Western Automakers Accelerate Push into Defense Sector Amid Industry Crisis

Over the past five years, the automotive industries in Europe and the United States have faced structural challenges due to slowing demand for electric vehicles, rising market share of Chinese automakers, high financing costs, and persistently lower sales volumes compared to pre-pandemic levels. Against this backdrop, automakers such as Renault, General Motors, Volkswagen, and Mercedes-Benz have increasingly partnered with defense contractors, seeking new opportunities amid Europe’s growing defense expenditures. Data shows that in January 2024, BYD delivered 13,982 vehicles in the European market, a 175% year-on-year increase, while overall EU new car sales declined during the same period. The STOXX Europe 600 Automobiles & Parts Index has fallen by 30% over the past five years, with Volkswagen Group and Stellantis Group shares down more than 60% and 58%, respectively. Meanwhile, since Russia’s invasion of Ukraine in 2022, numerous European countries have ramped up military spending. European Commission President Ursula von der Leyen declared that Europe has entered an “era of rearmament,” aiming to mobilize €800 billion in defense investments. Automotive and defense manufacturing share technological synergies, and historical precedents exist of automakers shifting production during wartime. Several automakers are already advancing concrete projects: Renault is collaborating with Turgis & Gaillard to produce dual-use (civilian-military) drones at its Le Mans plant in France, with a maximum monthly capacity of 600 units and a target to complete the first flight by the end of 2024. Renault is also working with Thales to develop the 4 TROOP, a hybrid all-wheel-drive military vehicle capable of all-terrain mobility and external power supply, and has initiated preliminary R&D cooperation with Belgium’s John Cockerill. General Motors is in talks with Lockheed Martin to manufacture standardized components for its weapons systems to boost ammunition output. GM’s subsidiary, GM Defense—which previously focused on infantry fighting vehicles—could significantly expand its business scope through this collaboration. The U.S. Department of Defense, having depleted large portions of its weapons stockpiles due to conflicts in the Middle East, is actively encouraging civilian manufacturers to participate in defense production. Volkswagen is negotiating with Israel’s Rafael Advanced Defense Systems to repurpose its Osnabrück plant in Germany for producing components of the Iron Dome air-defense system. Mercedes-Benz has signed a memorandum of understanding with German startup Tytan Technologies to develop anti-drone specialty vehicles based on the G-Class SUV and Sprinter van chassis, designed to intercept small drones and protect critical infrastructure. Despite the flurry of partnerships, industry observers widely agree that defense-related business cannot fundamentally resolve the auto sector’s structural woes. Germany’s metalworkers’ union (IG Metall) points out that the automotive industry relies on high-volume, assembly-line production, whereas defense manufacturing depends on low-volume, customized orders—two models with vastly different operational logics. The European automotive sector and its related industries employ over 13 million people, yet the entire European defense industry is projected to create only around 760,000 new jobs by 2030, offering limited employment absorption capacity. Moreover, Europe’s defense market lacks harmonized standards, with significant barriers in procurement bidding, export controls, and security certifications—making it incompatible with the automotive industry’s platform-based, scale-driven model. Automakers entering the defense space also face ethical controversies and political risks; for instance, Volkswagen’s collaboration with Rafael has been hindered by objections from Qatar’s sovereign wealth fund, its third-largest shareholder. Additionally, if geopolitical tensions ease, the sustainability of Europe’s defense budgets remains uncertain. In summary, while defense-related activities may offer short-term support for certain plants and open new growth avenues in areas like military drones and tactical vehicles, they cannot substitute for the core need to transform the automotive business itself. The fundamental challenges for European and American automakers remain adjusting their electrification strategies, competing effectively against Chinese rivals, and enhancing cost efficiency and innovation capabilities.