While most people probably understand we live in dangerous times, it’s easy to get complacent with the repetitive warning signs coming from Russia and China and underestimate how dangerous. Phillip Zelikow, in a forthcoming article in the Texas National Security Review, warns of “a serious possibility of worldwide warfare” in the next two or three years.
Is America ready? Unfortunately not. And the core of the problem relates to the U.S. defense-industrial base, which suffers from too much concentration, too little commercial technology, and an insufficient ability to produce munitions. It is therefore ill-prepared for the dangers of the present and future.
How did we get here?
The First Gulf War demonstrated the decisive power of U.S. technology applied to warfighting: precision-guided munitions, stealth aircraft, satellite-based intelligence, and advanced communications. These enabled the U.S. military to defeat the Iraqi military — the world’s sixth largest — in six days. Moscow and Beijing saw the vast technological gap between the U.S. military and their own forces. The Soviet Union would fall months later, but China’s struggle for global supremacy was only beginning. China responded by beginning the largest and fastest buildup of military capability since World War II.
In the United States, things began to move in the opposite direction. In 1993, then Deputy Defense Secretary William Perry invited executives to a Pentagon dinner since coined the “Last Supper.” Perry explained the implications of the peace dividend as a logical implication of winning the Cold War: dramatically lower defense spending that could not support the number of companies in the defense industry.
America’s 50 main defense suppliers consolidated to five. Today, the top six suppliers to the U.S. Department of Defense receive two-thirds of all procurement dollars. To be sure, these six suppliers are not the problem per se. All are vital to national security and must continue to be successful. However, depending on just six companies represents a bottleneck to defense capabilities. Thirty-three years after the U.S. military’s stunning display of military power in the First Gulf War, China commands a force that can rival the U.S. military power in the Indo-Pacific and credibly threatens a forcible seizure of Taiwan — the holy grail for the Chinese Communist Party. And Russia currently is pressing its advantages in Ukraine. This bottleneck, therefore, represents a major danger to the United States and its allies.
Unless Congress and the Defense Department act with alacrity, the preponderance of global military power will shift against America and its allies. Nothing less than the security of the free world is at stake. That is why Congress and the department ought to double procurement spending and require the procurement of items that complement large defense platforms commercially, at scale, and consistently. As a partner at Shield Capital, which invests in technology companies that seek to work with the Defense Department, our portfolio companies could surely benefit from these recommendations, but I’ve been calling for them since I was leading the Defense Innovation Unit because I believe in the mission.
The recommendations I offer here have long lead-times and should be deployed in combination to reverse the shrinking and decaying of the U.S. arsenal. The acquisition chief of the Department of Defense, Bill LaPlante, recently said, “We’re moving past the post-Cold War era and starting to get our industrial capacity up again where it needs to be. It’s not where it needs to be. It’s going to take years to do this. Everybody … is recognizing this.”
Consequences of Defense Consolidation
Consolidation has made the U.S. defense industry less competitive and less able to surge to meet unexpected demand. Suppliers in specific categories have declined dramatically over the three decades since the end of the Cold War: tactical missile suppliers have declined from 13 to three, fixed-wing aircraft suppliers have declined from eight to three, satellite suppliers have declined from eight to four, surface ship suppliers have declined from eight to two, and 90 percent of missiles come from three sources. While there have been many stories in the press about single sources of supply resulting in price gouging, the real threat to national security is not the higher prices the Defense Department pays, but the lack of capacity to rapidly supply what the military would need in a conflict. This is the result of defense primes focusing on more efficient operations, such as just-in-time inventory levels and capacity optimized for low-rate production. Shareholders of defense primes demand a management focus on cash flow enabling stock buybacks instead of investment in new technology or production capacity.
This won’t change without a reliable, annual demand signal from congressional appropriators. This year was no exception as the defense appropriations came six months into the fiscal year. In fact, in the past 47 fiscal years, Congress has only passed a defense budget on time in three of those years. Exacerbating this trend, the Defense Department for many years prior to Ukraine had not forecast an ongoing need for munitions in its budget and instead reallocated spending away from missiles or 155 millimeter shells towards large defense platforms like submarines or fighter jets. With this action, the Defense Department sent a signal to munitions suppliers that there would be little ongoing demand. Experience from the First Gulf War and the Global War on Terror reinforced the belief that military inventories are not depleted quickly and there is time to replenish them during a conflict. In contrast, Ukraine shows future wars are not necessarily short and the outcome may depend more on the production capacity of ordinary items like munitions rather than submarines and fighter jets. In a potential conflict with China, whose manufacturing capacity already exceeds that of the United States in most areas, Washington will not have years to ramp production to make a decisive difference.
Rather than the world being a safer place that justifies a reduction in defense spending described at the Last Supper, the world has become more dangerous and the consolidated supplier base is a constraint rather than a benefit or necessity. In fact, the defense industry is far more consolidated than the average U.S. industry. In defense, the top six suppliers account for 67 percent of defense spending and the top 10 suppliers for 74 percent. Across all U.S. industries, the top eight suppliers represent only 44 percent of the market. In the industry with the most consequential implications for poor performance where America can least afford a lack of choice in offerings, low resiliency, inflexible capacity, and higher prices, defense leadership from three decades ago triggered consolidation that is now approaching twice the average for all U.S. industries.
Need for Increased Defense Procurement
If the U.S. government hopes to expand the supply base, Congress will need to increase defense spending and likely more than it has in the past few years. While the United States has increased its defense spending in nominal dollars more than tenfold from around $100 billion in the 1950s to nearly $1 trillion today, defense spending as a share of GDP has dropped from 15 percent in the 1950s to 3.5 percent today. Within the defense budget, the largest costs are personnel plus spending not typically thought of as defense, since the Department of Defense operates one of the world’s largest real-estate portfolios and one of the nation’s largest healthcare and school systems for military families. The result is that despite a growing defense budget America has a smaller military with older and less equipment than at any time in memory. The average fighter aircraft today is 28 years old — with some F-16s that began flying in the early 1980s and many that will be flying into the 2040s. The U.S. Navy is facing equally daunting challenges maintaining aging fleets.
According to the annual report submitted to Congress from the Navy’s Board of Inspection and Survey,
The cruisers are all closing in on their expected 35-year expected hull lives, and the first 27 Arleigh Burke-class destroyers are not far behind them. Keeping the radars going … has been a particular challenge, as has maintaining the aging engineering plants.
On average, 70 percent of U.S. defense procurement dollars maintain old platforms because the United States keeps these platforms in service beyond their expected lives. This practice may be lucrative business for a few defense suppliers who have locked-in service contracts, but the result lessens the ability to buy more platforms or newer technology.
The Heritage Foundation’s annual assessment of U.S. military strength is sobering and reinforces these points. Five years ago, the assessment concluded that the armed forces were “too small, too old and not ready enough to support a credible two-war battle force.” Unsurprisingly, the 2024 report concludes much the same. Consequently, the “current U.S. military force is at significant risk of not being able to meet the demands of a single major regional conflict.” Bottom line: The United States is not providing a credible deterrent to adversaries.
To upgrade forces and equipment to the level needed to address global threats, defense spending on procurement should be doubling to about $335 billion per year, implying a 20 percent increase in total defense spending. At $1.02 trillion, defense spending would be 3.5 percent of GDP, well less than the 6 percent spent in the Reagan administration years. Eric Lofgren noted another important trend in the defense budget over the past 40 years: An increasing amount of the budget is dedicated to research and development projects for future weapons systems and less to procuring systems for today’s force. In the 1980s, of the spending for research and development and procurement combined, procurement was close to 75 percent. In the current budget, procurement is just over 50 percent of the total. While this increased research budget is important for future capabilities, the shift to lower procurement budgets shortchanges the replenishment and modernization of equipment and is less of a deterrent. This increased spending would go a long way to ensuring the largest suppliers remain healthy companies, to rebuilding America’s defense-industrial base to again become the arsenal of democracy, and to creating a credible deterrent to avoid a potential war with China estimated to cost $10 trillion globally.
Spending on Hedged Capabilities
To once again become the arsenal of democracy requires more than increased spending with the same vendors for the same platforms. Some of the money needs to be spent differently as a hedge to the large defense platforms of Ford-class aircraft carriers and F-35s. China, in particular, has stolen the designs of large U.S. platforms and observed American forces in operations with these platforms for decades. The United States needs to complement these platforms with the digital technologies that are changing the battlefield in a revolution that may have begun in the First Gulf War but has not stopped. The most advanced of these technologies — AI, cyber tools, autonomous systems, satellite data from space — come more from commercial suppliers and less from defense primes. In fact, the current chief technology officer of the Defense Department has identified 14 critical technologies for national security and 11 of these are being developed by commercial companies — not from government labs or defense primes. To illustrate how much progress needs to be made, in 2023, $406 billion of defense contracts were awarded to traditional defense suppliers while only $4 billion were awarded to venture-backed companies, which are most often the sources of digital innovation.
This hedged capability is recognized as a means to provide lower cost, attritable systems — in many cases autonomous systems — which add more mass in theater and also create targeting dilemmas for adversaries, since the force is more resilient and more widely distributed. Likely the best way to quickly change what the U.S. military fields and create credible deterrence would be to provide production orders to commercial companies who can supply more autonomy, satellites, resilient communications, and other digitally based capabilities. Commercial companies can respond to this demand signal quickly — within 2 years — whereas new defense platforms can take 17 years on average to field. We need both new platforms like Columbia-class submarines and commercial capabilities such as maritime autonomy, but only commercial capabilities can increase deterrence in the next two years. Additionally, new manufacturing technologies — robotics, advanced materials, computer-controlled processes, and 3D printing with multiple materials — enable the United States to again be competitive with onshore production.
The chairman of the Defense Subcommittee of the House Appropriations Committee this year called for up to $1 billion more in defense spending specifically on a hedge strategy of complementary capabilities. More recently, the Department of Defense has recognized the need for these capabilities in its Replicator initiative aiming to put thousands of attritable systems in the Indo-Pacific region in the next 18 to 24 months. In fact, leaders in the Indo-Pacific theater, at the Defense Department, and on the Hill are now all calling for these capabilities — promisingly, the newly-released defense budget includes the first demand signal for Replicator at $1 billion.
The Way Forward
The United States became the “arsenal of democracy” after President Franklin Roosevelt foresaw the need to build the defense-industrial base in another very dangerous time.
After winning World War II, the United States maintained superior military technology and production capacity throughout the second half of the 20th century. Much has changed, and not for the better. As I noted, in the decades since, the U.S. technology edge has been blunted and the defense-industrial base suffers from too much concentration, too little use of commercial technology, and too little production capacity.
The United States can once again be the arsenal for democracy, empowering the free nations of the world to chart their paths into the future in the face of authoritarian powers. But this will not be possible without bold and urgent congressional and Defense Department actions.
Commercial technology should be a part of the solution because it can be fielded faster, at greater scale, and from more suppliers than specialized military gear including for U.S. partners and allies. When partners and allies procure the same commercial solutions, these are interoperable when we fight together. Commercial products also mean buying the latest technology for our warfighters since these products iterate rapidly to improve performance, cost, and functionality — especially in software. Additionally, the incentives of increased military demand spurs suppliers to invest in more production capacity and investors to provide more capital to these companies. As observed in non-defense markets, an increased number of suppliers results in more choice, more competitive pricing, more resilient supply chains, and more investment from private capital. More private investment in national security means more solutions for warfighters instead of more dating apps or better ad-targeting.
Recognizing that too few suppliers is a national security threat is the first step to remedying this situation. Additionally, Congress should double defense procurement spending. Third, the Department of Defense should rebuild the existing defense-industrial base and expand it by buying different capabilities — more autonomous and attritable systems that increase the mass on target, provide resiliency, and create confusion for adversary targeting. Fourth, to expand the supply base in a relevant timeframe, the Defense Department should source more commercially. Fifth, Congress should leverage America’s capitalist system to its fullest by providing strong and consistent demand signals with increased multi-year production orders. These actions will attract the best and brightest from innovation hubs across the nation to develop capabilities that warfighters need and make the nation safer.
Today’s consolidated defense industry took 30 years to unfold. Reversing this can be faster but will not be instantaneous. Addressing this threat means acting now since there is a long lead-time to change the structure and capability of defense suppliers. Roosevelt’s words from eight decades ago on the eve of World War II remain as relevant today as they were at that time. “Let not the defeatists tell us that it is too late. It will never be earlier. Tomorrow will be later than today.”
Michael Brown is a partner at Shield Capital and is the former director of the Defense Innovation Unit at the U.S. Department of Defense.
Image: Midjourney
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