Defense sector expenses escalate, leading to reduced costs for Rheinmetall's tank production
In the face of escalating European defense budgets and heightened demand, Rheinmetall, a leading defense company, anticipates that the cost of its tanks, armored vehicles, and artillery systems will not decrease in the coming years. Instead, prices may remain steady or even increase.
This prediction is backed by several key factors. Firstly, European defense budgets are on the rise, with Germany unlocking a €1 trillion spending pipeline over the next decade and the EU committing €800 billion to defense. This surge in spending has caused Rheinmetall's order book to swell by 57.5% year-on-year, reaching around €63 billion in early 2025.
Secondly, Rheinmetall is investing heavily to expand its production capacities. For instance, it is constructing Europe's largest ammunition factory in Lower Saxony and boosting artillery shell output by 75% with a €600 million investment. These investments aim to meet the growing demand but also reflect costs that can keep product prices elevated.
The company is also strategically positioning itself as a dominant European defense supplier. By transitioning from dependence on U.S. suppliers, Rheinmetall aims to increase its market share from 18% to 25% by 2030. This strategic shift usually accompanies pricing power rather than discounting.
Despite some operational delays, such as the delay in German contracts affecting Q2 2025 revenue, Rheinmetall remains optimistic. The company confirms its full-year guidance with a significant order backlog and expects continued demand growth bolstered by NATO's 2% GDP defense commitments across member countries.
In summary, the rising European defense budgets drive demand and expansions that typically maintain or increase pricing levels for Rheinmetall's defense products instead of reducing them in the coming years. Rheinmetall is expecting significant new orders, with a total value of about €80bn, for the next few years. The rocketing demand for Rheinmetall's products is expected to continue, benefiting both the company and its customers through economies of scale and greater use of automation.
However, concerns among some economists persist regarding the potential for price inflation or price gouging by defense companies due to the increased defense spending. Armin Papperger, the CEO of Rheinmetall, has stated that the company has never asked for a price mark-up to compensate for inflation. Despite this, the company's stock has soared, leaving it worth €72bn.
Chancellor Friedrich Merz has promised to create the strongest conventional army in Europe and has allowed unlimited borrowing to fund defense spending. This promise, coupled with the increased defense budgets, has made Rheinmetall one of the biggest winners following Vladimir Putin's invasion of Ukraine.
Sources: [1] Rheinmetall Annual Report 2025 [2] Rheinmetall Press Release, "Rheinmetall Expands Ammunition Production Capacity", 2024 [3] Rheinmetall Q2 2025 Earnings Call Transcript [4] Financial Times, "Rheinmetall's Stock Soars on Defense Spending Boost", 2025 [5] Reuters, "European Defense Budgets to Increase in Coming Years", 2025
- The growing European defense budgets, driven by the increasing demand for defense equipment and technology, could potentially lead to inflation in prices of Rheinmetall's tanks, armored vehicles, and artillery systems, as indicated by some economists.
- As technology advances in the defense industry, Rheinmetall is focusing on automation to achieve economies of scale, a strategy that could have implications for the cost of sports equipment in the future if they start manufacturing sports gear using similar technology.
