Home  // . //  //  Inside Europe’s Defense Boom — The Race For Supply Chains

Europe's aerospace and defense (A&D) market is experiencing unprecedented growth, driven by escalating geopolitical tensions and a significant increase in government spending to bolster national security. As the continent responds to emerging threats, the A&D sector is becoming a focal point for strategic investments.

This surge in defense spending should serve as a wake-up call for heavy industry manufacturers across the board. Many may find their suppliers shifting priorities and capacity toward defense contracts, as they seek to capitalize on the lucrative opportunities presented by the boost in expenditures on armaments. Admittedly, the opportunity will not be immediately available to all suppliers as A&D manufacturing requires specific and not easily obtained certifications.

Aerospace and defense market demand exceeds Tier 2 and 3 supply chain capacity

Europe’s defense expenditures are set to almost double by 2030, reaching between €650 billion and €750 billion. The increased spending is driven by countries like Germany, France, and the United Kingdom, but European Union (EU) member nations in general are increasing their defense budgets as part of the EU’s “Rearm Europe” plan.

While only about one-third of the total allocation will go for equipment, this rapid A&D expansion will still pose challenges for an already overtaxed European industrial supply chain, which will likely struggle to keep pace with this new growth. Making matters worse, suppliers may be inclined to prioritize defense contracts over those from other industries as pressure from governments to rapidly ramp-up may prompt defense contractors to pay higher prices for the large quantities of parts and materials they seek. Government contracts like this are particularly attractive as they tend to be longer term programs. This could lead to a "winner takes all" scenario in which defense manufacturers dictate terms and pricing.

Exhibit 1: Historical data on European defense spending show huge jump between 2024 and 2030
in EUR billions
a chart indicating the growth of defense spending from 2014, includes a big jump between 2024 and 2030
Source: NATO defense expenditure Oliver Wyman analysis

Identifying supply chain risks in aerospace and defense growth

Our analysis, based on publicly available data of more than 600 Tier 2 and Tier 3 suppliers predominantly focused on the European market, reveals critical vulnerabilities. Overall, we see significant overlaps between the supplier networks for defense contractors and various adjacent industrial sectors, especially involving electrical components, electronics, and mechanical parts. Some more complex components, such as pneumatic and hydraulic systems, may become scarce depending on the industry.

In the industrial machinery sector, bearings, sensors, mechatronics, hydraulics, and simple system components emerge as having a high overlap with aerospace and defense manufacturers. These essential components, vital for the operation of machinery, could become increasingly scarce as suppliers begin to service, and potentially prioritize, defense applications.

The rail industry faces a similar fate, with printed circuit boards and housing assemblies, semiconductors, microelectronics, and control units among the most vulnerable subsegments.

In the automotive sector, the stakes are even higher. A potential shift in supplier priorities toward defense contracts — or even the simple addition of more demand from defense — could severely impact an already strained supply chain. Among the vital automotive components that may become scarce are simple electrical components, such as harnesses and cables and connectors, as well as sensors and hydraulic systems.

The energy sector is also not immune. Key components such as wire harnesses, cables and connectors, and bearings are at risk of becoming harder to source.

Exhibit 2: Secondary suppliers by segment and their degree of overlap with the A&D supply chain

These findings underscore a pressing need for manufacturers like automakers, as well as machinery and rail manufacturers, to proactively address these vulnerabilities. It remains uncertain how quickly parts and raw material suppliers can scale up production in response to the escalating demand from air, land, and naval defense contractors and governments. Understanding and mitigating the risks will be crucial for maintaining operational continuity and competitiveness in an increasingly volatile landscape.

Five strategies to mitigate supply chain risks in aerospace and defense

In recent years, supply chain departments have already faced numerous disruptions. These included the semiconductor crisis from 2020 to 2023, the war in Ukraine beginning with Russia’s 2014 seizure of Crimea and escalating with the 2022 Ukraine invasion, the COVID-19 pandemic, and the recent threat of global trade wars and tariffs. Despite this decade of challenges, most supply chain departments still engage in reactive problem-solving rather than proactive planning.

It is crucial for organizations to anticipate and mitigate supply chain risks, given already tight conditions for many parts and materials and the explosive outlook for demand. We have identified the following best practices, based on our own analysis and steps already taken by some of our clients:

1. Assess secondary supply chain vulnerability

As an initial step, original equipment manufacturers (OEMs) should establish transparency by pinpointing critical components within the direct material spent and evaluating vulnerability within the Tier 2 and 3 supply chain. Analyzing potential overlaps with defense players can help identify emerging bottlenecks. Our analysis indicates that threat levels vary by industry and company. Maintaining transparency about market supply conditions and lead times for critical components, performing continuous stock coverage monitoring, and updating continually forecasts for production risks become key risk mitigators.

2. Set up a task force for short-term arbitrage decisions

Similar to the approach taken during the semiconductor crisis, companies can establish an internal, cross-functional task force that monitors the real-time marketplace, enabling senior stakeholders to make well-informed decisions about allocating critical components across various plants and products.

3. Strengthen supplier management

By creating transparency with suppliers around demand dates and working collaboratively on the commitment status for critical materials, end users can provide hands-on crisis management support, such as secondments or additional external project management resources. This can help Tier 1 suppliers address immediate challenges effectively. Strong supplier relationship management should be fostered across the entire chain, emphasizing partnerships, supply agreements, and shared technology roadmaps.

4. Rapidly identify qualified alternative suppliers

OEMs should swiftly identify and qualify alternative suppliers to diversify their supply base when necessary. This process involves fast-tracking the identification and qualification of alternative sub-components and sub-suppliers. It is crucial to assess the cost and timeline implications associated to ensure a seamless transition to these alternatives. Evaluating the technical and operational efforts required to activate short-term alternatives is essential, particularly when weighing these against the risks of production line stoppages or the need for retrofitting options.

5. Define technical alternatives and form buying alliances

When faced with significant supply bottlenecks, OEMs can consider forming buying alliances and exploring alternative technical solutions as a last resort. By challenging existing technical specifications, OEMs can identify modifications that allow for the use of alternative products, thereby increasing flexibility in sourcing. Forming buying alliances can help OEMs leverage collective industrial capacity, enhancing their position relative to suppliers and fostering long-term partnerships.

Adapting to the new normal of supply chain disruptions

Supply chain disruptions have become increasingly frequent and are now considered the new normal. Factors such as geopolitical tensions, natural disasters, and fluctuating trade policies contribute to an unpredictable environment, challenging the resilience of various sectors. To thrive in this landscape, companies must develop capabilities that allow them to proactively address and manage these disruptions. This includes investing in advanced data analytics for real-time visibility, establishing agile and flexible supply chain strategies, and fostering robust partnerships with suppliers to ensure continuity and adaptability. By enhancing their resilience, end users can not only mitigate risks but also seize opportunities for growth and innovation in an ever-changing world.