Germany Is Reinventing Itself as a Weapons Factory

After decades as Europe’s manufacturing engine, the country is mired in its longest stretch of stagnation since World War II as it wrestles with competition from China and a slump in demand. The response is as stark as the crisis: recasting its industrial base as the West’s arsenal.

A mesh of data points reveal how the old model has cracked. Each month, roughly 15,000 jobs are disappearing from German manufacturing, including the once-dominant auto sector, according to government figures. Mercedes-Benz posted a 49% drop in profit for 2025, while Volkswagen, the world’s second-largest carmaker, said its profit dropped 44% in the same period and announced plans to cut 50,000 jobs in Germany by 2030.

Even flagship brands such as Porsche are reporting staggering hits, with operating profit sliding 98% compared with 2024, which was already one of its worst years in modern history. Much of the heavy lifting in the German economy is now being done by the services sector, which comprises around 70% of economic output, though manufacturing still accounts for 20%—and up to a fifth of all services are tied to industrial firms such as carmakers.

Now, as American security guarantees look less certain and Europe races to rearm, Berlin is positioning itself to become the backbone of the continent’s defense industry.

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, one of the world’s leading auto suppliers making everything from powertrains to bearings—and now an emerging player in the defense sector.

At the same time, recent regulatory changes in Germany and the European Union have improved capital-market access for defense companies, while huge government contracts and public financing schemes have unlocked nearly one trillion euros in defense funding, roughly $1.2 trillion, driven by fears of Russian expansionism and an ever more 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 Rosenfeld.

Rosenfeld’s firm is now making engines for drones, onboard systems for armored vehicles and components for military aviation. His aim is for 10% of the company’s turnover—currently €24 billion, equivalent to roughly $28 billion—to come from the defense division set up last year, with much of the output provided by its more than 100,000 total employees and 100 factories worldwide, including eight in the U.S.

“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.”

Across Germany’s industrial belt, factory lines that once powered the country’s export miracle are being rewired into the machinery of Europe’s rearmament.

The government is on board. Berlin’s approach isn’t to revive the old economy, but to replace it. Idle factory floors and a growing pool of laid-off skilled workers are being redirected into the only sector still expanding at scale.

Volkswagen is in talks with Israeli companies with the aim to start producing components for Israel’s Iron Dome system by 2027. A swath of companies have added third shifts to churn out weapons and ammunition for Ukraine. Patriot interceptors, long a purely American product, are soon to be manufactured in Germany to meet surging demand.

Nearly 90% of European venture capital invested in defense technology is flowing into German companies, according to government figures.

“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.

Reiche, together with cabinet colleagues, including the defense minister, has been pushing to transform ailing manufacturing companies into defense contractors. “Repurposing existing production sites from other industries can reduce the hurdles to scaling up domestic capacity,” she said.

The economy ministry is now funding a matchmaking platform, set up by the main defense-industry trade association BDSV, to connect established defense supply chains with companies from other sectors.

The push by nondefense companies into the sector is helping alleviate the pressure on traditional supply chains to scale up, BDSV head Hans Christoph Atzpodien said.

Sebastian C. Schulte took over as chief executive at Deutz, the 162-year-old pioneer of the internal-combustion engine, around two weeks before Russia launched its full-scale invasion of Ukraine in 2022. Like many industrial peers, the company had been battered by Germany’s weakening economy and the war made matters worse.

“Transforming the company became my job,” Schulte said.

Coming from the marine defense industry, his instinct was to turn a crisis accelerated by war into opportunity. “Our USP is stable supply chains: What works for engines and mining equipment will work for the defense industry,” he said.

While traditional defense companies often have very long development cycles and take years to expand production, manufacturers steeled in the fiercely competitive automotive market are able to scale up quickly, he said.

Indeed, Lockheed Martin, the U.S. defense giant that makes missiles for the Patriot air-defense system, produces only about 620 interceptor missiles a year despite huge demand triggered by the wars involving Russia and Iran.

Deutz, a nimbler business used to the fast-shifting whims of car buyers, moved so quickly that it now supplies power-generation engines for Patriot systems used by Saudi Arabia, as well as various unmanned systems and armored vehicles.

The company acquired defense startups and invested in an entirely new business in which it had no prior experience. “We decided to put our money where our mouth is,” Schulte said.

The bet paid off: Unlike many automotive firms, the company has made no mass layoffs as workers shifted into defense production. The company grew 15% in revenue last year.

Write to Bojan Pancevski at [email protected]