Billions for the Military: Germany's Economy Pins Its Hopes on the Defense Industry
SOURCE:Spiegel International
Increased defense spending is a boon for Germany's ailing industrial sector. Numerous companies, even those with no previous military experience, are now hoping to get in on the act.
Visiting the works of Ilsenburger Grobblech GmbH is like taking a trip back in time. Way back in the 16th century, copper used to be produced at this site in the northern Harz Mountains, not far from eastern Germany’ tallest peak, the Brocken. Today, slabs of steel up to 35 centimeters thick are piled up in front of the factory halls, delivered from the blast furnaces and converters of parent company Salzgitter, less than an hour’s drive away.
What is happening behind the factory walls, though, is part of a new hype that has gripped Germany’s crisis-ridden industrial sector. A hype which many are hoping will be enough to revive it.
The article you are reading originally appeared in German in issue 43/2025 (October 17th, 2025) of DER SPIEGEL.
The slabs are heated up, rolled into sheets, shaped and cut before then once again being superheated in a facility over 260 meters in length. Thousands of nozzles then cool the steel by spraying it with up to 13 cubic meters of water per second – a so-called quench line – before it is then tempered in yet another oven. The result is the material of the hour: armor-grade steel. For tanks.
It is a product that seemed outdated not all that long ago. When Salzgitter presented the armored steel at the defense trade fair Eurosatory in Paris three years ago, "customers thought the product no longer actually existed,” says Thomas Brecht, head of development for Ilsenburger Grobblech. Interest, he says, was even greater as a result.
The defense industry is booming, and Salzgitter is far from being the only company that is hoping to profit from it.
Automobile parts suppliers like Schaeffler are seeking to ride out the problems in their own sector by producing products for defense. VW parent company Porsche SE is eyeing the establishment of a platform for investments in defense technologies while VW itself is considering the formation of a production partnership with defense industry giant Rheinmetall in its Osnabrück facility, which is currently operating at well below capacity. The Heidelberg-based firm Druckmaschinen AG is hoping to form an alliance with defense industry supplier Vincorion, whose product line includes energy systems for air defense and backup generators for the Eurofighter, the jet used by Germany’s military, the Bundeswehr. And the family-owned operation Trumpf has taken the step of amending its articles of association to allow the sale of its high-tech laser for military purposes. The move, said CEO Nicola Leibinger-Kammüller, is not a "shifting of values” but "the evolution of our societal responsibility.”
Startups have also begun eyeing the defense industry since it has recently proven to be an effective way to attract investor money. The Hamburg-based food-tech startup goodBytz, for example, recently announced its entry into the defense business by supplying a fully automated robot kitchen to the U.S. Army.
Even as dark clouds continue to beset the rest of German industry, armaments and defense manufacturers believe they are on the cusp of an upswing unprecedented in postwar Germany. The euphoria has been further fueled by German parliament’s decision to suspend the country’s debt brake rules when it comes to defense spending. Not to mention Defense Minister Boris Pistorius’s pledge to invest 35 billion euros by 2030 in the use of space for military purposes.
Politicians and business leaders alike are hoping that the new munitions boom could finally give a much-needed boost to the country’s sluggish economy. An economic miracle driven by defense and lubricated by government spending.
Inauguration of a Rheinmetall munitions factory in August with NATO General Secretary Mark Rutte, German Defense Minister Boris Pistorius and German Finance Minister Lars Klingbeil.
Foto: Noah Wedel / picture alliance
"Increased spending for defense and aerospace is a huge opportunity for the entire German industry,” says Matthias Wachter, defense expert at the Federation of German Industries. In a study released early this year, the Kiel Institute for the World Economy calculated that European gross domestic product (GDP) could grow by 0.9 to 1.5 percent if EU member states boosted defense spending from 2 percent of GDP to 3.5 percent – on the condition that they begin purchasing their high-tech weapons in Europe instead of the U.S. and that some of the spending goes to research and development that has dual use in the civilian sector.
Oliver Falck, head of the ifo Center for the Economics of Innovation and Digital Transformation in Munich, is more skeptical. If the German defense industry primarily sells its products to the German military, the Bundeswehr, then sector growth and the knock-on effects for the economy as a whole will be limited, he believes. "An entirely different potential” could be achieved, though, he says, if an innovative German defense industry was able to export a large number of products. Similar to the development of the German automobile industry.
The question is, though, whether such a restructuring will be successful. German industry experienced decades of global success, after all, not just because of a few market leaders, but on the strength of its dense network of complementary suppliers. Lasting success for the defense industry would depend on emulating that approach.
Gunnar Groebler opted for the correct product early on. Just a few months before the Russian invasion of Ukraine, the Salzgitter CEO decided to purchase the patent for armored steel production from Thyssenkrupp Steel, Germany’s largest steel producer. Groebler wasn’t just thinking of the Bundeswehr when making the decision: Such steel is also good for armored cash transporters and armored doors, and it is also used in ship manufacturing. "It was just an additional product for our new quench line,” says Groebler. A short time before, Salzgitter had invested 200 million euros in its factory in Ilsenburg.
Salzgitter CEO Gunnar Groebler at the company's production site.
Foto: Daniel Pilar / laif
“For us as a steel company, it will remain a small business unit for the foreseeable future."
Gunnar Groebler, Salzgitter CEO
After Russia marched into Ukraine, Groebler increased his efforts to obtain certification for several military applications from the Bundeswehr’s procurement department.
In doing so, the Salzgitter executive learned just how tedious the defense business can be. More than three years passed before the first certification for certain types of steel arrived, with additional approvals set to roll in soon. Groebler has since bundled armored steel and other defense industry products under the brand name "Salzgitter Defence” and is offering them to companies in Germany and elsewhere in the NATO alliance. In addition to steel sheeting, he intends to supply rifle barrels and steel products for tank tracks and bunker systems.
For defense companies like Rheinmetall, Groebler’s strategic shift is a blessing: Over the course of many years, they had been completely dependent on the Swedish producer SSAB for their armored steel needs, a company that had a virtual monopoly on the European market.
For Salzgitter itself, though, "the revenue potential is difficult to forecast,” says Groebler. "For us as a steel company, it will remain a small business unit for the foreseeable future.”
Furthermore, for the Salzgitter CEO and his industrial counterparts, moving into the defense sector is not without risk, including for historical reasons. Salzgitter emerged from the Reichswerk AG für Erzbergbau und Eisenhütten "Hermann Göring,” which delivered steel to Nazi Germany’s armaments industry. Furthermore, the company’s future strategy calls for the production of more climate-friendly steel. Some investors aren’t particularly pleased by the shift from eco-green to olive green.
Klaus Rosenfeld is also plagued by strategic questions. As a young financial officer, he once played a role in the sale of the foundering Dresdner Bank to Commerzbank. As head of the automobile supplier Schaeffler, he is now grappling with the difficulties facing his sector. On the sidelines of the IAA Mobilty auto show, Rosenfeld explained in a slightly hoarse voice how he intends to position Schaeffler to profit from the defense industry boom – without taking on too much financial or reputational risk.
Such a step, Rosenfeld says, "can only work with the support of the entire management team.” The decision was the focus of intense debate, he says, including with stakeholder supervisory board chair Georg Schaeffler.
Schaeffler CEO Klaus Rosenfeld at the international auto show IAA Mobility.
Foto: Sven Hoppe / dpa
"Industrial operations in other sectors do not necessarily have products that can be used in the armaments industry."
Oliver Falck, ifo economist
The defense sector, though, is nothing new to Schaeffler. The company already pulls in 100 million euros in revenues from defense, about two-thirds of that coming in the U.S. and the rest in Europe. Those revenues come from dual-use products – items that have both civilian and military purposes like ball bearings, which can also be used for rocket-launch systems.
Now, Rosenfeld wants to make defense more of a focus, with such activities bundled together in a single unit. The fundamental decision was made in summer, with the focus now on developing a strategy for product development, sales and production. Rosenfeld declined to pinpoint a revenue target.
When the initial idea was born, Rosenfeld began searching through the far-flung Schaeffler Group, with its 120,000 employees, for suitable staff. The goal was to find people who had served in the German armed forces, were familiar with its needs and were in a position to reactivate contacts. But the search proved challenging: Such information isn’t included in personnel files. Ultimately, Rosenfeld chose to focus on employees who occasionally missed work to take part in military exercises. In order to improve his contacts in the defense industry and the Bundeswehr, Schaeffler also joined the Federation of German Security & Defense Industries.
Problems likewise arose when it came to production itself. Normally, Schaeffler counts the parts it produces in the hundreds of thousands, but for the defense industry, says Rosenfeld, they had to remove at least one zero.
Companies that have learned to master the highly automated production of automobile parts are not necessarily in a position to churn out smaller runs of more complex components. Furthermore, "industrial operations in other sectors do not necessarily have products that can be used in the armaments industry,” says Falck, the economist from ifo. In the automobile industry and mechanical engineering, there might be sufficient know-how to jump into the military business, he adds, but it can’t be done from one day to the next.
The reverse is also true: Established defense sector companies need assistance when seeking to enter the classic industries. They have to learn to make do with less hands-on work in order to produce larger quantities.
Alexander Schubel, an eloquent and self-confident man in his late 30s, is just the person to provide such assistance. Since the beginning of the year, he has been head of production at tank manufacturer KNDS Deutschland, a company that grew out of Krauss-Maffei Wegmann. In the Allach district of Munich, the company – Germany’s third-largest defense operation – produces the Leopard 2 battle tank in addition to other products.
Schubel’s task is a clear as it is complicated: He must transform a manufacturing operation into an efficient factory. That, though, is why KNDS brought him on board: Schubel has experience in streamlining the production of companies
In a previous job, Schubel helped the German Rail supplier Schaltbau restructure such that it could also offer its direct current technology to the renewable energy and e-mobility markets. At the auto supplier Dräxlmeier, he led the conversion of cable production, which had relied heavily on manual labor, to energy management systems for e-mobility. Then, KNDS called.
Schubel recalls his time in the mountain infantry. After spending years in the globalized world of the automotive industry, he found it attractive to work at a company "with local impact.” Initially, he says, he wasn’t sure he wanted to work for a company that produces military products. "But ultimately, those concerns were outweighed by a conviction that Europe must be able to defend itself and its soldiers have to be outfitted with the best possible materiel.”
Schubel had a lot to do from the very beginning. The defense industry lags far behind carmakers when it comes to production methods and automation. He says he was surprised by "the degree to which production is dependent on the qualities of each and every expert.”
Schubel now must standardize production steps to create a greater degree of division of labor. He has to find employees for tasks that haven’t been in demand for some time, such as welding. On the one hand, KNDS needs people with experience in serial production. On the other hand, though, many employee profiles don’t match up with the skills that are still needed in tank production. Schubel must find a mix.
The military and civilian industries can profit significantly from each other. In practice, though, they don’t always match up that well.
"Defense companies and industrial companies are used to improving in small steps,” says Falck, the researcher from ifo. "And they do so in long-established networks.” That makes it difficult for both sides, he says, to dissemble structures and processes.
Which means that the impulse cannot come exclusively from established companies. "Numerous technological innovations and startups are appearing that are driving them forward,” says Falck. Young entrepreneurs, he adds, are usually more open to cooperations, but they need experienced partners and capital.
In a courtyard located in the small municipality of Oberding near Munich, Marc Wietfeld is creating a robot army. It is a place where tradition and the future lie close together. The town is surrounded by fields, but it’s also just a stone’s throw from the Munich airport and a Bundeswehr innovation center is just a few kilometers away. Wietfeld is a metal worker by training, in addition to being an officer in the reserve. And he is the founder of the startup Arx Robotics.
A division is forming in the defense sector, says Wietfeld. There are "the old systemic suppliers, who continue to operate within their networks, and new defense companies like Arx Robotic, which are developing new production lines and networks.” Wietfeld hopes to expand Arx Robotics into a kind of Rheinmetall 2.0.
German Chancellor Friedrich Merz with Arx Robotics CEO Wietfeld with the autonomous track vehicle Gereon.
Foto: Michael Kappeler / dpa
“Because they are quiet, electric or hybrid troop transporters can leave the danger zone more quickly and go unnoticed by enemy reconnaissance."
Sebastian Schulte, Deutz CEO
Gereon is the name of the autonomous tracked vehicle that Wietfeld and his co-founders have developed in numerous different variations. The core of the company is the software platform Mithra OS, an operating system that can integrate old and new weapons systems and control them. Wietfeld is hoping Arx can become a standard software for the German defense industry. And he would like to develop a network of companies around this software that will join forces to offer a military system – a vision that can only be successful if he is able to get established producers and suppliers on his side.
"We are building the digital heart, the sensors, the wiring harnesses,” says Wietfeld. What Arx needs, he says, are partners for vehicle construction, drivetrains and motors. He has formed an alliance with Daimler Truck and is outfitting its existing military vehicle line with Mithra. New, jointly produced vehicles are also planned.
Wietfeld has also brought the Augsburg-based company Renk on board, which produces drivetrains for tanks and armored vehicles like the Leopard, the Puma and the Boxer. Drone producer Helsing is also involved, a company whose kamikaze drones can, for example, be brought into the deployment area and controlled by Arx vehicles. Wietfeld is now integrating a new company into the network – Deutz, one of the oldest motor producers in the world.
For Arx Robotics, Deutz is an important partner for providing complex components that Arx itself is unable to develop and produce. "Deutz won’t just a partner for motors, but with its battery packs, it will also be an energy partner,” says Wietfeld. Providing power, for example, to AI-driven battle management systems. Like Daimler Truck and Renk, Deutz is also working to integrate the Mithra software into its systems.
Industry insiders say that the four new partners are planning on underpinning their cooperation with cross investments and the formation of joint ventures. Arx Robotics, say insiders, is also working on a new financing round that will focus on this new network – a network which will be able to build a variety of vehicles, with either Arx Robotics or Daimler Truck taking the lead, depending on size.
Deutz, meanwhile – as it has recently confirmed – is planning on participating in the financing round as a lead investor. Arx Robotics also plans to begin joint production with Deutz in Ulm.
Sebastian Schulte, 46, is the CEO of Deutz. A former world champion rower, Schulte took over leadership of the Cologne-based company virtually concurrently with the Russian invasion of Ukraine. To that point, Deutz had primarily focused on the production of internal combustion engines. "We had already started to broaden Deutz’s focus, so defense seemed like an attractive additional line of business,” says Schulte.
A green-painted, water-cooled V8 engine is standing in a production hall in the southern German city of Ulm. It is a giant piece of machinery and is used, for example, in howitzers of the kind deployed in Ukraine.
Arx Robotics vehicles at the Deutz engine factory in Ulm.
Foto: ARX Robotics / DEUTZ
For many years, Deutz employees here have been performing the complex and labor-intensive task of engine refurbishment. They receive engines that have broken down or are in need of maintenance from construction and agricultural machinery manufacturers as well as from the Bundeswehr. Once they have been dismantled, workers clean the components, swap out or fix defective parts, and put it all back together again.
Between 50 and 100 Bundeswehr engines – belonging to Patriot air defense systems, troop transporters or pontoon bridges – go through this process each year, making Deutz an important partner for the old armaments industry, helping maintain its several-hundred-million-euro systems that have been used for decades and repeatedly refurbished.
Schulte would like to expand the business while also preparing it for the future, seeking to broaden the company’s cooperation with the defense industry and combine it with the transformation to e-mobility. Electric drivetrains, he says, are particularly attractive for lighter, autonomous weapons systems. "Because they are quiet, electric or hybrid troop transporters can leave the danger zone more quickly and go unnoticed by enemy reconnaissance.”
Next to the main factory hall is a smaller building where a handful of employees assemble battery packs. In the future, they are to be built into the electric drives of troop transporters, including the Bushmaster, a model that is in use in Ukraine.
Deutz is investing quite a bit in the new strategy. The company first acquired the electric motor producer UMS in the Netherlands and then took over Sobek, which specializes in the construction of electric motors for drones. The purchase price for Sobek alone is thought to have been in the three-figure millions.
Defense tech companies like Sobek and Arx Robotics are interesting because of their innovations. "New products and entire ecosystems are developing,” says Schulte. At the same time, help can be provided to the young companies in ramping up hardware production and securing access to the armed forces as customers.”
As a rower, Schulte achieved his greatest success in the eight. It is quite possible that in his new role as a captain of industry, he will soon be bringing additional partners on board.
