German arms companies fear for their slice of defence windfall

In a hangar that blends into the German port of Kiel’s industrial wharf, Thyssenkrupp engineers are testing the steel hull of a submarine to ensure it can withstand more than 50 bars of water pressure. But the vessels built in the country’s largest shipyard will not be delivered to Germany’s navy.

Instead, they will go to the likes of Israel and Singapore, which placed orders with the group even as the German government shunned its homegrown manufacturer by awarding a €4.6bn contract for MKS 180 frigates to a Dutch company. The 2020 snubbing of Thyssenkrupp Marine Systems (TKMS), which had been haemorrhaging cash, came to encapsulate the parlous state of Germany’s defence sector.

But Russia’s invasion of Ukraine and the German government’s subsequent commitment to vastly increase military spending has suddenly turned TKMS into an asset.

“Now we have a recalibration,” said TKMS’ new chief executive Oliver Burkhard. Since chancellor Olaf Scholz announced he would set aside €100bn to modernise Germany’s armed forces, and committed to spending 2 per cent of annual gross domestic product on defence, TKMS has expanded. Originally set to be sold by parent Thyssnkrupp, it has become a buyer, snapping up the insolvent MV Werften, based in the nearby city of Wismar, whose Asian owner had run out of cash midway through building a giant cruise ship.

Yet behind the scenes, German industry still “fears nothing will happen”, according to a former defence official who now advises the sector.

“There was virtually no domestic market for German arms companies,” the person said, referring to the fact that at least three-quarters of local arms production is exported. “There is no playbook.” 

Several German defence companies have been banking on rapid growth as a result of closer collaboration with Scholz’s coalition government.

Within days of the chancellor’s speech in February, Rheinmetall, the country’s largest listed weapons-maker, presented Berlin with a list of products worth €42bn that it could deliver over the next decade.

The majority of its orders for tanks, armoured vehicles and ammunition had previously come from outside Germany, from the likes of the UK and Hungary.

Hensoldt, an Airbus spinout backed by KKR and partly owned by the German government, is also expecting a windfall. “We will be part of every large procurement programme,” said a person close to the company, which specialises in advanced radar and sensor systems.

Concerns that Scholz’s spending plans would not pass through parliament without being watered down were abated when the vast majority of the Bundestag voted them through earlier this month.

So far, however, the large orders made by Berlin following Russia’s invasion of Ukraine have consisted of 35 American-made F-35 fighter jets, as well as 60 CH-47F Chinook heavy-lift helicopters from Chicago-based Boeing. Procurement from Germany’s own weapons producers has largely been limited to ammunition and clothing from existing stocks.

Longer-term projects worth more than €25mn currently have to go through a lengthy tender process run by a division of the defence ministry in Koblenz that in some instances has taken several years, and then be approved by two parliamentary committees — by which point additional production capacity could be reserved for other countries, representatives from public and private companies told the Financial Times.

Hensoldt board member Celia Pelaz, a Spaniard, agreed that “we need to look at the acquisition processes of the German government”, which are mired in bureaucracy, warning that otherwise it was “going to be difficult actually to put that money to use”.

Berlin has since pledged to speed things up. In an attempt to entice the government into further accelerating its decision-making, TKMS has said it could secure up to 1,500 jobs in Wismar if it gets picked to build more submarines and battleships.

“I made a formula saying the more you order, the more people we can employ,” Burkhard said of his discussions with Scholz’s administration. “Sometimes they need a bit of pressure just to act.” 

Rheinmetall’s boss has also dangled a carrot in front of policymakers. “In the next 12 to 18 months, we will hire 1,500-3,000 people, depending on what contracts we get,” Armin Papperger said.

But lobbyists for the sector privately concede that it is not significant enough to apply pressure on the government by pledging to create new roles. Germany’s defence companies account for fewer than 57,000 jobs in the country, according to the German Economic Institute in Cologne, while France’s armaments industry directly employs 165,000 people.

“In the past, if the car industry had a headache the chancellor would probably run and hold their hands. If the defence industry struggled, so far not many cared,” said Claudia Major, a security expert at the German Institute for International and Security Affairs, SWP.

“Economically speaking, it’s not important.”

There is also public sentiment to contend with. “In Germany, the defence industry is seen as one of those unpleasant, dirty things almost nobody wants to show up with,” Major added. Indeed, Germany’s aversion to the sector almost forced the sale of TKMS, as its parent group was told banks would no longer finance Thyssenkrupp if the unit exceeded 10 per cent of annual revenue, falling foul of lenders’ environmental, social and governance criteria.

Consolidation among Germany’s patchwork of defence contractors — especially when it comes to shipyards — will also be needed to offer value for money to the government, TKMS’ Burkhard said. The choice for his company, he added, is “to be lunch or to have lunch”.

Yet even those with unparalleled technology have found it hard to attract the interest of Berlin. At its manufacturing site in Ulm, Hensoldt builds cutting-edge passive radar systems that can detect enemy objects without emitting a signal. The devices, which when stowed away are roughly the size of an airline drinks trolley, were initially produced for Egypt.

The tech developed at a former army barracks in the heart of Bavaria has not yet been ordered by Germany itself.

The lesson from the invasion of Ukraine is that “we need an industry, we need a technology base”, Hensoldt’s Pelaz said. “We shouldn’t now say: ‘well, because we need it quickly, we don’t care where it comes from’.”

Some new contracts have come through. On Thursday, Rheinmetall was awarded a €13mn contract for air start units from the German Air Force. But with order books at the likes of TKMS already full, the sector is mostly “in a holding pattern”, according to one senior executive, waiting for concrete commitments before making large investments.

Looking out over the Baltic Sea from his office in Kiel, TKMS’ Burkhard sees the potential for a wave of new business. “A commander told us that everything that floats is out at the moment,” he said of the German Navy’s current fleet. The next global conflict could well occur in the South China Sea, making submarines and frigates all the more important.

A test of whether the German government will embrace its own arms industry is coming up. Two more MKS 180 frigates — now called F126s — are on the military’s recently compiled “wish-list”. If those contracts are not awarded to Thyssenkrupp, Burkhard said, “the signal would be not a great one”.

Additional reporting by Guy Chazan in Berlin