German Automakers Mercedes-Benz and Volkswagen Pivot Toward Defense Production

Ola Källenius, CEO of Mercedes-Benz, signaled the company's openness to entering defense production to support Europe's growing military capabilities, speaking to the Wall Street Journal across multiple statements beginning May 15. Källenius emphasized that any defense-related business would remain a small complementary activity secondary to core automotive operations, and he did not outline concrete project plans. The pivot comes as Mercedes-Benz faces severe financial pressure, with reports of its 2025 profit drop ranging from 49% to 57% across coverage.

Mercedes-Benz already supplies chassis to specialized firms for military applications and views the security and defense sector as a strategic development focus. The broader German automotive industry is pursuing similar diversification amid high production costs, weak European demand, tariffs, and intensifying Chinese competition. Volkswagen CEO Oliver Blume is considering producing military transport vehicles at the company's Osnabrück plant, though Volkswagen has ruled out manufacturing weapons or tanks. Defense firm Rafael Advanced Defense Systems, designer of the Iron Dome, is reportedly in discussions with Volkswagen.

Simultaneously, German defense companies are capitalizing on the sectoral shift. Rheinmetall CEO Armin Papperger is evaluating the conversion of automotive supplier sites in Neuss and Berlin for defense manufacturing and exploring the acquisition of struggling car factories. Hensoldt is recruiting skilled workers from automotive suppliers including Bosch and Continental AG. The moves align with the European Union's push for member states to expand domestic arms production and reduce reliance on U.S. military supplies, accelerated by Germany's military buildup following Russia's 2022 invasion of Ukraine.