Germany's Shrinking Auto Industry May Be Key to Defense Ramp Up, Says Deutsche Bank

12:29 PM EDT, 03/31/2025 (MT Newswires) -- Germany faces two urgent challenges: a subscale defense sector and too many auto factories lying idle, said Deutsche Bank.

It now has a historic opportunity to kill two birds with one stone by turning some of its automaking prowess to military production, wrote the bank in a note to clients.

Against the backdrop of cracks in the NATO alliance, the Russian war against Ukraine and global trade tensions, both houses of parliament agreed earlier this month to change the German constitution to exempt defense spending above 1% of gross domestic product from the so-called debt

brake.

That change effectively permits open-ended borrowing for defense by a prospective new government that says it will do "whatever it takes" to protect freedom and peace on the continent, stated Deutsche Bank. Assuming a gradual ramp-up of spending towards 3.5% of GDP by 2028, additional defense spending is projected to amount to more than 170 billion euros over the next three years.

Yet the German defense industry currently punches way below its weight, despite being the home to leaders in areas such as radars, air defense and military engines, it pointed out.

Arms sales by major German companies amounted to just 0.2% of GDP in 2023. By comparison, Germany's automotive industry accounts for 5% of GDP and employs

10 times more people than the defence.

At the same time, German automotive production has almost halved since its peak in 2017. Capacity has shifted to Eastern Europe, the United States and China, and sales of more expensive European vehicles have declined.

Major plants are operating at one-quarter capacity, potentially entailing the loss of around 100,000 jobs and a

restructuring cost of over 10 billion euros, added Deutsche Bank.

Moving capacity to defense could materially cut the price tag for restructuring the auto industry. Demand appears set to surge. Germany needs to restock after record exports to Ukraine and strengthen its defenses. European nations are seeking to "buy European". The auto industry brings personnel, facilities and expertise to ramp up production and deploy unused capacity.

However, turning ploughshares into swords is "challenging" and the U.S. is likely to remain a critical defense provider for the foreseeable future, according to the bank. The auto industry needs to cut fast, yet defense companies will need at least two to three years to transition plants even after they have received orders. And an employee who is made redundant in Wolfsburg is unlikely to want to work in Munich.

The new German government can aid the transition with structural reforms, noted Deutsche Bank.

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