February 7, 2024

7 Lessons from the National Defense Industrial Strategy (NDIS)


The NDIS was published by the US DoD on January 11th as the first of its kind. It posits a four-pronged set of policy objectives, which are: 1) resilient supply chains, 2) workforce readiness, 3) flexible acquisition, and 4) economic deterrence. The existence and contents of the 60-page document mark yet another in the growing list of sobering departures from the 30-year unipolar intermezzo in geopolitics. Russia’s full invasion of Ukraine in February 2022 marked the definitive end of that unipolar moment. Autumn of that same year, the DoD’s National Defense Strategy (NDS) followed suit – the document that the NDIS aims to complement – diagnosing the return of great power rivalry. The signs were loud and clear: the Post-Cold War Era had ended and the specter of high intensity kinetic warfare between peer competitors had returned. 

For the purposes of defense contractors – primes and small- and medium enterprises (SMEs) alike – the previous event of comparable significance had been the 1993 “Last Supper” that marked the advent of the 30-year peace dividend within the A&D community. As the NDIS itself illuminates, this was a meeting between DoD and defense prime representatives that put the Cold War defense industrial base (DIB) on the backburner. Since then, US defense spending saw a decline by 2% GDP and DIB workforce reduction by more than 60%. It is the aim of the NDIS to reverse these trends in the long term, given the newfound urgency of building up defense industrial capacity. 

Consequently, it is key for players in the A&D space to study the policy objectives outlined in the NDIS. This will allow them to better navigate the changing defense industrial landscape within the US and its European and Indo-Pacific Allies and partners. BCE delineated seven lessons from the NDIS, contextualizing these policy objectives for A&D players to better position themselves under new geopolitical and defense industrial realities. 

[1] A wartime document 

The NDS and NDIS emphasize the precarious geopolitical trends of our era both in their language and substance. It is pinpointed at the very beginning of each document that the People’s Republic of China’s (PRC) growing assertiveness is the single biggest threat faced by the US and Allies. While framed as secondary to the PRC, the persistent Russian aggression against Ukraine and Europe remains a prominent threat in the NDIS, serving as grounds for acquisition case-studies and calls for action. Further attention is paid to the continued unstable situations in the Near East. 

In short, the NDS and NDIS are wartime documents, informed and motivated by a need to adapt to the shifting geopolitical landscape of the 2020s. As US hegemony over the world seas is endangered, the freedom of maritime trade and supply chain stability suffer in turn. As such, the NDIS calls for increased reliance on and development of domestic production capacity within the US and Allies, posing considerable opportunities for defense contractors in North America and Europe. 

The Transatlantic DIB is likely to see a major uptick in growth catalyzed by the NDIS and its surrounding policymaking context. A prime example of this process is the case study of 155mm artillery shell production as dissected in the NDIS. In the wake of Russia’s aggression, Allied munition stockpiles are dwindling. The US Army’s response was to award $1.5bn in contracts in September 2023 to increase production of 155mm munitions to 80,000 units per month by the end of FY2025. This followed expansion of a Pennsylvania production line and the opening of a second Texas line in December 2022. Following the publication of the NDIS, the NATO Support and Procurement Agency (NSPA) also announced a $1.2bn contract awarded to German and French defense primes to supply 220,000 155mm shells. The underlying lesson is clear: the North Atlantic community and their Indo-Pacific partners are facing existential challenges by revisionist powers, which warrants major investment into the DIB with the eventual aim of bringing it back to Cold War-levels over the next decade. 

[2] Generational scope 

While the ambitions outlined in the NDIS range across various sectors, they also have a vast temporal scale. The document spells out that the changes called for are generational, not incremental. The trends of disarmament and shrinking DIB that the NDIS is set to correct also lasted for a generation themselves. 

On the geopolitical level, this puts the US’ and Allies’ DIB on a marked growth trajectory at least until the PRC’s centennial promise of “National Rejuvenation” in 2049, which some analysts see as the latest date by which the PRC must reunite with Taiwan as a tenet of regime legitimacy. Others, however, prognosticate a more urgent prospect of conflict with China as early as 2027. 

The latter contingency is particularly worrisome. The Center for Strategic and International Studies’ (CSIS) war games last year simulated that the US may lose up to two carriers in a hypothetical effort to defend Taiwan against the PRC at the current level of naval power difference. The People’s Liberation Army Navy (PLAN) also has a higher vessel-count and higher shipbuilding capability than the US Navy, notwithstanding the persistent tonnage advantage and VLS-count of the latter. Moreover, while it’s possible to scale up the production of UAVs or artillery shells with relative haste, naval vessels and dockyards inherently take much longer to build. 

In either case, the Cold War against the PRC is a marathon, not a sprint – a sentiment, which the NDIS also reinforces with its generational scope. While Jim Hursch, the Defense Security Cooperation Agency (DSCA) Director claimed that the immediate policies outlined in the NDIS will guide DoD decision making for the next 3-5 years, the wider implications of those policies will ripple well-beyond this timeframe. This is good news for defense contractors that aim to strategize for the medium to long term, especially within the naval domain. The trends of increased spending and contract volume are likely to persist over the following years. The correct lessons learnt, and strategies adopted today will serve decision makers for years to come. 

[3] Transatlantic cooperation and global decoupling 

Over the past few years, some analysts have been raising the red flag regarding a trend of US isolationism. The US is indeed seeking increased geoeconomic autonomy and in many ways undergoing the largest wave of industrialization since the Gilded Age. The NDIS also underlines the perils of supply chain dependence on adversarial powers. For instance, supply chain resilience against Chinese nickel and silicon, Congolese cobalt, or Russian palladium must be securitized with respect to the semiconductor ecosystem at large. The US’ and North Atlantic community’s distancing of themselves from these adversaries reduces precarious resource dependencies. What is more, it also aids long-term war aims by geoeconomically isolating these powers, thereby weakening their respective DIB capacities. 

The precarious geopolitical situation around the Red Sea and Persian Gulf as well as the PRC’s building of artificial islands in the South China Sea endanger the freedom of trade on the world sea. Not only do these calamities underline the importance of long term naval buildup outlined in the previous lesson, but also further endanger the resilience of Allied supply chains in the maritime domain. 

That said, to interpret this as a strategic outlook of US isolationism (let alone autarky) would be wrong. The NDIS also emphasizes the importance of close cooperation and technology sharing within the network of US Allies and partners be it in Europe or the Indo-Pacific. As geoeconomic interconnectivity is likely to decrease globally, these same ties are set to entangle North America and Europe more closely. 

Both defense primes and subcontractors are advised to closely study their counterparts on the other side of the Atlantic to position themselves well within the Foreign Military Sales (FMS) process. Similarly, the NDIS also calls for better visibility of Allied and partners’ strategic-operational and capability needs, to enable streamlined procurement cooperation. 

A neat case study on this trend is the NSPA’s recent announcement to invest $5.5bn into COMLOG, a joint venture between US-based Raytheon and European MBDA. Under the European Sky Shield Initiative (ESSI), COMLOG was commissioned with the production of 1,000 Patriot Advanced Capability Guidance Enhanced Missiles (PAC-2 GEM-T). The PAC-2 deal decreases unit costs for European customers, while also bringing closer the western and eastern flanks of the Transatlantic DIB. Such deals are likely to serve as precedent for future procurement cases and technology sharing based on the lessons of the NDIS. A&D players are likely to see Transatlantic sub-contracting and M&A activity, along with closer supply chain integration. 

[4] Civilian-military stakeholder pool 

The NDIS delineates a holistic approach to structuring the defense industrial reforms of the next decades. It is not merely the volume of investment that is expanding, but also the spectrum of stakeholders involved. As the NDIS states, a robust and resilient civilian sector is integral to the US’ deterrent posture and warfighting capabilities. 

The inclusion of workforce readiness as one of the overarching policy objectives denotes a wider focus than on the immediate DIB and a multi-sector understanding of the US’ defense industrial capabilities. This entails, among other things, closer civilian-military cooperation. For instance, the NDIS calls for promotion of STEM fields within educational institutions, in cooperation with relevant government departments. Similarly, the destigmatization and promotion of industrial careers are mentioned to reverse workforce reduction within the DIB prevalent since 1985. 

Various programs, incentive packages, and subsidies between the civilian-military spheres are expected to come into effect over the next years. These will range from grants to universities and research institutes to better utilize cutting edge civilian research within warfighting capabilities, to SME-facing tenders to exploit their technological innovation for military purposes. The latter cluster is likely to see increased business, as the NDIS aims to increase the current 10% of defense tenders that are awarded to SMEs. These enterprises have been traditionally dissuaded from the defense landscape by high barriers of entry. 

In terms of financing, the NDIS also aims to challenge historical practices within the DIB. Reliance on private capital, and especially private equity and venture capital will do much and more to reinvigorate the Cold War Era state-funded defense investment model of a DoD monopsony. In short, it is not merely defense primes and their SME subcontractors that are wise to learn the lessons of the NDIS, but a much wider, holistic set of stakeholders in higher- and trade education, R&D, civil service, healthcare, finance, robotics, construction, yellow goods, shipbuilding, and more. 

[5] Emerging technologies and warfighting domains 

As alluded to above, technological innovation remains in the forefront of the NDIS’ focus. This is true in terms of both risk mitigation and opportunity maximization. Emerging Disruptive Technologies (EDTs) are repeatedly mentioned in the NDIS. These include quantum technologies, AI, autonomous systems, and advanced materials. 

The increasingly prominent cyber domain is also framed as an integral dimension of modern warfare, playing an infrastructural role. Cybersecurity is seen also as a cornerstone of holistic civilian-military deterrence. The markets of proofing Allied economies, militaries, and infrastructure against adversarial cyber-attacks will likely see growth and incentive structures from the DoD, the DIU, DARPA, and others. These barriers of entry (also in the case of AI) tend to be lower than the manufacturing of military hardware or subcomponents, thereby allowing further room for SME-powered innovation. 

At the same time, capital-intensive EDTs such as quantum will likely bring in DoD or DARPA funds to large tech players like Google. Their programmable superconducting quantum processor, Sycamore in 2019 undertook a calculation in 200 seconds, which would have taken the world’s then fastest conventional supercomputer 10,000 years. Experimentation is likely to take place with avenues for harnessing such EDTs for the purposes of warfighting capability improvement and adoption. The uses cases are wide-ranging. A&D and tech players will do wisely to position themselves to partake in these processes and to capitalize on AI-powered interoperability, ISR, MilSatCom, data processing, upstream ancillary, and fundamental- and applied science initiatives. 

While not spelled out in the NDIS, the focus on EDTs and cyber infrastructure implies a reliance on the space domain, which is in turn infrastructurally integral to the cyber domain and to information warfare within the three conventional terrestrial domains. A&D players will have exploitable markets to capitalize on ASAT weapons, provide rocket launch services, process downstream data, and overall participate in the emerging satellite ecosystem and space economy. 

[6] Turnkey solutions and unmanned systems 

In the NDIS’ Introduction the speed-cost-scale triangle of defense development and procurement is lamented as often mutually exclusive – i.e. the developer and customer must pick two of these and sacrifice the third. However, the NDIS aims to maximize both haste and scale, while minimizing cost. These policy objectives mostly fall under flexible procurement and denote a departure from highly customized and mission-specific military systems. Instead, off-the-shelf, turnkey solutions will be adopted to ensure scalability and speed of development. 

This already implies a degree of equipment standardization across military branches, joint procurement, and increased interoperability between Allied capabilities. These avenues provide additional exploitable market for major defense primes that attain these tenders. Economies of scale will in turn reduce unit costs given higher production volume and longer production line lifespan. 

Currently it seems that the best way to crack the above-mentioned three-pronged dilemma would be through UAVs. Increased reliance on UAV systems will likely further hasten development timelines. Not only are drones generally cheaper and easier to mass-produce, but their development also tends to be much faster than that of manned aircraft. For example, the reason testing during the development of manned aircraft is so stringent is to ensure that danger to the pilot’s life is minimized. This factor is eliminated when it comes to UAVs, making the testing requirements swifter during development. While it would be unacceptable for a manned aircraft to crash 1% of the time it takes off, the same risk doesn’t bear that heavily on a cheap, mass-produced UAV. 

Relative newcomers to the A&D landscape like Anduril Industries are well-positioned to capitalize on this NDIS policy objective with their unmanned systems such as Fury, or their more software-focused counterpart, Palantir. In more general terms, the holistic scope of the NDIS, together with its objectives to standardize and rely on turnkey will open up defense capitalization avenues for more commercially focused vendors, in addition to expanding existing markets for defense primes. 

[7] Growth opportunities 

In sum, BCE distinguished five archetypes of A&D players that are particularly well-positioned to capitalize on the policy objectives outlined in the DoD’s NDIS. This list is meant to be illustrative rather than exhaustive. As our fourth lesson shows, the NDIS expands the pool of stakeholders well beyond the conventional defense contractor realm and its implementation will offer opportunities across various civilian and military sectors to market players of all sizes. However, given the multilateral Transatlantic (and both defense prime- and SME-encompassing) nature of the NDIS, a five-way typology of the main beneficiaries is in order: 

  1. Traditional defense primes 
  2. Large newcomers and innovators 
  3. A&D-focused PE and VC funds 
  4. US-based sub-system SMEs 
  5. European subcontractors of US defense primes 

The above six lessons establish these market players as uniquely positioned to benefit from the NDIS’ policy objectives. 

All in all, the NDIS serves as an ideal microcosm for diagnosing prevalent trends in geopolitics, corresponding defense industrial trends, and the changing character of warfighting at large. The policy objectives that the NDIS illuminate will contribute to long-term securitization of the North Atlantic community and its Indo-Pacific partners. The implementation of said policy objectives will provide unique generational growth opportunities for A&D players and adjacent civilian markets beyond the traditional stakeholder pool of defense primes. In particular, the opening of the DoD monopsony over the A&D marketplace will empower new cohorts of defense contractors and their financiers to gain access to and harness markets of the changing character of warfare and defense economics at large. 

The NDIS and its fact sheet are available through this link. BCE encourages A&D players to get in touch with our Global A&D vertical team to learn further market insights about prevalent trends during the implementation of the NDS, the NDIS, as well as other geopolitical and domestic market forces. Our team has on-the-ground experience across INDO-PACOM, CENTCOM, and EUROCOM, and have worked on various strategic as well as technical subjects such as JADC2, IAMD, IFVs, EO/IR, and C5ISRT. 

Global A&D

Adam Meszaros
Analyst London
Craig Belanger
Senior Partner & Co-Founder Boston
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