Europe’s Auto Industry Seeks Salvation Through Defense Contracts Amid Crisis

Inside Ford’s Dagenham plant, the mood is one of cautious optimism. A camouflaged, heavily modified Ford Ranger sits outside, embodying the company’s attempt to pivot from civilian to military markets. This “beefy” vehicle, capable of towing four tonnes and carrying two, represents more than just a rugged truck; it carries the hopes of the 2,000 workers who keep the site’s engine production alive, even as output has halved over the last decade from 90,000 units annually.

Ford is part of a joint bid with defense specialists General Dynamics and Ricardo to supply 9,000 Light Mobility Vehicles to the British Army, replacing aging Land Rover fleets over the next five to seven years. Lisa Brankin, chair of Ford UK, described the opportunity as vital for demonstrating the sector’s agility in meeting defense needs.

This strategic shift comes as Europe’s automotive industry faces what insiders describe as a “perfect storm.” The sector is grappling with a terminal decline driven by surging Chinese competition, sluggish electric vehicle (EV) sales, and massive overcapacity. In response, car manufacturers are looking to the continent’s ramping up of defense spending as a potential lifeline.

The history of industrial mobilization looms large. During World War Two, Ford’s Dagenham facility was Europe’s largest car plant, producing 360,000 military vehicles and supplying Merlin engines for Spitfires and Hurricanes. Today, executives hope that the engines of war might again save the industry from commercial collapse.

Renault has partnered with defense giant Thales to produce military drones, targeting an output of 1,000 units per month to bypass traditional, slower defense supply chains. Meanwhile, Volkswagen has agreed to sell its underutilized Osnabrück factory in western Germany to a joint venture with an Israeli defense investor, converting it into a military manufacturing hub.

Mike Hawes of the Society for Motor Manufacturers and Traders (SMMT) noted that the UK automotive supply chain is dangerously concentrated. With major manufacturers like Nissan, Toyota, BMW, and Jaguar Land Rover (JLR) dominating specific regions, the closure of JLR’s recent 4,000 job cuts has sent shockwaves through suppliers. Dave Roberts of Evtec, a cooling systems supplier, warned that JLR acts as the “glue” holding the sector together, and its struggles ripple deeply through the supply chain.

Industry leaders have urged the government to help automakers move into aerospace and defense. In an open letter to Prime Minister Keir Starmer, Chancellor Rachel Reeves, and West Midlands Mayor Richard Parker, executives argued that the supply chain is not in decline but is simply “in the wrong market.” They signed the letter representing over 8,600 direct employees and the Confederation of British Metalforming, which represents approximately 75,000 workers.

The crisis is compounded by the loss of profitable markets in China. Once accounting for half of Volkswagen’s profits, the Chinese market is now saturated with fierce domestic competition. Chinese brands like BYD, Chery, and Geely are aggressively expanding into Europe, leveraging lower production costs and faster EV development timelines.

Volkswagen has announced plans to cut 100,000 jobs and has already shuttered its Dresden plant, with Zwickau—a site where over €1bn was invested in EV conversion just four years ago—also at risk. Industry estimates suggest Western European plants have roughly 2.5 million vehicles worth of annual spare capacity.

Sigrid de Vries, director general of the ACEA auto industry association, acknowledged that automotive manufacturers possess relevant industrial assets, logistics capabilities, and integrated supply chains. However, she cautioned that defense contracts would not fully replace the mass consumer market, noting that security protocols and political rivalries present significant hurdles.

As traditional models falter, some European automakers are considering sharing their facilities with Chinese rivals to offset fixed costs. Stellantis has taken a stake in Chinese maker Leapmotor, while Nissan and Chery are exploring contract manufacturing arrangements. VW CEO Oliver Blume has also indicated openness to sharing spare capacity with Chinese joint-venture partners, signaling a complex new era for European auto manufacturing.