Why defence production is struggling to keep pace

Short-term contracts and fragile supply chains are constraining America’s military readiness in an era of wider strategic competition

America is spending heavily on defence, yet the industrial base behind it remains one built for a slower era. Recent conflicts have changed the face of war: even short, intense fighting has drained stockpiles of advanced weapons, from Patriot interceptors to long-range missiles, exposing how slowly they can be replaced.

The problem is not a lack of money, but a defence system unable to expand quickly enough. That reflects a deeper mismatch: defence companies invest in contracts, not headline budgets. Without long-term demand, factories are not built, workers are not hired and supply chains do not expand.

Vulnerabilities in the defence industrial base extend far beyond the large contractors to smaller suppliers deeper in the industrial chain. The system needs a revived workforce, faster permitting for new facilities, and, in time, critical mineral supply chains that are less exposed to geopolitical disruption.

Russia’s invasion of Ukraine and conflicts in the Middle East have intensified pressure on America and its partners to expand military production. But much of that demand remains short-term, leaving companies unsure whether it will last.

For decades policymakers relied on global markets and existing suppliers to deliver military capability. But that model is increasingly under strain. American systems still dominate the battlefield: aircraft and missiles still strike with precision, and air-defence systems shield allies from retaliation. But supplies of these costly weapons have fallen rapidly even during short conflicts, raising doubts about whether production could keep pace in a larger-scale war over a longer timeframe.

“We don’t have an industrial base that can replenish munitions stocks quickly and on demand,” says Stephen Hadley, national security adviser during George W. Bush’s second term.

Cheap drones have changed the economics of war. Unmanned systems costing thousands of dollars can destroy tanks or even ships that cost millions to build. Iran’s disruption of shipping in the Strait of Hormuz has also exposed vulnerabilities in U.S. naval power at a time when China’s navy now fields more battle-force ships than America’s.

“We don’t have an industrial base that can replenish munitions stocks quickly and on demand.”

Stephen Hadley, former US national security adviser

Contracts not budgets

Investment will depend on credible long-term contracts that give defence companies confidence to grow. That points to a deeper structural problem. Companies invest over decades, whereas Congress still funds much of the defence budget one year at a time.

“It’s not just about money: this year's budget cannot buy this year's capacity,” points out Chris Power, founder of Hadrian, a company that builds automated factories for defence production. “By the time appropriations land, the machines and the people trained to use them either exist or they don’t.”

Defence spending has long enjoyed bipartisan support in Congress. That could be threatened by the prevailing narrow divide between two increasingly polarised parties. The pressure is compounded as Washington’s fiscal space is squeezed by soaring entitlement payments and debt service.

“If we need to move into a world of higher defence spending, there are some very tough choices around how to finance that,” says Michael Cembalest, chairman of market and investment strategy at J.P. Morgan Asset Management.

Efforts are under way to mobilise more capital into manufacturing and supply chains. One such effort is JPMorganChase’s Security and Resiliency Initiative, a US$1.5trn programme to finance and invest in industries that are critical to economic security and industrial resilience.

Fixing the defence system will require policy shifts beyond the Pentagon. Workforce shortages have become a constraint across defence manufacturing, from shipyards to munitions plants. Among the proposed solutions is attracting workers without university degrees into industrial trades. Mr Power at Hadrian suggests subsidising the first year’s salary for new hires in defence industries while they learn their trade.

“It’s not just about money: this year's budget cannot buy this year's capacity.”

Chris Power, founder of Hadrian, a company that builds automated factories for defence production

Rethinking procurement

The deeper challenge is whether institutions designed for a slower era of methodical military planning and procurement can adapt to a form of warfare that evolves at Silicon Valley speed.

Policymakers are beginning to rethink how defence systems are bought and built. One idea under discussion is a two-track system: one track for long-term, complex systems built for perfection, the other for cheaper systems designed for rapid deployment and progressive improvement as they are used. The latter would require a “less prescription, more mission” model: setting goals and costs, but allowing firms greater flexibility in how they meet them.

“We should be less exclusively focused on the most exquisite capabilities and more focused on creating incentives for the national security community to scale the capabilities needed for the age of precise mass in war,” argues Michael Horowitz, a former Pentagon official.

The United States has faced more daunting military challenges before, notes JPMorganChase’s chairman and CEO, Jamie Dimon. In 1939 it had little military industry; by 1944 it was producing 100,000 aircraft a year.

Rebuilding that capacity is a test of political will and industrial co-ordination; capability is not the point at issue.

“We need industrial policy,” says Mr Dimon. “We cannot succeed without it.”

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