Originally published in Expeditions with Marine Corps University Press, 1 August 2024.
Abstract: Twice in the twentieth century—during World War II and the Cold War—the United States developed highly impactful industrial policies to support the scale-up of an innovative defense industrial base. The United States now faces a situation in which comprehensive and consequential industrial policy is once again needed to support its national security requirements. The 2022 Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act provides a recent model for the kind of industrial policy that the U.S. government can implement when it adopts a no-holds-barred approach to improving national competitiveness in a critical industry. However, the majority of the significant military capabilities used by the U.S. Department of Defense today—and for the foreseeable future—are supplied by a few large defense contractors. These contractors have demonstrated a mastery of large-scale systems integration and manufacturing, an activity that is beyond the scope of smaller firms that excel in the development of innovative technologies. Both the major defense contractors and newer, technology-oriented firms such as Anduril Industries, Leidos, and Palantir Technologies currently lack the available markets or funding that would permit the kind of aggressive approach to improving competitiveness that the United States has applied to semiconductors. Supporting these firms in a more substantial way would require the United States to selectively broaden and deepen its industrial policy efforts and become more organizationally skilled in implementing support of its most critical capability suppliers.
INTRODUCTION
During the summer of 2023, two calls to action illustrated the challenges facing the U.S. Department of Defense (DOD) in dealing with technological innovation. The outgoing chairman of the Joint Chiefs of Staff, U.S. Army general Mark A. Milley, expressed the view that “we are witnessing an unprecedented fundamental change in the character of war, and our window of opportunity to ensure that we maintain an enduring competitive advantage is closing.”[1] General Milley called for major changes in how the DOD manages capability development and how new technologies are incorporated into military forces.
At about the same time, entrepreneur and Defense Innovation Board chair Michael R. Bloomberg expressed frustration about the challenges faced by industry in working with the DOD. While supportive of recent changes such as expanded funding for innovative technologies with potential military applications, Bloomberg felt that DOD officials should have much more flexibility and authority to move promising projects forward. He also expressed the view that allowing—and supporting—greater risk-taking and occasional failure in technology adoption would make the DOD a better place to work, attracting in-house talent. Finally, Bloomberg suggested that “the more our military can ‘fail fast’ in the Pentagon, the more we can succeed on the battlefield.”[2]
Both General Milley and Bloomberg recognized the link between innovation and military superiority. While this connection has been demonstrated repeatedly throughout history, for the United States it is World War II and the Cold War that stand out as two moments when the country scaled-up innovative defense industrial bases to win against determined competitors. However, a key observation has been lost in many assessments of where the United States stands today: the crucial role of industrial policy to support innovation and scale-up of the industrial base. In the United States today, only the semiconductor industry is receiving the no-holds-barred approach to industrial policy that reflects the competitive challenges of the moment. Indeed, the 2022 CHIPS and Science Act and associated actions taken by the U.S. executive branch provide a model for industrial policy that causes one to wonder what other domains should be the focus of U.S. industrial policy.[3]
What if the United States were to treat industrial policy support for the U.S. Navy’s submarine maintenance and shipbuilding programs or the U.S. Air Force’s aircraft production and maintenance programs with this same vigor? What about targeted industrial policy to support all the Services’ needs to reconstitute the munitions and missile manufacturing base, collectively laboring—as they are—with supply shortages of critical materials leading to years-long delays?
The reality is that the majority of the significant military capabilities used by the U.S. Service branches today—and for the foreseeable future—are supplied by a few large defense contractors. These contractors have demonstrated a mastery of large-scale systems integration and manufacturing, an activity that is beyond the scope of smaller firms that excel at the development of innovative technologies.
That said, these major defense contractors, as well as newer, technology-oriented firms such as Anduril, Leidos, and Palantir, currently lack the available markets or funding that would permit the kind of aggressive approach to improving competitiveness that the United States has applied to semiconductors. This article examines this issue and suggests that supporting these sectors in a more substantial way would require the United States to selectively broaden and deepen its industrial policy efforts. Importantly, the DOD must become more organizationally skilled at being a knowledgeable client that can effectively support and manage the industrial base. In that context, U.S. president Joseph R. “Joe” Biden Jr. stated in July 2024 during a North Atlantic Treaty Organization (NATO) summit that “we need a new industrial policy in the West. It came as a surprise to some of us how we had fallen behind.”[4]
Until quite recently, industrial policy has been considered a dirty word in some U.S. policy circles, but now it is most definitely back in vogue.[5] Christian H. M. Ketels defines industrial policy as “all economic policies with an industry-specific impact” and remarks that, despite a long history of the United States denying that it uses industrial policy, it “clearly engages in policies that are targeted at specific industries.”[6] Linda Weiss suggests that U.S. industrial policy has actually been very transparent and not hidden at all.[7] The U.S. national security apparatus has selectively implemented industrial policies to meet the nation’s strategic objectives.[8] The pursuit of these security objectives led to massive support for specific industries during World War II and the Cold War and, in both cases, resulted in a dual-use dividend of U.S. dominance of economically significant industries as a side effect. The U.S. commercial aerospace industry is a good example of this phenomenon.
The roadmap for the rest of this article is as follows. The next section takes the CHIPS and Science Act as a model for what is possible when the U.S. government gets serious about industrial policy in support of a sector with very significant national security implications. The following section examines some of the issues in how defense innovation and manufacturing are currently managed and suggests applying the same no-holds-barred approach to improving competitiveness of the major defense contractor ecosystem and newer technology-oriented firms. The closing section provides some suggested takeaways, the most important of which is that the United States now faces a situation where comprehensive and consequential industrial policy is once again needed to support its national security requirements.
INDUSTRIAL POLICY FOR SEMICONDUCTORS
The CHIPS and Science Act is a large-scale implementation of industrial policy that is motivated by national security and may be a model that could be applied to other industries. Traditionally, direct government funding to manufacturers on this scale has been limited to major weapon systems (MWS) such as the Lockheed Martin F-35 Lightning II Joint Strike Fighter. MWS are produced by defense prime contractors led by the “Big Six”: BAE Systems, Boeing, General Dynamics, Lockheed Martin, Northrop Grumman, and RTX. In contrast, semiconductors are an example of dual-use technology (DUT) in which products developed for the commercial market are also vital for defense purposes. ...
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