European auto manufacturers are under pressure from stagnating sales, the acclerating threat from China and the unpredictable fallout from the war in the Middle East. But one side effect of global turmoil offers investors some comfort; increased defense spending presents a potentially lucrative lifeline.
A report from Germany’s Berenberg Bank said the urgent requirement to increase military spending, as NATO nations respond to President Trump’s criticism that they have relied for too long on U.S. largesse for armaments, finds defense manufacturers short on capacity. At the same time the auto industry is being forced to lay off workers and shut redundant factories.
About 50,000 German auto-sector jobs were lost in 2025. Analysts and trade groups predict about 200,000 more jobs could go by 2030. If Germany is suffering so badly, you can expect other European automakers to be hurting even more. In a lifeless market, China’s success with electric vehicles will have serious consequences.
Berenberg Bank said Europe’s automotive sector faces chronic overcapacity.
“The vast majority of European automotive suppliers have already initiated large-scale restructuring programs, with up to 10% of their workforces potentially affected. Most (manufacturers) are currently operating their European plants at low utilization rates of 60-70% and they earmarked approximately €40 billion ($47 billion) in restructuring and impairment costs for 2025 alone, with about a third being cash costs to be spread over the next few years,” the bank said.
Volkswagen and Renault eye defense opportunities
Volkswagen and Renault of France are two big automakers already diverting resources into military production. The bank said there will be a major acceleration in defense spending over the medium term.
“The European defense industry, however, dramatically lacks scale. This creates opportunities for a European automotive sector that is facing structural overcapacity challenges and is in urgent need of restoring its productivity to cope with both increasing China-led competitive pressure and the investments required for the transition to electric vehicles,” the bank said.
As competitive pressures rise, the Western European market remains stubbornly moribund. According to GlobalData, car and SUV sales were up nearly 4% in the first quarter, but because of inflation and rising energy costs due to the Iran conflict, growth for the year will be a barely perceptible 0.2% at 11.78 million. The pre-Covid high of 15.8 million remains a distant dream. Western Europe includes the five biggest markets of Germany, France, Britain, Italy and Spain.
Professor Ferdinand Dudenhoeffer, director of Germany’s Center for Automotive Research, said it’s not just Europe which will be hurt by the Iran conflict.
A poor year for the automotive industry
“Globally, significant inflation spikes and imbalances are expected due to the war with Iran. This will cause economic growth in key automotive markets to stagnate or decline. Since new car markets are closely correlated with the gross domestic product, a generally poor year for the global automotive industry in 2026 is expected,” Dudenhoeffer said in a report.
“In both Europe and North America, we anticipate a decline in car demand,” he said.
The defense development is timely, according to Berenberg Bank.
“We believe German (manufacturers) and suppliers should be relatively well exposed to the theme. Germany is likely to see the highest upside in defense budgets versus history, which would overlap well with current large automotive restructuring actions in the country: we think the main beneficiaries would be Volkswagen, (automotive suppers) Schaeffler and Aumovio.”
“We also identify Renault as one of the first European (manufacturers) to have, recently, diversified into military drone production; we view this as an opportunistic revenue diversification move rather than a response to overcapacity, given that the company does not require significant capacity rightsizing currently,” according to the bank’s report.
