The hastened pace of technological change and an increasingly globalized industrial base have upended well-entrenched industries from automobile manufacturers to music studios. Yet seismic change in the new millennium has so far been an anathema to the US defense industry, which may well be on the brink of a transformation that could prove more disruptive than ever.
Twenty-five years after the fall of the Berlin Wall, which drove the last cycle of change that still characterizes the defense industry today, the business and technological environments surrounding the industry have been transformed dramatically. We live in a more interconnected planet where the leading US auto export is a BMW made in South Carolina and China is a leading producer of iPhones. Global workforces operate multinational businesses; technology from around the world is integrated into a single product; international institutions regulate commerce; and we access a single worldwide web to share information.
For all our interconnectedness, and to some extent because of it, we nonetheless face an enormous array of security threats not only from nation-states but individuals, targeting both our physical and cyber assets. Cyber crime and attacks, proliferating weapons of mass destruction, black market arms, sophisticated smuggling methods and a range of capabilities provide unparalleled power and influence to illegitimate regimes, crime syndicates and super-empowered individuals.
This ever-growing range of threats provides a significant challenge to the US and its allies, especially when trying to simultaneously mitigate traditional state-based threats. Yet, despite these converging forces, when it comes to the business of creating defense technology, the US government-industry response to change has been comparatively slow.
Defense industry investment in research and development has not kept pace with commercial investments. The company-funded R&D budgets of the top five US defense contractors combined still would be less than half of what Microsoft or Toyota spends in a single year and would not even put defense on the list of the world’s top 20 industrial R&D spenders.
On the government side, a terribly outdated procurement system has made it difficult for commercial and international technology leaders to pursue US government business, thus reducing competition and making it even harder for the Pentagon to access the world’s best and most cost-effective technology at a time when money is in shorter supply.
The net result is that the Pentagon, which historically had been a technology exporter to the commercial sector of transformational capabilities like GPS and the Internet, has increasingly become an importer of everything from information technology to autonomous vehicles and processes such as 3-D manufacturing.
Clay Christensen, author of “The Innovator’s Dilemma” and a leading expert on “disruptive innovation,” notes that transformational shifts within industries often take root at the lower end of the market. For defense, IEDs and cyberwarfare are relatively low-cost technology disrupters.
Simultaneous disruption typically comes from new market entrants. Space-X, a private space launch company, recently sued the Air Force to force competition in the government’s satellite-launch market, while Google acquired Boston Dynamics, an autonomous vehicle and robotics franchise that grew in part through Defense Advanced Research Projects Agency funding. In fact, one-third of all dollars spent today on defense platforms is provided to these “non-traditional” defense firms.
Creative disruption has an insidious way of creeping up by generating cross-currents of pressure points that chip away at long-established infrastructure. In the past, the US government was able more often to restrict access to large swaths of defense technology but that too has changed. For example, night vision infrared technology, long considered a differentiator for our military, is now widely available for a fraction of the cost on the Internet. Several countries are outpacing US innovation in this field by pressing ahead in the commercial market while US regulations often impede commercial trade.
For similar reasons, Israel has surpassed the US as the world’s largest exporter of unmanned aerial vehicles.
Today, the business of defense is ripe for upheaval. With steep defense budget cuts, the proliferation of disruptive technology and new players chipping away at their market, the US defense industry will soon need to move beyond short-term strategies. Stock buy-backs and large dividends have driven share prices higher, yet they absorb some 80 percent of the industry’s cash resources, while R&D investments decline as a percentage of sales.
At the same time, the government has yet to send a clear signal regarding its most critical technology needs, while continuing to preside over an acquisition system that hinders rather than encourages technology investment.
The Pentagon and the US defense industry share intertwined futures and must assert a more active, collaborative role to shape how defense technology is developed and paid for. When it comes to our defense, the US must harness the power of change to put the world’s best technology, no matter the source, into the hands of our war fighters. ■
Lynn is CEO of Finmeccanica North America and DRS Technologies, and Stavridis is dean of the Fletcher School of Law and Diplomacy at Tufts University. They co-chaired a task force on “Creative Disruption: Technology, Strategy and the Future of the Global Defense Industry” for the Center for a New American Security.