German automaker Volkswagen is reportedly in talks with Israeli defense firm Rafael to produce missile defense systems — and Citi analysts say it could be an opportunity. The companies are in discussions to convert VW's factory in Osnabrück, Germany, which is slated to close, to make components for the Israeli Iron Dome missile-defense system produced by Rafael, the FT reported on Tuesday. A spokesperson from VW said it is "in dialogue with various market players" about the future of the site. They added that the production of weapons by Volkswagen remains ruled out for the future, and it does not engage in speculation regarding further plans for the Osnabrück site. VW's latest earnings reported a more than 50% drop in operating profit and flagged another tough year ahead as the firm continues to grapple with U.S. tariffs and competition in China. Its shares are down 18% year-to-date and 60% over five years, but the reported discussions with Rafael could be a step in facilitating a turnaround, Citi wrote. VOW3-DE YTD line Volkswagen shares year-to-date. "We think re-deploying ANY automotive invested capital (or just net cash) into higher return, higher growth non-automotive business could improve VW's return on invested capital, and would add a positive narrative that the auto industry currently does not offer," the analysts wrote in a Wednesday note. The ability to use the Osnabrück plant – which the company is due to close in 2027 – to boost the growth of the EU defense industry seems like a win-win, in Citi's view. "In this scenario, not only does VW save the short-term cash liabilities of closing the plant and making its 2,300 people redundant, but VW also avoids selling capacity to new (Chinese) competitors, and the defense industry likely sees an accelerated production ramp-up," the analysts added. Citi flagged political risks, however, citing how public opinion of Elon Musk's involvement in U.S. President Donald Trump's administration dovetailed with collapsing Tesla sales in Europe. "What European political reaction any VW association with an Israeli defense company might attract is currently unknown," the analysts added. If VW made missiles for Rafael, it would join a list of carmakers that are also involved in the production of weapons and defense equipment, including Renault, Mitsubishi and Hyundai.
