The discussion revolves around how the Russia-Ukraine conflict and changes in U.S.-Europe relations have propelled Germany's defense industry into a period of capacity expansion. The German government is actively promoting military build-up and fiscal policy reforms, presenting the defense industry with its largest expansion opportunity since World War II. Its role in national strategy and economic recovery has become increasingly prominent.

I. Literature Review and Analytical Framework

First, the history of Germany's defense industry is reviewed, from the military expansion under Wilhelm II, to post-WWII demilitarization, and then to the reduction in defense budgets following German reunification. Subsequently, the transformation of Germany's foreign and security policies in recent years amidst changing international security dynamics is elaborated, along with the context of Germany assuming greater international responsibilities following the release of the "German Defense White Paper." Concurrently, the current state of Germany's defense industry is analyzed, including issues such as insufficient funding and production capacity, lagging technological development, and measures taken by the government to promote the industry's growth. Furthermore, the potential impacts of defense industry development on Germany's economy and politics are explored, such as fostering industrial transformation and creating employment. Finally, the SCP (Structure-Conduct-Performance) theoretical framework adopted in this paper is introduced, and an analytical framework of "Geopolitical Restructuring—Industrial Structural Change—Adjustment in Government/Enterprise Behavior and Three-Dimensional Performance Impact" is constructed to conduct an in-depth study of the structural changes within Germany's defense industry and their effects.

II. Overall Characteristics of Germany's Defense Economy

This section analyzes the characteristics of Germany's defense economy, noting that while defense spending has increased since 2014, a gap remains compared to other major world powers. Influenced by a "culture of military restraint," Germany's defense industry has developed slowly, primarily producing military aerospace equipment and other products, with revenues and employee numbers experiencing some decline. The defense industrial base includes large enterprises such as Rheinmetall and numerous small and medium-sized enterprises (SMEs). The supply chain is divided into core tiers and upstream suppliers, with the production system dominated by large system integrators. The defense market is not fully competitive, with significant government influence; the demand side (the government) is the largest purchaser, while competition on the supply side is limited.

III. Geopolitical Restructuring and Structural Changes in Germany's Defense Industry

This section delves into the impact of global geopolitical restructuring since 2022 on structural changes within Germany's defense industry. The Russia-Ukraine conflict has fundamentally altered Europe's security landscape. Germany's defense policy has shifted, establishing a special defense fund to bolster military equipment. Military spending in Eastern European countries has increased, Europe's perception of security has changed, and Germany's economic and trade relations with Russia have become "securitized." Rifts in U.S.-Europe relations have deepened; the Trump administration reduced its security commitments to Europe, demanding that Europe share more of the defense burden. Europe's security and defense pressures have risen, challenging the transatlantic alliance. These changes have accelerated the process of European and German strategic autonomy, with defense autonomy becoming a core focus. Germany's defense industry has become a priority in government policymaking and a new economic growth driver. Policy support and an influx of societal resources are bringing about structural changes. Demand in the German defense market has surged significantly, primarily driven by weapons purchases by Ukraine and supporting nations, arms procurement by Eastern European countries, and increased German defense spending. However, capacity bottlenecks in German defense enterprises have led to insufficient supply. Long-term underinvestment has resulted in technological gaps in modern military weaponry, and the problem of insufficient production capacity is now pronounced in the face of large order volumes. Simultaneously, structural issues within the supply chain of Germany's defense industry have been exposed. Europe's defense industrial structure is fragmented; the development of national defense industries primarily serves domestic needs or exports, with significant differences in weapon systems, hampering competitiveness enhancement. The defense industry exhibits a high degree of external dependency. European defense is heavily reliant on the United States; at the level of military equipment production, the European defense industrial chain is deeply embedded within the U.S. system, with critical technological nodes controlled by the United States.

IV. Measures by the German Government and Enterprises to Promote Military Development

This section details a series of measures taken by the German government and defense enterprises to promote military development against the backdrop of geopolitical restructuring. On the government side, Germany has significantly increased its defense expenditure. In 2022, defense spending reached 53.389 billion euros, accounting for 1.3% of GDP, and a special fund of 100 billion euros was established for defense construction. In 2023 and 2024, expenditures from this special fund have continuously increased, and the proportion of defense spending to GDP has risen year by year, reaching 2.88% in 2024. The EU has also passed the "Rearm Europe" plan aimed at enhancing European defense capabilities. The German government has optimized the fiscal and trade policy framework, including reforming debt constraint policies and relaxing arms export control regulations to support the development of the defense industry.

In response to market demand and favorable policies, defense enterprises have adopted expansion strategies. Germany's four major defense companies—Rheinmetall, ThyssenKrupp, Hensoldt, and Diehl—have undertaken comprehensive expansion across three levels: research and development (R&D), production, and organization. In the R&D phase, companies have increased their R&D investments, particularly in modern military technology fields such as artificial intelligence and unmanned aerial vehicle (UAV) systems. In the production phase, enterprises have expanded capacity by building new factories and production lines. Organizationally, companies have adjusted their structures to concentrate resources on defense business and have expanded scale and enhanced competitiveness through mergers, acquisitions, and the establishment of joint ventures. These measures collectively drive the structural changes and development of Germany's defense industry.

V. Performance Impacts of Germany's Defense Industry Development

This section analyzes the performance impacts of Germany's defense industry, propelled by new government and corporate initiatives, across three dimensions: industrial development, economic exports, and geopolitics. Germany's defense industry is developing rapidly, with the competitiveness and innovation capabilities of leading enterprises strengthening. For instance, companies like Rheinmetall have seen revenue growth, significant stock price increases, and risen in international rankings. Overseas military equipment demand, particularly from the war in Ukraine and equipment renewal needs in Eastern European countries, is a major source of this growth. Simultaneously, German defense enterprises have also improved in the R&D and production of modern military technologies. Germany's arms export figures have repeatedly hit record highs, but their direct stimulative effect on the German economy is limited, constituting an extremely small proportion of total exports. However, the industry's prosperity has some indirect positive effects on related manufacturing enterprises. Through military expansion, Germany has enhanced its leadership within the EU and its international influence. The integration of European defense resources has improved. The strengthened defense industrial capabilities have elevated Germany's status in European defense and international affairs. Its arms export policy aligns with its foreign policy. Nevertheless, Germany and Europe still struggle to overcome their dependence on the United States for military equipment, and strategic autonomy faces numerous challenges.

VI. Conclusion

This section summarizes the current state and challenges of Germany's defense industry in the context of geopolitical restructuring. Supported by the government, the competitiveness of Germany's defense industry has improved, yet it faces many uncertainties. Economic structural difficulties lead to a slow pace of intelligent transformation. The industrial chain is deeply embedded within the U.S. system. European defense autonomy is challenged by diverging interests among member states. Moreover, the industry's role in promoting economic growth remains unclear.