'Anything but autos': Can defense save Europe’s ailing car industry?

In this articleThe European car industry is in a structural crisis. Slowing demand for electric vehicles, lost market share to Chinese competitors and higher borrowing costs have created the perfect storm for the sector over the past five years, as sales volumes continue to slump well below pre-pandemic levels. Europe's automakers have a long history of producing defense equipment and weapons when called upon during wartime. Some firms now think returning to these roots could offer a lifeline.Analysts at Citi have dubbed this shift the "anything but autos" trade.On Monday, Renault announced it was developing a ground-based drone for military and civilian use. This followed its announcement of a partnership with defense group Turgis Gaillard in January to produce aerial drones in France. Meanwhile, German automaker Volkswagen is reportedly in talks with Israeli defense firm Rafael to produce parts for missile defense systems.The pair are in discussions to convert VW's factory in Osnabrück, Germany, into facilities for making components for the Israeli Iron Dome missile-defense system produced by Rafael, the FT reported on March 24. European autos are struggling to compete directly with Chinese rivals, such as BYD. While new-car sales dropped in the EU through January, BYD stunned the market by reporting a 175% year-on-year increase in deliveries to 13,982 units, according to ACEA data.The industry's decline is felt in carmakers' share prices, too. The Stoxx 600 Automobiles index has fallen 30% over the past five years as of April 2, while VW has tanked over 60% since then. Stellantis, which owns brands including Fiat and Peugeot, has shed 58% over the same period.By contrast, the European defense industry is booming. The urgent need to rearm following Russia's invasion of Ukraine in 2022 and an apparent fracturing of relations within NATO mean Europe must become more self-sufficient in its defense production. Last year, EU president Ursula von der Leyen said Europe was in an "era of rearmament" and could mobilize 800 billion euros in defense investment through loans and other programs."The defense industry has huge growth prospects with government budgets and Nato requirements backing it," Rico Luman, senior sector economist for transport and logistics at Dutch bank ING, told CNBC by email. "For the defense industry it's rather a question of how to expand production than if. Redirecting production capacity is an opportunity for the automotive industry."But other analysts question whether riding the coattails of the defense sector will be enough to save the ailing auto industry, flagging several concerns about carmakers' ability to grow in this space. The relationship between carmakers and weapons manufacturing has always been symbiotic.

During World War II, automotive companies across the world halted civilian production to focus on their nations' respective war efforts — producing military vehicles, aircraft engines, as well as guns and ammunition.The transition from wheels to weapons and back again is achievable in part because many of the underlying skills are highly transferable, according to experts."There is significant overlap in capabilities, as both industries rely on advanced manufacturing, complex supply chains, and engineering," Zuzana Pelakova, economy and business director at Slovakian think tank Globsec, told CNBC over email."There is also a historical precedent. Countries like Slovakia and Czechia – today among the world leaders in car production per capita – built much of their automotive strength on a workforce that once worked in defense industries before the end of socialism."VW is in a particularly tight spot, facing deteriorating profitability and looking to reduce headcount by 35,000 — or roughly 5% of its workforce — before 2030.Should talks with Rafael or other defense suitors bear fruit, VW's potential to repurpose its obsolete Osnabrück plant – which the company is due to close in 2027 – could save up to 2,300 jobs. But Germany's largest trade union said that transferring large numbers of workers from other industrial sectors to defense industry companies is "unrealistic" and "not a solution" to the industry's structural problems."This will not be enough to offset the impending job losses in the automotive industry, among suppliers, and in other core sectors of the metal and electrical industries," IG Metall told CNBC over email. "The sectors operate too differently for that. Unlike in the high-volume automotive industry, for example, the defense sector is dominated by small-batch production. Even if production volumes are ramped up here, manufacturing will not resemble that of the automotive industry."Automakers' partnerships with defense firms could also raise ethical concerns among workers, should they be given the choice of producing weaponry or facing layoffs.Citi flagged the political risks involved, citing how public opinion of Elon Musk's involvement in the U.S.

President Donald Trump's administration dovetailed with collapsing Tesla sales in Europe."What European political reaction any VW association with an Israeli defense company might attract is currently unknown," the analysts added."If firms give workers the opportunity to keep their job, I would say the majority of the workforce would continue their contractual obligations and continue producing for defense manufacturers," said Matthias Schmidt, founder of Schmidt Automotive Research."If you have a family to support, your morals can only go so far."Despite the flurry of partnerships between automakers and defense firms, analysts are skeptical of a full-blown pivot to weapons manufacturing."I do not expect leading automakers to become large-scale defense manufacturers," Pelakova added. "What we are likely to see are selective and opportunistic moves into the defense sector."IG Metall said that on a large scale, defense cannot offer the solution to the industry's woes."We warn against pinning all hopes on the defense industry and neglecting other sectors," they told CNBC over email.Got a confidential news tip? We want to hear from you.Sign up for free newsletters and get more CNBC delivered to your inboxGet this delivered to your inbox, and more info about our products and services.© 2026 Versant Media, LLC.

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