As Europe prepares to increase military spending, German defence companies are turning to the struggling car industry to expand capacity, potentially reviving the continent’s largest economy after two years of contraction. Manufacturers of tanks, radar, and weapons are aiming to boost production in response to US pressure for Europe to enhance its own defences.
Carmakers, once Germany’s economic powerhouse, are cutting jobs and closing plants amid slowing demand and the transition to electric vehicles. Rheinmetall, Europe’s top ammunition maker, announced last week that it would repurpose two plants currently producing automotive parts to primarily make defence equipment.
Hensoldt, the manufacturer of TRML-4D radar systems used by Ukraine in its conflict with Russia, is in discussions to hire around 200 workers from major auto parts suppliers Bosch and Continental. “We are benefiting from the difficulties in the automotive industry,” Hensoldt’s CEO Oliver Doerre told Reuters, adding that further investment could more than double annual production of the TRML-4D to between 25 and 30 units.
On March 2, European leaders agreed to increase military spending at an emergency summit in London, following a public clash between US President Donald Trump and Ukrainian President Volodymyr Zelensky that cast doubt over future US support for Ukraine. EU leaders are scheduled to meet on March 6 to discuss proposals to mobilize up to €800 billion (S$1.1 trillion) for rearmament, including €150 billion of joint borrowing.
In separate talks, parties negotiating to form Germany’s new government announced proposals on March 4 to establish a €500 billion fund for infrastructure and overhaul borrowing rules to significantly increase defence spending. Consequently, European defence stocks have rallied sharply this week.
The Bruegel think-tank estimates that Europe may need 300,000 additional troops and a short-term annual increase in defence spending of at least €250 billion to deter Russian aggression. A shift towards defence production could boost Germany’s economy, which has lagged behind European peers due to high energy costs, red tape, and aggressive competition from abroad.
The IfW Kiel Institute for the World Economy estimates that the EU’s GDP could grow by 0.9-1.5 percent annually if member states raise military spending to 3.5 percent of GDP from the current 2 percent NATO target and rely on local technology. For Germany, with its existing industrial infrastructure, GDP growth would likely be at the upper end of that range.
Raising defence spending to 3 percent of GDP would more than double Germany’s annual investments to €25.5 billion, create 245,000 direct and indirect jobs, and generate nearly €42 billion in production and service activity each year, according to EY estimates. In 2022, Germany’s security and defence industry employed 387,000 people, compared to the auto sector’s 800,000 employees. Defence industry sales totaled €47 billion, while the car sector generated €506 billion.
“We must consider the defence industry as an economic motor for Germany,” said Hensoldt’s Doerre. He noted that using spare capacity in the car sector would help preserve Germany’s established manufacturing infrastructure while boosting military equipment output.
Car industry supplier ZF Friedrichshafen, currently undergoing restructuring, has been in contact with defence companies about shifting workers, citing “industrial synergies.” Tank gearbox manufacturer Renk, previously owned by Volkswagen, has also focused on scaling production capacities in the automotive sector.
Analysts at Deutsche Bank warned in February that increased EU defence spending might not significantly benefit the local industry, which is more fragmented than its US counterpart. Former European Central Bank chief Mario Draghi noted that between mid-2022 and mid-2023, nearly four-fifths of the EU’s defence procurement spending went to non-EU suppliers.
Rheinmetall is also in talks with Continental to take on around 100 employees to bolster operations. CEO Armin Papperger emphasized the need for significant investments in missiles, ammunition, and vehicles to make Europe more resilient, acknowledging that the continent is far behind its spending targets.
“(Russian President Vladimir) Putin knows this too, of course, and that’s why we have to act,” Papperger said.