Dive Brief:
- The U.S. defense industry is facing obstacles to draw private investment to meet security requirements amid ongoing global threats, according to a study released Monday by the Aerospace Industries Association and global consulting firm Bain & Co.
- “Current acquisition, business, and investment models are increasingly out of step with security requirements,” while demand for systems such as weapons, heavy military equipment and munitions and low-cost capabilities rise, according to an executive summary.
- “Private sector investment is central to solving these challenges,” per the summary. “Expanding production and driving rapid innovation require sustained investment — but key pockets of the defense sector struggle to attract it. It’s not an overall shortage of capital, but a shortage of investable opportunities.”
Dive Insight:
The study identified four funding gaps that AIA and Bain deemed the “most critical.”
- Critical input production
- Technology transitions from prototype to production
- Capacity growth and resilience in sub-tier manufacturing
- Large company research and development and capital expenditure investments
“At the root of these gaps are investments never made because expected returns don’t justify the risk,” according to the summary. “Traditional defense contracting caps profit margins and returns, which makes it hard to invest in higher-risk projects. This misalignment, along with buying friction and demand uncertainty, keeps capital on the sidelines.”
Existing defense investment and business models are inadequate in the new environment, Michael Sion, a partner in Bain’s aerospace and defense practice, said in a statement.
“Private defense investment growth of all kinds is required to address capacity and innovation constraints that are risks to national security,” Sion said. “There is ample capital and pent-up investor interest, but needed funding will flow only when conditions make business cases easier to close.”
While investor interest in the U.S. defense industry has “clearly grown,” Sion said, that interest has to “bridge the gap between risk and return for investments in critical inputs, technology transition, and new production capacity.”
“Closing that gap is what turns today’s momentum into real capability,” he added.
The study identified six priorities to increase private investment to the U.S. defense industry that would make it “more sustainable and deliver better, faster, lower cost capabilities.”
Stakeholders should back clear priorities with funding, the report said. That includes clarified munitions framework agreements, “awards for worthy new entrants that send signals that risk-taking will be rewarded,” and “meaningful new company capacity and R&D commitments.”
Companies should also:
- Offer incentives that align with risk and reward.
- Reduce buying and selling friction, which can deter new investors, raise capital costs and reduce supplier agility. Instead, make greater use of flexible procurement pathways and clarified commercial buying processes. Entities should also speed up operating models to reduce friction.
- Grow market volumes through international sales and dual-use products, which will benefit domestic capacity growth and product affordability.
- Develop flexible sources of capital such as fit-for-purpose fund structures aligned to defense timelines and expanded flows to defense-oriented funds.
The report also recommended that suppliers improve their operations by devoting more time, energy and resources to remedying schedule, quality and cost performance. Additionally, new investors should spend more on manufacturability to increase customer confidence.
The report demonstrates that the U.S. has the money, technology and industrial expertise to meet the moment and deliver the capabilities, Eric Fanning, AIA President and CEO, said in a statement.
“However, continuing to build capacity in the defense industrial base requires long-term, stable public and private investment,” Fanning said. “What we need now is a more predictable environment that rewards performance, reduces unnecessary friction, and enables investment to flow to the areas most critical to national security.”
