Wheels To Weapons: Europe's Carmakers Look To Defense As The Auto Slump Bites

Europe's automotive industry, battered by Chinese competition and stalling electric vehicle demand, is seeking an unlikely lifeline: the arms industry. Analysts at Citi have christened the shift the "anything but autos" trade, and the name fits.

Volkswagen, the continent's largest carmaker, is in advanced discussions with Israeli defense firm Rafael Advanced Defense Systems to convert its Osnabrück plant in Germany into a production site for components of the Iron Dome air-defense system. The facility, which currently assembles the T-Roc Cabriolet and is due to close in 2027, employs around 2,300 workers. Under the proposed arrangement, it would manufacture supporting equipment including heavy-duty transport trucks, launch units, and power generators, though not the interceptor missiles themselves. Citi analysts noted that if the deal proceeds, Volkswagen avoids the cash liabilities of closure while keeping the plant out of Chinese hands, calling it a potential win-win for the carmaker and European defense supply chains alike.

Renault has moved faster. The French manufacturer has confirmed plans to produce up to 600 drones for the French armed forces at its Le Mans plant, its first foray into defense manufacturing since the Second World War, alongside a partnership with defense group Turgis Gaillard for aerial drone production.

The backdrop is one of sustained industrial distress. The Stoxx 600 Automobiles index has shed roughly 30 percent of its value over five years, with Volkswagen and Stellantis losing more than half their market capitalisation. Meanwhile BYD recorded a 175 percent year-on-year surge in European deliveries in early 2026, underscoring the depth of the competitive challenge from China.

Germany's IG Metall union has been characteristically blunt, warning that defense cannot solve the industry's structural problems at scale. The sectors operate too differently, it argues, with defense dominated by small-batch production rather than the high-volume model on which European automotive prosperity was built. That may be true. But with governments across the EU mobilising towards an estimated €800 billion in defense investment, carmakers are in no position to ignore the call.