Volkswagen, the world’s second-largest auto manufacturer, is slashing 100,000 jobs. Auto suppliers Bosch and ZF are cutting tens of thousands more, putting at risk a combined 350,000 jobs across the continent.
But behind the grim news, there’s hope: Europe’s struggling automakers are diversifying into defense manufacturing. Israel’s Rafael signed a letter of intent to take over Volkswagen’s 2,300-worker Osnabrück factory. It plans to build Iron Dome launchers, generators and trucks. Renault has cleared a 5,000-square-meter hall to assemble Chorus strike drones. Auto supplier Schaeffler is selling electronics parts to German drone maker Helsing.
Europe’s defense and car industries make natural partners. They require similar skills. One is growing. The other is declining, bloodied by Chinese competition and the transition to electric vehicles. By working together, the two can offset the pain and increase the continent’s security — provided they can overcome several obstacles.
Europe’s defense industry needs to scale. European NATO members’ defense spending is on track to grow from 1.3% of GDP in 2023 to 3.5% by 2035. According to McKinsey, budgets have already doubled since 2019, growing by nearly €250 billion, and are set to rise by a further €300 billion over the next five years. Unmanned fleets across air, land, and sea that fuse robotics with artificial intelligence, represent key priorities.
The automotive industry brings a ready-made stack to meet this demand: plants, process discipline, quality systems, compliance, engineers, and shop floor workers. Both cars and military equipment require machining and powertrains, electric drives, batteries, actuators, electronics, and sensors, to name a few.
Given Europe’s low labor mobility and slow permitting regimes, the opportunity to take over existing plants and staff for conversion represents a potential bonanza. For startups specializing in AI-powered drones and missile interceptors, the potential is enormous. Most begin near zero on industrial capacity. By taking over existing auto plants, they hurdle over several years of construction and gain a manufacturing foothold.
Three challenges could derail Europe’s ambitions.
- Speed: Car plants run multi-year model cycles, whereas drones iterate on the frontline in weeks. Fortunately, most defense procurement still largely runs on slow cycles, despite efforts to accelerate.
- Misguided Government Incentives: Germany’s electric vehicle consumer subsidy represents a painful example. The new EV premium of up to €6,000 per car carries no country-of-origin restriction. China’s BYD qualifies on the same terms as Volkswagen. German taxpayers ultimately pay.
- Supply Chain Bottlenecks: China controls key resources, from mines and minerals to metals and batteries. The entire Western alliance must work together to reduce Beijing’s stranglehold over key raw materials and components.
Europe should be clear-eyed about what this conversion to defense production can achieve. The continent will not compete on frontier AI models against the US or China. Europe will not win the single-use hardware manufacturing race against China.
Defense companies will not become an engine of prosperity that compensate for the decline in the automotive industry, either. In Germany, eight large defense companies employ 70,000, while the country’s six car companies employ 500,000. That doesn’t even count suppliers, automotive sales, and service. Many weapons systems require capabilities where automotive expertise cannot contribute, such as guidance systems, rocket propulsion, warheads, and munitions production.
But the defense buildup offers a significant upside that could cushion the car industry’s decline — and bolster its defense independence. Because the Pentagon can cut off Western allies from the most capable AI and decide to disable US-manufactured systems for specific allied missions, Europe needs its own strong, AI-enabled unmanned systems manufacturing base.
Re-engineering excess automotive capacity will not only preserve thousands of highly skilled industrial jobs. It will increase the resilience of Europe’s democratic, open societies. The outcome of that battle will be decided as much in factories as in a battlefield.
Andreas Urbanski was Director AI Partnerships for Google Cloud and VP AI & Digital for Airbus Defence and Space. He is the founder of deepi.ai, a defense tech firm.
Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions expressed on Bandwidth are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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