German defense industry expands shipbuilding business with Europe's rearmament strength, testing the position of non-regional companies in strengthening the regional defense ecosystem

German defense companies Rheinmetall and TKMS accelerate expansion of shipbuilding business
U.S. pressure on defense cost sharing accelerates European rearmament; defense spending increases
EU strengthens regional procurement strategy, posing both burdens and opportunities for Asian defense industries

German defense company Rheinmetall is acquiring the Mangalia shipyard in Romania. Amid accelerated rearmament movements by European countries driven by U.S. pressure to share defense costs and security threats from Russia, the German defense industry is also rapidly expanding its business into maritime forces. The market analyzes that this European push for self-reliant defense enhancement and expanded regional procurement may raise barriers for non-European defense companies, such as those from South Korea, trying to enter the European market.

Rheinmetall’s entry into the shipbuilding business

On the 9th (local time), maritime and shipbuilding specialist media The Maritime Executive reported that Rheinmetall agreed to acquire the Mangalia shipyard for €138 million (approximately US$159 million). This is about 75% of the initial auction base price. Once one of Europe's largest shipyards, Mangalia Shipyard had been operated since 2018 as a joint venture between the Dutch shipbuilding company Damen and the Romanian government, but this structure began to falter in 2023 when the Romanian government abruptly changed regulations concerning private company management. Damen deemed this a clear contract breach and filed for insolvency procedures citing large loans invested in shipyard modernization and operations in 2024. The local court declared Mangalia Shipyard bankrupt in April, and subsequent auctions were canceled three times.

This transaction is expected to accelerate Rheinmetall’s business expansion. In March, Rheinmetall completed the acquisition of Naval Vessels Lürssen (NVL), the warship construction division of the German shipbuilding company Lürssen Group, expanding its business from land weapons, military vehicles, and ammunition to the maritime defense sector. In May, it signed a contract worth €920 million (approximately US$1.06 billion) to supply the Romanian Navy with two coastal patrol vessels and two diver support vessels, marking its first large-scale local warship order. The contract stipulates that hull construction, superstructure fabrication, armament, and equipment installation must be carried out at shipyards in Romania, providing Rheinmetall clear incentive to secure a local production base.

Rapid growth of the German defense industry

Another German defense company, ThyssenKrupp Marine Systems (TKMS), is also accelerating its entry into the large warship market based on its existing submarine and surface shipbuilding capabilities. Particularly, it is participating in the German Navy’s next-generation air defense frigate F127 project, focusing on developing large vessels equipped with long-range air defense and ballistic missile interception capabilities. These ships are based on TKMS’s existing MEKO A400 design and aim to establish a maritime defense system capable of intercepting enemy ballistic missiles outside the atmosphere.

There is also observed movement of existing civilian shipbuilding companies expanding into the defense industry. For example, German shipbuilder Meyer Werft has traditionally focused on building large cruise ships but has recently emphasized naval shipbuilding. In May last year, Ralf Schmitz, Meyer Werft’s Chief Restructuring Officer (CRO), expressed confidence in an interview with German economics newspaper Handelsblatt, stating, "If we focus our capabilities on the defense business, we can consecutively build 4 to 5 frigates." Meyer Werft has been accumulating military shipbuilding experience through its subsidiary, Neptun Shipyard, participating in the German Navy’s 707-class replenishment shipbuilding project. Currently, it is reported to be simultaneously recovering orders in its main cruise ship business and making efforts to enter the defense sector.

Table 1. Expansion of maritime defense business by German defense and shipbuilding companies

Changes in European security landscape

The prominent trend of business expansion and production capacity enhancement across Germany’s defense industry is rooted in the rapidly changing European security landscape. Since his re-election last year, U.S. President Donald Trump criticized NATO allies for overly relying on U.S. military power and persistently demanded increased defense cost sharing. Consequently, major member states including Germany began adjusting policies to maintain military alliances with the U.S. while independently expanding troop, weapon systems, and defense industry bases.

These countries agreed at the NATO summit in The Hague in June last year to allocate 5% of their GDP to defense and security-related expenditures by 2035. At least 3.5% of GDP is earmarked for core defense areas such as troop operations and weapon system acquisition, with up to 1.5% allocated to military infrastructure, cyber security, and defense industry expansion. Furthermore, NATO requires member states to submit annual expenditure plans to meet these goals and plans to review compliance and expenditure structure in 2029.

European countries increase defense budgets

Germany reformed its fiscal system in response by relaxing the 'debt brake' constitutional fiscal rule limiting national borrowing to exclude defense and security spending exceeding 1% of GDP from borrowing restrictions. Accordingly, the German government is increasing investments in major military equipment procurement and troop expansion. According to the German Finance Ministry, this year’s combined defense ministry budget and special funds amount to €108.2 billion (approximately US$125 billion), expected to rise to €139.7 billion (approximately US$161 billion) next year and €153.9 billion (approximately US$178 billion) by 2028.

This increase in defense budgets is observed in many European countries beyond Germany. Poland, bordering Russia, leads military buildup in Europe by allocating 4.81% of its GDP, equivalent to 200.1 billion zloty (approximately US$52.7 billion), for defense this year. France amended its military planning act in August to increase its 2026–2030 defense budget by €36 billion (approximately US$41.5 billion) beyond the original plan. Latvia on the Baltic Sea allocated €2.16 billion (approximately US$2.49 billion), 4.73% of GDP, for defense this year and aims to increase spending to 5% of GDP by 2027.

Future positioning of Asian defense industries

Europe’s emphasis on self-reliant defense is expected to impact the market entry of non-regional defense companies. As part of its 'ReArm Europe' initiative announced last year, the European Commission introduced the 'Security and Defence Action for Europe' (SAFE) program offering up to €150 billion (approximately US$173 billion) in defense industrial investment loans to member states. Under this scheme, joint procurement projects receiving financial support must source at least 65% of the final product’s parts costs from eligible regions including the EU, Ukraine, and the European Economic Area (EEA). While participation by external companies is not entirely blocked, local production capacity and cooperation with European companies determine competitiveness in contracting.

Recent major European warship procurement projects have highlighted procurement successes by regional defense companies. In August last year, Norway selected the UK’s BAE Systems Type 26 frigate as its next-generation anti-submarine warfare vessel, and in November, Poland chose Sweden’s Saab A26 submarine as the preferred partner in its new submarine Orca project. France’s state-owned shipbuilder Naval Group is also capturing large-scale rearmament demand within Europe. According to a Reuters report on the 8th, the share of European customers outside France in Naval Group’s total revenue rose from 0% in 2019 to about 20–25% recently.

However, some analysts believe there is still room for Asian companies to expand their influence locally. Due to long periods of reduced warship orders, European shipbuilders have limited production bases and may find it difficult to meet sharply increasing demand for warships in the short term. Indeed, the German Navy’s F126 frigate project, contracted to Damen, suffered delays and cost overruns, leading to suspension in June this year. Similarly, the next-generation anti-submarine frigate project jointly pursued by Belgium and the Netherlands with Damen saw the delivery schedule for the first ship delayed by three years to 2033 due to design changes. In this context, cooperation with non-European countries such as South Korea and Japan, which possess solid production infrastructure and design and construction experience, could be a meaningful option for Europe.