EUR: Defense tech’s critical minerals war

BLUF: European defense tech startups are at a disadvantage in the race for Chinese-controlled critical materials. Larger firms are even hesitant to tell the European Commission which of their products depend on Beijing.

Estonia has published a tender worth €460 million for drone detection equipment, as it moves to build a “drone wall” along its borders with Russia.

Denmark’s largest defense firm, Terma, has acquired British counter-drone company OSL.

Elon Musk’s SpaceX launched Poland’s first military satellites on Friday.

Leonardo and Thales are vying for the title of the EU’s highest-grossing defense firms in 2024, according to competing figures published this week, while Britain’s BAE Systems leads overall.

Europe’s defense industry needs critical raw materials that China controls—from neodymium magnets for drone motors to gallium for the GPU chips that power artificial intelligence.

The EU is trying to lower that dependence by increasing extraction, processing and recycling, while diversifying imports as much as it can. 

Last year’s Critical Raw Materials Act set targets for these goals, and the European Commission is expected to publish a new plan for pursuing them on Wednesday, called RESourceEU.

But no law written in Brussels can change geology—and China has been fortunate on that front. Nor can it quickly catch up to decades of Beijing’s investment in the sector. 

Major defense contractors are wary of exposing weaknesses in their supply chains that military adversaries could exploit. 

“We will never, never, never publish our supply chain,” Rheinmetall’s business development chief, Charles Dijon de Monteton, told an audience in Brussels on 18 November. “We also don't know our supply chain,” he added, comparing procurement of defense components to buying a PC. 

Industry sources told The Arsenal that they’re even careful about how much information they share confidentially with the European Commission because they worry about espionage and leaks. They’re more confident talking to their own national governments. 

Defense startups focused on a smaller array of products are less reticent, but feel left out of the race for raw materials. 

“Large primes secure long-term supply agreements and reserve capacity, which shifts risk down the chain to SMEs,” Jacques Nel, managing director of the Belgian autonomous drone startup, Drone Matrix, told The Arsenal.

“We see higher volatility in lead times and pricing, because the suppliers prioritize volume customers,” he added. “It also forces SMEs to carry much higher inventory buffers than they can comfortably finance.”

Pieter-Jan Note, founder and CEO of Belgian startup MAHI, which develops AI automation systems for sea-surface vessels, echoed that concern. 

“We need to be quite creative, because we don't have the same resources in terms of lobbyists, or even in just pure cash to spend on stockpiling.”

Nicolas Bas, head of strategy and public affairs for Belgian defense industry lobby group BSDi, said the EU should ensure the SME view doesn’t take a back seat to the interests of larger companies. 

“It’s quite normal that everybody is pushing for their own position,” he said, but small defense companies often view European discussions as “above their level.” 

A source from a major European defense firm, who, to be more candid, spoke to The Arsenal on condition of anonymity, called for financial incentives for company-level stockpiling. 

The source also said there should be procedures in place that permit defense firms to access others’ strategic stockpiles in a crisis, such as dipping into those designated for the automotive industry. 

Drone Matrix’s biggest concern is the permanent magnets used in their drones’ electric motors, Nel told The Arsenal. 

“These are rare earth magnets, typically neodymium iron boron. They give the motors high torque and efficiency at a very low weight, which is essential for small UAVs,” Nel said. “China dominates the mining, refinement and sintering of rare earth materials, so even if the final motor is assembled elsewhere, the raw material almost always originates from China.” 

Dysprosium, he added, is critical for heat resistance. 

The metal is used in everything from radio systems in fighter aircraft to artillery and missiles, Benedetta Girardi, analyst at The Hague Centre for Strategic Studies, told The Arsenal. Samarium, like dysprosium, is similarly valuable for its high melting point.

Both are largely mined in China, and virtually all of it is processed there. China also controls the majority of lithium processing.

“China controls 86% of the production of rare earth elements,” Girardi said, with Australia a distant second, producing about 6-7%, and the US in third at around 2%.

Pieter-Jan Note told The Arsenal that what keeps him awake at night is Taiwan. That’s where Nvidia’s GPUs are produced, which power MAHI’s AI systems. 

Nvidia’s market share is enormous, and the alternatives similarly depend on Taiwanese chip manufacturing. Every other component in MAHI’s product can be quickly substituted, he said, but not the GPUs. 

Meanwhile Taiwan, Girardi said, depends on Chinese supplies of gallium and germanium to produce those chips.

Advanced RF components, some microelectronics, and high-performance communications modules are also a challenge, Nel said. 

“Even where production is in Europe or the United States, the upstream wafers, substrates or chemicals often trace back to Asia.”

Geology is only one of China’s advantages. Some five decades of investment is another—not only in mining, but also “very well thought out investments in processing,” and supply chain oversight, Girardi said.

Other countries with significant mineral wealth didn’t show the same foresight. Australia, for example, has mining capacity, but still depends on China for processing. 

Europe has been especially late to the game, Girardi said. 

“Most policymakers and industry themselves don't really realize which materials are in which weapons or components,” she added.

Europe’s mineral production is limited, but not nonexistent. 

For example, about 45% of the world’s hafnium, another heat-resistant element used in missiles and jet engines, is mined in France. Framatome operates a zirconium processing site in Jarrie, near Grenoble, that extracts hafnium and other minerals. 

Belgium, meanwhile, has recycling capacity to extract roughly half of the critical elements identified on the EU’s list, Patrick Van Den Bossche, head of environment and materials technology at the Belgian industry association Agoria (which includes BSDi), told The Arsenal. Among them is germanium, used in night-vision goggles. 

Much of the scrap that provides Belgium with those elements is sourced from outside Europe, he said. But that excludes China, which keeps hold of its scrap.

China’s dominant position in critical materials is a source of diplomatic power, Girardi said.

To beat its American rival, “it has a series of coercive instruments, among which are export controls on critical raw materials that, if applied to the US, will also indirectly hurt Europe.” 

Still, China has reasons to work with Europe rather than strangle it, she added. In addition to its value as an export market, Europe is home to advanced lithography machines, a critical component in chip manufacturing. 

Those are controlled by the Dutch firm ASML, and China would like a piece of them: The firm does export some machines to China, but its most advanced technologies are subject to export controls.

“China knows that to play the long game, it cannot just choke Europe,” Girardi said.

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