture capital funding is essential for early-stage startups that may struggle to secure traditional financing due to the high-risk nature of their projects. By investing in these startups, venture capitalists help to de-risk the innovation process and foster the growth of a vibrant defense technology ecosystem.

The Bundeswehr Cyber Innovation Hub provides essential knowledge and assistance for venture capitalists and startups, to determine the product-market fit of defense innovations. Defense tech requires highly specific knowledge of users’ needs and demands. The CIHBw expertise and close ties to the armed forces provide unprecedented value to venture capitalists to evaluate investment targets and to startups to develop market-fit solutions.

Venture capitalists can accelerate the development and deployment of new technologies, ensuring that the Bundeswehr remains at the cutting edge of innovation.

Successful Collaborations

In Germany, Project A is one of the few German VC firms that is loud and proud about investing in dual-use. Its portfolio includes drone companies Quantum Systems (UAV) and ARX Robotics (UGV) – both startups have worked closely with the CIHBw on multiple projects. ARX’ founding was encouraged by the CIHBw. Other prominent dual-use tech investors include Vilnius-based ScaleWolf and Germany’s HV Capital and Deutsche Telekom Capital Partners (DTCP).

However, the only German unicorn in defense tech, AI-company Helsing, is mainly backed by US VC giant General Catalyst. In May it secured a €450 million in Series C funding [16].

Overcoming Challenges

Despite the benefits, venture capital investment in defense technology faces challenges such as regulatory hurdles and the inherently high-risk nature of the sector. Addressing these challenges requires a supportive legal and policy framework that encourages investment while ensuring national security interests are safeguarded.

To overcome these challenges, Germany must further implement policies that streamline regulatory processes and provide incentives for venture capital investment in defense technology. Initiatives such as the European Defense Fund and the German Federal Government’s High-Tech Strategy can play a crucial role in creating an environment conducive for innovation and investment.

5. Setting the Legal Framework

A robust legal framework is essential for fostering innovation in defense technology. It provides the necessary guidelines and regulations to ensure that technological advancements are developed and deployed in a manner that aligns with national security priorities.

Regulatory Environment

Germany’s regulatory environment for defense innovation includes laws and policies that govern research and development, procurement, and the use of emerging technologies. These regulations are designed to balance the need for innovation with the imperative to protect sensitive information and maintain operational security [17].

The German Federal Office of Bundeswehr Equipment, Information Technology, and In-Service Support (BAAINBw) plays a key role in overseeing defense procurement and ensuring compliance with regulatory standards. The BAAINBw works closely with industry partners to streamline procurement processes [18].

Yet, procurement needs to be modified and streamlined to meet the urgent threat Germany and NATO allies face in light of Russia’s war of aggression. Current procurement regulations are fit for times of peace, but not for today.

International Collaboration and Compliance

In Germany’s defense innovation efforts, there is a need for collaboration with international partners. Ensuring compliance with international agreements and standards is vital for maintaining trust and cooperation with allies. This includes adhering to export control regulations and participating in multinational research initiatives.

In Germany, however, international collaboration in defense innovation is mainly facilitated through private organizations, such as VC events, hackathons, meetups and conferences, and the CIHBw. NATO and the European Union provide platforms for joint research projects, but these are not being used sufficiently. By participating in these initiatives, Germany could leverage the expertise and resources of its allies, enhancing its own defense capabilities and contributing to collective security efforts.

Conclusion

Innovation in defense technology is paramount for the German Armed Forces to address today’s security challenges and maintain a strategic edge. The need for innovation is driven by the evolving nature of warfare and the rapid pace of technological advancements. The Bundeswehr Cyber Innovation Hub plays a critical role in fostering collaboration and accelerating the development of new technologies. The shift towards software-defined defense offers numerous benefits in terms of flexibility, capability enhancement, and cost-effectiveness. Venture capital investment is crucial for bringing innovative solutions to market and bridging the „valley of death“. A supportive legal framework ensures that these innovations are developed and deployed in a secure and effective manner.

By embracing these elements, Germany can ensure that its armed forces are well equipped to meet the demands of modern warfare and protect national security in an increasingly complex and dynamic global environment.

Furthermore: When discussing startup promotion in the defense sector in Germany it must be clear, that procurement acceleration and financing are inextricably linked. One will not work without the other:

If there are no opportunities for accelerated procurement – or if such opportunities are not sufficiently utilized – this directly impacts the willingness of venture capital funds to invest. No private fund can afford to wait the statistical seven years for its portfolio company to achieve significant revenues. Under these conditions, private funds are forced to prefer investment opportunities outside the defense sector.

Conversely, rapidly developed innovative solutions by startups will not be available if there is insufficient investment willingness on the part of VC funds.

Additionally, in the current German debate on defense innovation there is an attempt to reinvent the wheel. A pronounced insular mentality is evident. But in fact, all the key points of the discussion are not new and have been known for decades, thoroughly empirically and scientifically studied, and widely tested in practice.

Sven Weizenegger

Best practices are most significant in the US. In the USA for example, in response to the increasing pressure for innovation during the emerging Cold War, DARPA (Defense Advanced Research Projects Agency) was established in 1958 – 66 years ago. This led to the development of a broad and successful defense innovation system, which also has significant positive spillover effects on the civilian innovation capacity and economic performance of the USA. It includes, among other things, the creation of attractive conditions for private VC funds in defense-related startups, government defense VC funds, government involvement in the strategic allocation of private capital (the Pentagon’s Office of Strategic Capital), and a strong network of innovation units located directly within the military to ensure the direct military relevance and implementation of innovative solutions, including Defense Innovation Unit (DIU), National Security Innovation Network (NSIN), AFWERX (Air Force innovation arm), XVIII Airborne, etc.

Of course, the situation in the USA cannot directly be applied to Germany, but core elements sure can and must.

The CIHBw is already well-positioned in its mission and structure to quickly make innovative solutions available to our armed forces. Its innovation capability has been demonstrated in more than 170 innovation projects over the past years. It is now important to integrate the topic of financing for startups in line with internationally long tested and recognized best practices, so that it swiftly contributes to Germany’s modern defense readiness.

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Sven Weizenegger is Head of the German Armed Forces‘ Cyber Innovation Hub.