European automakers weigh shifting to weapons production amid crisis

European automakers are facing a structural crisis as demand for electric vehicles has weakened, market share has shifted to Chinese competitors, and financing costs have risen—creating what one report described as a “perfect storm” for the region’s carmakers.

With sales continuing to fall well below pre-Covid levels, some European manufacturers are exploring defense production as a potential lifeline, even as analysts question whether the shift can meaningfully resolve the auto sector’s problems.

From cars to defense: new projects and negotiations

In recent months, several automakers have moved toward defense-related activities. Earlier this week, Renault said it is developing a ground-based drone for military and civilian use. In January, Renault also announced a partnership with defense group Turgis Gaillard to produce drones in France.

Volkswagen, meanwhile, is negotiating with Israeli defense firm Rafael to manufacture components for missile-defense systems.

Citi characterized such a shift as “anything but cars,” reflecting the scale of the pivot being considered by parts of the industry.

Pressure from China and weaker EU demand

European automakers are struggling to compete directly with Chinese rivals such as BYD. In the EU, new car sales fell in January, while BYD reported 175% year-over-year growth in the region to 13,982 units, according to data cited from ACEA.

Market performance: stocks down as the sector contracts

The downturn is also visible in equity markets. The Stoxx 600 Automobiles index fell 30% over five years as of April 2, with Volkswagen down more than 60%. Stellantis, the owner of Fiat and Peugeot, has shed 58% of its value over the same period.

Defense demand rises as Europe re-arms

While auto demand has weakened, Europe’s defense industry is expanding amid re-armament needs following the Russia-Ukraine war that began in 2022 and growing emphasis on European self-reliance within NATO.

Last year, EU Commission President Ursula von der Leyen said Europe was entering a “re-arming era” and could mobilize 800 billion euros to invest in defense through loans and other programs.

Rico Luman, senior economist for transport and logistics at ING, said in an interview with CNBC that the European defense industry has “strong growth prospects,” supported by government budgets and NATO requirements.

Job and plant implications: Volkswagen’s Osnabrück

Volkswagen is described as being in a particularly difficult position, facing shrinking profits and planning to cut 35,000 jobs—about 5% of its workforce—by 2030.

If talks with Rafael or other defense partners succeed, the potential reuse of Volkswagen’s outdated Osnabrück plant—scheduled for closure in 2027—could save up to 2,300 jobs. However, Germany’s largest union argued that moving large numbers of workers from other industries into defense companies is “not realistic” and “not a solution” to the sector’s structural issues.

The article also notes that worker concerns could intensify if employees face trade-offs between producing weapons and layoffs.

Limits of a defense pivot: skepticism from analysts

Despite partnerships between automakers and defense firms, analysts remain skeptical about a full pivot to weapons production. Zuzana Pelakova of Globsec said in an interview with CNBC: “I do not think the leading automakers will become large-scale defense manufacturers. Perhaps only a few selective, opportunistic moves by some carmakers into defense.”

IG Metall similarly warned that, at scale, defense cannot solve the challenges facing Europe’s auto sector, stating: “We do not believe the auto industry should place all its hopes in defense and ignore opportunities in other areas.”

Political risk concerns

Citi’s report also highlighted political risks, pointing to public backlash against Tesla CEO Elon Musk’s involvement in the Trump administration as a factor that contributed to weaker Tesla sales in Europe.