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Source: L’automobile Magazine |
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Structural crisis in the automotive sector |
The EU’s automobile sector faces a structural crisis. They have a large production capability. But not enough demands. Europe’s factories run at about 55% of capacities. Key factors play a role in this issue. Global competition, mostly from China, is a big one. Producing a car in the EU costs 30% more than in China. Workforce costs and regulations in the EU prevent carmakers from being competitive. Plus, purchasing power in many EU states is decreasing. Many people are not willing or cannot afford to buy a new car. EVs are also still considered too expensive. Plus, the need for charging stations is seen as a burden. |
Booming EU defense industry |
On the other side, EU’s defense industry is booming. In recent years, three key elements pushed to this shift in EU’s strategy: |
Russia’s threat and invasion of Ukraine Difficult relations with the U.S. and uncertainty around NATO’s future Increased instability and troubles global order
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These dynamics led to an urgent need to rearm in a quest for strategic autonomy. |
In March, the EU Commission approved a 1,5 billion euros work program. It aims to: |
Enhance and modernize Europe’s defense industry, Boost production capacities, Secure technological advancement and resilience.
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EU also introduced a defense package providing financial levers to member states. This is part of the ReArm Europe Plan/Readiness 2030. The goal is to drive an investment surge in defense capabilities. |
Ongoing rearmament efforts by EU members led to the sharpest annual growth in spending since the end of the Cold War. Germany was the largest spender. Its expenditures grew by 24% year-on-year to 114 billon USD. For the first time since the 90’s, its military burden exceeded the 2% threshold. Spain also increased its budget and met the 2%. France is currently debating an update to its 2024-2030 Military Planning Law. The draft bill seeks to reach 436 billion euros. Overall, military spending by EU NATO members rose faster last year than at any time since 1953. |
These spendings lead to increasing production. |
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Latest deals and discussions |
Since last year, automakers across Europe worked on deals with defense companies. In some cases, these deals saved factories and companies. |
In Germany, Volkswagen is working on a deal with Rafael. Rafael is an Israel state-controlled defense company. One of Volkswagen’s factories in Germany is in crisis. It could produce assets for the Iron Dome. The deal could include: |
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In France, Renault and Turgis Gaillard launched a project. The goal is to produce up to 600 drones monthly in two Renault factories. The deal is expected to worth 1 billion euros over 10 years. Last year, Fonderie de Bretagne (former Renault subsidiary) was taken over by Europlasma to produce artillery shells. The company was in bad shape. The same happened for Forges de Tarbes and Valdune. |
In Finland, Valmet Automobile signed a deal with Patria to produce armored vehicles. In the Netherlands, VDL NedCar shifted to drones and combat vehicles. |
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Conclusion |
This dynamic is nothing new. Automakers have a long history of producing defense equipment and weapons when called upon during wartime. During WWII, companies across the world put civilian production on standby. They focused on their nation’s war effort. They produced military vehicles, aircraft engines, guns, and ammo. |
It will not erase the automotive sector broader challenges. But it will avoid dead production space and provide income. It will also prevent some factories to close and people to lose their jobs. |
Automakers are not a threat to the defense sector. These companies’ expertise and know-how are meant to be complementary. Automakers will have more of a supplier role for less crucial parts. The defense industry will likely keep crucial production like warheads, rockets, etc. Automotive companies might not be experts in rockets or propulsion. But they can produce in mass and cheaply. Defense companies have the expertise. But they usually produce fewer assets that are technically advances but cost a lot. |
This phenomenon is more and more visible in Europe. But the U.S. is also concerned. Last month, the Pentagon held talks with Ford and General Motors. The goal was to discuss how they could contribute to U.S. weapons supply chain. |
Decoding geopolitics isn’t a job. It’s survival. |
Joy |
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