Germany’s Industry at a Crossroads: Challenges Ahead

Industrial Fair Highlights Innovation Amid Turbulent Times

Germany is preparing for a critical year in its industrial and economic development, and all eyes are on Hannover, where over 4,000 exhibitors from around the world are showcasing cutting-edge technologies. The annual Hannover Messe, considered the world’s largest industrial trade fair, is drawing participants from nearly 150 countries. This year’s spotlight is on robotics, AI, mechanical engineering, energy production, and powertrain systems — sectors viewed as essential for ensuring industrial competitiveness.

The timing of the event is significant. Germany’s economy is entering a third year of recession, and the political landscape is shifting. Both German Chancellor Olaf Scholz and Canadian Prime Minister Justin Trudeau, representing this year’s partner country, are leaving office. Yet, despite political uncertainty, the fair’s organizers aim to project optimism. Deutsche Messe AG CEO Jochen Köckler emphasized the importance of rebuilding trust in investment and reviving the global prestige of “Made in Germany.”

The government’s recent removal of constitutional borrowing limits has unlocked €500 billion in funding, with €100 billion earmarked for green infrastructure, attempting to marry climate targets with economic revitalization. Business leaders are optimistic that this fair will drive investment and partnerships, especially with Canada, which is seen as a strategic partner in light of geopolitical tensions and trade disputes involving the United States.

Defense Industry Surges as Military Budgets Expand

While the traditional pillars of German industry struggle, another sector is quietly becoming a powerful engine of growth: defense. Spurred by the Russian invasion of Ukraine and shifting U.S. foreign policy under President Donald Trump, Germany and the EU are drastically increasing military spending. On March 18 and 21, 2025, the German Bundestag and Bundesrat approved constitutional changes that suspend debt limits for defense spending above 1% of GDP. The EU Commission has proposed a €800 billion military build-up plan across Europe, loosening debt rules EU-wide.

This surge in defense budgets has directly benefited firms like Rheinmetall, Hensoldt, and KNDS. Rheinmetall alone reported revenues of €9.7 billion in 2024, with order backlogs reaching €55 billion. The company is rapidly expanding, planning to increase its workforce from 32,000 to 40,000 in just two years. Factories in Neuss and Berlin, previously focused on automotive components, may soon pivot to defense manufacturing. Rheinmetall has already offered 100 employees from Continental’s struggling brake division new jobs in a munitions plant.

KNDS recently acquired a historic railcar factory in Görlitz, turning it into a tank component production site. This saved hundreds of jobs and marked a trend where under-pressure automotive facilities are repurposed for defense manufacturing. Hensoldt, a radar systems specialist, is also recruiting from the auto sector, noting that the industry’s troubles have become an unexpected recruitment boon.

However, the scale of this transformation still falls short of replacing the output of the automotive industry, which generated over €540 billion in revenue in 2024. For comparison, the combined revenue of Germany’s top five defense firms in 2023 was under €30 billion. While the defense boom is significant, it remains a supplement — not a replacement — for the auto sector’s economic weight.

Machine Builders Under Pressure from Chinese Competition

As defense spending climbs and industrial trade fairs rally optimism, Germany’s machine builders are sending warning signals. Companies such as Flender, Festo, and Kaeser — all major players with global footprints — are facing intense pressure from Chinese competitors who now match or exceed them in speed and innovation.

Flender, a leader in high-performance gear systems, has invested heavily in fully digital engineering processes to stay competitive, especially in wind energy applications. CEO Andreas Evertz admitted that working in China-level timeframes and efficiencies has become essential. “We used to be copied; now we are learning from them,” he said.

Festo has maintained research spending even as revenues dropped to €3.65 billion, hoping that innovation will keep them ahead of new Chinese entrants. The company is producing locally in China, acknowledging that global presence is now a necessity, not an option. CEO Thomas Böck stressed the urgent need for better investment conditions in Germany, describing the local environment as slow and expensive. He remains confident in Germany’s strengths — particularly its world-class education system — but warns that many firms are losing their technological lead.

Kaeser, a compressor manufacturer, echoed similar concerns. While 99.9% of its production remains in Germany, Kaeser fears that without major changes, Germany could lose its status as a top-tier industrial location. The company has already transitioned to offering compressed air as a service under industrial digitalization models, but CEO Thomas Kaeser insists that industry-wide adoption of AI and new business models is essential.

The Promise and Pressure of Artificial Intelligence

Artificial intelligence has emerged as a unifying theme across sectors. At the Hannover Messe, AI is not merely a buzzword — it’s a core focus. German manufacturers are betting on industrial AI to deliver operational efficiency, real-time optimization, and global competitiveness. Companies are embedding AI into administrative and production workflows, hoping to outpace both U.S. and Chinese rivals in industrial applications.

Kaeser, Festo, and Flender have all committed to AI as a strategic pillar, believing Germany can lead in applied AI for manufacturing. Still, they face serious challenges. China is already integrating AI across its industrial base with tremendous speed, and U.S. tech giants remain dominant in AI R&D. The race to apply AI practically — not just theoretically — may define the future of German industry.

Can Germany’s Industrial Future Be Rebuilt?

Germany’s industrial economy stands at a turning point. While political transitions, economic stagnation, and global competition loom large, opportunities are also emerging. The surge in defense investment is breathing new life into dormant manufacturing sites. The Hannover Messe is amplifying technological optimism, and AI promises a new industrial revolution. But executives warn that none of this will matter without structural reforms, faster investment cycles, and a renewed commitment to industrial leadership.

Germany’s reputation for precision, quality, and innovation remains intact — but for how long depends on whether this moment becomes a turning point or a missed opportunity.