Building A New American Arsenal

MunitionsPrep

Alarm bells are ringing at the Pentagon. The United States is rapidly depleting its munitions stockpiles to support the Ukrainian military. This support comes amid a serious backlog on the  delivery of over $14 billion worth of arms shipments to Taiwan. The war in Ukraine has confirmed what was already widely known: America’s industrial base atrophied following the collapse of the Soviet Union.

Despite efforts to reshore and bolster the manufacturing base, reaching the production capacity needed to replenish stockpiles and prepare for the possibility of full-scale conflict with China remains improbable. The current replacement times for critical inventories average over a staggering 13 years at current production capacity rates. Many of America’s advanced systems are produced on a very small number of assembly lines by an even smaller number of manufacturers. Production requires input from a shrinking labor force with knowledge of these systems, and supply chains are composed of rare earth metals, chips, and obscure mechanical parts from across the world that are very difficult to secure.

This challenge is not new and many have written about America’s ossified industrial base. Solutions range from updating and streamlining regulatory authorities to selling more expensive weapons systems like F-35s to allied nations. However, to begin solving the challenges facing the industrial base, the U.S. government should consider building a new “value arms” market that bolsters the American arsenal with massive quantities of cheap, easily reproducible, and effective weapons systems to create a hedge against current shortages and weaknesses. To accomplish this, the government should establish a special task force that leverages private industry and create new acquisition-management processes for emerging contractors with business models oriented towards the rapid production of inexpensive systems. This would enable the development of a new value arms market sector alongside the major existing defense contractors, boosting production capacities while fortifying against weaknesses.

 

 

A Different Side of the Arms Market 

Value arms make up the portion of the global arms market that is defined by the smaller transaction values of new, more affordable defense systems and refurbished equipment, and is often characterized by dynamic purchasing patterns. While some countries only buy value market equipment, others, including South Korea and the United Arab Emirates, buy high-end fighter aircraft from the United States and shop in the value market for other systems. India, for example, has purchased a number of T-72 and T-90 tanks from Russia, while purchasing advanced aircraft such as the proposed purchase of a F-16 variant — the F-21 — from the United States. Though the value arms market encompasses over 100 countries with varying defense budgets, the United States does not participate as a producer or a customer. 

Why does the United States not participate in the value arms market, especially as incumbents now struggle to fulfill foreign orders as a result of the war in Ukraine and leave a gap in the market? The answer — and opportunity — lies within an understanding of the business models driving the American defense industrial base. 

A Look at the U.S. Defense Primes

America’s major contractors operate with a unique set of cost structures and are plagued with issues stemming from consolidation, labor shortages, and policies that have resulted in the atrophy of surge production capabilities.

Ukraine is firing 6,000 to 7,000 artillery shells per day. U.S. firms produce 15,000 per month. This is a critical shortfall. The same is true for Stinger anti-aircraft shoulder-fired missiles, Javelin anti-tank missiles, and Guided Multiple Launch Rocket System surface-to-surface missiles. American industry cannot keep up with demand. This problem began in the 1990s as decreases in defense spending prompted a series of defense firm mergers, eliminating excess surge production capabilities to cut costs. These firms also began to focus on civilian production, for example General Electric’s pivot to civilian aviation sales. In tandem with changing expectations on Wall Street, this counterintuitively bred a sedentary period where the defense sector’s prime contractors continued to shape a federal contracting system that favored incumbent players building a small number of highly complex systems. These contractors are designed to only operate at peacetime efficiency levels. 

The challenge is that American defense companies are all publicly traded on the New York Stock Exchange and, to an extent, are beholden to public market investor expectations. The traditional Wall Street view of the defense industry is that it should demand lower multiples than the technology industry as it possesses less revenue risk having the Department of Defense as its primary customer. However, with year-over-year variations in the defense budget and high-value transaction fluctuations in the Foreign Military Sales program, revenue volatility can actually be much higher than expected. Given that contract revenue volatility can result in lower margins, the major defense contractors seek alternative methods of revenue stability. To do so, they spread manufacturing facilities across different congressional districts, lobby, and seek longer-term contracts. As businesses, they generate value through revenue, margins, invested capital, and/or competitive advantages. Stabilized revenue generation and high margins are limited by fluctuating policies and budgets while competitive advantages are disrupted by innovative new companies, so the primes utilize their balance sheets and respond with acquisitions and consolidation, further reducing production capacity to save costs. They also create jobs in different U.S. states, thereby creating political incentives to secure government funding and increasing the cost of labor, which simultaneously increases the cost of advanced systems.

This system has remained in place for three decades. It is also still driven by processes set up during the Cold War. American firms — and the Department of Defense — are focused on purchasing expensive and complex systems, which cannot be produced quickly and in large numbers. This approach overlooks the importance of the mass-produced, smaller capabilities that will be needed in a war of attrition.

The current time needed to replace Major Defense Acquisition Program inventories (such as the Stingers, Javelins, and Guided Multiple Launch Rocket System) at surge production rates is an average of 8.4 years, and 13.8 years at peacetime production rates (the current state). Most systems are also produced on a very small number of assembly lines by a very small number of producers, by a similarly small number of workers with the knowledge of how to assemble the systems. For example, 80 percent of Marine Corps and Army vehicle production is done by a single manufacturer on a single assembly line. AMTEC is the only company that makes grenades for the Department of Defense — if they encounter supply chain issues, there are no other suppliers that could fill the shortage.

 

 

Lessons from Iraq and Afghanistan

This is not the first time that the defense industrial base has faced a capacity crisis. However, through acquisitions workarounds and buy-in from top officials, it has managed to emerge out of production ruts before. While the mobilization for Afghanistan and Iraq only required small surges in production in comparison, facing a lack of adequate equipment and tanks to fight in counter-insurgency conditions, the defense industrial base was actually able to increase production rapidly as it re-oriented to produce systems for the new fighting conditions. The Department of Defense established the Joint Improvised Explosive Device Defeat Organization in 2006, which enabled it to turn to industry for critical systems and equipment better suited for combatting insurgent groups. Concurrently, the establishment of the Joint Improvised Explosive Device Defeat Approval and Acquisition Management Process enabled the organization to articulate capability gaps through Broad Agency Announcements and fund and deploy new systems in only a matter of months, instead of years. 

To spur the production of Mine-Resistant Ambush Protected vehicles, which offered more protection from explosive devices, Secretary of Defense Robert Gates established a task force, calling on 12 different firms to produce the vehicles instead of the usual one contractor. The program cut down operational requirements, relied heavily on commercially available products, awarded indefinite delivery, indefinite quantity contracts to nine commercial sources (committing to buy vehicles from each source), and designated the program as the department’s highest priority acquisition. 

Combining existing production lines with new technology from industry, rapid acquisitions processes, and competition, the Mine-Resistant Ambush Protected vehicle program shows that the industrial base, despite its brittleness, can respond quickly to regional threats. The Department of Defense should recognize the success of this non-traditional acquisition strategy and implement it in more programs by reducing requirements, easing regulations, allowing multiple producers, and standardizing production processes.

Herein lies an emerging opportunity for the Department of Defense to take a page from the past, leveraging U.S. industrial mobilization successes during the war in Afghanistan to solve the current shortages and brittleness plaguing the industrial base while projecting influence and bolstering deterrence. 

Building a New American Arsenal

There is little disagreement that the directional arrows of technological progress — not to mention billions of dollars of invested capital in the United States and China — point towards a new type of conflict requiring a multitude of complex offensive and defensive weapons systems. An integrated battlefield will be characterized by autonomous systems, drone swarms, advanced sensor capabilities, and the hypersonic weapons that are on the verge of becoming a reality. However, the reality is that this revolution in technological capabilities designed to make kill chains shorter will likely result in a form of warfare that is slower, harder, and more expensive than ever. Surviving in a technologically complex battlefield will become more and more costly as the integrations of autonomous systems and sensors, supported by electromagnetic umbrellas and decoys, will increase transparency, slow down movements, and require significant capital and system expenditures to overcome.

A recent article in the People’s Liberation Army’s Daily publication noted that cheap unmanned aerial system advancements pose a significant threat to traditional air defenses. Small systems are incredibly difficult to detect with radar and attack using expensive guided munitions or anti-air guns. Advanced systems designed to absorb and process more information than ever before are also prone to making more mistakes, exacerbated by deception and diversion. This is because the underpinning technologies have not quite reached full maturity. These systems, too, are dependent on complex supply chains and will require intensive input from an already weakened industrial base. 

As the war in Ukraine is already indicating, the decisive edge in a war with China over Taiwan may be the ability to quickly manufacture and finance replacements for rapidly consumed arms and systems for U.S. and allied forces. The Department of Defense is starting to come around to this concept. Under Secretary of Defense for Research and Engineering Heidi Shyu recently announced a new Defense Science Board Strategic Task Force focused on exploring low-cost weapons systems.

This task force will have to grapple with a serious challenge: American defense prime contractors are built to operate at peacetime production levels to ensure profitability as defense budgets fluctuate year to year. They maintain their margins not necessarily from the production of new systems, but through providing training and maintenance services for the most expensive ones. In the global market, the prime contractors conduct foreign arms sales and justify high price tags with a strategy called the Total Package Approach, providing training, tech support, and maintenance over the lifetime of a system. This approach generates a significant portion of revenue from such services and makes the systems exceedingly expensive to lose in conflict and replace. 

While Russia draws attention to Eastern Europe, China is readying itself for a new era of industrial warfare, preparing to raise the cost of U.S. intervention over Taiwan to unacceptable levels. Further escalation will likely not come with a warning — existing mobilization capabilities may be all that is available.

The good news: There are innovative, early-stage defense companies waiting in the wings that can rapidly produce lower-cost weapons. Take emerging defense startup Firestorm*, for example — by leveraging 3D printing manufacturing capabilities, they are building unique aerial systems at a fraction of the traditional cost, producing radically affordable and mission-adaptable unmanned systems that can be printed anywhere, assembled, and made ready to fly in a mere matter of days. 

The Department of Defense should support emerging contractors that are already built with the right operating models to support rapid production, advanced and efficient manufacturing techniques, and scalable capacity to design and produce these new systems. By developing and enabling the growth of a new value market consisting of smaller and more nimble producers and systems to complement, not replace, the expensive advanced systems already produced by the primes, the United States can effectively lower the cost of conflict, bolster deterrence, and create a hedge against supply chain disruptions, labor shortages, and capacity constraints — to outlast even the most attritional of adversaries. Looking beyond American borders, these low-cost systems would also be incredibly attractive to U.S. allies such as Israel — and, as the Russians have found, foreign military sales can be used to gain and project influence in critical countries like India and the wider Indo-Pacific region to counter China’s encroachment. 

The establishment of a distinct value arms sector of the U.S. defense industry, positioned as a hedge, could also help to change the “destroy or acquire” culture that persists between the primes and smaller emerging contractors, expanding the market and protecting against points of failure. The emergence of new defense contractor business models that generate value from innovations in manufacturing, efficiency, and scale — rather than sustainment and maintenance — would also make the sector more attractive to venture capital investors who have traditionally avoided the industry, creating a multiplier effect and bolstering the overall industrial base capacity in the United States.

Think of it this way: The U.S. arsenal is like an investment portfolio in desperate need of a risk management strategy. By investing in new manufacturers and companies capable of producing these critical low-cost systems, the Department of Defense can diversify and hedge against the risks of the myriad of problems facing the defense industrial base today — ensuring liquidity, longevity, and material returns on the battlefield. 

 

 

Julia van der Colff is an associate at Decisive Point, a venture capital and advisory firm investing in deep tech innovations for security, health, energy, and infrastructure. She is a graduate of the University of Southern California, where she was a Presidential Scholar.

*Decisive Point has invested in Firestorm through its Venture Capital Fund

Image: U.S. Air Force photo by Senior Airman Jessica Blair