Out with the defense industrial base, in with the defense industrial network

The importance of the commercial industry to modern militaries is clear. Yet, an examination of military assumptions and habits related to the defense industrial base—the group of businesses and organizations that produces the materials a military requires—largely reflects a bygone era where a handful of bespoke defense companies provided military-specific goods and services.⁶ When a software-defined world meets old ways of procuring military goods and services, a military is likely to struggle to develop or acquire the things it needs when it needs them.

While software increasingly underwrites much of what a military does, software alone isn’t all that is needed. Hardware is a necessary complement to software. A modern military should be able to access a wide range of companies, allies, and others who can develop both software and necessary hardware.

To be able to operate in the modern threat environment, militaries should consider reassessing the components of their current defense industrial base. This likely require broadening their outlook regarding potential providers of essential tools and services while simultaneously aligning the commercial interests of a more expansive defense industrial network that can be more inclusive of industry and other stakeholders, like consortiums, inventors, and academia. By undertaking these actions, militaries can not only facilitate the ongoing integration of new or upgraded capabilities within their operations but also bolster their capacity to efficiently produce required resources in a timely manner.

Factors driving militaries to develop defense industrial networks

• Commercial products and services have become increasingly indispensable for military operations, while the number of traditional defense contractors has declined.
• Decisions made by the private sector based solely on commercial considerations now hold national security implications, which is require defense organizations to rethink how they approach industry for products and services.
• The complexities of modern defense challenges often necessitate and provide an opportunity to elevate defense industrial–based interoperability among allied nations.

Fostering a defense industrial network

The Russia-Ukraine war has demonstrated the impact of advanced software (with appropriate hardware) in modern warfare. By harnessing technologies such as commercial satellite imagery, smartphones, and small consumer drones, Ukrainian forces have defended and repelled the initially stronger Russian force. The technology firms responsible for enabling this capability are not always the familiar, large defense contractors but rather tech companies, both big and small.⁷

The growing prowess of software-driven technologies has impacted the requirements of contemporary armed forces, which increasingly strive to incorporate these technologies into their operations. In one example, the US military has embraced a “modular open systems approach,” which is designed to allow systems to be routinely modified and upgraded.⁸ However, often a nation’s existing defense industrial base might be inadequately equipped to fulfill the demands of modern militaries.

Presently, a nation’s industrial base can often be heavily concentrated, with only a relatively few major participants, and this concentration is continuing. For instance, in the US, the number of major aerospace and defense prime contractors has dwindled from 51 in the 1990s to a mere five.⁹ The defense industrial base, dominated by a small number of major players primarily dedicated to fulfilling conventional military requirements, can struggle to effectively prototype and develop a wide range of innovative technologies while meeting existing production demand for fielded capabilities. Additionally, a small defense industrial base can further expose militaries to the risk of being unable to produce the materials when the need arises.

To integrate novel innovations into their operations, militaries should explore transitioning from relying on a limited and exclusive defense industrial base consisting of only a few large defense contractors. Instead, they should foster a broad defense industrial network where military-industrial reliance is spread equally across a diverse range of commercial players, encompassing various types and sizes of businesses. In 2022, Heidi Shyu, the chief technology officer of the US Department of Defense, identified 14 technology areas that are critical to national security.¹⁰ According to Mike Brown, the former director of the US Defense Innovation Unit, the commercial industry is already leading in 11 of those 14 areas.¹¹ Relying on a few defense-specific companies can leave militaries on the sideline of important innovation ecosystems.

By cultivating a defense industrial network, militaries can gain access to an expansive and diverse pool of solution providers. A diverse group is not only important to access new tools or ways of producing them, but also avoiding vendor lock—where militaries are “locked in” to a single company for products and services. This network, comprising innovative commercial companies, can pave the way for the emergence of radical new solutions in pursuit of desired outcomes. For instance, a critical aspect of a successful military campaign is the ability to effectively gather intelligence by intercepting and analyzing adversary communications. Traditionally, this task required numerous analysts investing countless hours in listening and deciphering adversary conversations. However, with the advent of AI-enabled voice recognition software, this process can now be conducted on a much larger scale and at a significantly faster pace. A notable illustration of this occurred during the war in Ukraine, where Primer, an AI company, customized its commercial AI-enabled voice transcription and translation service. By employing this technology, intercepted Russian communications were automatically analyzed, extracting relevant information for Ukrainian forces and creating a searchable text database.¹²

Establishing a broader defense industrial network can enable defense agencies to tap into the inherent economic dynamism of commercial enterprises, which constantly strive to develop increasingly innovative products in response to global consumer demands. Take the space sector as an example. In the past decade, the involvement of private firms has brought significant advancements to the US space program. Instead of designing new space vehicles to transport cargo or astronauts to the International Space Station, NASA adopted a different approach. The agency communicated its needs to the marketplace and accepted proposals from companies that not only designed the spacecraft but also operated them as a service.¹³ The successful outcomes of this collaboration have opened the doors to more joint efforts. Private sector entities now play a crucial role in space station activities. Additionally, private companies are actively working on the development of spacecraft that can facilitate the transportation of astronauts to and from the lunar surface.¹⁴ Similarly, by integrating secure and resilient commercially-developed technology for defense purposes, militaries can also save significant time and costs that might otherwise be spent on years-long development processes for new, military-specific technologies. This approach can help enable militaries to leverage the advancements already achieved in the commercial sector, resulting in accelerated innovation, cost efficiencies, and even better military capabilities outcomes.

While some military resources, like munitions, won’t have commercial demand and thus must be supported by military demand, many other capabilities a military requires, like semiconductors don’t rely on militaries as a prime customer. In the case of the latter, militaries must figure out how to identify who can provide production of necessary products and services. However, militaries finding alternative sources is one part of the equation. Another part lies in the fact that many private companies may not naturally perceive themselves as part of the defense industrial base. They prioritize markets beyond defense and develop technologies driven by global consumer demands.

Consequently, their inclination to proactively collaborate with defense agencies can be limited. Unlike traditional defense contractors, who are subject to significant control by national defense agencies as the sole buyers of their products, private firms that don’t see themselves as part of the defense industrial base tend to operate with little or no need to seek militaries as customers. One consequence of many private sector companies being dissociated with the defense industrial base is that they may not be aware of how their commercial interests align or contrast important national security interests.¹⁵

To be sure, existing defense primes are expected to continue to play an important role. It would be unwise to assume a commercial company will start producing aircraft carriers. But by aligning the commercial interests of the defense industrial network with national security priorities, defense agencies and defense primes can foster a collaborative partnership with a larger number of commercial entities and gain access to more innovative solutions and sources of production.

Aligning the commercial interests of the defense industrial network with national security interests

The growing significance of software-enabled technologies in military operations has given commercial entities greater influence over critical assets that are essential for national security.¹⁶ Defense primes aside, despite private companies becoming crucial enablers of military operations, their decisions often are not driven by national security interests but rather by their own company agendas and incentives, such as improving their bottom line or demonstrating their corporate ethos.¹⁷ Consequently, corporate interests and national security interests can often diverge.

Take, for example, Project Maven, a partnership between Google and the Department of Defense to develop AI technology for analyzing drone surveillance footage. The partnership faced significant internal protests from Google employees who objected to their involvement in creating software specifically intended for military applications. In response to the concerns raised by its staff, Google made the decision to withdraw from the project. Furthermore, the company announced a set of guiding principles for future AI endeavors, explicitly forbidding involvement in weapons and surveillance projects that violate internationally accepted norms.¹⁸

The proliferation of commercial players now acting in the security space means that independent commercial business decisions can have an undue influence on national security.¹⁹ Governments looking to steer behaviors should consider using existing levers and creating new ones to ensure corporate actions align with critical national security interests.

Take semiconductors, for instance. Semiconductors are vital components in a wide range of electronic devices including cars and fighter jets, making their availability crucial for a nation's economic and national security. Up until this point, commercial interests emphasizing cost-effectiveness and efficiency have determined the locations where semiconductor manufacturing takes place. Consequently, this approach has led to a significant concentration of semiconductor production. Companies from Taiwan, the United States, China, and South Korea control a massive 84% of the global market share in assembly, testing, and packaging.²⁰ Moreover, Taiwan and South Korea manufacture nearly all advanced chips.²¹ This concentrated landscape creates vulnerabilities and supply chain bottlenecks, which could leave entire industries and countries susceptible to semiconductor shortages during times of heightened geopolitical tensions or trade disruptions.²²

Countries have come to realize that an effective approach to mitigating the concentration of semiconductor manufacturing is to establish commercial viability for private sector involvement in domestic production. Private sector firms, driven by profitability and shareholder expectations, often require compelling incentives to engage in such endeavors. Consequently, some countries are now directing substantial investments toward bolstering semiconductor production within their own borders. These investments aim to enhance domestic manufacturing capacity, foster scientific R&D initiatives, facilitate workforce development, and offer subsidies and tax credits to entice private sector firms to establish operations within their territories. The CHIPS and Science Act of 2022 provides nearly US$280 billion in new funding to enhance domestic semiconductor research and manufacturing in the United States. The majority, around US$200 billion, is allocated for scientific R&D and commercialization. The Act also includes US$39 billion in subsidies for chip manufacturing within the country and offers 25% investment tax credits for manufacturing equipment costs.²³ Similarly, the European Commission enacted the European Chips Act in 2023, consolidating 43 billion euros in public and private funding for the sector. The Act’s objective is to double the European Union's share of global chip production from 9% to 20% by 2030.²⁴

Aligning industry interests with national security also requires ensuring industry efforts are matched by appropriate return on investments. As discussed in the companion procurement article, Military procurement in a digital age, it can be expensive and time consuming to be a defense supplier. When it doesn’t make business sense to provide militaries with solutions, companies may not choose to be a part of a defense industrial network.

Leverage the defense industrial network to fill capacity gaps

During times of conflict, there is often a sudden surge in demand for a wide range of military equipment, ranging from helmets to guided missiles. However, a country’s defense industrial base may be ill-prepared to effectively manage the high variability of demand in such circumstances. For example, the increased production of weapons like Javelins, Stingers, and High Mobility Artillery Rocket Systems (HIMARS) to aid Ukraine in defending against the Russian invasion has placed strain on the US defense supply lines.²⁵ Providing assistance to an ally in a war that is thousands of miles away can lead to challenges in defense production. Wartime production would place even greater strain on a defense industrial base.

Developing a defense industrial network and reshaping incentives to proactively work with national militaries can not only help enhance the ability of the military to deploy novel technologies but also do so more rapidly.

A defense industrial network consisting of an extensive network of firms already familiar with military production can be mobilized swiftly to ramp up the manufacturing of both dual-use and military-specific equipment. While commercial firms may not have the capabilities to produce entire military-specific equipment, such as anti-tank systems, they likely can help in other ways. For example, during the COVID-19 pandemic, when ventilators were in short supply, car manufacturers and other companies that didn’t normally produce ventilators adjusted production to help produce more.²⁶ Important to accessing a greater network of technology and production solutions is being able to communicate military needs broadly and have the processes in place to quickly access less familiar industry partners who can step in to help. By leveraging a multitude of defense partners specializing in various equipment components, militaries can have more options to rapidly scale up defense manufacturing during periods of heightened demand.

However, even if nations can create a robust defense industrial network, they are still constrained by geographical and technical limitations. No single country can control the development and adoption of all new technologies. With commercial technologies finding increasing applications in military contexts, many militaries are becoming increasingly reliant on commercially driven advancements that transcend national borders.

Collaborating with allies who share similar values and goals can enable nations to tap into the innovative advancements taking place in the commercial sectors of other countries. Moreover, the magnitude and complexity of modern defense challenges have surpassed the capacity of any individual nation to address in isolation.²⁷ Nations should leverage this need for collective action to help establish transnational collaborations with trusted allies that provide mutual access to the innovation taking place in their partner nations’ commercial industries.

Collaborations of this nature can not only enable nations to access innovation and reduce per-unit costs, but also provide an opportunity to leverage the surplus defense industrial capacity of their allies. When engaging in transnational defense-focused collaborations, it is important to identify areas where each ally possesses excess defense industrial capacity and the agreed means to utilize it effectively. By doing so, nations can address their own defense capacity shortages while simultaneously enhancing the collective defense industrial capacity of the allied nations involved.

For example, in 2022, the US Navy leveraged India's industrial capacity by conducting ship maintenance at private Indian shipyards.²⁸ Furthermore, the US Navy is presently considering the use of Japan's private shipyards to address maintenance, repair, and overhaul requirements for its warships, with the goal of reducing service backlogs in its own facilities.²⁹ Concurrently, Japan has unveiled a new strategy to align the standards of its domestically produced defense equipment with those of its allies. This initiative aims to achieve two main objectives: reducing maintenance costs and creating more business prospects for Japanese defense companies. Furthermore, this strategy is expected to enhance the Japanese army's operational continuity by mitigating situations where equipment mobility is hindered by parts shortages.³⁰ In both of these cases, India and Japan demonstrated understanding of both strategic policy and economic benefit by expanding defense industrial network supports.

The above-mentioned Japanese effort to harmonize the standards of its domestically produced defense equipment with those of its allies is not an isolated case. In today's complex security landscape, achieving interoperability in defense manufacturing has become imperative. A case in point is Ukraine. Kyiv is consuming artillery shells at a rate much higher than the West's normal steady-state production capacity.³¹ Recognizing the urgency of this issue, the North Atlantic Treaty Organization (NATO) unveiled a Defense Production Action Plan in 2023. This plan takes a proactive approach to enhance interoperability by establishing uniform standards for weapons and ammunition production.³² By doing so, NATO aims to improve the effectiveness of allied defense production.

Defense collaboration with allies and partners across geographical boundaries can inculcate agility and resiliency within defense manufacturing. By leveraging a vast defense industrial network inclusive of international partners, each with their unique manufacturing capacities and supply chains, nations can more quickly scale up their defense production in times of conflict. Moreover, this wide network of international partners can also provide multiple alternative pathways for obtaining armaments, helping mitigate the risk of an adversary choking critical supply lines.

Moving forward

The long-term sustainability of a defense industrial network relies, in part, on two crucial factors: the capability of defense agencies to communicate their requirements and understand the priorities of a decentralized and expansive network, and the ability to ensure that the corporate and economic interests of the defense industrial network remain aligned with working alongside the military.

As militaries transition toward establishing a defense industrial network, the following steps could aid in achieving long-term viability.

• Develop bridgebuilders that can span both worlds. Militaries and industries possess distinct interests, operate in different environments, and communicate using different terminology. To bridge the gap between these two sectors, consider developing organizations and identifying leaders who possess a strong understanding of both domains and can act as bridgebuilders. These organizations and leaders should comprehend the nuances of the diverse interests held by the military and industry and effectively translate the needs and priorities of each sector to facilitate collaboration between them.³³ These bridgebuilders can come from industry or government.
• Link serving national interest to corporate success. While businesses continue to prioritize profits, there is a growing recognition of the importance of social responsibility. This increasing sense of purpose among businesses to make meaningful contributions to society presents an opportunity for defense agencies to strengthen their collaboration with commercial entities. Defense agencies could partner with national corporate affairs departments to include the pursuit of national security goals as one of the ways in which businesses can fulfill their social responsibilities. Doing so can incentivize commercial entities to establish long-term working relationships with militaries, fostering a sense of shared commitment and mutual benefit.
• Drill with the defense industrial network to build demonstrated surge capability. The expanding defense industrial network possesses diverse and extensive manufacturing capabilities. To help facilitate the network's manufacturing potential to effectively fulfill military requirements, particularly during periods of increased demand, defense agencies should consider regularly conduct scenario testing. These tests should meticulously evaluate the performance of the defense industrial network across various intricate aspects. The exercises should simulate hypothetical crisis scenarios and thoroughly examine the end-to-end capabilities of the defense industrial network, encompassing design generation, design review, supplier production, and supplier distribution. These efforts can serve to inform and keep current forecasts, arrangements, and underpinning resources with defense industry network suppliers.