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Fierce competition from China and high energy costs have left many German industries struggling. Increasingly, companies like engine manufacturer Deutz are moving into defense. CEO Sebastian Schulte explains why.
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00:02We are talking defense. German industry, including its cars, are famously struggling due to competition with China, high energy costs,
00:11and a lot more.
00:11We're going to track the rise of the defense industry and also ask whether it could be a lifeline to
00:17save some parts of industry, especially in Germany, but also other parts of Europe as well, which haven't been doing
00:22so well, and that's car makers like Volkswagen, but also many other industrial companies as well.
00:28Joining us now is someone who's undergoing this pivot. Deutz is a German company that's made engines for 160 years
00:36and is also now moving into defense. Their CEO, Sebastian Schulter, joins us now.
00:41Thank you for taking the time for us today. So, if I can be so bold and describe your company,
00:46and correct me if I'm wrong, you basically make engines for everything except for cars.
00:49So, agricultural construction machines, generators, and this kind of thing. And now you're pivoting towards defense. I think you may
00:56have had a toe in it before, but now you're really going for it. Why?
01:00Yeah, it has several reasons. And in fact, there's three reasons. First reason, of course, is, you know, it is
01:06a market that develops strongly where the growth is above, let's say, ordinary market growth, and that's for me always
01:14a precondition to go into any business.
01:16And that's certainly the case in Europe and in Germany in particular since 2022. And we reacted fairly quickly after,
01:23you know, the Russian attack on Ukraine.
01:27Number two is, of course, you know, it's not just relevant that there is a market. It's also relevant that
01:34you bring some knowledge, some competency into the field.
01:38And that's the way you just mentioned 160 years of engines for everything which is not on the road, off
01:46highway.
01:47And the requirements for these engines are, they have to be extremely robust.
01:51They have to function on high altitude or, let's say, in a mining environment, high temperatures, low temperatures.
01:56So, perfect, perfectly suitable also for any sorts of military equipment.
02:03So, you know, in business terms, we'd call it sort of the right to play and right to win, although
02:08we're not talking about playing and winning in this context.
02:11I need that to be very clear.
02:12And the third reason, we are now, I mean, we are in the center of Europe and we are very,
02:18very close to a front and a threat which we hadn't really have for quite some time.
02:25So, for us, it's also like, it's also sort of a responsibility we have to bring to safeguard freedom and
02:33peace in Europe.
02:34And we feel not only prepared, but actually also almost obliged to make a contribution here.
02:42So, these are the three reasons why we moved into defense.
02:44Now, one thing that you briefly touched on was that pre-2022 around then, there was a kind of unease
02:53among some companies in Germany about participating in this sector outside of those big players with the big names.
03:00And there has been a cultural shift since then.
03:04And I think a lot of people are realizing that Germany needs to defend itself.
03:10And that's certainly what the government's position is, that this industry needs ramping up.
03:14Was that also a cultural shift for you personally and for the company as well?
03:19Well, for me personally, it wasn't because I came from a background of defense.
03:25For the company, honestly speaking, I wasn't sure how the company, how the employees would react at that point in
03:31time.
03:32For exactly the reason you just mentioned in your question, right?
03:36So, I wasn't sure, but the first time I addressed it in front of all our employees here at the
03:41main facility in Cologne, I was very transparent.
03:45I told it to them exactly why this is not only good for Deutz, it's good for the employees, but
03:51also good for society and for the freedom of the Western world.
03:54And I received applause for that.
03:57I received applause.
03:58There's always the one or other who says, oh, we don't want to get involved in, you know, anything relating
04:03to weapons.
04:04And that's fine.
04:04And that's totally acceptable.
04:06And we may have, we may have lost one or two employees who said, oh, we really don't want to
04:11get engaged in that.
04:12But the majority, the vast majority of all people, they were actually reacting.
04:17I would always say enthusiastically.
04:19The engineers, you know, who need to do some development on the products, they left the challenge.
04:24They said, oh, great, that's a new challenge, right?
04:26Let's solve the challenges.
04:27Our engineers, many German engineers, they're super excited about providing fantastic solutions for problems which are brought to them.
04:35And that's exactly what happened.
04:37And those involved in assembly and manufacturing, I mean, there is a certain concern about job security going forward, given
04:45the technological change we're all undergoing at the moment.
04:48And for them, it's really a perspective, which they probably wouldn't have seen otherwise.
04:54So in total, for reasons, you know, sometimes a bit, I wouldn't say selfish, but for reasons for, you know,
05:02for their own future.
05:04But also, and I think that's probably the most important thing, a threat, which we had not experienced in peacetimes
05:13for decades, suddenly is becoming quite imminent.
05:17And here the perception has changed.
05:20And we cannot rely on other countries like the United States to fully protect us.
05:27And we need to take our fate a bit in our own hand.
05:31And I believe also the German government has taken the right decisions to, you know, provide funding to really double
05:38down on a rearmament.
05:40And we feel, again, privileged to support here.
05:43You mentioned the German government.
05:45And I want to return to customers here, the customer side of things.
05:49Where do you expect most of your orders to come from?
05:51Do you expect it to come from the German government?
05:54It's, well, I mean, we are a provider of engines or, let's say, a motorist drive solution.
06:02So the direct customers are, in our case, mostly not the government, but defense companies who manufacture either, let's say,
06:10drones or armed vehicles, battle tanks and vehicles like that.
06:19But behind that, I believe at the moment, the biggest growth driver in the European defense industry is indeed the
06:26German government, but it's not only the German government.
06:29I mean, we are clearly acting only, obviously, in NATO countries or European countries.
06:34We don't go beyond that.
06:36But the biggest pull comes certainly from the German government.
06:40And this also relates to the fact that, particular in this sort of new defense tech field, where we see
06:46these drone makers or the makers of unmanned ground vehicles like Arx Robotics, a lot of them are German companies
06:54and startups.
06:55So, and that's why it's not a surprise that here the relationship is very German-focused at this point in
07:02time.
07:02Okay.
07:03And I just want to kind of zoom out and look at German industry more broadly.
07:06What's your diagnosis for the state of German industry right now?
07:12That's a good one.
07:13And that's a very wide one.
07:15So, I mean, we Germans, we have, I think, typically a tendency to be always a bit more on the
07:22complainy than on the...
07:24No.
07:26Exactly.
07:27I'm sure I would receive a lot of counter arguments.
07:33So, but I personally believe we can do much more than we sometimes say and will again.
07:41So, I try with Deutz and my leadership team and the entire company, I try always to phrase, you know,
07:47there are lots of challenges out there.
07:48And we always have a tendency to believe that the current challenges are unheard of and that 20, 30, 50,
07:5570 years ago, the world was so much easier.
07:57But let's face it, it wasn't.
07:59I mean, we had oil crisis before.
08:01We had world wars before.
08:02And there were so many moments when people probably thought, okay, that is the end of the world and of
08:07society or whatever.
08:09And, right, so I don't want to talk what's currently happening down, not at all, but I'd like to, like,
08:16I'd like to sort of remind everyone that our predecessors, you know, they were also facing challenges and they just,
08:23you know, rolled sleeves down and said, okay, let's, let's get on with it.
08:26And that's what I believe it's a bit lacking in German industry, maybe also in German politics.
08:30But we try to be a blueprint for the group who is actually doing, seeing that in a more sort
08:38of optimistic way.
08:39With this industrial, German-wide industrial move towards defense, are we seeing innovation-led growth here or is this just
08:48state-led industrial preservation?
08:51Now, I believe innovation is very strong, right?
08:55I mean, obviously, it needs because the end customer is always a government, right?
09:00So, it needs both.
09:01It needs funding from governments, from the respective armies.
09:07But on the other hand, we see so much innovation right now, particular in this field of unmanned vehicles.
09:17And it is most likely has been initiated by the war in the Ukraine, where a country that suddenly was
09:27put under the biggest pressure one could probably expect needed to react quickly.
09:33And then suddenly, in and around Kiev, almost like an innovation hub emerged, which was certainly not, you know, long
09:42-term planned and funded.
09:43And it just shows how a society and industry with an engineering knowledge and background can innovate.
09:53And that's what we see in Germany as well, in particular in the south of Germany.
09:58But not only there, so many really fantastic companies with great ideas emerge.
10:03And so, it needs both, in short.
10:06It needs both.
10:07Aren't you worried whether a switch to defence, as many companies are undergoing at the moment, not just yours, whether
10:14that's going to be sustainable in the long term?
10:17I mean, at the moment, it's deficit-financed in Germany.
10:20Demand is mostly for governments like the German government, which, you know, it could change its policy if another government
10:25comes along.
10:26And, of course, this switch doesn't fix any of the underlying issues.
10:30You're very optimistic, but yet it doesn't get rid of high energy costs.
10:33It doesn't get rid of slow adaptation in some areas or the skills shortage.
10:39So, aren't you worried that this move into defence may actually leave some companies, maybe even yours, more vulnerable, if
10:47not now, than a few years down the road?
10:49Well, that would be true if one would now decide and say we go totally in defence.
10:55Yeah, and that's not our approach.
10:58We said, we asked ourselves very clearly with the abilities we have, with also the footprint we have, the people
11:05we have, how can we support in fields which are, you know, clearly macroeconomic megatrends and defence is one of
11:15them.
11:16But I would not go all in and, you know, completely transform Deutz from an industrial sort of engineering company
11:24to a defence-only company.
11:25We said we want to be more broad, more resilient, and defence is certainly one of the pillars which is
11:32currently a very strong pillar, and I personally believe is also going to be a strong pillar in the next
11:375, 10, maybe even 15 years.
11:38But it's not the only pillar, and that is reflected in our company strategy, besides obviously preserving what we have
11:47done in the last 20, 30 years, in particular engines for off-highway applications, that's extremely relevant.
11:54We will also investing a lot of money and resources into new technologies, battery, electric technology for exactly those sectors,
12:03and we have also decided to move into the energy sector with the knowledge we have, you know, engines for
12:12backup power generation.
12:13And so that's why, you know, it was always unwise to go only in one field, and so that's why
12:22we feel we're very well prepared, and I could only advise that to everyone else as well, never put all
12:27eggs in one basket, to quote Warren Buffett.
12:29We'll see you next time.
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