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- [00:06]
Jessica Mendoza
Germany is well known for producing high quality vehicles. Its luxury car companies are the crown jewel of the country's manufacturing sector. But recently, those companies have been flashing warning signs.
- [00:21]
Bojan Panchevski
After years of roaring down the autobahn. A speed bump for Porsche, Volkswagen and
- [00:25]
Jessica Mendoza
Mercedes Benz posting year on year declines of over 40% in net profits, Iconic
- [00:32]
Bojan Panchevski
sports car maker notched up a spectacular third quarter loss of almost 1 billion euros. There is sort of a creeping sense of panic.
- [00:43]
Jessica Mendoza
Our colleague Bojan Panchevski covers Europe and he's been reporting on the pain being felt throughout Germany's economy.
- [00:50]
Bojan Panchevski
Germany is basically losing roughly 15,000 jobs from manufacturing each month.
- [00:57]
Jessica Mendoza
Wow. Wow.
- [00:58]
Bojan Panchevski
This is a striking figure per month. Yeah, it's a striking figure. It's a bloodbath.
- [01:03]
Jessica Mendoza
Yeah.
- [01:03]
Bojan Panchevski
And obviously it's a situation that requires urgent action, both on behalf of the businesses on the enterprises and the government who is desperate to help them and stop the bleed.
- [01:18]
Jessica Mendoza
German officials and companies have been feverishly looking for a way to inject life into the economy. And that led to a big aha moment. While luxury car brands have suffered, another kind of precision manufacturing shows some real weapons.
- [01:35]
Bojan Panchevski
There is money to be made in the arms industry, which is one of the very few branches of the economy that's actually booming. And they seem to have coalesced around the idea of going into the defense industry, which is now kind of crucial in Europe.
- [01:55]
Jessica Mendoza
So they're pivoting basically from the car business to the business of war.
- [02:00]
Bojan Panchevski
That's right. They're pivoting from cars to cannons.
- [02:05]
Jessica Mendoza
Welcome to the Journal, our show about money, business and power. I'm Jessica mendoza. It's Tuesday, May 5th. Coming up on the show, Germany is reinventing itself as a weapons factory.
- [02:32]
Bojan Panchevski
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- [02:37]
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- [02:55]
Bojan Panchevski
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- [03:08]
Jessica Mendoza
Bojan, how would you describe the role that the German economy plays in Europe?
- [03:14]
Bojan Panchevski
Oh, you know, in Germany, Germany is this giant sort of beating industrial heart of Europe smack in the middle of the continents. Essentially, a lot of countries, if not most countries in mainland Europe, are entangled in the German supply chain. And when German manufacturing is stuttering, these countries are also losing growth. I mean, one example is Austria, one of the richest countries in Europe. And it's completely embedded in the German supply chains. The same is true also for countries like Hungary or the Czech Republic. So, you know, everyone suffers if Germany suffers.
- [03:53]
Jessica Mendoza
And Germany is not only a major economic force in Europe, it's also deeply important to the continent's security. After the US, Germany contributes the most money towards NATO. When Russia invaded Ukraine in 2022, it both threatened Europe's stability and and hurt Germany's economy. Russia had been Germany's biggest supplier of natural gas and a major supplier of other energy resources.
- [04:22]
Bojan Panchevski
Russian gas firm Gazprom is scheduled to switch off its largest natural gas pipeline running to Germany today.
- [04:29]
Jessica Mendoza
The war in Ukraine sent energy prices skyward and those price increases rippled throughout the manufacturing sector. That was devastating to the German car industry, which was already facing stiff competition from overseas.
- [04:46]
Bojan Panchevski
China, once basically a customer of Germany, has turned into its most fierce rival and is producing things that are as good or cheaper than what Germany has to offer. I mean, their electric cars are in part better than the German cars, which is unheard of so far. You know, the Germans were always comfortable as being the best on the market.
- [05:09]
Jessica Mendoza
Combined, all of these headwinds have stalled Germany's economy.
- [05:14]
Bojan Panchevski
The economy hasn't effectively grown since 2018. It's the longest period of time of stagnation since the Second World War. So it's alarming essentially at this stage. Chancellor Scholz announced last week he would call a confidence vote and trigger snap elections.
- [05:37]
Jessica Mendoza
In February of last year, Germany held a big election and in the run up, it was clear that voters were looking for a change.
- [05:44]
Bojan Panchevski
Polls are showing that people have a very dim view of the future. The majority thinks that their children will be worse off than their parents. The stagnation of Europe's biggest economy has been one of the burning issues of the campaign. Others have been support for Ukraine.
- [06:01]
Jessica Mendoza
The election proved to be a major turning point. Incumbents were voted out. The far right and the far left surged. The party that got the most votes was the Christian Democratic Union with a conservative and business friendly platform. They vowed to turn around the economy with investment and deregulation. And the face of that turnaround is the new Minister of the Economy.
- [06:24]
Bojan Panchevski
And the Minister of the Economy is a woman called Katarina Raiche. She comes from business herself. She used to be in energy, in the energy trade. She dealt with gas and so on. And she's very, very much attuned to the mood inside the business community. We need speed and investments and we need private capital. And that will be another topic I
- [06:45]
Jessica Mendoza
will take care of with the ongoing security threat from Russia. Rajke bet that there would be higher demand for weapons across Europe and that Germany could make them.
- [06:57]
Bojan Panchevski
So Katharina Reiche, the economy minister, figured that out and realized, we need to onshore manufacturing for these things. We need to start making these things ourselves in Germany, but also in Europe, or then start exporting them to our partners elsewhere.
- [07:16]
Jessica Mendoza
Reicha and the new government spearheaded a change to the German constitution that unlocked billions for defense manufacturing. Berlin has since pledged to spend more than half a trillion dollars on defense over the next decade. And the government didn't stop there. Rajke also launched a program that encouraged existing German companies to connect with new defense customers.
- [07:41]
Bojan Panchevski
So she came up with this idea of setting up a platform, matchmaking platform, where businesses from across the manufacturing economy can log in and offer their services in manufacturing things that the defense industry needs.
- [08:00]
Jessica Mendoza
Say you're a manufacturer that makes screws, you could get matched with a company that makes drones, learn their needs, and start making screws for them, too. And for these manufacturers, there's another benefit to getting on board with defense.
- [08:16]
Bojan Panchevski
Once you enter that zone, the defense industry, you are no longer exposed to the competitive pressures from Asia and elsewhere, because it's just the way it works. Allies buy from allies. They're not going to buy from adversaries.
- [08:33]
Jessica Mendoza
In the years since Reicha and her party were voted into office, there's been even more reason for Germany to lean into defense. President Trump's tariffs have further squeezed German exports, piling pressure onto the auto industry. Trump has also pulled back on US support for NATO, and more recently, he's announced the withdrawal of around 5,000 US troops stationed in Germany. In the face of this US retreat, Germany is anticipating Europe will need their weapons more than ever. I'm wondering, was there any pushback at all to making weapons the focal point of Germany's industrial economy? Like, is there any stigma still attached to this idea?
- [09:15]
Bojan Panchevski
I think, you know, there used to be a stigma because Germany is a very pacifist nation for obvious reasons of history and has, until the war in Ukraine, been extremely restrictive with government contracts for weapons factories, with exports. Now all that is gone. Now with Russia becoming super aggressive, with America becoming detached, I think the mentality has basically fundamentally shifted.
- [09:45]
Jessica Mendoza
So is this big pivot working? That's next.
- [10:03]
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- [10:39]
Jessica Mendoza
So the German government is encouraging manufacturers to go into defense, but how hard is it exactly for a company or a factory to make that switch from, you know, making a part for a consumer good, like a car, to a part for a weapon?
- [10:53]
Bojan Panchevski
Apparently it's not that hard at all. Obviously, depends on what they're doing. But, you know, in terms of engines and board systems and computer systems and electric engines for drones, for example, it's very much the same thing.
- [11:10]
Jessica Mendoza
Bojan talked to one company that's already making the switch. It's called Deutz. Deutz is one of Germany's oldest engine makers.
- [11:31]
Bojan Panchevski
Well, one thing you need to know about Deutsch is not just any old engine company. It is the oldest engine company in the world.
- [11:39]
Jessica Mendoza
Bojan recently interviewed the company Circumstances CEO who actually used to work in the defense industry.
- [11:45]
Bojan Panchevski
And he decided, now we need to transform the company. You know, we can't go on as we used to. And so we need to look farther than just the car industry. So what do we have?
- [11:59]
Jessica Mendoza
And what Deutz had, the CEO found were products that could be adaptable.
- [12:04]
Bojan Panchevski
You know, the engines they sell to carmakers, they can be used also with modifications. They can be used for tanks and armored vehicles and other kind of vehicles used in the defense industry. They can also be used for drones.
- [12:17]
Jessica Mendoza
Deutz acquired a drone company in 2025, but otherwise it's largely been able to supply new customers by retooling what they already had.
- [12:30]
Bojan Panchevski
I mean, there's a minor kind of retuning. They have to reprogram some computers and robots. They have to retrain some of the workers.
- [12:38]
Jessica Mendoza
But.
- [12:38]
Bojan Panchevski
But they're using existing production lines. This is the most important thing. They're not out there building new factories, you know, that costs a lot of money to build. A new factory in Germany is north of 1 billion in this business, you
- [12:50]
Jessica Mendoza
know, Bojan says that German companies like Deutz also have a kind of cultural advantage when it comes to manufacturing. They're known for being really nimble because they've had to respond to a demanding global market.
- [13:02]
Bojan Panchevski
If you're a car parts supplier in Germany, you have to be the best, and you have to be quick, and you have to be responding to the market in real time. If you can't do that, you're gone. And there's a reason why some of these companies have been around for almost two centuries, because they've been responding to the market, so they're very quick to adapt, very quick to scale up.
- [13:26]
Jessica Mendoza
That ability to adapt is what Germany's hoping to leverage in its nascent defense industry. And the war in Iran is opening up another big opportunity. American defense manufacturers have dominated the global weapons trade for decades. But as the fighting continues, the US and its allies in the Gulf have burned through their stocks of weapons, particularly things like Patriot missile systems, which are used to defend against airstrikes. And American companies can't move fast enough to replace them.
- [14:00]
Bojan Panchevski
So, you know, in the near future, the United States will not be able to supply its own armed forces sufficiently, let alone the Allies in Europe. And, you know, they're not stupid. They know this. I mean, I think even, even Volodymyr Zelensky, the president of Ukraine, said, we know that we're not getting the stuff from America now that we need because they used it all up in the Gulf. In a weird way, that is a boost for European and particularly German defense manufacturers, because now they need to step up and fill in the gap.
- [14:34]
Jessica Mendoza
German companies are stepping up. Deutz now supplies engines for Patriot systems used by Saudi Arabia. And Volkswagen is currently in talks with the Israeli government to supply parts for the Iron Dome, their sky shield against missile and rocket attacks. So, as you've been spelling out, Boyan, Germany has a lot riding on this major pivot. Are there signs that the pivot to defense is the solution to their economic problems?
- [15:05]
Bojan Panchevski
Well, we're talking about less than a year now. You know, depends for some companies. Some companies were pioneers in it. Others are kind of jumping on the bandwagon now. So it's early days, but individual companies show that there is a very positive effect. I mean, we talked about Deutschland. You know, Deutz made the pivot, and the bet paid off. The company grew 15% in revenue last
- [15:30]
Jessica Mendoza
year, which is a stark contrast to what some of these other companies have been seeing. Right, like the.
- [15:34]
Bojan Panchevski
Exactly. I mean, this is a company that supplies the car industry. So you would have expected them to be, you know, in a very tough spot. But actually, these guys are growing. They're very happy.
- [15:44]
Jessica Mendoza
With some companies seeing growth, employment numbers are also showing positive signs. Many of the workers who lost their manufacturing jobs, they're finding new jobs in the defense sector. If Germany is able to pull off this giant shift in its industrial economy, what could it mean for Europe?
- [16:06]
Bojan Panchevski
Well, it could only mean good things for Europe, because if they preserve the supply chains, if they preserve the workforce, if they preserve the market and the factories, keep the factories running, then that means their partners across Eastern Europe and elsewhere will benefit from it. So, you know, Germany coming back to growth is absolutely brilliant news, you know, because effectively, without Germany, the European Union economy is essentially an old people's home with a huge mortgage.
- [16:42]
Jessica Mendoza
Is this plan of Germany's kind of banking on a world with more conflict? So is that kind of the bet that Germany is making here?
- [16:52]
Bojan Panchevski
Absolutely, they are making that bet, and I think they're quite right. I mean, you'll hardly find any geopolitical analyst who will tell you there will be peace and prosperity in the world in the coming years. You know, it's not looking like that Russia is not going to stop being Russia the way it is at the moment, you know, and Russia is a huge menace on the European continent. It's very obvious that the war in Iran is not going to pacify the region in any conceivable sense and that Iran will then sort of become a peaceful nation. It's very obvious that China is expanding and is flexing its own muscles and America is trying to sort of frustrate those efforts. Essentially, they're not banking on war. They're banking on the anxiety and the fear of war. And it seems to be working so far.
- [17:55]
Jessica Mendoza
That's all for today. Tuesday, May 5th. The Journal is a co production of Spotify and the Wall Street Journal. Additional reporting in this episode from Shelby Holiday, Michael R. Gordon and Vera Bergengrun. Thanks for listening. See you tomorrow.