HOW DEFENCE SPENDING CAN SAVE THE EUROPEAN AUTOMOTIVE INDUSTRY - Filenews 22/4
By Neil Winton
European carmakers are under pressure from stagnant sales, the accelerating threat from China and the unpredictable consequences of the war in the Middle East. However, a side effect of the global turmoil offers investors some relief: rising defense spending presents a potentially lucrative "lifeboat."
A report by German bank Berenberg says the urgent need to increase military spending as NATO countries respond to President Trump's criticism that they have relied too long on U.S. generosity for their equipment, finds defense hardware manufacturers having limited production capacity. At the same time, the automotive industry is forced to lay off workers and close redundant factories.
Around 50,000 jobs in the automotive industry in Germany were lost in 2025. Analysts and trade associations predict that about 200,000 more jobs may be lost by 2030. If Germany is facing such serious problems, one can expect that the rest of the European car manufacturers will suffer even more. In a market-empty market, China's success in electric vehicles will have serious consequences.
Berenberg reports that the European automotive sector has been facing chronic overcapacity.
"The vast majority of European car suppliers have already embarked on massive restructuring programs, with up to 10% of the workforce likely to be affected. Most (manufacturers) are currently operating their European factories with low utilization rates of 60-70% and had projected around €40 billion in restructuring and impairment costs for 2025 alone, with about a third being cash to be allocated in the coming years," the bank said.
Volkswagen and Renault turn to defensive opportunities
Volkswagen and France's Renault are two major manufacturers that are already pouring resources into military production. The bank said there will be a significant acceleration in defense spending in the medium term.
"However, the European defence industry lags dramatically behind in scale. This creates opportunities for the European automotive sector, which faces structural challenges of overcapacity and urgently needs to restore its productivity to meet both the growing pressure from China and the investments needed to transition to electric vehicles," the bank said.
As competitive pressures mount, the Western European market remains persistently stagnant. According to GlobalData, sales of cars and SUVs increased by almost 4% in the first quarter, but due to inflation and rising energy costs due to the conflict in Iran, annual growth will be almost negligible, at 0.2%, at 11.78 million. The pre-pandemic high of 15.8 million remains a distant dream. Western Europe includes the five largest markets: Germany, France, Britain, Italy and Spain.
Professor Ferdinand Dudenhoeffer, director of the Automotive Research Center in Germany, said it was not only Europe that would be hit by the conflict in Iran.
A difficult year for the automotive industry
"Globally, significant increases in inflation and imbalances are expected due to the war with Iran. This will cause economic growth to stagnate or fall in key automotive markets. Given that new car markets are closely linked to GDP, a generally bad year for the global auto industry is expected in 2026," Dudenhoeffer said in a report.
"In both Europe and North America, we expect a drop in car demand," he added.
Defense deployment comes just in time, according to Berenberg Bank.
"We believe that German manufacturers and suppliers will have relatively good exposure to the issue. Germany is likely to see the largest increase in the defense budget compared to the past, which will combine well with the current major restructurings of the automotive industry in the country: we consider that the main beneficiaries will be Volkswagen, as well as suppliers Schaeffler and Aumovio."
"We also identify Renault as one of the first European manufacturers to recently diversify into the production of military drones; We see this as an opportunistic revenue diversification measure rather than a response to excess capacity, given that the company does not currently need a significant capacity adjustment," the bank's report said.
