Within days of Russia’s invasion of Ukraine, as Germany’s industrial heartlands shuddered and recession loomed, the boss of 161-year-old engine maker Deutz came up with a plan to turn adversity into opportunity.
“I said ‘what about defence?’,” Sebastian Schulte recalled asking colleagues, thinking that the Cologne-based company’s engines for tractors, diggers and other heavy machinery were a perfect fit for tanks.
“Our engines run 3,000 metres above sea level, in a mine, at 40 degrees celsius or minus 20 — that’s exactly the kind of reliability militaries need,” he added.
Three years on, the manufacturer expects to make about 2 per cent of more than €2bn in annual revenue from defence contracts, from close to nothing previously. That is a proportion that is only likely to grow as Deutz begins to roll out products specifically targeted at military customers, such as hybrid engines that can help tanks approach enemies more quietly.
Deutz is one of a number of companies in Germany’s Mittelstand — the network of small and medium-sized enterprises that form the backbone of Europe’s largest economy — that have jumped at the opportunity to tap into the country’s soaring arms expenditure, amid a deepening industrial malaise.
Germany’s defence reboot — fuelled by the loosening of its strict borrowing rules and the threat of waning US support — has overturned a widespread taboo among German businesses surrounding arms manufacturing, quietly redrawing the moral and commercial boundaries of its industrial core.
Family-owned laser specialist Trumpf is considering walking back a pledge to abstain from arms production. Meanwhile, automotive supplier Schaeffler — which has announced thousands of job cuts, as German car production slows — has said it could in the future supply bearings to tank manufacturers.
Economists expect many Mittelstand companies, squeezed by a punishing industrial slowdown, to jump on the opportunity presented by rising European defence spending.
Corporate distress in Germany has been nearing levels last seen during the pandemic, as soaring energy costs — driven by the collapse of Russian gas supplies — and a bleak industrial outlook have intensified warnings of looming deindustrialisation. The country’s economy is suffering the most protracted slump in its postwar history, shrinking in both 2023 and 2024.
“You can be sure that every company able to provide services and products needed by the German Armed Forces, will definitely try to get contracts,” said Hans-Jürgen Völz, the chief economist of BVMW, a Mittelstand lobby group. “Almost all sectors of the economy can benefit from [Germany’s rearmament],” he added.
One group repositioning itself to serve the defence industry is Bavarian chemical producer Alzchem.
Until 2022, one of Alzchem’s core businesses focused on supplying the agricultural sector with nitroguanidine — a building block for many herbicides used to improve crop yield, which also happens to be highly explosive, and can be used to propel long-range shells.
“Everybody talked about cyber wars in the future, nobody had in mind that [Nato-standard] 155mm munitions would come back as the most needed ammunition,” said Alzchem’s chief executive Andreas Niedermaier.
But when the sheer demand for artillery shells became apparent — Rheinmetall has in the past three years expanded its production of 155mm munition tenfold — Alzchem pivoted from fertiliser to firepower, setting aside its agricultural clients to supply the defence industry instead.
“We let that market go to the Chinese,” Niedermaier said of Alzchem’s former herbicide business. Instead, it is rapidly expanding its capacity to supply arms makers.
Alzchem has since received a €34mn EU grant for ammunition production to support a €140mn plan to double nitroguanidine production at its Trostberg headquarters.The US government has also awarded the company $150mn to build a plant stateside — a project for which Alzchem is scouting locations.
Niedermaier said he expected defence to account for more than 10 per cent of Alzchem’s sales in the near future, depending on how its other major growth bet — creatine, a muscle-building amino acid popular among fitness influencers — performs.
But the transition under way at several of Germany’s famed Mittelstand companies has not been without friction. Arms manufacturing has long been taboo in postwar Germany because of the legacy of industrial co-operation with the Nazi regime.
Germany’s deliberate under-investment in the military allowed the country to channel resources into its welfare state and export-oriented industrial base — but the political consensus surrounding that approach is now visibly fraying.
Deutz’s Schulte, previously managing director of submarine manufacturer and defence contractor Thyssenkrupp Marine Systems, said his plan to broaden the engine maker’s client base to arms contractors was initially met with resistance from colleagues.
“I got a lot of pushback internally,” he said, adding that it took a while until Deutz’s new strategy became “I wouldn’t say broadly, but fairly accepted”.
Traditionally, many Mittelstand companies steered clear of the defence sector, wary of the reputational risks and cultural sensitivities tied to Germany’s postwar pacifism.
If deals happened at all — both Deutz and Alzchem have in the past had small contracts with defence companies — they were quietly tolerated rather than actively pursued.
“Like many German Mittelstand companies, [at Deutz] defence was not only not a focus — it was actively avoided for [environmental, social and governance] reasons,” Schulte said.
But Germany’s long-held resistance to arms production is now fading, as the country faces a historic geopolitical shift. “We need to see challenges as opportunities — not by benefiting from the war, but asking: how can you contribute best to solve the challenge?”
