Scholz’s response to Ukraine crisis reshapes Germany’s corporate landscape
Chancellor’s reversal of defence and energy policies shifts prospects for arms makers and utility companies
Armin Papperger is not used to being in demand. The head of Germany’s largest listed defence contractor, Rheinmetall, has seen his industry sidelined to such an extent that as recently as last month companies could not get domestic banks to fund their activities.
But German chancellor Olaf Scholz’s decision to inject €100bn into the country’s armed forces and boost defence spending in response to Russia’s invasion of Ukraine has made Papperger among the world’s most sought-after executives.
“Some months ago people wanted to ban us, to say that this industry is a very bad industry, is a harmful industry,” Papperger told the Financial Times. “It’s a totally different world now.”
Berlin’s defence commitment, along with its suspension last week of the Nord Stream 2 pipeline as it seeks to wean itself off Russian gas, has upturned decades-old defence, energy and finance policies, raising the prospect of a dramatically reshaped German corporate landscape.
Armin Papperger: ‘It’s a totally different world now’ © Thilo Schmuelgen/Reuters
As chief executives, including Papperger, on Monday hashed out with the German defence ministry how the new funds should be spent and what weapons were available for immediate aid to Ukraine, shares in the sector soared.
Along with Rheinmetall, investors bought into contractors such as sensor specialist Hensoldt and submarine maker Thyssenkrupp, as well as smaller companies such as Jenoptik, which makes rifle sights.
“Everyone was taken by surprise” by Scholz’s decision, a person close to Hensoldt’s management said, but the chancellor “kind of reiterated what we have been saying for a very long time, that German armed forces need to be properly equipped”.
Three scenarios were discussed on Monday’s call between the German government and defence contractors, according to people involved.
The first was the deployment of equipment to Ukraine, including ammunition and tents, using existing stockpiles. The second was to bring European forces, especially Germany’s, up to scratch in a matter of weeks by supplying munitions and repairing neglected equipment. Lastly, the companies were asked about lead times for new artillery and vehicles.
Rheinmetall said it had certain vehicles and ammunition in stock, which could now be handed over.
Some of the products Hensoldt can supply with short lead times include radar sensors, long-range surveillance cameras and self-protection systems for aircraft and helicopters, which can throw surface-to-air missiles off course by detecting exhaust plumes from launchers and ejecting flares to confuse heat-seeking projectiles.
In the medium term, companies are speeding up planned projects, with Rheinmetall considering fast-tracking a prototype tank with a 130mm gun and a fully digital turret, as installed in the British Challenger, which could be manufactured within two years to replenish the German army’s arsenal.
A next-generation tank was likely to be among the German government’s top priorities, according to Christian Cohrs, an analyst at Warburg Research.
“The chancellor explicitly mentioned joint development projects with France,” Cohrs said. “One of these is the Main Ground Combat System [an updated battle tank], in which Rheinmetall plays a vital role.”
Other manufacturers said they expected up to a 50 per cent increase in orders for products with certification already in place. Germany’s defence ministry declined to comment.
While Germany appears to have found a clear approach for handling its new defence targets, its vision for an energy transformation looks foggier.
The bosses of Germany’s much-maligned nuclear power producers — E.ON, RWE and EnBW — have been left wondering about the future of the country’s last three reactors after Green party economy minister Robert Habeck said on Sunday an extension of their lifespan was under consideration.
On Monday, Habeck appeared to downplay comments that he would not “ideologically oppose” a return to nuclear power, which had been phased out by Angela Merkel, increasing the country’s reliance on imported fuel following Japan’s 2011 Fukushima disaster.
Meanwhile, coal power company Uniper was asked by the government to consider building a liquefied natural gas terminal to help reduce German reliance on Russian fuel.
“It’s not just a question of climate protection now,” Habeck said on Monday. “It’s a question of national security.”
But how the country will attain energy independence stills seems unclear — both to politicians and the companies needed to make the shift happen.
Uniper officials confirmed that they were preparing for talks with the government. The company last year shelved a plan to set up an LNG terminal in Wilhelmshaven, having found there was not enough interest to justify going forward with the project, and switched instead to a focus on a green hydrogen and low-carbon ammonia terminal.
“We are looking into resuming these [LNG] plans,” one official told the FT. “We already did the preliminary research so we would not start at zero . . . but we haven’t talked any details with the government yet and it is still not clear to us how much interest in such a project has really changed with the situation,” the official added.
The person also said that it would be “very ambitious” to assume such a terminal could be ready in time to be used to support Germany through a potential energy crisis caused by the current conflict with Russia.
Claudia Kemfert, an energy expert at the German Institute for Economic Research, bemoaned the fact that the €100bn made available for defence was not matched by a similar commitment to renewables.
Such a sum “would be the sort of man to the moon project funding we really needed so that we could be independent of Putin for our energy by 2030”, she said.
But a pledge by Habeck to cut red tape for renewables, particularly for wind energy, could have a dramatic impact, Kemfert added.
“It currently takes about six to seven years to get all the approvals you need to build a windmill, but it only takes about six to seven months to physically put a windmill up,” she explained, although new procedures could take a while to come into effect.
Germany’s defence industry had been bracing for EU taxonomy rules that could have designated arms manufacturers unsustainable, restricting their access to capital.
Highlight text
But after German finance minister Christian Lindner referred to such proposals with disdain on Sunday and said the war in Ukraine was waking Germany “from a self-righteous dream” such fears have been assuaged.
“Recent developments should lead to banks also understanding the importance of defence industry companies for the country’s security,” a large privately owned German manufacturer told the FT. “The Russian invasion of Ukraine shows that it was wrong to classify the defence industry as socially harmful.”
An executive at another defence company predicted that the industry — often the target of activists who point to some German arms manufacturers’ Nazi past — would now attract talent as well as investment.
“It is very unfortunate,” the person said, “that it took such tragic and brutal events to come to this.”