Market analysis

Strengthening the industrial base: opportunities for German SMEs

An analysis of the German defence industry landscape: how medium-sized companies can benefit from the strengthening of the industrial base.

10 min readLast updated: 2026-02-25

The Zeitenwende and a realignment of industrial policy

The security policy turning point (Zeitenwende) since 2022 has moved the defence industry to the centre of industrial policy. The 100 billion euro Bundeswehr special fund, the NATO commitment of 2 % of GDP for defence and the EU defence initiatives (EDF, EDIS, EDIP) create an investment framework that will keep the German defence industry supplied with orders for years to come. For medium-sized companies this means: entering the defence industry has never been more attractive than it is now.

Bundeswehr special fund: 100 billion euros for procurement and modernisation — invested in major equipment, but also in infrastructure and supply chains
NATO 2 % target: putting the defence budget on a permanent footing at over 75 billion euros a year — long-term planning certainty
European Defence Fund (EDF): EU research and development funding for defence technology — accessible to suppliers as well
EDIP (European Defence Industry Programme): a new EU programme to strengthen the European production base
National Security Strategy 2023: an explicit commitment to strengthening the domestic industrial base

A political paradigm shift

For decades the defence industry was regarded in Germany as a politically sensitive subject. The Zeitenwende has changed this fundamentally: defence industrial capability is today understood as a national security resource. For suppliers this means not only more orders, but also social acceptance and political support.

Bottlenecks as opportunities: where SMEs are needed

Rapidly scaling up defence production is running into capacity bottlenecks in the supply chain. The prime contractors can only increase their production capacity if the supplier pyramid grows with them. This applies in particular to specialised technologies for which there are only a few qualified providers — a classic field for highly specialised medium-sized companies.

Metallurgy and casting: capacity bottlenecks in special steel casting, armour steel and engine alloys — refractory expertise is indispensable for expanding capacity
Ammunition production: scaling up on a large scale requires new melting and casting capacity with refractory lining
Maintenance and repair: the Bundeswehr is planning to establish regional maintenance centres — refractory servicing for military heating and combustion systems
Thermal management: growing demand for high-temperature protection for new weapon systems (hypersonics, DEW, FCAS)
Recycling and the circular economy: recovering strategic raw materials from decommissioned systems — high-temperature processes as the key

A concrete example: ammunition production

The German government has announced a major expansion of ammunition production. Rheinmetall is building new plants in Germany and Lithuania. Every ammunition factory needs melting furnaces, casting plant and heat treatment furnaces — all with refractory linings. For refractory specialists, this means concrete opportunities for orders in both new construction and maintenance.

Funding and framework conditions

Alongside direct contracts, there is a growing number of funding programmes and framework conditions intended to make it easier for medium-sized companies to enter the defence industry. The EU and the German government have recognised that a strong industrial base is only possible with a broad foundation of specialised suppliers.

European Defence Fund (EDF): funds collaborative research and development projects — SME participation is expressly encouraged and scored with a bonus
BMVg research contracts: technology studies and feasibility analyses — also open to small companies with niche expertise
KfW guarantees: export credit guarantees (Hermes cover) secure defence export business
EU taxonomy: the defence industry is increasingly recognised as ESG-compatible — making financing easier
Accelerated procurement: new BwBBG rules enable faster procurement — less bureaucracy for suppliers

Strategic positioning for refractory specialists

Companies in refractory construction have specific positioning opportunities in the defence industry. Their core capability — mastering high-temperature processes, manufacturing and installing furnace linings, carrying out maintenance under difficult conditions — is in demand at many points in the defence value chain.

Support for special metallurgy: refractory linings for melting furnaces producing armour steel alloys and engine materials
Maintenance for the defence industry: servicing and repair of furnaces in defence plants — plannable and recurring
Mobile repair services: refractory repairs in field camp energy systems and mobile combustion plants
Research partner: developing new high-temperature materials for defence applications — together with Fraunhofer, DLR or the prime contractors
Dual-use products: refractory materials used in both civil and military metallurgy — exploiting the synergies

Competitive advantage: Made in Germany

German refractory expertise enjoys the highest reputation worldwide. In a defence context there is a further advantage: producing in Germany avoids the export and technology transfer problems that can arise with foreign suppliers. Prime contractors prefer local suppliers in order to reduce dependencies on third countries.