In what is the third and final article our “turmoil series”, we focus on the potentially radical impact of changes taking place within the US Department of Defense since the inauguration of the Trump administration against the backdrop of current events. Suffice it to say that if the reader has considered our first two blogs in this series, then we are anticipating transformations on a parallel scale to those we have previously identified. (You can read part 1 here, and part 2 here)
To the new reader, we would cite one very respected member of the defense community in saying these significant upheavals will be to the military ecosystem, what the Enlightenment was to Europe’s Middle Ages; break, disjuncture and new, potentially revolutionary orthodoxies setting free pent-up energies, individual creativeness and collective inventiveness. At the time of writing, these changes are being both underscored and energized by tensions in the Far East and ongoing conflicts in Europe and the Middle East; the latter facing potentially serious escalation.
Initial ambitions of the Administration translated into a number of strands, including a crack-down on the use of consultants (to be replaced by developing in-house competences), an 8 percent reduction in the civilian workforce, and a structured, iterative program to identify ill-defined projects and eliminate waste. What may prove to be tectonic, however, is the intended abandonment of the monolithic approach in which a single buyer—the DOD—substantially controls the market as the major purchaser of military hardware and software from a very small number of companies, largely or wholly producing for this sector, to the status quo ante in which the ecosystem was supplied by a much larger number of companies. Companies where defense marked perhaps around 20-40 per cent of total revenue of each of these corporations, not 60 to 90 percent as is true today.
This may take years to implement, but the positive outcomes are hard to over-estimate. The key benefits of this earlier model were cheaper and more efficient R&D pipelines, quicker development of new systems, less dependency, greater competition, the infusion of commercial thinking into today's unduly complex and sclerotic procurement mechanisms, will provide greater opportunities for cutting edge SMEs to enhance the overall level of military capabilities and effectiveness, and finally, the ability to buy commercial devices off the shelf rather than reinvent the wheel. Aligned together, the collective impact of this return to earlier model will give impetuous to the speed and positive nature of future change.
The latter cannot be separated from the wider ethos now driving decision-making in the Trump Administration as a whole, the default that immediately halts questionable expenditure, seeks to reduce civil service workforce (especially the number of civilians working in the military), ends periphery projects based on ideology, and, finally, demands critical data from senior management that allows for informed decisions to be made within a very short period of time, often within two weeks.
Simultaneously, with input from figures like Elon Musk, there is growing conviction that new defense systems cannot be effectively dictated monolithically, but must emerge from multiple competing companies working only within the constraints of inter-operability. Again, this is exactly the picture that is now playing out in the most recent DOD contracts.
A further, and inextricably significant strand, relates to a series of very substantial set of defense deals signed on President Trump’s recent tour of the Middle East netting several hundred billions of dollars in orders for over a dozen US defense contractors, itself indicative of a less than subtle move towards escalating global rearmament, and part of a much larger package of investment intended to re-industrialize, or re-shore, areas of manufacturing critical to US security, a theme developed in the next paragraph.
Anyone familiar with the first two blogs in this series will have realized how this defense shift more widely coheres with the Administration’s trade policy, which, while embracing clear fiscal elements (reduce the deficit and end third countries’ unfair practices), is also designed to urgently re-shore industrial manufacturing. From semiconductors to pharmaceuticals to defense, overseas corporations and sovereign wealth funds have, over the past six months announced (literally) trillions of investment dollars either to expand their US capabilities, or invest in new industrial infrastructures.
In military terms this would allow for local replacement of munitions and equipment. That being said, America simultaneously needs to create an environment where working within the defense sector is appealing and can attract new commercial interest. Only in this way can hitherto compartmentalized and sclerotic practices give way to the more holistic and efficient.
For example, a great window into historical DOD mindsets is revealed in the fact that the latter overestimated the cost of developing SpaceX by a factor of 10. On the basis that efficiency and innovation are two sides of the same coin, the level of potential advantage coming from radical change are clear.
Figure 1. Most recent 100 DOD Contracts of less than $100 million. Breakdown by Sector.
Another swift change shift pertains to short and medium-term budgetary expenditure, moving from capital-hardware to software. As the reader will anticipate, much of this is due to the priority to developing generative AI, but increasingly so, this also includes the development of broad range of software allowing existing hardware to be used to much greater advantage—critically so, in an age where the US in no longer militarily peerless. Our review of recent DOD contract awards of less than $100 million reveals the breakdown shown in Figure 1. These are the number of contracts awarded, not dollar values. Contracts of more than $100 million show a very similar breakdown.
Figure 2. Most recent 100 DOD by Value. Breakdown by Sector.
Notwithstanding, and despite the fact that the US leads the world in the development of military software, the increased advantage it lends to current generation hardware will only last so long. New generations of hardware will be required and new development paradigms to go along with them. At least one analyst has conjectured that the F-57 may be the last fighter-jet that is not capable of autonomous flight. Speaking of autonomy, this also is unambiguously the future of warfare, machines fighting machines all guided by AI. The ability of middle ranking powers to use drones to great effectiveness provides an important illustration of this point. That the US is determined to play catchup in this area is shown in Figure 2. Take out what maybe argued to represent an anomaly in terms of the Starshield project and defense investment seems fairly evenly divided between the three major categories of software, drones and other autonomous systems, and more traditional but highly advanced military hardware.
Continuing on the theme of AI, while its advantageous use in warfare is almost axiomatic, an equally significant if not greater impact flows from the DOD’s intent to make the procurement process itself subject to artificial intelligence. This may yield the most far-reaching set of changes of any we have noted thus far.
Another defense shift is the critical reorientation away from the European theater to the Pacific Asia region, and as we are now very much aware, the Middle East. In these two regions the emphasis is on the development of a significantly more robust deterrence. This is not only expensive, but as Europe is de-prioritized it will produce cuts in the army budget—perhaps as much as $70 billion. This means, for example, that ground vehicle and aviation modernization and procurement programs will be shelved in favor of unleashing new US Navy and the Air Force capabilities in the India-Pacific region. This clearly impacts more traditional defense contractors.
The reader will quickly deduce that should these and other trends pan out, the impact on the current defense market has the potential to be significant. Those who cannot follow these changes will clearly lose out. Budget cuts, budget shifts and increased competition are most likely to hit historic defense sub-contractors, together with their suppliers. Recent DOD funding decisions are increasingly reaching into diverse areas, such as Pryzm, who received $2 million to help defense startups land more government contracts, to otherwise fully commercial companies such as SpaceX who—as noted above—were recently awarded $10 billion.
On current trajectories the result of such decisions will be significant upheaval across the ecosystem that will require, to quote one analyst, “some novel mental states” to navigate the “messy potentials” outlined, and aggressively exploit the new opportunities this planned chaos represents. Investment and technical advance is also deeply challenging; commercialization means more competition, companies facing off with similar products, novel solutions and potentially swift redundancy to “orthodox” solutions, not to mention the threat represented by almost infinite chiplet flexibility.
Palomar’s Advanced Solutions Division in California—and the significant expansion of our Singapore facilities—was born of our determination to help our customers swiftly flip these challenges into opportunities.
In particular, we are increasingly working with companies aligned to the critical technologies of autonomy, AI, quantum devices, and qubit computing—and the raft of tailored and or advanced packaging technologies these require to create the necessary packages. In this we build upon both historical and current projects serving photonics, RF and other applications in telecom and datacom, 5G infrastructure, 6G technologies, sensors in smartphone, automotive, aerospace and military applications. Looking to the future, we anticipate Administration’s policies will result in an expanded and re-invigorated industrial base that will further sustain and exploit these technologies, as the latter themselves go through rapid and swift iteration with the adoption of chiplet and hybrid packaging.
That being said, many critical areas of military and indeed non-military technical development are far more mundane, less headline grabbing yet equally inventive, challenging and necessary to America’s future security. If the reader is working in or towards any of these areas, we exist to help, support and deliver your contribution to ensuring a safer world, not to mention our customer’s continued relevance and competitiveness. Please contact ASD direct for a swift answer to any interest you may have or support you may need. We like to think that no job is too small, and no challenge is too big. Remember, we love to talk.
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Dr. Anthony O'Sullivan
Strategic Market Research Specialist
Palomar Technologies, Inc.