European drone investments: Mapping the value chain

Co-author: Antonio Marco D'Errico

We thank Okke Lucassen (TNO/Dutch Ministry of Defense) and Willem-Jan van Loon (Deep Tech Defence Alliance) for their insightful feedback on earlier versions of this report.

EU leaders have recently intensified their focus on strengthening military drone capabilities – both by increasing domestic production and by enhancing defenses against hostile drones. In October 2025, the European Commission unveiled its Defence Readiness Roadmap 2030, which makes drones a flagship priority. A centerpiece of this plan is the so-called “Drone Wall” (formally the Drone Defence Initiative), a networked anti-drone system that the EU plans to deploy along Europe’s eastern flank. However, many details about its scope and implementation are currently unclear. EU leaders have broadly backed accelerating joint efforts on drone production, anti-drone systems, and air defense projects in light of recent airspace incursions.

Notably, the Commission’s roadmap is industrial in nature – it seeks to boost European production of defense systems, including drones, and reduce reliance on imports. Drones are not merely military assets; they have become a cornerstone of modern industrial capability and a symbol of technological sovereignty. Countries that master drone production gain an edge in batteries, electric motors, and power electronics – capabilities that spill over into civilian industries and future technologies. Currently, around 80% of EU member states’ military equipment procurement comes from outside the EU, a dependency deemed unsustainable. The EU’s goal is to reverse this trend: By 2035, at least 60% of member states’ defense procurement budgets should be spent within Europe.

Alongside these policy targets, significant funding has been earmarked for drones. European Commission President Ursula von der Leyen announced a EUR 2bn EU package dedicated to military drones for Ukraine, recognizing that drones have become “the keystone” of modern warfare (they account for up to 80% of combat casualties in the Russia-Ukraine war). Furthermore, the anti-drone wall will receive an allocation of about EUR 6bn and will be developed in collaboration with Ukraine, which provides real-world testing and development experience. This anti-drone wall budget is part of a broader effort to boost Europe’s defense readiness by 2035. European defense spending overall has been rising sharply, reaching EUR 343bn in 2024 (the 10th consecutive year of growth) and projected to hit EUR 381bn in 2025.

In this report, we analyze the structure of the drone supply chain using input-output tables and a “Leontief” model, which allows us to trace both direct and indirect effects across global value chains. This approach helps identify not only which EU sectors and countries would benefit most from increased local procurement, but also where value added may leak abroad through upstream linkages.

Even with higher EU procurement targets, a substantial share of value added is likely to leak abroad, as components and materials remain heavily sourced from international supply chains. To quantify where the additional euros land, we translate drone investments into final-demand shocks within a Leontief input-output (IO) model. The model’s coefficients then pull in upstream inputs (metals, chemicals, electronics parts, energy, and business services) automatically. This gives a clear view of direct activity (which country and sector book the order) and indirect activity (which suppliers produce down the chain).

Leontief models are deliberately simple, and that simplicity has limits. They assume fixed technologies (no input substitution when prices move), don’t allow wages, margins or exchange rates to adjust, and assume capacity is available. In the real world, a surge in defense orders could displace civilian production (e.g., machining or electronics), tighten specialist labor markets, and prompt supplier switching as availability and relative prices change.[1] New initiatives and innovations – such as drones with sodium batteries or without rare earth metals – can also significantly alter the composition of the value chain. In addition, geopolitical developments can drastically disrupt supply chains. Furthermore, this analysis was conducted on supply chains at the sector level. Military supply chains may differ from the average structure of the entire sector due to security requirements. Still, these models can give insight in global value chains and trade in value added.

Since there is no IO table with a separate drone sector, we break down the drone supply chain into key sectors as described in the appendix, and map these to HS-coded input-output data using trade data and recent program information. For each segment, we estimate the share of production in EU member states versus external (non-EU) sources and identify the top countries involved. We model two scenarios:

The appendix presents the full methodology and the table of sectoral shocks. Using the Leontief input-output framework, we trace how the shocks from increased EU drone procurement propagate through the economy. The direct effects represent the initial increase in value added from final production, excluding the additional use of intermediates. These gains are booked by the sectors most directly involved in drone manufacturing, as detailed in the component breakdown in the appendix. However, the economic impact extends well beyond these direct sectors. Intermediates used in drone production also contain value added, either domestically or abroad. This generates first-order effects, as suppliers of components such as carbon fiber, rare earth magnets, semiconductors, and battery systems ramp up production. These suppliers in turn rely on their own inputs, creating second-order effects, and so on. This recursive structure allows us to capture the full chain of economic activity triggered by the initial shock.

How is this demand shock constructed?

Because the input-output tables do not include a separate sector for drones, we have developed a methodology to distribute the demand shock as realistically as possible. Military drones come in various shapes and sizes (quad-, hexa-, and octocopters, as well as fixed-wing and VTOL systems) and serve a wide range of purposes such as attack, reconnaissance, resupply, and electronic disruption. Despite this variation, all drones share one common feature: They consist of multiple high-tech components, as shown in the infographic.

[1] In a forthcoming report, we will extend that analysis into a full-economy view using a Computable Equilibrium model (CGE), which introduces prices and constraints: producers and consumers can substitute across inputs and suppliers; labor and capital are scarce and reallocated; government budget choices have macro consequences; and trade responds endogenously via import–domestic substitution and export supply.

To reflect this complexity, we have broken down the total investment amount into subcomponents and allocated it to the sectors with a relatively large share in drone production. In addition to the aerospace sector, these include manufacturers of electrical and electronic equipment, precision and control instruments, weapons producers, and R&D and ICT companies. This approach prevents the analysis from relying solely on aerospace and aligns more closely with the actual industrial structure of the drone supply chain. A full description of the various components and the role of different European companies in their production is provided in the appendix, along with details of the methodology.

Which country captures the investment?

In the Leontief input-output model, the sum of all first and higher-order increases in value added equals the total additional spending on drones. This allows us to trace which share of additional EU drone investments ultimately lands where. Figures 1 and 2 illustrate this distribution for the two scenarios.

Scenario 1

In the historical setting, the US captures the largest share with 32%, reflecting its dominant role as a supplier of complete systems and high-value subsystems. Through input-output linkages, the EU retains 27% of the total value added, slightly below the 28% estimated for direct procurement. Within the EU, Germany, France, and Italy emerge as the main contributors, consistent with their strong aerospace and defense manufacturing bases discussed in the component analysis in the appendix.

Scenario 2

Under the 60% EU procurement scenario, the picture changes. The EU’s share rises to 51%, although this is still well below the direct procurement, as nearly one-sixth of the intended domestic spending leaks to non-EU suppliers through global supply chains. This gap is much larger than in the historical scenario, where the difference between direct procurement (28%) and total value added (27%) was marginal. In other words, as Europe ramps up local sourcing, the complexity of upstream linkages creates more leakage.

The value added captured by the US, Israel, and Turkey almost halves compared to the historical scenario, while the UK’s share declines more modestly due to its deeper integration in European supply chains. China’s share even increases slightly, driven by its upstream role in critical raw materials and electronics. Within the EU, Germany, France, Italy, and Spain gain the most, as their advanced drone programs and component capabilities replace imports from the US, Israel, and Turkey.

Of course, these countries are also among the largest EU economies. When we normalize by GDP, the distribution looks very different (see figures 3 and 4). Estonia stands out as the biggest relative beneficiary, thanks to its specialization in launch and recovery systems and tactical unmanned aerial vehicle (UAV) components (notably Threod Systems and ELI Military Solutions). Italy also performs strongly in relative terms, reflecting its growing role in loitering munitions and drone technology, giving it a larger proportional boost compared to other major EU economies.

Decomposition of value added

Figure 5 shows how value added accumulates across the different production rounds (supply chain tiers) in scenario 2, scaled to the size of the economy. The results indicate that Turkey realizes most of its value added in the final production round. Because it imports many subcomponents, the indirect effects are limited. Israel benefits more strongly, as a larger share of the production chain is domestic. The Netherlands generates relatively little value added in the final tier and comparatively more as a supplier. It is important to note that the model is based on the current sector structure and trade relationships. Within the traditional aerospace industry, the Netherlands primarily acts as a parts supplier. Additional domestic assembly capacity – such as the recent focus on assembly at VDL Nedcar – could shift the sector structure and change the chain profile, resulting in more domestic processing and a larger share in higher tiers.

Sectoral connections to the drone industry in the EU

The heatmap in table 1 shows clear variation in sectoral impacts across EU member states. Darker green indicates stronger relative gains in value added. Unsurprisingly, the most intense colors appear in sectors directly linked to drone production. The aviation industry and the arms and ammunition industry benefit the most, reflecting their central role in drone assembly and weapons integration discussed in the component analysis.

France benefits the most in arms and ammunition, followed by Poland and Germany, which aligns with their strong defense manufacturing bases and recent investments in loitering munitions and missile systems. For airplanes, the Netherlands stands out as the largest beneficiary, followed by Poland and Spain. This reflects the Netherlands’ relatively new role in advanced aerostructures and integration capabilities, and Spain’s involvement in Eurodrone and tactical UAV programs. Spain also shows the strongest relative gains in precision and control instruments, while France and Sweden stand out in electrical and electronic equipment, consistent with their specialization in avionics and sensor technologies.

Other sectors that are directly shocked, such as machinery, ICT, and R&D, show more modest relative impacts. This is not because they are unimportant – on the contrary, they are essential for propulsion systems, ground control, and software integration – but because these sectors are very large in many EU countries. The shock therefore represents a smaller share of their total activity, limiting the relative effect.

Indirect effects are clearly visible in upstream industries. Fabricated metal products and various sectors producing metallic materials see notable gains, particularly in France and Italy, as they supply structural components and specialized alloys for airframes and propulsion systems. To a lesser extent, plastics and rubber, basic chemicals, manufacturing services, and transport also benefit, reflecting their role in composite materials, coatings, and logistics.

The European ambition to spend at least 60% of defense procurement within the EU by 2035 –with scaling up drone production as a key component – will have significant economic implications. Our analysis shows that under a 60% procurement scenario, the share of value added retained within the EU rises from about 28% to 51%. This means that more than half of the economic impact of drone investments would remain in Europe, primarily benefiting countries with strong aerospace, electronics, and defense industries such as Germany, France, Italy, and Spain. At the same time, a substantial portion of value continues to leak abroad through complex supply chains, particularly for critical components and raw materials.

We base these results on the assumption that the input structure of drone components mirrors that of the broader sectors in which they are produced. For military drones, this structure may differ significantly, and additional requirements – such as national origin rules imposed by defense ministries – could alter the actual distribution of value added. Such requirements may increase domestic integration but also raise costs and complexity.

Furthermore, dependence on critical materials and technologies from non-EU countries, especially China, remains a structural risk. The success of Europe’s drone industry will therefore depend not only on investments in production capacity but also on strategic cooperation in securing raw materials, advancing technology, and boosting R&D.

Please read the Appendix: European drone investments