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European Automakers Turn to Defense Sector Amid Industry Struggles

Apr 05, 2026 05:00 UTC
^VIX, CL=F, RDSA.MC
Medium term

European car manufacturers are exploring a shift to defense production as the automotive sector faces declining sales and competition from Chinese rivals. Renault and Volkswagen are among the automakers pursuing military contracts.

  • European carmakers face a structural crisis with declining sales and competition from Chinese rivals.
  • Renault and Volkswagen are exploring defense contracts, including drone and missile-defense system production.
  • BYD's EU deliveries surged 175% year-on-year in January.
  • The Stoxx 600 Automobiles index has dropped 30% over five years, with Volkswagen and Stellantis shares down over 60% and 58%, respectively.
  • The European defense industry is expanding due to increased rearmament needs and EU investment plans.
  • Analysts highlight the feasibility of transitioning from automotive to defense production due to shared manufacturing capabilities.

The European automotive industry is grappling with a structural crisis marked by slowing demand for electric vehicles, competition from Chinese manufacturers, and higher borrowing costs. Sales volumes have remained below pre-pandemic levels for the past five years. In response, some automakers are considering a return to their historical roots in defense production. Renault recently announced the development of a ground-based drone for military and civilian use, following its partnership with Turgis Gaillard to produce aerial drones in France. Volkswagen is reportedly in discussions with Israeli defense firm Rafael to produce components for the Iron Dome missile-defense system, potentially repurposing its Osnabrück factory. The shift is being dubbed the 'anything but autos' trade by analysts at Citi. Meanwhile, Chinese automaker BYD has reported a 175% year-on-year increase in deliveries to 13,982 units in the EU through January, according to ACEA data. The automotive sector's struggles are reflected in its share prices, with the Stoxx 600 Automobiles index down 30% over five years and Volkswagen's shares falling over 60%. By contrast, the European defense industry is experiencing growth, driven by the need to rearm following Russia's invasion of Ukraine and increased defense investment. EU President Ursula von der Leyen has highlighted the potential for 800 billion euros in defense investment through loans and programs. Analysts suggest that the transition from automotive to defense production is feasible due to overlapping skills in advanced manufacturing and supply chains. However, some question whether this pivot will be sufficient to revitalize the struggling car industry.

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