Chapter 1: What are the warning signs in Germany's automotive industry?
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.
After years of roaring down the Autobahn, a speed bump for Porsche. Volkswagen and Mercedes-Benz posting year-on-year declines of over 40% in net profits. The iconic sports car maker notched up a spectacular third quarter loss of almost 1 billion euros.
There is sort of a creeping sense of panic.
Our colleague Bojan Panczewski covers Europe, and he's been reporting on the pain being felt throughout Germany's economy.
Chapter 2: How is Germany's economy currently performing?
Germany is basically losing roughly 15,000 jobs from manufacturing each month. Wow, wow. This is a striking figure.
Per month?
Yeah, it's a striking figure. It's a bloodbath.
Chapter 3: What audacious plan is Germany considering to revive its economy?
Yeah.
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 bleeding.
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 promise. Weapons.
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.
Chapter 4: How does the war in Ukraine impact Germany's economic strategy?
So they're pivoting, basically, from the car business to the business of war?
That's right. They're pivoting from cars to cannons.
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. Boyan, how would you describe the role that the German economy plays in Europe?
Oh, you know, when Germany, Germany is this giant sort of beating industrial heart of Europe and smack in the middle of the continent. 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.
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 hurt Germany's economy.
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Chapter 5: What changes are being made in Germany's defense manufacturing sector?
Russia had been Germany's biggest supplier of natural gas and a major supplier of other energy resources.
Russian gas firm Gazprom is scheduled to switch off its largest natural gas pipeline running to Germany today.
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.
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 over as comfortable as being the best on the market.
Combined, all of these headwinds have stalled Germany's economy.
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.
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.
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.
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Chapter 6: How are companies adapting to the shift towards defense production?
They vowed to turn around the economy with investment and deregulation. And the face of that turnaround is the new minister of the economy.
And the minister of the economy is a woman called Katarina Reiche. 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 will take care of.
With the ongoing security threat from Russia, Reike bet that there would be higher demand for weapons across Europe and that Germany could make them.
So Katerina 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.
Reiche 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. Reiche also launched a program that encouraged existing German companies to connect with new defense customers.
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.
Say you're a manufacturer that makes screws.
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Chapter 7: What challenges does Germany face in its pivot to a defense economy?
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.
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.
In the years since Raika 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 U.S. support for NATO. And more recently, he's announced the withdrawal of around 5,000 U.S. troops stationed in Germany.
In the face of this U.S. 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?
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.
So is this big pivot working?
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Chapter 8: What could the implications of Germany's defense strategy be for Europe?
That's next. 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?
Apparently, it's not that hard at all. obviously depends on what they're doing. But in terms of engines and board systems and computer systems and electric engines for drones, for example, it's very much the same thing.
Boyan talked to one company that's already making the switch. It's called Deutz.
Deutz is one of Germany's oldest engine makers. Well, one thing you need to know about Deutz is it's not just any old engine company.
It is the oldest engine company in the world.
Boyan recently interviewed the company's CEO, who actually used to work in the defense industry.
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?
And what Deutz had, the CEO found, were products that could be adaptable.
You know, the engines they sell to car makers, 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.
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