The European car industry is facing a structural crisis, with slowing demand for electric vehicles, lost market share to Chinese competitors, and higher borrowing costs contributing to sales volumes that remain well below pre-pandemic levels over the past five years [1]. In response, automakers are increasingly turning to defense manufacturing as a potential lifeline, a shift dubbed by Citi analysts as the 'anything but autos' trade [1]. On April 5, Renault announced the development of a ground-based drone for military and civilian use, following its January partnership with defense group Turgis Gaillard to produce aerial drones in France [1]. German automaker Volkswagen is reportedly in talks with Israeli defense firm Rafael to convert its Osnabrück factory into a facility for producing components for the Iron Dome missile-defense system, according to a Financial Times report from March 24 [1].
The competitive landscape has shifted dramatically, with European automakers struggling to compete directly with Chinese rivals such as BYD. While new-car sales dropped in the EU through January, BYD reported a 175% year-on-year increase in deliveries to 13,982 units, according to ACEA data [1]. This decline is reflected in share prices: the Stoxx 600 Automobiles index has fallen 30% over the past five years as of April 2, Volkswagen has dropped over 60%, and Stellantis has shed 58% in the same period [1].
In contrast, the European defense industry is booming, driven by the urgent need to rearm following Russia's invasion of Ukraine in 2022 and shifting NATO dynamics. EU president Ursula von der Leyen stated last year that Europe is in an 'era of rearmament' and could mobilize 800 billion euros in defense investment through loans and other programs [1]. Rico Luman, senior sector economist for transport and logistics at ING, noted that the defense industry has 'huge growth prospects with government budgets and Nato requirements backing it,' and suggested that redirecting production capacity presents an opportunity for the automotive industry [1].
However, some analysts remain skeptical about whether leveraging defense sector growth will be sufficient to revive the struggling auto industry, highlighting concerns about carmakers' ability to expand meaningfully in this space [1].
CONCLUSION
European automakers are increasingly pivoting to defense manufacturing as traditional car sales falter and competition from Chinese firms intensifies. While the defense sector offers significant growth prospects and government backing, analysts caution that this shift may not fully offset the auto industry's structural challenges. The market impact is high, with share prices reflecting ongoing uncertainty and transformation.