Germany shifts gears: From auto powerhouse to Europe’s arsenal

Germany is accelerating a dramatic transformation of its industrial base, pivoting from a struggling export-driven model centered on automobiles to a rapidly expanding defence sector, as economic stagnation and geopolitical pressures reshape Europe’s largest economy.

After decades as the continent’s manufacturing engine, Germany is facing its longest stretch of stagnation since World War II. Intensifying competition from China, weakening global demand, and structural challenges in the auto sector have eroded the foundations of its export model, the Wall Street Journal writes.

The scale of the downturn is evident across key indicators. Roughly 15,000 manufacturing jobs are being lost each month, including in the once-dominant automotive industry. Major carmakers have reported sharp declines: Mercedes-Benz saw profits fall 49% in 2025, while Volkswagen posted a 44% drop and announced plans to cut 50,000 jobs in Germany by 2030. Porsche has also been hit hard, with operating profit plunging 98% compared with 2024.

While services now account for around 70% of Germany’s economic output, manufacturing remains a critical pillar at about 20%, with extensive links to industrial supply chains.

Against this backdrop, Berlin is increasingly positioning the country as the backbone of Europe’s defense industry, amid growing concerns over regional security and uncertainty surrounding long-term U.S. security guarantees.

“The car industry is going through a crunch because of the global downturn, geopolitical risks and rising competition from China,” said Klaus Rosenfeld, chief executive of Schaeffler.

“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,” he added.

Rosenfeld’s company has begun producing engines for drones, onboard systems for armored vehicles, and components for military aviation, aiming to generate 10% of its €24 billion turnover from defense.

“In Germany there is a lot of whining—if everyone just complains all the time that things are horrible then nothing will work. We must roll up our sleeves,” he said.

Government policy is reinforcing this shift. Berlin is not attempting to revive its old industrial model but to replace it, redirecting idle factories and laid-off skilled workers toward defense production. The push is supported by regulatory changes in Germany and the European Union that have improved access to capital for defense firms, alongside nearly €1 trillion in public funding driven by security concerns.

“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.

“Repurposing existing production sites from other industries can reduce the hurdles to scaling up domestic capacity,” she added.

Industrial firms are already adapting. Volkswagen is reportedly in talks to produce components for Israel’s Iron Dome system by 2027, while other manufacturers have expanded shifts to meet demand for ammunition and weapons, including supplies for Ukraine.

Sebastian C. Schulte, chief executive of engine manufacturer Deutz, described how the company pivoted rapidly following Russia’s full-scale invasion of Ukraine.

“Transforming the company became my job,” he said. “Our USP is stable supply chains: What works for engines and mining equipment will work for the defense industry.”

The strategy has delivered results. Deutz has expanded into supplying engines for Patriot air-defense systems and unmanned vehicles, while avoiding mass layoffs and achieving 15% revenue growth last year.

“We decided to put our money where our mouth is,” Schulte said.

As Europe races to rearm, Germany’s industrial reinvention is gathering pace—turning economic adversity into a strategic realignment with far-reaching implications.

By Sabina Mammadli