Other industries can only dream of such growth: up 9 percent last year and 39 percent over the past decade. The subject is the global defence market. According to the Stockholm International Peace Research Institute (Sipri), defence spending rose steadily from 2014 to 2024 – with a sharp jump following Russia’s invasion of Ukraine.

More than half of the world’s annual 2.7 trillion dollars in defence spending comes from NATO countries, which are comparatively accessible customers for German industry. Germany itself ranks as the world’s fourth largest defence buyer, while Ukraine, a major recipient of German weapons, ranks eighth.

It is no surprise, then, that more and more companies from other sectors are becoming interested in this market, especially when their core businesses are under pressure. „In mechanical engineering and the automotive industry, some companies are currently exploring the possibility of entering the defence sector to build new, future-oriented segments,“ says M&A expert Alexander Stefan Rieger from the law firm Latham & Watkins. „These companies can draw on their existing know-how and production capacities.“ However, he adds, the defence sector is not just about heavy equipment, saying that "defence is a broad field and should be viewed as such. Infrastructure, digitalisation or cybersecurity, for instance, can also fall under this category.“

Some companies have already made the leap. Heidelberger Druckmaschinen plans to produce control systems and power distribution units for power generation equipment supplied to the German armed forces and other militaries. The Austrian circuit-board specialist AT&S will tailor its products for military applications in the future. Engine manufacturer Deutz expects strong business in drone propulsion systems.

The consultancy Roland Berger surveyed more than 200 executives from medium-sized automotive suppliers about which foreign industries they see as having the greatest growth potential. Defence topped the list. Two-thirds of respondents said they see high or very high potential here. Well behind came medical technology and the aerospace industry.

Entry barriers to the defence industry, however, are significant. Companies must realign their sales strategies, find new customers, comply with political and regulatory frameworks, go through approval procedures, and obtain certifications. In addition, newcomers must adapt to typically smaller production volumes at higher quality standards. In return, they can expect better margins and long-term supply contracts.

„The requirements for companies in public procurement, such as with the Bundeswehr, can be demanding,“ says regulatory expert Jana Dammann de Chapto of Latham & Watkins. „They have to meet technical specifications, account for bureaucratic layers, and respect lead times. That requires a high level of planning.“ Depending on the target market, investment and export controls may also apply. „In our observation, companies are aware of these requirements and are planning carefully,“ she adds.

There are several ways to enter the defence sector. AT&S is going it alone. „We have already been approached by customers and will now proactively reach out to new ones,“ said CEO Michael Mertin recently. Heidelberger Druck, meanwhile, has found a partner in Vincorion, formerly part of Jenoptik. The collaboration is proceeding as planned, a company spokesman said when asked, without disclosing details. „We are still in the early stages of various projects.“

Deutz, for its part, has opted for an acquisition. The Cologne-based company, which employs 5,000 people, is taking over the 70-strong Sobek Group, originally a specialist in motorsport components and now a manufacturer of propulsion and control systems for drones. „Through Sobek, we gain direct access to the rapidly growing defence market,“ said CEO Sebastian Schulte, explaining the acquisition. He aims to roughly multiply revenue from high-margin drone engines twenty times by 2033. Deutz can build on its experience as a mass producer – most recently, 150,000 combustion engines rolled off its assembly lines each year. The company does not disclose how many drone engines Sobek had produced.

The deal likely did not come cheap. „Ebitda multiples have risen noticeably,“ says Latham & Watkins expert Rieger. „In the past, multiples often ranged from 10 to 12, whereas now they are closer to 13 to 15.“

M&A activity in the defence sector has increased significantly over the past two to three years. „We will see even more carve-outs in the future", he says. "This provides opportunities for other companies to enter the defence environment or expand their business in this area.“

Money being spent is plentiful given the changing security landscape. „The political framework currently points to stronger support for investments in the defence sector,“ says Dammann de Chapto. This could be a positive signal, particularly for struggling mid-sized firms, adds Rieger – and he is already thinking one step ahead: „If the business develops positively, there is always the option of spinning off that division later.“