Volkswagen finds defence future for German plant amid major overhaul

By Christina Amann and Christoph Steitz

OSNABRUECK, Germany, Sept 7 (Reuters) - Volkswagen on Monday struck a preliminary deal that will see one of its German sites switch to defence production under new ownership, a first in the automaker's efforts to restructure plants struggling to compete with lower-cost Chinese rivals.

The deal offers a potential blueprint for other Volkswagen sites facing an uncertain future as Europe's largest carmaker embarks on its biggest ever restructuring to revive margins and battle chronic overcapacity in its stagnant European market.

Under the initial terms of the deal, Volkswagen will sell its factory in Osnabrueck to Israel's Aurelius Capital and Volkswagen's home state of Lower Saxony, in a move labour officials said could preserve about 1,400 of the site's 1,800 jobs.

The agreement comes days after Volkswagen unveiled a major revamp to cut jobs and simplify its structure, highlighting how rising defence spending in Europe could help absorb excess manufacturing capacity in the automotive sector.

Volkswagen has warned that up to four German plants could face closure or repurposing unless alternative uses can be found amid weak demand, high costs and growing competition from China.

LETTER OF INTENT

Aurelius Capital and Lower Saxony, Volkswagen's second-largest shareholder, signed a statement of intent on Monday to take over the factory, where vehicle production is due to end in 2027.

Volkswagen said an initial "anchor project" for Osnabrueck would be a cooperation with Israel's Rafael Advanced Defense Systems, one of the key partners behind Israel's Iron Dome, Arrow and David's Sling air and missile defence systems, confirming what sources told Reuters in May.

"These plans involve the potential manufacture of systems and components for air defence systems for Germany and Europe," Volkswagen said, adding the cooperation could pave the way for further such deals.

Additional projects could involve converting VW Amarok pick-up trucks into military vehicles, a person familiar with the matter said, adding Polish defence firm WB Group could do the same for vehicles from MAN, owned by Volkswagen's Traton business.

Lower Saxony and WB Group declined to comment on the plans, which were first reported by German newspaper Frankfurter Allgemeine Zeitung.

Defence production is increasingly being seen as a solution for underused automotive plants, with companies including Rheinmetall and Continental pursuing similar initiatives.

Under the proposal, Aurelius would take a majority stake in the site alongside Lower Saxony, whose premier Olaf Lies said the state's engagement would be similar to its purchase of a stake in the Meyer Werft shipyard in 2024.

At the time, Lower Saxony spent €200 million ($232 million) for a 40% stake in the shipyard.

"Osnabrueck brings with it something that cannot be built from scratch: many years of experience with demanding products, precise manufacturing processes and high-quality, well-coordinated teams and a strong tradition," Aurelius Capital's Tomer Jacob said.

The investor lists cybersecurity, drone technology and satellite systems among its focus areas.

($1 = 0.8604 euros)

(Reporting by Christina Amann in Osnabrueck and Christoph Steitz in Frankfurt. Editing by Friederike Heine and Mark Potter)