Germany’s defence boom draws industry giants into military shift

Founded in 1864, Cologne-based Deutz—Germany’s oldest engine maker—built its reputation supplying engines for agriculture, mining and construction. Now, it is pivoting toward the defence sector, reflecting a broader shift across German industry as military spending surges, as highlighted in the latest analysis by The Telegraph.

The turning point came after Russia’s 2022 invasion of Ukraine, when then-chancellor Olaf Scholz secured political backing for a €100 billion defence fund. His successor, Friedrich Merz, has since accelerated the build-up by loosening Germany’s constitutional debt brake for defence, pushing spending sharply higher.

Germany’s defence budget rose to about €62 billion last year, with an additional €24 billion from the special fund. Core spending is set to climb to €83 billion this year and is projected to reach €153 billion by 2029—nearly triple pre-war levels.

For companies like Deutz, the shift presents a strategic opportunity. Chief executive Sebastian Schulte said the company’s engines—designed to operate in extreme environments—are well suited for military use. While he initially expected resistance from employees due to Germany’s historical sensitivities around militarisation, staff largely supported the move, citing both technical challenges and job security.

The defence push comes as Germany’s industrial base faces weak demand, high energy costs and increasing competition from China. Analysts say rearmament could provide a rare source of economic growth. At the same time, Berlin is seeking to reduce reliance on US defence suppliers, especially amid transatlantic tensions during Donald Trump’s presidency.

Recent data suggests a strong domestic tilt: of 178 defence contracts awarded, 160 went to German companies, with a combined value of €182 billion. Major contractor Rheinmetall secured nearly half, but significant opportunities remain for smaller firms.

Much of the potential lies in Germany’s vast automotive supply chain, which is under pressure as car production declines and the transition to electric vehicles reduces component demand. Suppliers are increasingly exploring defence as an alternative market. Companies like Volkswagen and Bosch are assessing opportunities, though both stress they are not entering weapons manufacturing.

Attitudes within the industry have shifted markedly. Where defence was once avoided for reputational reasons, companies are now actively exploring how to contribute technology and scale production. Deutz, for example, is partnering with drone manufacturers to help expand output—an approach its leadership sees as a model for collaboration between traditional industry and defence start-ups.

However, challenges remain. Defence procurement is complex and often favors established contractors, making it difficult for new entrants to scale quickly. Production constraints also limit the extent of the shift. Schulte noted that while Deutz produces up to 180,000 engines annually, only a small fraction would be destined for defence.

Economists caution that even rapid growth in defence will not fully offset weaknesses in Germany’s automotive sector, which accounts for about 7% of the economy, compared with roughly 0.5% for defence.

Ultimately, while Germany’s defence boom is reshaping industrial priorities and creating new opportunities, its long-term impact will depend on Berlin’s ability to translate increased spending into a coherent industrial strategy.

By Tamilla Hasanova