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The AI Germans are counterattacking me with stronger divisions than I have and they are destroying the Allied armies.

I'm rebuilding the Allied divisions whenever possible and making high odds attacks with air attacks.

What's wrong?

The German units are getting stronger as the game goes on.

Yikes.

What am I doing wrong?

I've played through the Overlord scenario once as the Allies and the Germans (on normal difficulty) do seem to get some reinforcing units though these may well be recently un-frozen units from beyond my air-recon range. Still managed to win it by turn 18.

Are you using your strategic bombers ? I was usually doing 3-6 PP damage per turn to the Germans which meant that after turn 5 or so they probably had little left to construct units with.

PS also worthwhile making sure you leave empty hexes around the newly liberated ports to enable you to Sea Transport as many of your own reinforcements from England as possible each turn - with a bit of luck all bar the air units should be on French soil in the first 4-6 turns.