OSNABRUECK, Germany -- Behind Volkswagen's factory in the western German city of Osnabrueck, hundreds of new T-Roc Cabriolets sat on freight wagons in the early autumn sunshine, awaiting delivery to dealerships. Outside the main entrance, the scene hinted at the future of the 125-year-old auto plant: VW vehicles painted in olive-green camouflage were transported on trucks, while stickers on lampposts urged workers to rebel against the looming militarization of the facility.

Several passing employees reacted frostily to Nikkei Asia's attempts to seek their opinions on recent bombshell news: Under intense pressure from Chinese rivals, VW will cease car production at Osnabrueck in the summer of 2027.

In early September, VW agreed on terms for selling the plant to a consortium including Tel Aviv-based Aurelius Capital and Lower Saxony, the German state where the factory is located and VW's second-largest shareholder. Israeli arms maker Rafael Advanced Defense Systems is lined up as the main industrial partner, with plans for production of air defense equipment, potentially along the lines of Israel's Iron Dome.

"Volkswagen stands by its responsibility toward Osnabrueck," CEO Oliver Blume said in a statement at the time. "With today's agreement, we are taking an important step toward opening up a new industrial future for this site." The move reflects growing European security concerns as well as the profound structural changes sweeping the German automotive industry. Chinese cars are pouring into the European Union, despite anti-subsidy duties the bloc imposed on the country's electric vehicle exports in late 2024. At the same time, storied German auto marques like VW are faltering in China, and elsewhere, as Chinese competitors like BYD, Geely and Xpeng add muscle.

VW earlier this month reported a 14.3% drop in global deliveries for the third quarter, the worst figure in over four years, with the number for China plunging 38.5%.

Chinese carmakers' combined market share in Western Europe reached 13.1% in August, according to Citi estimates, up 5.5 percentage points from a year earlier.

The impact is already being felt in the form of job cuts. VW plans to eliminate up to 100,000 positions worldwide through the end of this decade. But at Osnabrueck, which is running at only around 20% of capacity, the turn to arms promises to save about 1,200 out of 1,800 jobs.

"It is a last-ditch effort by Lower Saxony to keep the plant running and prevent job cuts, and the cards are undoubtedly held by the defense companies rather than the automakers," said Matthias Schmidt of Schmidt Automotive Research.

"The German automakers' long-term strategy involves increasing car production in North America and China and developing market-specific concepts," Schmidt added. "The era of manufacturing a car in Europe and exporting it globally is over, with the exception of high-end, low-volume models." The German Economic Institute on Oct. 15 flagged that Germany's trade deficit with China is expected to exceed 100 billion euros ($112.4 billion) this year, an increase of roughly 90 billion euros since 2019, with the bulk of the growth concentrated in the three core sectors of the economy: automotive, electrical and mechanical engineering.

The stark figures have spurred European leaders including German Chancellor Friedrich Merz to call for stronger trade defenses and pushed the bloc to the brink of a trade war with China. That was at least temporarily averted by an understanding reached earlier this month in Beijing, under which Brussels is poised to implement a safeguard measure to limit hybrid imports. China would receive an initial quota of 350,000 vehicles, increasing 6% annually.

Still, EU Trade Commissioner Maros Sefcovic cautioned that this was "only a first step" toward reversing the bloc's daily deficit with China of more than $1 billion.

European Commissioner for Trade and Economic Security Maros Sefcovic, fourth from front of photo on left side, meets with Chinese officials including Vice Premier He Lifeng, directly opposite Sefcovic, in Beijing on Oct. 9.

This so-called China shock is just part of the motivation to redirect German manufacturing muscle toward arms. A key catalyst was the invasion of Ukraine launched by China's close partner, Russia, back in 2022. Germany is now the largest defense spender among NATO's European members.

The German Association of the Automotive Industry (VDA) told Nikkei Asia that auto companies are receiving many inquiries about the extent to which their production lines could be used or converted to make weapons. The Federal Association of the German Security and Defence Industry (BDSV) is addressing this with the Auto2Defence initiative, which aims to answer both the employment and security worries by tapping available auto workers, factories and technical expertise.

"Automakers' departments that became bloated over the years are now being downsized, with the affected employees now seeking secure employment," said Joshua Krebs, CEO of manpower recruiter WK. "Job cuts at automotive manufacturers lead directly to problems for suppliers, affecting numerous engineering and administrative roles, but the defense industry is now offering much higher compensation packages for skilled workers, especially in blue-collar roles like welders."

The list of transition cases is growing. In June, Forvia, an automotive technology supplier, agreed to transfer its Augsburg site in southern Germany to General Dynamics European Land Systems (GDELS), which makes wheeled and tracked military vehicle and artillery systems.

In Berlin, German arms giant Rheinmetall is converting the former automotive supplier Pierburg into an artillery ammunition producer. Separately, Rheinmetall is working with Continental to absorb employees affected by the automotive supplier's restructuring, initially offering opportunities for as many as 100 workers from Continental's Gifhorn site.

Mercedes-Benz is reportedly in talks with German-French tank manufacturer KNDS to divest itself of a van factory near the capital. Earlier this year, KNDS entered into a partnership with automotive supplier Draexelmaier to produce superstructures for the Boxer wheeled armored vehicle.

Hensoldt, which specializes in defense electronics, in March launched a partnership with automotive supplier Aumovio, allowing Hensoldt to take on hundreds of skilled workers. Hensoldt is also actively recruiting personnel from German parts giant Bosch as well as Continental.

"Demand for modern defense technology is currently growing very strongly, and with it, our need for highly qualified engineers," Hensoldt CEO Oliver Doerre said. "Many skill sets from the automotive industry -- such as those in system development, software, or electronics -- align perfectly with the technologies we develop." A man bicycles past Volkswagen's Osnabrueck auto plant. Numerous German auto and parts makers are exploring opportunities to shift toward arms production.

Despite such moves, experts stress that repurposing plants can be a complex process and that the Osnabrueck transfer is not necessarily a blueprint. This is because Osnabrueck is not a typical car plant: It passed to VW following the insolvency of Karmann, a smaller, niche metalworks producer.

"The plant is already oriented toward components and specialized metalwork as well as smaller scale modifications of Volkswagen cars to special versions, making it more amenable to defense production than typical high-volume auto factories," said Pieter Wezeman, a senior researcher in the arms transfers program at the Stockholm International Peace Research Institute (SIPRI).

"Its characteristics suggest quicker conversion for tasks like missile housings or actuators rather than electronics-heavy assembly," he said.

Germany's powerful IG Metall union echoed the point that arms manufacturing is a different beast than auto production, which is optimized for global markets, maximum production volumes, just-in-time supply chains and rigorous cost efficiency.

"Defense production follows a fundamentally different logic," said Jan Mentrup, a spokesman for IG Metall involved in the Osnabrueck plant's collective bargaining negotiations.

An employee of Germany's Rheinmetall welds on a production line in Kassel, Germany, on Aug. 27. The company is working with auto component suppliers to repurpose facilities.

"While areas of technological overlap do exist, such as propulsion systems, sensor platforms and wiring harnesses, there are realms that a civilian automotive plant simply cannot enter without years of developing specific testing environments and security architectures, such as fire-control systems, encryption technology and secure communication systems," he said.

Mentrup added that hallmarks of automotive plants, like interconnected supply chains and digital infrastructure, can become "vulnerabilities" from a military perspective. "Production must remain operational even in the face of hybrid threats, cyberattacks, sabotage or logistical disruptions." While turning to defense may help shield the German auto industry from the China shock, there is speculation that European automakers could also seek relief by becoming contract manufacturers for Chinese brands or selling off underutilized production lines to them. Chinese marques have already made moves to tap Western competitors' underutilized capacity in France and Spain.

Media reports in May said that Chinese electric vehicle maker Xpeng was in discussions with VW about acquiring surplus production capacity in Europe. VW's Blume quickly assured workers that there were "currently no plans or discussions with Chinese manufacturers," while acknowledging excess capacity. Volkswagen electric vehicles roll along a production line in Hefei, in China's Anhui province, in February.

An Xpeng spokesman this month declined to comment on "rumors" but told Nikkei Asia that the company currently produces four models at contract manufacturer Magna in Austria and confirmed that it is in talks with various potential partners to expand production in Europe.

Schmidt, the auto researcher, said he believes VW could eventually consider another option: "producing Volkswagen models in Germany for European customers based on Chinese models that are currently offered only in China, specifically the VW ID. Unyx 09, an all-electric premium sedan." The model, made by VW's Anhui joint venture with China's state-owned JAC, incorporates computing systems driven by Xpeng's proprietary Turing AI processors.

This would improve capacity utilization and also help VW "to transfer some of the cost-effective and highly efficient production methods used in China to Europe," Schmidt suggested.

A VW spokesman told Nikkei Asia that "these are speculations that we, as a company, have explicitly not fueled. Quite the contrary: behind the scenes, we are saying that -- as things stand today -- it is rather unlikely." A sticker on a lamp post near VW's Osnabrueck plant asks, "Does your employer want to manufacture armaments against your will?" A helpline offers support.

While German manufacturers endeavor to strike a balance between shifting to arms and preserving more than a century of automaking heritage, trade friction looks likely to persist. China's exports continue to soar and analysts noted that hybrid cars make up only a small portion of bilateral trade. Sefcovic vowed that "where dialogue cannot deliver, the EU will use its tools to ensure a rebalancing." This month, European Commission President Ursula von der Leyen said the bloc will craft a new trade diversification measure as soon as December to help redress the trade imbalance and promote de-risking, along with a solidarity mechanism of instances when a member faces coercion or retaliation.

But an observer called on the European Commission to adopt a China trade policy with even more bite.

"Europe is right to guard its economic interests, but swagger isn't strategy," said Cristina Vanberghen, head of the diplomatic sector at Yerevan State University in Armenia and an expert on the European Commission. "A trade policy that ignores retaliation and the web of interdependence will hurt the very industries it claims to shield." The top EU and Chinese negotiators are due to hold further talks early next year. Jens Kastner is a contributing writer.