Pentagon intervention may not quickly fix supply chain risks
The Pentagon is taking a more aggressive role in shaping and financing the defense industrial base, but industry experts say entrenched supply-chain problems could take years to fix, leaving programs vulnerable to bottlenecks even as Washington pours billions of dollars into expanding production.
The issue was a topic of discussion at an Aerospace Corp. space policy forum last week, where panelists said some of the toughest constraints sit several layers below the big defense contractors, among smaller manufacturers that may lack the capital, equipment or firm orders needed to expand before demand arrives. They said the Golden Dome missile defense initiative could provide an early test of whether a more interventionist approach can work.
David Rader, a Hudson Institute senior fellow who previously worked in the Pentagon’s Economic Defense Unit and at the Defense Innovation Unit, said the government has been looking beyond the companies expected to receive Golden Dome contracts to understand whether their supplier networks can support the anticipated buildup.
“We’ve worked very closely with Gen. [Michael] Guetlein and his team saying, ‘Who are you going to give the money to?’” Rader said. “They say, ‘All these guys.’ We say, ‘Great. I need to figure out your entire vertical below you.’”
Rader described companies telling officials they would ramp production once Golden Dome funding began flowing. His response: “When do you get your [Computer Numerical Control machine] that’s got a three-year delay? ... Okay, guys, like we got to pull this to the left.”
Push to rebuild missile inventories
In recent weeks the Defense Department has signed seven-year agreements intended to triple production of Patriot PAC-3 MSE interceptors and quadruple THAAD output, while striking separate deals with L3Harris and Northrop Grumman to expand production of rocket motors and other critical components.
Those agreements are designed to provide suppliers with the long-term demand signals needed to invest in facilities, equipment and workforce. But Rader argued that even sustained procurement commitments may not solve constraints deeper in the supply chain quickly enough.
“That’s where we’re thinking about government intervention,” he said, pointing to lower-tier suppliers that have not yet seen the “cash pass-through” from larger contractors.
Washington is supplementing traditional procurement contracts with loans, grants, equity investments and programs designed to draw private capital toward companies and production capacity deemed strategically important. “Debt is an amazing tool,” Rader said. “But it doesn’t solve all the problems in industry. Equity is an amazing tool; it doesn’t solve all the problems.”
He said the goal is to combine those mechanisms with grants and contracts depending on the particular bottleneck. “We have the best capital markets in the world. It’s actually our superpower,” he said, but that capital “is not yet making its way to companies” in some parts of the industrial base.
Beyond the Pentagon
Joshua Carter, associate administrator of the Small Business Administration, said SBA is trying to work with smaller suppliers that may need relatively modest investments to substantially increase output.
“We’re looking at these companies that are tier five, tier six, like small suppliers, where we’re going to be able to get in and help them buy a machine that can double their production,” Carter said.
SBA is using its Small Business Investment Company program to encourage private investment in government priorities, Carter said. Under a new partnership with NASA, investment funds can receive low cost SBA-backed leverage if they commit at least 60% of their capital to NASA-identified technology and supply chain priorities, including launch infrastructure, communications systems, specialized components and propulsion.
The model is intended to mobilize private money rather than replace it. Carter said SBA provides financing to investment funds and gives them incentives to put capital into priority industries while leaving individual investment decisions to private managers.
Interventionist industrial policy
“In theory, we are supposed to be the guys who hate government intervention in the marketplace,” Rader said.
But he also argued that the shift transcends administrations, adding that he saw “almost perfect continuity” between the Biden administration’s creation of the Office of Strategic Capital and the Trump administration’s expansion of the government’s industrial-finance toolkit.
“The industrial base, specifically the space industrial base, has a long way to grow and catch up to where we need it to be,” he said. “We’re in a new era of this,” one he predicted would continue across multiple administrations.
William Henagan, a research fellow at the Council on Foreign Relations, similarly described the broader use of government finance for industrial policy as increasingly bipartisan. The Biden administration tended toward sector-wide interventions, he said, while the Trump administration has taken a more company-specific approach.
“This is probably the new reality that we’re living with from a government intervention standpoint,” Henagan said, particularly within the defense industrial base.
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