By Nick Carey, Gilles Guillaume and Kalea Hall
LONDON/PARIS/DETROIT, Sept 28 (Reuters) - Western automakers are chasing a defence spending boom as a way to sell more vehicles and make use of underemployed factories, though executives say military work will not make up for slowing car sales and growing Chinese competition.
Automakers including Ford, General Motors and Jaguar Land Rover are bidding for military contracts using modified versions of pickup trucks and off-road vehicles they already produce,
while others are selling underused plants to defence manufacturers expanding capacity.
The industry is tapping into rising Western defence spending, but executives and analysts told Reuters the opportunities to materially boost revenue remain limited.
"In reality all of these opportunities will have very little financial impact," said Jefferies auto analyst Vanessa Jeffriess, adding that automakers face slowing demand and intensifying competition from Chinese rivals, putting them under pressure to at least show investors they are trying to diversify.
GM, the biggest US automaker, expects its defence division to generate revenue of $700 million this year and grow by 30% annually for several years. But that would put revenue at about $1.5 billion in 2029, less than 1% of group revenue of $185 billion in 2025.
Traditional US and European automakers are losing market share in China to home-grown rivals like BYD and Geely, while Chinese brands are expanding rapidly into Europe and emerging markets to offset weak domestic demand, squeezing profit margins and leaving Western manufacturers with excess capacity.
Most major automakers ditched military contracts decades ago, but as governments from Europe to North America ramp up military spending, defence has emerged as one of the few growth sectors for the industry.
ALREADY PRODUCING AT SCALE
Analysts see the most realistic opportunities in assets that automakers already have.
Ford's European head Jim Baumbick said providing the military with vehicles fits with the company's existing strengths of providing "tough vehicles with high payloads".
Ford, GM and Britain's JLR are among companies bidding for a £900 million ($1.2 billion) UK Ministry of Defence vehicle contract, initially for 3,000 vehicles, using modified versions of trucks and off-road vehicles they already make.
Ford is bidding with its Ranger pickup truck, while two models in GM's bid are retrofitted Chevrolet Silverado pickup trucks which will be modified for UK military use. JLR, a unit of India's Tata Motors, is bidding with its off-road Defender model, and all are betting that decades of engineering, manufacturing scale and global supply chains can give them the edge over specialist defence firms.
"They're such capable trucks from the beginning, that's not a heavy lift," said Gilbert Nelson, GM Defense's vice president for international sales and marketing, referring to the modifications required for military use.
JLR North America CEO and former head of the Defender brand Mark Cameron said the automaker has also had discussions "with lots of countries across Europe... and further afield" about similar tenders due in the next 12 to 18 months.
Cameron said using a vehicle JLR already makes at scale was "strategically valuable" though the company was not dependent on it.
FINDING BUYERS FOR FACTORIES
Another attractive proposition for the auto industry is being able to offload surplus manufacturing capacity to companies looking to expand production in defence without the cost of building from scratch.
Italy's Stellantis is planning to sell an idled Canadian factory to armoured-vehicle maker Roshel while earlier this month Germany's Volkswagen agreed to sell its Osnabrueck plant to Israel's Aurelius Capital and the German state of Lower Saxony for a project with Rafael Advanced Defense Systems.
Analysts said factory disposals rather than diversifying production are one of the clearest benefits from the defence boom.
"There's been a lot of talk," about diversifying into defence production, said Ian Henry, director of consultancy AutoAnalysis. "But there's not been a lot of concrete action."
Suppliers could also emerge as bigger beneficiaries of rising defence spending. Unlike vehicle assembly plants, their smaller and more flexible production lines can often be adapted to military programmes with limited investment.
"Car assembly lines are just not geared for making components," because they are too large, AutoAnalysis' Henry said.
For suppliers, the defence industry "drives growth, which the automotive market does not," Christophe Perillat, CEO of French supplier Valeo said in July, adding that military contracts also offered higher profit margins than traditional automotive business.
French supplier Forvia is using its existing production capacity to explore military opportunities, CFO Olivier Durand said.
"The industrial investment required is very low... so it's quite an attractive prospect," he said.
Forvia also recently signed a deal to transfer a factory in Germany and 300 staff to defence firm General Dynamics.
CORE BUSINESS REMAINS VEHICLES
Some automakers are pushing further into defence in the US and France. Renault plans to produce 1,000 military drones per month starting next year with French defence technology firm Thales, though executives acknowledge the scale is small compared with its automotive operations.
Oddo BHF auto analyst Michael Foundoukidis said Renault makes about 10,000 vehicles a day.
JLR, which makes over 100,000 Defenders a year, is avoiding branching out and competing with specialist companies. JLR's Cameron said automakers would face formidable competition in unfamiliar sectors.
"Our core business is vehicles," he said. "We don't want to stray into any offshoots."
($1 = 0.7413 pounds)
(Reporting Nick Carey, Gilles Guillaume and Kalea Hall;Editing by Elaine Hardcastle)
