Europe’s Auto Industry Looks for Lifeline From Defense Boom

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(Bloomberg) — Martin Büchs’ family business in small-town Bavaria has been supplying gearshift and engine-cooling systems to carmakers for more than a century.

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With Europe’s automotive sector in turmoil, Büchs is trying to reinvent his company, Jopp, as a supplier to one of the country’s fastest growing industrial sectors: the military.

“We see a lot of opportunities in the defense industry,” said Büchs, who’s had to cut 20% of Jopp’s workforce over the past five years due to the automotive downturn. “Our employees are generally open to new ideas because their priority is to have sustainable jobs in the long term.”

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Büchs’ decision reflects a growing trend in Europe as vast networks of small and mid-sized manufacturers struggle with the auto industry’s shift to electric vehicles that require different and far fewer parts. Many are turning to the defense industry in hopes of cashing in on the hundreds of billions of euros European governments are allocating to ramping up their militaries as the US walks back its commitment to the decades-old transatlantic security alliance. 

Germany this week paved the way for more defense expenditures by loosening national debt rules, while Sweden, the Czech Republic and the Baltic nations are increasing their military budgets. The European Union plans to mobilize €800 billion ($874 billion) to bolster the continent’s security, and NATO Secretary General Mark Rutte has called on European countries to boost defense spending to 3.5% of their economies.

Transforming factories to supply the military isn’t easy, requiring equipment to be refitted and workers to be retrained. But the extra money is already mobilizing manufacturers across the continent. In Germany, auto-parts maker Schaeffler AG is looking for defense industry partners to expand sales, while Trumpf SE + Co., an industrial manufacturer known for its specialty lasers, is considering building devices that can shoot down drones. Hungary’s Büttner Kft, which previously supplied German automotive tool makers, expects to shift more of its capacity to the defense sector.

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In France, Europlasma, a company that develops solutions to destroy hazardous waste, made a takeover offer for the Fonderie de Bretagne factory, which supplies cast-metal parts to Renault. Europlasma said the bid is part of a strategy to diversify into the defense sector in order “to respond to the challenge of national sovereignty and to growing demand on a European scale.”

Although the defense industry is booming, it’s still much smaller than the automotive sector and can only make up for part of the job losses and production cuts that have started to materialize there. Roughly 13 million people work in Europe’s auto industry — about 7% of EU employment — while the defense sector employs just over one million.

“I think the discussion that defense will stop the decline in the automotive industry and its suppliers is an illusion,” said Jürgen Kerner, deputy chief of IG Metall, Germany’s largest union. “None of this can be done overnight.” 

Yet the spending is also giving rise to new companies. In Estonia, a civil servant, a general, a rocket scientist and one of the country’s richest businessmen launched Frankenburg Technologies to build cheap air-defense systems. The country, which borders Russia, has doubled its military budget since 2022.

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Meanwhile, Volkswagen AG, Europe’s biggest carmaker that’s cutting capacity and more than 40,000 staff, is open to the defense industry tapping into its excess capacity. Rheinmetall AG has looked into using VW’s factory in Osnabrück, Germany, to make armored vehicles, and the company’s Audi production site in Brussels could be similarly transformed, according to plans by Belgium’s John Cockerill Defense SA.

Italy’s Industry Minister Adolfo Urso has proposed converting car factories to defense production due to the auto-industry crisis. The plan, driven by a 63% drop in vehicle output in January and Fiat maker Stellantis NV’s shrinking domestic presence, aims to protect jobs by leveraging the sector’s overlap with military technology.

In addition to retooling factories to make weapons, manufacturers have to contend with a cumbersome certification and security clearance process.

To directly supply the military or produce specialized military products requires NATO certification, which typically takes one to two years and costs a minimum of €200,000, according to Christian Bartsch, chief executive officer of ACATO, a firm specialized on certifications and cyber security. And the process can’t start until the company has already received an order from the military. 

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“In Germany, the procurement process is tenacious and life-threatening. The company is starved until it gets its turn,” Bartsch said. “It takes time for the German authorities to actually order, during which companies have costs, costs, costs and don’t earn a single euro.”

Yet, if Europe wants to achieve military independence from the US, it will need to support its own companies, like Büchs’ Jopp, which employs about 1,600 people worldwide.

“We will probably be able to become a supplier for companies in the defense industry,” Büchs said. “We’ll talk to potential customers to see if there is demand.”

Thomas Hirsch, who founded Germany’s Hirsch Engineering Solutions, has already made the jump. The automotive sector accounted for 95% of his company’s revenue four years ago. Now, the mechanical parts Hirsch produces go into anything from military vehicles to satellites and rocket engines.

“Getting into this sensitive sector takes time and energy,” Hirsch told an audience of more than 100 entrepreneurs at a recent event organized by the chamber of industry and commerce in Schweinfurt. “But once you’re in the system, you remain in the system.”

—With assistance from Veronika Gulyas, Laura Alviž, Albertina Torsoli and Monica Raymunt.

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