The defence industry will help fill the gap left by companies moving production out of Germany, according to the chief executive of a major industrial park owner, because a historic shift in security policy since the war in Ukraine has led to surging demand for weapons and munition factories in Europe.

Andrew Coombs, CEO of Sirius Real Estate, an owner and operator of industrial properties in Germany and the UK, tells fDi that he expects factories in Germany vacated by manufacturers due to higher energy prices to be occupied by defence companies over the next two years. This prediction follows a surge of government defence spending and Nato conducting its largest military exercises in decades, which included troops crossing the Vistula river near Korzeniewo in Poland.

“You’re going to have more munitions, more armaments, more vehicles and more industry linked to defence that is going to be made up around that Polish area,” says Mr Coombs, who previously served as a British soldier in Berlin during the Cold War. “Now, [defence companies] can do one or two things: [they can locate] east closer to Russia, which is unlikely. Or they can [shift production] west into Germany, where they have the factories, expertise, engineering and industrial property.”

Shortly after Russia’s full scale invasion of Ukraine in February 2022, German chancellor Olaf Scholz announced a €100bn fund to modernise the country’s military, known as the Bundeswehr. This new era of German defence policy in the face of global security threats, dubbed by Mr Scholz the Zeitenwende, has transformed the prospects for the aerospace and defence industry. Defence spending in Germany is estimated to have surpassed €68bn in 2023, up from €52.4bn in 2021 before Russia’s full scale invasion of Ukraine, according to Nato figures.

Major defence companies have already signed huge contracts with European governments and set out plans to expand their productive capacity in Germany, including air missile supplier MBDA, sensor specialist Hensoldt, submarine maker Thyssenkrupp and Rheinmetall, which produces everything from tanks to weapons and ammunition. 

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“A new decade of security policy has begun,” said Armin Papperger, CEO of Rheinmetall, in the company’s latest financial results released in March. “We are sparing no effort in order to fulfil this task of national importance. We are investing massively, building new plants and significantly increasing our personnel.”

Rheinmetall is investing €300m to build an ammunition factory in Lower Saxony, which will produce explosives and about 200,000 artillery shells per year once complete. The company has a record backlog of orders worth €38.3bn, an increase of 44% from the previous financial year. 

Hensoldt, which produces radar systems used in fighter jets and armoured vehicles, is another defence company expanding in response to higher demand. The company is building a new production site in Oberkochen, about an hour’s drive from Stuttgart, which is due to open in 2025.

Hensoldt chief financial officer Christian Ladurner said in a statement that it was “systematically expanding production capacities” because it expects greater demand for its sensors and electronics systems amid growing international tensions. 

Alongside a change in domestic defence policy, Germany also leads the European Sky Shield Initiative, which enables 10 Nato member countries to jointly procure air and missile defence systems. The other nine members are Belgium, the Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, the Netherlands and Slovenia.

These dynamics present “a quite large, unrealised, intransparent opportunity”, says Mr Coombs, who believes that an expansion of defence production activities will cross over with fewer factory relocations out of Germany as gas prices fall. 

Signs of de-industrialisation have grown in Germany as domestic multinationals have closed factories and invested more in countries like the US, where they can operate more competitively due to incentives and lower utility prices.

“A depleting market doesn’t help us, but we can overcome a depleting market,” added Mr Coombs, noting that a slowdown in industrial occupancy in Germany has enabled the company to buy “assets at a substantially discounted rate” from owner-occupiers who plan to be in Germany for a lot longer.