German carmaker Volkswagen is reportedly in talks with Israeli defense firm Rafael to produce missile defense systems, which Citi analysts say could be an opportunity. The two companies are in talks to repurpose VW’s factory in Osnabrück, Germany, which is scheduled to close, to make parts for Israel’s Iron Dome missile defense system, manufactured by Rafael, the FT reported on Tuesday. A VW spokesperson said the company is “in dialogue with various market participants” about the future of the site. They added that the production of weapons by Volkswagen was also ruled out in the future and that they were not involved in speculation about further plans for the Osnabrück facility. VW’s latest financial results showed that operating profit fell by more than 50%, hinting at a difficult year ahead as the company continues to battle U.S. tariffs and competition from China. The company’s shares have fallen 18% since the start of the year and 60% in five years, but the reported talks with Mr. Rafael could be a step toward facilitating a turnaround, Citi wrote. VOW3-DE YTD Line Volkswagen’s stock price since the beginning of the year. “We believe that reallocating any auto investment capital (or just net cash) to high-yielding, high-growth non-auto businesses could improve VW’s return on invested capital and add a positive narrative that the auto industry does not currently offer,” the analysts said in a note Wednesday. In Citi’s view, it appears to be a win-win for the company to be able to use its Osnabrück factory, which is scheduled to close in 2027, to foster growth in the EU’s defense industry. “In this scenario, the defense industry is likely to accelerate production ramp-up, as VW not only saves short-term cash liabilities from closing plants and making 2,300 employees redundant, but also avoids selling capacity to new (Chinese) competitors,” the analysts added. But Citi pointed to political risks, citing how public opinion over Elon Musk’s involvement in President Donald Trump’s administration coincides with the collapse of Tesla sales in Europe. “It is unclear at this point what kind of political reaction VW’s relationship with an Israeli defense company will provoke in Europe,” the analysts added. If VW builds missiles for Rafael, it will join a growing list of automakers that also produce weapons and defense equipment, including Renault, Mitsubishi and Hyundai Motors.
