European manufacturers pivot to defense as EV demand falls

What happened?

In the past week, four European manufacturers have announced alliances or launches in the defense sector: Ineos is bidding for a contract from the UK Ministry of Defence; Daimler Truck has launched a brand dedicated to military vehicles; Renault has partnered with Thales to develop armored vehicles; and Mercedes-Benz is collaborating with a German startup to build anti-drone platforms. According to The Next Web, this shift occurs against a backdrop of slowing demand for electric vehicles (EVs) and a significant increase in military budgets across Europe. The news reflects a broader trend: following Russia's invasion of Ukraine in 2022, NATO countries committed to spending at least 2% of their GDP on defense, and several have already exceeded that threshold. Germany, for example, created a special €100 billion fund to modernize its armed forces. This environment has opened a new market for automakers facing a decline in EV sales: in 2024, EV registrations in the EU grew only 3% year-on-year, compared to 37% in 2023, according to the European Automobile Manufacturers Association (ACEA).

Why is it important?

This pivot marks a historic shift for an industry that has been at the forefront of sustainable mobility. The drop in EV demand, driven by the removal of subsidies in some countries (such as Germany, which cut incentives in December 2023) and concerns about charging infrastructure, has led manufacturers to seek new revenue streams. At the same time, the war in Ukraine has boosted defense spending, creating a growing market for military vehicles. According to SIPRI data, European military spending rose 13% in 2023, the largest increase in decades. This trend could accelerate the conversion of plants and the development of dual-use technologies, with implications for European competitiveness. This is not the first time the automotive industry has adapted to wartime contexts: during World War II, manufacturers like Ford and General Motors produced tanks and aircraft. However, back then the mobilization was total, whereas today it is a strategic diversification in an uncertain environment.

Consequences

For companies: Manufacturers pivoting to defense could stabilize their revenues in the short term, but risk diluting their brand and losing focus on sustainable mobility. Dependence on government contracts can be volatile. For example, Ineos is competing for a UK Ministry of Defence contract for patrol vehicles, but if it fails, its investment in military capacity could be underutilized. Daimler Truck, meanwhile, has launched a specific defense brand, suggesting a long-term commitment, but this could also create conflicts with its civilian business if military orders are prioritized. Renault, by allying with Thales, gains access to expertise in armor and communication systems, but could divert resources from its Renaulution plan focused on electrification. Mercedes-Benz, by collaborating with an anti-drone startup, is betting on high-tech niches, although the defense market is less predictable than the civilian one.

For consumers: There could be less investment in EV R&D, delaying the arrival of more affordable models with greater range. In 2024, the average price of an EV in Europe was around €45,000, compared to €36,000 for a combustion vehicle. If manufacturers divert funds to defense, the gap could widen. The price of civilian vehicles could also increase if production lines are shared, as military components often have stricter and more costly specifications. Additionally, the semiconductor shortage that affected the industry in 2021-2023 could worsen if military demand competes for the same chips.

For the labor market: Converting plants to defense could save jobs in the short term, but will require significant retraining of the workforce. For example, workers specialized in EV batteries would need training in armor systems or military electronics. According to a 2023 McKinsey report, the shift to defense could generate between 50,000 and 100,000 new jobs in Europe, but would also eliminate some roles in sustainable mobility R&D. Unions have expressed concern, as defense contracts are often less stable than civilian production.

For geopolitics: An automotive industry oriented toward defense strengthens European strategic autonomy, but could also strain trade relations with partners like China, which is a large market for European EVs. In 2023, China imported 1.2 million European EVs, and any sign that manufacturers prioritize defense could be misinterpreted in Beijing. Additionally, NATO has urged its members to reduce dependence on Chinese components in defense, which could lead to a relocation of supply chains. On the other hand, cooperation with US defense companies, such as Thales (which has a strong presence in the US), could align Europe with Alliance interests.

What readers should know

• The pivot to defense is not a complete abandonment of EVs, but a diversification amid market uncertainty. In fact, all involved manufacturers maintain their electrification plans: Renault continues with its CMF-EV platform, and Mercedes-Benz plans to launch 10 electric models by 2027.
• Alliances with established defense companies (like Thales) allow automakers to quickly access expertise and military sales channels, reducing entry costs. Thales, for example, already supplies communication systems to armies in 50 countries.
• This move could accelerate the adoption of technologies such as autonomous vehicles and hybrid propulsion systems in military applications, with potential spillovers to the civilian market. For instance, autonomous driving systems developed for military convoys could be adapted to civilian trucks. Indeed, Daimler Truck is already testing autonomous trucks on German highways.
• Not all manufacturers are following this trend. Stellantis and BMW have not announced similar moves, suggesting that the strategy depends on each company's exposure to the EV market and structure. Stellantis, with brands like Jeep and Ram, has a strong presence in off-road vehicles that could be adapted to defense, but for now it focuses on electrification.

"The European automotive industry is reshaping itself for rearmament. Ineos, Daimler Truck, Renault, and Mercedes-Benz are leading a change that could redefine the sector for decades." — The Next Web

In summary, this pivot to defense is a pragmatic response to the confluence of two crises: the slowdown in EVs and the rise in military spending. Its effects will be felt throughout the value chain, from component suppliers to dealerships. The coming months will be key to seeing whether other manufacturers join in or whether this trend is just a tactical move by a few.