Key Takeaways
Germany is recasting its industrial base as the West’s arsenal, pivoting from cars to cannons as its export-led economic model breaks down after decades of success. The move is backed by nearly one trillion euros in defense funding driven by fears of Russian expansionism and an increasingly hostile global environment.
"A great trend in the German economy is that people are asking much more than before ‘how can we contribute to what has not been done over the last many years—to regain the ability to defend ourselves’—and this is what we are doing,” said Klaus Rosenfeld, chief executive of Schaeffler, a leading auto supplier now entering the defense sector.
The shift comes as Germany’s manufacturing engine sputters, losing roughly 15,000 jobs monthly, according to government figures. Volkswagen, the world’s second-largest carmaker, saw its profit drop 44 percent and announced plans to cut 50,000 jobs by 2030. Meanwhile, auto supplier Deutz saw revenues grow 15 percent last year after it began transforming its business to supply the defense industry.
With American security guarantees looking less certain and Europe racing to rearm, Berlin is positioning itself to become the backbone of the continent’s defense industry. The strategy aims to transform idle factories and a growing pool of laid-off skilled workers from the auto sector into a strategic asset for European defense.
The pivot is widespread. Schaeffler, a global auto supplier with a €24 billion turnover, established a defense division last year and aims for it to generate 10 percent of its business. The company is now making engines for drones and systems for armored vehicles. Deutz, a 162-year-old engine maker, now supplies power-generation engines for Patriot air-defense systems. Even Volkswagen is in talks to produce components for Israel’s Iron Dome system by 2027.
“Europe must be able to defend itself [and] that also means building a strong security and defense industry we can depend on,” said Economy Minister Katherina Reiche. The government is actively supporting the transition, funding a matchmaking platform to connect established defense supply chains with companies from other sectors. Nearly 90 percent of European venture capital invested in defense technology is now flowing into German companies.
This industrial transformation reflects a significant change in Germany's economic and security policy, leveraging its manufacturing prowess to address new geopolitical realities. The success of companies like Deutz, which avoided mass layoffs by shifting workers to defense production, provides a model for the broader industrial transition.
This article is for informational purposes only and does not constitute investment advice.
