Germany’s Industrial Crossroads: The Fall of Car Manufacturing and the Rise of the Defense Economy
Germany’s world-leading automotive sector is undergoing a historic decline as multiple structural and geopolitical pressures converge. Production volumes have dropped from approximately 5.65 million vehicles in 2017 to 4.1 million in 2023, with profits at Volkswagen, BMW, and Mercedes-Benz shrinking by 27–38% in 2024. Weak electric vehicle demand, rising battery costs, aggressive Chinese EV competition, and looming U.S. tariffs up to 50% are undermining German carmakers’ profitability and scale. This crisis is putting at risk hundreds of thousands of jobs, particularly in auto hubs like Wolfsburg and Stuttgart, and has contributed to two consecutive years of GDP contraction.
In response, Berlin has launched a strategic pivot to defense manufacturing as an industrial lifeline. The government has committed to raising defense spending to 3.5% of GDP by 2029 and enabling up to €1 trillion in new borrowing to rebuild Germany’s military capabilities. Major arms manufacturers are moving swiftly to absorb idle automotive capacity: Rheinmetall is converting former Volkswagen and Mercedes-Benz component plants in Berlin and Neuss into armored vehicle and ammunition factories, while Renk plans €500 million of investment in new tank transmission production lines. These companies are also actively recruiting laid-off auto workers and retraining them for defense production roles, aiming to preserve regional employment and industrial expertise.
This transformation is not only a response to economic stagnation but also a strategic rearmament to meet NATO commitments and counter Russian threats in Europe. While the shift promises to stabilize parts of Germany’s manufacturing base, it also introduces new fiscal risks, potential inflation, and contentious debates over diverting skilled labor and public funds away from civilian industries. Whether defense can fully replace auto manufacturing as Germany’s economic engine will define the country’s industrial landscape for the next decade.
Base Case – Managed Transition to Defense-Led Growth (60%)
Germany succeeds in scaling defense manufacturing to partially offset auto sector decline. Repurposed auto plants gradually ramp up production of armored vehicles and ammunition, stabilizing employment in affected regions. Though cultural resistance to rearmament remains, centrist coalitions hold together by balancing defense investment with targeted social spending and retraining programs. GDP growth modestly recovers by 2028 as defense output contributes around 0.5% annual growth, while automakers continue shrinking but avoid outright collapse through limited EV market share and selective exports to less tariff-restricted regions. This scenario assumes Berlin keeps debt servicing manageable and public opinion tolerates a reindustrialization strategy anchored in security production.
Upside Case – Defense Boom Spurs Industrial Renaissance (20%)
Defense procurement accelerates faster than planned, with strong NATO orders and surging geopolitical demand driving a sustained boom in German arms production. Auto plant conversions exceed expectations, quickly absorbing displaced workers and suppliers. The influx of state-backed financing and private investment leads to technology spillovers into civilian sectors, revitalizing engineering, electronics, and advanced manufacturing clusters. Public resistance to rearmament softens as job creation and regional economic stabilization take hold. Under this scenario, Germany emerges by 2030 as Europe’s undisputed defense production leader, with industrial GDP growing by 1%+ annually and the auto sector transitioning more smoothly to EV niches without catastrophic job losses.
Downside Case – Industrial Fracture and Political Backlash (20%)
Defense reindustrialization fails to scale quickly enough to absorb the economic shock from collapsing car production. Auto plant closures outpace defense conversions, leading to persistent regional unemployment and economic contraction. Mounting public anger over rearmament spending triggers sustained protests, splintering the governing coalition. Fiscal strains from massive borrowing combine with inflation, forcing budget cuts that undermine both defense and social programs. In this scenario, Germany enters a prolonged period of industrial decline, with GDP stagnation and deep political polarization over the prioritization of military production over civilian prosperity. The auto sector continues to erode under tariffs and Chinese competition, while defense fails to deliver the promised economic rescue.
