Rheinmetall’s Strategic Response to Critical Raw Material Vulnerabilities in a Geopolitically Shattered Supply Chain Era

In a world where critical raw materials like rare earths, lithium, and tungsten are as vital to national security as they are to technological innovation, defense firms face a dual challenge: securing supply chains while maintaining profitability. Rheinmetall AG, a German defense and industrial technology giant, has emerged as a case study in navigating this volatility through a dual strategy of vertical integration and global supplier diversification. This article evaluates the long-term investment viability of Rheinmetall’s approach, contrasting it with peers like European Lithium and BYD to assess resilience in an era of constrained mineral access.

The Geopolitical Context: A Fractured Supply Chain Landscape

Critical raw materials are the lifeblood of modern defense systems, electric vehicles (EVs), and renewable energy technologies. However, their supply is heavily concentrated in a few countries—China dominates 90% of rare earth processing, while lithium production is dominated by Australia, China, and Argentina [1]. Geopolitical tensions, export restrictions, and trade wars have turned these materials into strategic assets, forcing companies to rethink supply chain strategies. For Rheinmetall, which relies on rare earths for precision-guided systems and tungsten for armor, the stakes are existential.

Rheinmetall’s Dual Strategy: Vertical Integration and Global Partnerships

Rheinmetall’s response to raw material vulnerabilities is twofold. First, it has pursued vertical integration to control key inputs. In 2023, the company acquired Hagedorn-NC, a German nitrocellulose producer, to secure in-house propellant production for artillery ammunition [6]. This acquisition added a fourth production site for nitrocellulose, reducing reliance on external suppliers and ensuring control over a critical component of its value chain.

Second, Rheinmetall has expanded global partnerships to diversify supply. A €626 million investment in Romania now produces artillery and KF41 Lynx IFVs while securing propellant supply through partnerships like the Victoria Explosive Powder Factory [1]. Additionally, joint ventures in India, such as the India-SMPP project, leverage the “Make in India” initiative to bypass export restrictions and localize production [6]. These moves align with broader European efforts, including the EU’s Critical Raw Materials Act (CRMA), which aims to localize 30% of lithium and rare earth processing by 2030 [4].

Contrasting Strategies: European Lithium and BYD

While Rheinmetall focuses on defense-specific materials, European Lithium and BYD address broader energy and EV markets. European Lithium is advancing domestic lithium and rare earth projects, such as the Wolfsberg mine in Austria and the Tanbreez project in Greenland. These initiatives aim to reduce Europe’s reliance on Chinese imports, with Wolfsberg expected to produce battery-grade lithium hydroxide by 2026/27 [2]. A partnership with BMW underscores the project’s strategic value [2].

BYD, the Chinese EV leader, takes a different approach. By vertically integrating battery production and securing lithium mining rights in Brazil, BYD insulates itself from geopolitical risks. Its global expansion—factories in Brazil and planned sites in Hungary—also circumvents tariffs and reduces delivery times [2]. This strategy has enabled aggressive pricing, with BYD capturing market share in price-sensitive regions like Singapore [3].

Financial Performance and Investment Viability

Rheinmetall’s financials reflect the costs of its strategy. In H1 2025, Group sales rose 24% to €4.7 billion, driven by defense demand, but operating free cash flow was negative €644 million due to high investments [1]. While its order backlog hit a record €63 billion, the company’s reliance on rare earths—90% of which are processed in China—remains a risk [1].

European Lithium’s stock surged 250% in 2025, reflecting investor optimism about its projects, though volatility persists due to regulatory and geopolitical uncertainties [3]. BYD, meanwhile, has thrived despite EU tariffs, leveraging its global footprint and vertical integration to maintain profitability [3].

Risks and Opportunities

Rheinmetall’s strategy is not without challenges. Vertical integration requires significant capital, and geopolitical shifts—such as China’s 2024 rare earth export restrictions—could disrupt even diversified supply chains [5]. However, its alignment with EU initiatives like the CRMA and Germany-Canada critical minerals alliance offers long-term stability [6].

European Lithium’s success hinges on the Wolfsberg project’s timely execution and regulatory approvals, while BYD’s expansion faces trade barriers and market saturation risks. For investors, the key question is whether these strategies can scale fast enough to meet surging demand for critical materials, particularly in defense and EV sectors.

Conclusion: Resilience in a Fractured World

Rheinmetall’s dual strategy of vertical integration and global diversification positions it as a resilient player in a fractured supply chain era. While its financials reflect the costs of securing raw materials, its alignment with EU policies and strategic partnerships mitigate long-term risks. European Lithium and BYD offer complementary models—domestic localization and global vertical integration—each with distinct advantages. For investors, the lesson is clear: in a world where critical materials are geopolitical leverage, companies that control their supply chains will outperform those that don’t.

Source:
[1] Rheinmetall's Strategic Global Ammunition Expansion [https://www.ainvest.com/news/rheinmetall-strategic-global-ammunition-expansion-navigating-risks-surge-demand-2508/]
[2] Critical raw materials such as rare earths in the spotlight [https://news.financial/comments/critical-raw-materials-such-as-rare-earths-in-the-spotlight-how-european-lithium-is-saving-renk-byd-and-your-returns]
[3] Rheinmetall, European Lithium, BYD – Drastic measures [https://news.financial/comments/rheinmetall-european-lithium-byd-drastic-measures]
[4] EU selects 13 strategic raw materials projects outside bloc to diversify supply chains [https://www.worldecr.com/news/eu-selects-13-strategic-raw-materials-projects-outside-bloc-to-diversify-supply-chains/]
[5] Can the U.S. Reduce Its Reliance on Imported Rare Earth Elements [https://econofact.org/can-the-u-s-reduce-its-reliance-on-imported-rare-earth-elements]
[6] Rheinmetall secures nitrocellulose supply amid European ammo scramble [https://www.defensenews.com/global/europe/2025/04/07/rheinmetall-secures-nitrocellulose-supply-amid-european-ammo-scramble/]