Defense industry: An opportunity for automotive suppliers? | DW News

Key Concepts:

• European rearmament
• Automotive supplier financial distress
• Bankruptcy
• Defense industry transition
• Production process overhaul
• Planning security
• Market size comparison (automotive vs. defense)

Europe's Rearmament and its Impact on Automotive Suppliers

The current geopolitical climate, marked by fears of a Russian attack, is driving significant rearmament efforts across Europe. Countries are investing billions in military hardware, including aircraft, weapons, and tanks. This surge in defense spending raises a crucial question: can these new orders provide a lifeline to German automotive suppliers, many of whom are facing severe financial difficulties?

Case Study: Bohigh in Saxony

One example of an automotive supplier in deep trouble is Bohigh, located in the eastern German state of Saxony. The company has filed for bankruptcy, impacting its 600 employees who are now uncertain about their job security. Bohigh specializes in producing gearboxes, body parts, and other components for major German car manufacturers.

• Reasons for Insolvency: According to a company representative, Bohigh's insolvency is attributed to a combination of factors, including high energy intensity, challenges in utilizing production capacity, and broader changes within the automotive industry. These issues, coupled with other "peripheral factors," ultimately led to bankruptcy.
• Failed Cost-Cutting Measures: Bohigh initially attempted to mitigate its financial woes by reducing costs and laying off 100 employees. However, these measures proved insufficient, making bankruptcy unavoidable.
• Employee Concerns: The bankruptcy has created significant uncertainty for employees. One employee expressed concern about their future job prospects, highlighting the difficulty of finding new employment in a struggling German industrial sector, especially given their local family commitments.
• Lack of Defense Industry Expertise: Bohigh had not previously considered producing components for the defense industry due to a lack of necessary contacts and, crucially, specialized expertise. The company had been exclusively focused on the automotive sector for decades.

A Successful Transition: FWM

In contrast to Bohigh's struggles, another German automotive supplier, FWM, has successfully navigated a transition into the defense sector. While FWM had previously undertaken smaller contracts for defense companies, this segment has now become its core business, accounting for 80% of its sales.

• CEO's Strategic Advantage: FWM's CEO, Tomas Folks, benefits from a strategic advantage in the defense market: reduced competition from Asia. The risk of industrial espionage from Asian suppliers is deemed too high, effectively limiting competition to primarily German companies. This contrasts sharply with the global competition FWM faced in the automotive industry from China, India, and Eastern Europe.
• Workforce Acceptance: FWM's employees have welcomed the shift to defense production, appreciating the job security it offers. Some employees have joined FWM from other struggling automotive suppliers in the region. The production of military components does not pose an ethical dilemma for them, with one employee stating, "The bottom line is that I earn my money and if FWM doesn't make them, someone else will. Not an issue for me." Another sentiment expressed was, "Everyone has to be able to defend themselves. We make parts for the good guys and don't really concern ourselves with where they end up."
• Production Process Overhaul: The transition to defense components was not without its challenges. FWM had to significantly re-engineer its production processes to meet the stringent requirements of the defense industry. This commitment has yielded substantial rewards.
• Planning Security: A key benefit of FWM's focus on defense technology is the unparalleled planning security it provides. The company has orders extending through 2030, with discussions about contracts reaching as far as 2040. This long-term visibility is a significant advantage not found in most other industries.

Challenges for Large-Scale Transition

While FWM's success is encouraging, the broader transition for automotive suppliers faces significant hurdles.

• Bohigh's Hope for Survival: In Saxony, there is hope that Bohigh's insolvency proceedings might lead to its rescue. However, the company's size necessitates a high volume of orders, and defense contracts alone are unlikely to be sufficient.
• Market Size Discrepancy: The fundamental difference in market scale between the automotive and defense sectors presents a major challenge. The automotive industry generates millions of orders annually, whereas tanks and similar military vehicles are produced in much smaller quantities and have a long service life of 20 to 30 years. This translates to significantly lower order volumes and product turnover in the defense sector.
• Limited Scope for Transition: The automotive industry is approximately ten times larger than the defense sector. Consequently, a successful switch to military components will likely only be feasible for a limited number of automotive suppliers.