Within days of Russia’s invasion of Ukraine, German industrial centres were shaking and a recession was on the verge of looming, the 161-year-old engine maker Deutz boss came up with a plan to turn adversity into opportunities.
“I said, ‘What about defense?'” Sebastian Schulte asked her colleague, recalling that he thought engines for tractors, diggers and other heavy equipment would be perfect for tanks.
“Our engines are in mines, running 3,000 meters above sea level at 40 degrees Celsius or minus 20. That’s exactly the kind of reliability the military needs,” he added.
Three years later, the manufacturer expects to make around 2% of annual revenue from defense contracts to more than about 2 billion euros, up to the nearest previous ones. Deutz could potentially increase as Deutz starts deploying products specifically targeted at military customers, such as hybrid engines that help tanks get closer to the enemy quieter.
Deutz is one of the many companies in Germany’s Mittelstand, a network of small and medium-sized enterprises that form the backbone of Europe’s largest economy, and jumped at the opportunity to capitalize on the country’s rising arms spending amid deepening industry falsehoods.
The reboot of German defenses, driven by the threat of loosening strict borrowing rules and the decline of US support, overturned a widespread taboo among German companies surrounding arms production, quietly redrawing the moral and commercial boundaries of its industrial core.
Trumpfe, a family-owned laser specialist, is considering walking his pledge to refrain from producing weapons. Meanwhile, Schaeffler, a car supplier, who announced thousands of job cuts as German car production slows, says it could potentially be fed to tank manufacturers in future supply bearings.
Trump, a family-owned laser specialist, is considering returning his pledge to refrain from weapons production ©Trumpf
Economists hope that many Mittel Stand companies have been squeezed into the industry slowdown, punishing, to jump on the opportunities presented by the rise in defence spending in Europe.
The pain of German companies is approaching the level last seen during the pandemic to increase the energy costs caused by the collapse of Russia’s gas supply, with the outlook for a bleak industrial outlook reinforced looming warnings of post-industrialism. The country’s economy is suffering from the longest slump in postwar history, shrinking in both 2023 and 2024.
“We’ve seen you get a lot of money,” said Hans Jurgen Welz, chief economist at BVMW, the lobby group at Mittel Stand. “Almost every sector of the economy can benefit from (German re-contracts),” he added.
One group that will relocate itself to serve the defense industry is Bavarian chemical producer Alzchem.
Until 2022, one of Alzchem’s core businesses focused on supplying nitroguanidines to the agricultural sector. This is a component of many herbicides used to improve crop yields.
“Everyone talked about cyberwar in the future. No one had in mind that (NATO standard) 155mm ammunition would return as the most needed ammunition,” said Andreas Niedermaier, CEO of Alzchem.
But when demand for cannon shells became apparent – Rheinmetall has expanded production of 155mm ammunition by 10 times over the past three years – Alzchem was pivoted from fertilizer into fireplaces, setting up farming clients to supply the defense industry instead.
Rheinmetall has expanded production of 155mm Munition Tenfold over the past three years © Axel Heimken/AFP/Getty Images
“We handed that market to the Chinese,” Niedermeyer said of Alzem’s former herbicide business. Instead, their ability to supply weapons manufacturers is expanding rapidly.
Alzchem has since received an EU grant of 34 million euros for ammunition production to support its 140 million euros plan to double nitroguanidine production at its Trostberg headquarters. The US government also awarded the $150 million company to build Plant Stateside, a project that Artzchem is scouting the location.
Niedermaier said he hopes that more than 10% of Alzchem’s sales in the near future will perform more than 10% of near future sales, depending on how other major growth bets (the muscle-building amino acids popular among fitness influencers) perform.
However, the transition at some of Germany’s well-known Mittel Stand companies is not without friction. Arms manufacturing has long been a taboo in postwar Germany due to its legacy of industrial cooperation with the Nazi regime.
While deliberate investment in German military has enabled the state to guide its resources to a welfare state and an export-oriented industrial base, the political consensus surrounding that approach is now visibly frayed.
Deutz’s Schulte, previously managing director of submarine manufacturers and defense contractor Thyssenkrupp Marine Systems, said his plan to expand the engine manufacturer’s customer base to arms contractors initially encountered resistance from colleagues.
“I got a lot of pushbacks within the company,” he said, adding that it took some time for Germany’s new strategy to “not broadly say it, but it’s pretty unacceptable.”
Traditionally, many Mittelstand companies avoided the defence sector, noting the risks and cultural sensitivity of reputation associated with postwar pacifism in Germany.
If there was a deal that both Deutz and Alzchem had signed small contracts with defense companies in the past, they were quietly tolerated rather than actively pursued.
“Like many German Mittelstand companies, defense (in Germany) was actively avoided for reasons (environmental, social, governance, and governance) rather than focus,” Schulte said.
However, as the country faces historic geopolitical changes, years of resistance to Germany’s arms production is now declining. “We need to see challenges as opportunities. We ask, not be beneficial from war. How can we contribute to solving the challenge?”
