DOD's new industrial strategy points to the future of national security

The National Defense Industrial Strategy, introduced by the Defense Department in January, represents a major step in the right direction for U.S. national security.

In addition to creating a roadmap to a more resilient and innovative supply chain, it encourages new and non-traditional companies and sources of capital to drive innovation critical to the national defense. As an investor in aerospace and national security, AE Industrial believes private capital will play a pivotal role in supporting the companies that will provide the next generation of critical materials, capabilities and capacity.

As the NDIS outlines, the U.S. national security industrial base stands at a crossroads. Over the past several decades, we have become dependent on foreign suppliers to provide critical components and materials. We learned from COVID that important links in our supply chain have been sent overseas (often to unreliable locations), that they are very fragile – with limited suppliers in the U.S. – and that we may not have assured access for critical items at a time of need. Given the current threat environment, from Ukraine to the Middle East to the South China Sea, the time is now to invest in our domestic national security supplier base.

While legacy defense primes continue to be important stakeholders and partners to DOD, we believe that new entrants, partnered with both private capital and the defense primes, can accelerate technology innovation, agile production, and more resilient infrastructure. We commend the self-awareness of the NDIS authors to also note that the DOD has not leveraged commercial technologies enough, instead relying on highly customized products, which has resulted in spiraling costs and a lack of adaptability.

Looking to Space as an Example

To meet this challenge head-on, we need to incentivize new commercial companies and players who may not have traditionally participated in the defense industrial base to come into the market. We must also encourage incumbents to change the way they think about their business models, how they invest in research and development and how they structure their supply chains.

Excitingly, it appears that national security has never been more open to new entrants, innovators and start-ups. If DOD needs a model for this critical transition, it need not look any further than the Space Development Agency, which has brought in new entrants through a radical overhaul in architecture and acquisition. AE Industrial’s portfolio company York Space Systems is a part of that paradigm shift to commercial, cost-effective and rapidly scalable technologies rather than highly customized systems.

The SDA has also re-thought its approach to acquiring satellites, moving from a “cost-plus” mentality that focused on highly specialized missions to a commercial fixed price approach. York has been able to win and deliver solutions to the SDA at a fraction of the cost of legacy and competitor products.

Even as the SDA has opened up opportunities to new players, it has continued to award contracts to larger companies while challenging them to think differently about how they manufacture satellites, how they bid on fixed price programs and how they intend to scale production. The competition from less seasoned but – in many cases – nimbler competitors, has resulted in everyone raising their game.

An Opportunity for Private Capital

While the NDIS places a strong emphasis on lowering barriers to entry and getting more non-traditional contractors involved, those companies wishing to take advantage still face hurdles to entry. Chief among these is gaining access to the capital necessary to produce quality products and materials at scale and investing in research and development, as well as the ability to identify, train and retain talented engineers in an intensely competitive labor market.

Another challenge is the ability to tap relationships and make the right connections. These are all areas where the private capital industry is well positioned to play a role – helping fuel innovation, ramp up production and capitalize on growth opportunities.

DOD must broaden its focus to include innovators and problem-solvers who can inject agility, cutting-edge technologies, and fresh perspectives. Investors in the national security sector can help these companies navigate through regulations and acquisition hurdles, making sure they can seamlessly fit within existing operating systems and ensuring they never compromise on security.

The next generation of defense companies the NDIS envisions has a lot of advantages to bring to the table that should help push incumbents in a more entrepreneurial direction. This includes agile processes, automated manufacturing, an ability to scale quickly, and a “fail fast” mentality.

In the end, Americans should be heartened by the NDIS report. It is a clear-eyed, comprehensive look at the many challenges we face, and how we can reinvigorate our national security industrial base and innovation. AE Industrial expects to accelerate our investments in national security innovation and support domestic manufacturing to stand up to future threats and deter U.S. adversaries.

Kirk Konert is a managing partner at AE Industrial Partners.