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July 9, 2026

Automotive's Pivot to Defense: Europe's Carmakers Find a New Runway

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Europe's Carmakers Find a Second Gear in Defense

Industry Signals

The European automotive industry has struggled with a variety of challenges in recent years, including heavy competition, a slow transition to electric vehicles, and low demand due to economic crises. Congruently, NATO governments are pouring hundreds of billions of euros into rearmament, and the continent’s defense manufacturers are struggling to find the production capacity and skilled labor to keep up. Because of this, automakers and defense companies benefit from relying on one another, and with policy tools and regional economics lining up, that pairing is becoming easier.

In this edition of Industry Signals, we look at:

A European Policy Centre discussion paper mapping where automotive capacity can plug into Europe’s defense buildup;

Forbes’ coverage of a Berenberg Bank report on why the defense pivot is proving well timed for struggling German and French manufacturers;

The European Commission’s Defence Industry Transformation Roadmap, which opens the door for automotive plants to be repurposed for defense production; and

New OECD-backed research from VoxEU showing that regions with a defense-industrial presence tend to be richer and grow faster once defense spending accelerates.

European Policy Centre and ACEA on Automotive as a Defense Enabler

Source: European Policy Centre | Published: May 29, 2026

This discussion paper, written by EPC senior fellow Paul Taylor in partnership with the European Automobile Manufacturers’ Association, lays out where automotive capacity, workforce and know-how could realistically plug into Europe’s defense buildup, as well as challenges that could be faced.

Key ideas:

NATO members agreed to lift defense spending to 5% of GDP by 2035, and the European Commission has moved to mobilise €800 billion in additional defense spending over the next decade, including €150 billion in joint-procurement loans under the SAFE instrument.

The automotive sector, which accounts for around 7% of EU GDP and 13.8 million jobs, is running well below capacity, with a survey of six light vehicle producers finding average utilisation of just 60% in 2023, while the defense sector needs the exact things automakers have in surplus like factory floor space, mass-production know-how, and skilled engineers.

The clearest near-term opportunities are drone airframes and artillery munitions casings, work estimated to take roughly 12 to 18 months to bring an existing auto plant up to speed on, and truck OEMs are already building modular platforms that can flex between civilian and military production.

Defense contracts are long-term, low-volume and nationally fragmented in a way that clashes with the automotive sector’s mass-market playbook, and some OEMs still have ESG policies that rule out weapons production entirely, both of which are remaining barriers.

Forbes on Berenberg Bank’s Defense Relief Thesis

Source: Forbes | Published: April 21, 2026

Drawing on a new Berenberg Bank report, this piece argues that Europe’s defense buildup is arriving at exactly the moment automakers need a new source of demand.

Key ideas:

Berenberg frames the timing as fortunate for the industry: defense manufacturers are short on capacity just as automakers are laying off workers and closing redundant plants, with European suppliers earmarking roughly €40 billion in restructuring and impairment costs for 2025 alone.

Volkswagen and Renault are singled out as automakers already redirecting resources toward military production, and Berenberg expects defense spending to keep accelerating over the medium term.

The bank points out that Europe’s defense industry “dramatically lacks scale,” which is precisely the gap an automotive sector with structural overcapacity is positioned to fill while it works through its own EV transition costs.

Berenberg names Volkswagen, Schaeffler and Aumovio as the German companies best placed to benefit from rising defense budgets, and flags Renault’s move into military drone production as an early example of an automaker treating defense as a genuine growth opportunity.

European Commission on Building the Defense Transformation Pipeline

Source: European Commission | Published: November 19, 2025

This Commission communication sets out how the EU plans to speed up defense innovation and production, including specific mechanisms to bring outside industrial capacity, and outside workers, into the defense sector.

Key ideas:

The Roadmap proposes a Manufacturing-as-a-Service and Security-as-a-Service initiative that would let companies from any sector make idle industrial capacity available to defense producers, directly formalising the kind of plant-sharing arrangements automakers and defense firms are already negotiating on their own.

A Skills Guarantee pilot, launched in the final quarter of 2025, is specifically designed to help workers at risk of unemployment in the automotive sector and its supply chains move into defense jobs, backed by a broader goal of reskilling 600,000 people for the defense industry by 2030.

More than 230 defense tech startups have launched in Europe since Russia’s invasion of Ukraine, and private investment in the sector hit a record high in 2024, more than five times 2019 levels.

The Commission wants Member States to treat defense procurement, which represents around 15% of EU GDP, as a tool for building long-term industrial capacity, a change that would favor automotive suppliers positioning themselves as long-term defense partners.

CEPR VoxEU on the Regional Payoff of Defense Production

Source: CEPR VoxEU | Published: July 5, 2026

New OECD-backed research mapping 347 defense production plants and 3,888 linked firms across 15 European countries finds that hosting defense-industrial activity carries a measurable and lasting economic upside for a region.

Key ideas:

Regions with a defense-industrial presence are richer, more populous and more innovative on average than comparable regions without one, and defense presence is positively associated with higher long-run per capita GDP even after controlling for population, manufacturing employment and patenting.

The income premium is largest in regions that already have strong innovation capacity, suggesting that places with the research depth and skilled workforce automotive manufacturing regions often already have are best positioned to convert defense investment into broader productivity gains.

Looking at the years following Russia’s 2014 annexation of Crimea, the authors find that defense-hosting regions saw meaningfully stronger cumulative GDP growth than non-defense regions, with the gap reaching about 0.6% four years out.

The authors frame defense spending as a place-based industrial policy: the regional payoff isn’t automatic, and governments that want the gains spread beyond existing defense clusters will need to invest in the local skills and research systems that let a new defense plant generate spillovers.

Looking Ahead

Automakers with idle capacity are signing real contracts with defense primes, EU policy is being rewritten to make plant-sharing and worker retraining formal and fast, and the regional economics suggest that communities built around automotive manufacturing have much of what it takes to capture the upside of Europe’s rearmament. None of this erases the real friction between two industries with very different business models, and the automotive sector’s overcapacity problem was not caused by defense demand and won’t be solved by it alone. But the pieces required to turn Europe’s carmakers into a genuine part of its defense-industrial base, capacity, policy support, and workforce, are coming together faster than they have at any point in this buildup.

That’s a wrap for this edition of Industry Signals. Have a report, use case, or event you’d like to see featured in an upcoming issue? Send a note via PM. We’re always looking to spotlight what’s shaping the future of industry, and recommendations from the Xcelerator Community are especially valuable. Your insights and experiences continually shape Industry Signals.

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