Lincoln International’s experts discuss the trends driving growth in mergers and acquisitions for European defense logistics.

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While tanks in World War II were typically transported across Europe via railcar, the historic tank weighed around 10 tons, up to eight times lighter than modern vehicles. Across the modern continent, many road networks and bridges cannot support even half the weight of a modern tank, particularly in the nations connecting Germany to eastern frontlines in Ukraine. In Germany itself, crumbling infrastructure after decades of underinvestment in bridges, waterways and roads is an additional problem.

Recent transportation of tanks to the front lines of Ukraine has involved extensive routes via water, air, rail and trucking channels. Logistics are complex, and heavy equipment transporters (HETs) that can safely transport tanks on roads struggle to adhere to EU environmental regulations. Coordinating water, air, rail and trucking transportation across international borders remains difficult for EU nations and militaries due to historic roadways and railways.

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Transportation and logistics assets, including airports, canals, highways, ports and railway systems, are aging in many countries. The same applies to the energy systems that power transportation networks. As infrastructure is increasingly utilized by both civilian and defense players (dual-use infrastructure), private players across the infrastructure sector are collaborating with government agencies to meet capital needs and production demands.

On the water, funding from the Connecting Europe Facility (CEF) fund is upgrading EU ports to allow for increased capacity and military transportation. From 2021-2023, 77 projects were granted more than €1.7 billion of EU funding (covering 50% of the total eligible costs of the project). Port and airport projects under the CEF included reducing port bottlenecks by expanding nearby rail connections, fixing port ramps for heavy machinery, upgrading canals and building aircraft parking at airports across the continent. A more recent large-scale port and transport upgrade is totaling up to €75 billion, many times previous EU spending on mobility. The union funding is crucial, as private investors remain wary of investing in infrastructure projects that are potential targets for future attacks.

Upgrades to port and airport infrastructure are set to benefit both the civilian and defense economies. Projects are intended to create infrastructure robust enough to transport military equipment and support high volumes of traffic during military exercises and conflict, all while enhancing synergies between civilian and military transport networks for short-notice and large-scale military movements. European transit hubs already see high activity; in 2023, an estimated 2.2 million vessels entered the main EU ports, and 6.3 million commercial flights took off or landed. Upgraded and newly created dual-use infrastructure will stimulate economic growth and increase deterrence of foreign aggression, creating economic opportunities in the EU member states and beyond.

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According to a recent analysis by Oliver Wyman, the European defense industry will need around 250,000 additional engineers and technical specialists over the next five years—an increase of more than 25% compared to today’s workforce—in order to keep pace with growing demand and existing production backlogs. Defense companies are trying to increase production at existing sites and are considering targeted acquisitions in adjacent industries. Repurposing can pose major challenges, such as in the case of plans to use former heavy industry facilities for defense production in areas such as electronics and precision engineering. Other assembly processes and subsystems can certainly be adapted more easily.

Outsourcing production logistics to contract logistics providers will be crucial for successful production expansion. Contract logistics providers typically work under multi-year contracts to meet the logistics requirements of defense companies and their suppliers in the areas of warehousing, inbound logistics, production support and ancillary services, including spare parts and distribution logistics. As defense companies need to continue ramping up production, these outsourcing partners are expected to play a crucial role in supporting these processes and prioritizing military and civilian capabilities.

The “tooth-to-tail” ratio is the ratio of non-combatant logistics and support personnel to each combatant soldier. In World War I, this ratio was 2.6 support personnel per soldier. In modern warfare, the need for support per soldier has continued to grow. For example, during the Iraq War in 2005, the U.S. Army had a ratio of eight support personnel per soldier. To avoid bottlenecks and strategy breakdowns, European militaries will require a significant investment in logistics and support personnel. The current trend toward outsourcing will open up new business areas for private providers, both in the practical provision of the necessary manpower and in financing; however, many of the tasks involved will require large teams with coordinated experience and skills.

A military equipment convoy would currently take an estimated two months to move from France to the French-led NATO garrison in Cincu, Romania, turning a 2-day road trip into a months-long trek, nearly 30x longer than a civilian tourist on the highways. To speed up such transports, private companies are turning to joint ventures and M&A. Companies with cross-border personnel capacities can act quickly across coordinated transport channels and borders, offering all transport and defense logistics from a single source.

Ensuring the timely transport of troops and equipment to potential conflict zones is creating new, sustainable demand for road transport and intermodal rail transport. Currently, both segments in Europe are suffering from continued weakness in industrial production. This need for rapid troop and equipment deployment increases the demand for infrastructure for dual-use container and transshipment terminals, both for inland and maritime shipping. Private equity investors in the infrastructure sector will be in particular demand in the areas of terminals and intermodal road / rail transport. In addition, the deployment of heavy equipment is expected to trigger a sustained increase in demand in the project freight forwarding sector.

The modernization of military equipment and accelerated investment in military equipment are challenging defense companies to rapidly expand their capacities. Defense companies must embrace innovation and digitalization (or find suitable outsourcing partners) to meet rising demand and respond to future challenges. Success depends on the coordinated efforts of all stakeholders: defense companies, governments, logistics service providers and investors. They must ensure that the industry is prepared for growth and resilient to future stresses. For logistics service providers, the challenge is to expand and improve collaboration with prime contractors and to expand capacity and capabilities by engaging strategic and financial partners.

Industrial contract logistics providers across Europe are currently experiencing modest growth, particularly in Germany and France. Adapting and repurposing existing offerings and solutions (from the mobility industry to defense manufacturers) can help industry players benefit from rising defense spending.

Looking Ahead with Lincoln

As international conditions continue to evolve and technology improves, logistics will stay increasingly critical for defense and conflict preparation. Leading defense contractors must consider strategies to overcome bottlenecks and expand production capacity, which could benefit contract logistics providers. Freight forwarders and transport companies offer long-term growth opportunities due to the increasing needs of European NATO members to ensure the mobility of troops and equipment. This is particularly true in countries such as Germany, where infrastructure repairs and comprehensive logistics planning are underway.

In the highly fragmented transport and logistics industry, M&A and joint ventures are important strategies for optimally positioning oneself for the upcoming growth. By pooling knowledge and resources, logistics service providers can increase their operational capabilities, secure additional capacity, and facilitate efficient cross-border transport.

Read the original article in German.