From cars to tanks
As Germany’s defence stocks go ballistic, armsmakers are tooling up
They are snapping up staff and sites from ailing firms
“Defence is now by far the most dynamic sector of German industry,” says Armin Papperger, chief executive of Rheinmetall, Germany’s biggest arms producer.
Until recently no one, including Mr Papperger, the firm’s boss for the past 12 years, would have believed it.
But as European countries prepare for a big boost to defence spending, Rheinmetall and its peers, including Hensoldt, a maker of electronic-warfare equipment such as radars, and Renk, which manufactures military vehicles, are scaling up production as quickly as they are able.
A surge of demand caused by the war in Ukraine has made defence firms stars among Germany’s listed companies.
Their share prices have leapt.
Announcements on March 4th by Friedrich Merz, set to become Germany’s next chancellor, made them shine more brightly still (see chart).
His aim is to exempt defence spending above 1% of gdp from the country’s fiscal rules, and set up a €500bn ($535bn) infrastructure fund.
Germany’s stockmarket soared, led by the construction and defence firms that will benefit the most.
The fortunes of a once maligned industry have reversed rapidly.
Until Russia’s full-scale invasion of Ukraine in 2022 defence companies were considered the Schmuddelkinder (grubby urchins) of German industry.
Rheinmetall was not even among the 40 members of the DAX, the German stockmarket’s blue-chip index.
European funds using environmental, social and governance (esg) criteria shunned the shares of defence companies.
Successive governments kept cutting expenditure on military equipment as a share of gdp.
Tepid demand at home forced Rheinmetall to look abroad. It set up shop in Australia, Britain and Hungary.
The urchins are now looking far better turned out.
Rheinmetall is Germany’s tenth-largest company by value.
Some esg investors are overcoming their misgivings.
But to become true industrial aristocrats Germany’s defence firms have to take advantage of the splurge of defence spending.
That would give them the opportunity to become the saviours of well-paid industrial jobs that are threatened by another conflict.
Donald Trump is threatening heavy tariffs on European goods imported to America—the most important destination for German exports.
Defence firms have to add capacity swiftly to supply a growing demand for new kit.
Although governments generally favour domestic firms, America’s giant defence companies will happily fill any gaps.
Ironically, the travails of other German manufacturers, struggling with a stagnant economy at home and faltering exports, may help.
Rheinmetall, Hensoldt, Renk and knds, a Franco-German company, are negotiating to take over factories from beleaguered firms in other industries, as well as offering to hire the workers they are about to let go.
In February KNDS took over an entire plant in Saxony from Alstom, a French trainmaker, to build tanks.
Production will switch from double-decker train carriages and trams to Leopard 2 tanks and Boxer armoured vehicles later this year, with the entire retooling of the site due to be completed in 2027.
Around 580 of the 700 employees will get a job at KNDS or move to another Alstom site.
Hensoldt is in talks with two huge suppliers of car parts, Bosch and Continental, to take on some of their staff.
Both are cutting jobs and closing factories because production of vehicles in Europe has failed to regain its pre-pandemic levels.
At the end of this year Conti will end production at Wetzlar, in Hesse, and cut 370 jobs.
Luckily, Hensoldt has a factory close by.
“Last week 150 Conti employees came to our open house in Wetzlar,” says Joachim Schranzhofer, a spokesman for the firm.
Hensoldt is also keen to hire entire teams of software engineers from carmakers and their suppliers.
Rheinmetall also struck an agreement with Conti to offer jobs at its new ammunition factory in Unterlüss, in Lower Saxony, to some of the 900 workers who will be laid off from a plant in Gifhorn, 55km to the south.
It is planning to retool sites in Berlin and Neuss that made parts for car companies and energy firms to make weapons and ammunition instead.
Germany’s defence firms have ambitious targets.
Hensoldt is aiming to double its revenues from €2.2bn ($2.4bn) last year to €5bn by 2030.
Rheinmetall says it wants its sales to grow from €10bn in 2024 to €20bn in 2027 and eventually to €30bn.
It aspires to a market capitalisation that will stand comparison with those of America’s defence giants.
Such heights are still far away.
Even so, the Schmuddelkinder are moving up in the world.
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