Executive Summary

Governments across Europe have made clear commitments to increase defence spending, strengthen sovereign capability and reduce reliance on external suppliers. The funding is substantial, but more importantly, it is sustained and politically anchored. This is not a short-term stimulus cycle; it is a permanent structural shift in how Europe thinks about security and industrial resilience.

At the same time, the automotive sector is working through its own transformation. Electrification, demand volatility and global competition have created pressure on margins and left parts of the industrial base underutilised. In many cases, capacity exists, but it is no longer aligned with future automotive demand.

These two trends are increasingly intersecting. Defense requires industrial capacity at scale; automotive has capabilities, facilities and talent that are, in some areas, not fully deployed.

From our work at Seraph across both sectors, what we are seeing is not a wholesale pivot, but a growing number of pragmatic, targeted moves. Companies are not abandoning automotive — they are looking for ways to extend and rebalance their portfolios.

That said, entering defence is not simply a matter of redirecting production. It requires a different way of operating, a different approach to customers, and a level of organisational discipline that many companies underestimate at the outset.

A Structural Shift in Demand — and in Expectations

It is easy to frame the current defense spending environment as a reaction to geopolitical events. While that is certainly the catalyst, it understates the depth of the change underway.

Across Europe, defense budgets are rising not just in absolute terms, but as a share of GDP, with multi-year commitments now embedded in national policy. At EU level, large-scale programmes are being introduced to coordinate investment and encourage intra-European sourcing.

What matters operationally is that demand is not the constraint. The real challenge is converting that demand into output.

Defense manufacturers are facing long order backlogs, constrained supply chains and limited surge capacity. In several areas — from munitions to mechanical subsystems — production simply cannot be scaled quickly enough using the existing industrial base.

This is why governments and primes are increasingly looking beyond traditional defense suppliers. The conversation has shifted from “who designs the system” to “who can actually build it at scale, reliably, and within Europe.”

That shift has direct implications for the automotive sector.

Why Automotive Capabilities Are Coming Into Focus

At its core, the automotive sector has developed a set of industrial strengths that are difficult to replicate quickly elsewhere. These include the ability to run complex, multi-tier supply chains; to manufacture at scale with high levels of precision and repeatability; and to integrate mechanical, electronic and increasingly software-driven systems into cohesive products.

When we look at defence requirements today, particularly in Europe, there is a growing need for exactly these capabilities.

That does not mean the sectors are identical — far from it. Defense has different tolerances, different certification requirements and a very different commercial structure. However, the underlying engineering and manufacturing competencies are often closer than expected.

In practical terms, this creates a number of natural points of alignment:
• Mechanical and precision components, where automotive suppliers already operate at tight tolerances and high volumes
• Power systems and thermal management, which are becoming increasingly important in both traditional and hybrid military platforms
• Electronics and control systems, particularly as defense platforms become more software-defined
• Platform engineering and systems integration, where experience from automotive programmes can be highly relevant

From Seraph’s perspective, the most interesting opportunities are not at the level of complete platforms, but within subsystems and components — areas where defence is struggling to scale and where automotive suppliers can integrate more readily.

What We Are Seeing on the Ground

This is already starting to play out across Europe. In Germany and other industrial regions, a growing number of mid-sized companies are exploring defense opportunities, often building on existing product lines. This is sometimes driven by necessity — declining automotive volumes forcing a search for alternative revenue streams. In others, it is a more proactive strategy to position for long-term growth.

Larger suppliers are also beginning to test the water, typically through partnerships with defence primes or by adapting specific components for military applications.

What is notable is that very few companies are attempting a wholesale pivot. The more successful approaches tend to be incremental — starting with a specific capability, a defined customer need, and a limited scope of engagement.

The Reality Check: Defence Is a Different Operating Environment

One of the consistent themes we see in early-stage discussions is a degree of underestimation of how different the defense sector is in practice. From an operational standpoint, several differences are worth highlighting.

First, demand is less predictable and more programmatic. Automotive production is built around relatively stable volumes and clearly defined product cycles. Defense programmes, by contrast, can span decades, with funding, timelines and specifications evolving over time.

Second, product lifecycles are significantly longer. Equipment is expected to remain in service for 20 to 40 years, which has implications for everything from materials selection to documentation and aftermarket support.

Third, the regulatory environment is materially more complex. Export controls, security requirements and certification processes introduce layers of governance that are unfamiliar to many automotive organisations.

Finally, procurement itself operates differently. Defense is, in most cases, a government-driven market. Relationships, track record and credibility play a far greater role than in typical automotive sourcing decisions, and timelines are often measured in years rather than months.

None of this should be seen as a deterrent, but it does mean that a “lift and shift” approach rarely works. Companies that succeed tend to recognise early that they are entering a different system and adapt accordingly.

Where to Play — Starting with a Clear View of Fit

The first strategic question for any automotive player is not whether to enter defence, but where to focus. In our experience, the companies that make the most progress are those that start with a clear-eyed assessment of their own capabilities and how these map onto specific areas of demand. This typically involves three steps.

1. Understand Your Own Capability Base

This goes beyond high-level descriptions and requires a detailed view of your:

• Core manufacturing processes and limits
• Existing quality systems and certifications
• Engineering capabilities across mechanical, electrical and software domains
• Supply chain dependencies and potential constraints

2. Identify Where Defence Needs Capacity

At the same time, it is important to understand where defence is currently constrained. These are often not the headline systems, but the components and subsystems that sit beneath them — areas where production capacity has not kept pace with demand.

3. Focus on Credible Entry Points

In most cases, the most effective entry strategy is relatively focused:

• Supplying components or subsystems rather than complete platforms
• Partnering with established defence primes
• Targeting areas where scaling production is a clear priority

There is often a temptation to think in terms of large, visible programmes. In reality, value is more often created by becoming a reliable supplier in less visible, but critical parts of the value chain.

Preparing the Organisation — What Needs to Change

Once a company has identified where it wants to play, the next challenge is preparing the organisation to operate effectively in a defence environment. This is where many initiatives slow down. From an operations perspective, four areas typically require attention.

Production Systems

Automotive production is optimised for volume and efficiency. Defence requires greater flexibility, with smaller batch sizes, higher levels of customisation and full traceability at component level.

Supply Chain

Defense supply chains are increasingly shaped by geopolitical considerations. There is a strong emphasis on sovereignty and resilience, which may require rethinking sourcing strategies and reducing dependence on certain regions.

Compliance and Governance

This is often the most significant gap. Export controls, security clearance, data handling and certification processes all require dedicated capability and cannot be managed as an extension of existing systems.

Workforce and Culture

Defense programmes demand a different level of documentation, discipline and long-term accountability. This can require both training and, in some cases, the introduction of new roles or teams. A pattern we see repeatedly is that manufacturing capability is rarely the limiting factor. The real challenge lies in building the surrounding systems that allow that capability to be deployed in a compliant and credible way

Entering the Market — Practical Routes

There are several ways for automotive companies to enter the defense sector, but in practice most fall into three categories.

The most common route is to become a supplier to an existing defense prime. This allows companies to leverage their existing capabilities while relying on the prime for system integration and customer access.

A second route is through partnerships or joint ventures, particularly where there is a need to combine manufacturing scale with defence-specific expertise.

Direct contracting with governments is possible, but tends to be limited to specific niches and requires a level of procurement capability and credibility that takes time to build.

From what we see, the most effective approach is usually to start within the existing ecosystem and expand from there, rather than attempting to establish a standalone position too early.

Scaling — From First Contract to Sustainable Position

Securing an initial contract is an important milestone, but it is not, in itself, success.

The real value lies in building a position that can scale with the market.

This typically involves:

• Standardising components and processes where possible
• Maintaining flexibility between automotive and defence production
• Investing selectively in capacity where there are clear bottlenecks
• Building long-term relationships with customers and partners

One of the advantages automotive companies bring is their experience in industrialisation — the ability to move from prototype to scaled production efficiently. In defence, this capability is increasingly valued, particularly as the focus shifts towards higher-volume, more affordable systems.

Common Pitfalls

There are a number of recurring challenges that are worth calling out.

Some companies approach defence as simply another customer segment, without recognising the structural differences in how the market operates.

Others underestimate the complexity of procurement and compliance, leading to delays or failed bids.

There is also a tendency, in some cases, to overcommit capacity before demand has fully materialised.

Perhaps most importantly, cultural differences are often overlooked. The pace, decision-making processes and risk tolerance in defence are not the same as in automotive.

These are all manageable, but they require awareness and deliberate management.

What Good Looks Like

At an organisational level, companies that succeed in defence tend to develop a slightly different operating model alongside their core automotive business.

This often includes:

• Dedicated teams focused on defence programmes
• Adapted production systems that can handle lower volumes and higher traceability
• Strengthened compliance and governance capabilities
• A commercial approach built around long-term programmes rather than short-term transactions

Importantly, this does not require abandoning existing strengths. The objective is to extend them into a new context.

Where to Start — Practical Next Steps

For operational leaders, the priority is to move from concept to action.

In the near term, this typically means:

• Conducting a detailed capability assessment
• Mapping potential customers and partners
• Initiating early discussions with defence players
• Identifying key gaps in compliance and certification

Over the following 6–12 months, the focus shifts towards pilot projects, initial contracts and targeted investment.

The companies that move early tend to benefit from learning effects and relationship building that are difficult to replicate later.

Conclusion: A Pragmatic Opportunity

The intersection between automotive and defense is becoming increasingly relevant in Europe. What remains uncertain is how broadly and how quickly it will develop.

From our perspective, the opportunity is real, but it is also nuanced. Not every capability will translate, and not every company will find a natural position. For those that do, the prize is not just incremental revenue. It is the opportunity to participate in the rebuilding of Europe’s industrial base, while making more effective use of existing assets and capabilities.

The companies that approach this with a clear understanding of their strengths, a realistic view of the challenges, and a willingness to adapt their operating model are likely to be the ones that establish a durable position.

The rest may find that the window, while open today, does not remain so indefinitely.

At Seraph, we specialise in operational due diligence and industrialization for automotive and defense manufacturers.

Contact us www.seraph.com/contact-us/ to schedule a rapid readiness review.