Defense officials hopeful incoming administration keeps funding cutting-edge tech

SIMI VALLEY, California—No one knows whether defense spending will grow or shrink in the next administration, whose publicly stated goals include rebuilding arsenals, curbing government expenditure, cutting taxes, and shrinking federal headcount. But defense officials who oversee investment in dual-use technologies and companies say they're optimistic about their corner of the Pentagon budget.

That’s because such investments—for example, in microelectronics, additive manufacturing, and materials development—are key to other stated Trump administration priorities, such as competing with China and rebuilding U.S. manufacturing capability, defense officials said on the sidelines of the Reagan National Security Forum here.

Pentagon officials and leaders from both parties have long complained about the way the Defense Department buys things. They say expensive requirement-driven programs that are subject to congressional oversight result in cost overruns and weapons that can’t be modified easily—and may be obsolete by the time conflict rises. By comparison, commercial tech companies produce products quickly using rapid iteration and scaling. 

It’s one reason why former Defense Secretary Ash Carter set up the Defense Innovation Unit. DIU connects the Pentagon to commercial tech companies in a variety of ways. 

Doug Beck, who now heads DIU, said Saturday that the department is still largely stuck in out-moded ways of building things. 

“Massive competition, also from around the world, forces innovation [and] forces investment in that innovation, because if you don't do that, you lose. And in our more traditional approach to defense procurement, we really have neither of those two things. … Instead, we’ve got something that looks a lot more like the traditional five-year plans from the old Soviet system, which the Chinese have actually spent a whole lot of time themselves trying to get away from, because it doesn't work.”

Lawmakers seem to agree. The most recent draft of the National Defense Authorization Act highlights a need to grow DIU and “position the Defense Innovation Unit as the primary accelerator for integrating cutting-edge technologies into the Department of Defense.” 

Congress more than doubled DIU’s budget this year, increasing it to $1 billion. But that is still barely over one percent of the Pentagon’s overall budget. 

What the department needs to do, Beck said, is “provide a consistent demand signal of the critical areas we'll be buying in, rather than specific programs, areas like AI, autonomy, space, biotech.” He said that the Pentagon should also give itself more flexibility to alter programs of record. 

Beyond the funding, the flexibility Congress has given DIU will enable the office to get new tech to warfighters much faster, Beck said. “We have the ability, with the majority of that funding, to go all the way from that initial prototyping all the way through to initial fielding to operational units.” 

The services would then decide how to scale up that tech.

DIU will release a list in January of requirements for companies who want to join the unit’s newest endeavor, Blue Manufacturing, Beck said. Blue Manufacturing will help companies that specialize in additive manufacturing work—not only with the Defense Department, but potentially also with defense contractors that routinely must custom-build their own parts and components, a big contributor to delays. 

Prime contractors are not just open to working with smaller companies on additive manufacturing—they’re asking to do so, said Heidi Shyu, the undersecretary of defense for research and development. 

“They can't get the parts. Their supply chain is so clogged up they can't get the parts, so their deliveries are behind schedule, right?” Shyu said. “So [a] way to help them out is really accelerate [and] utilize” additive manufacturing.

The Defense Department’s Office of Strategic Capital may also see continued support under a new Trump regime. The office makes loans to companies in key areas like microelectronics and additive manufacturing. 

Jason Rathje, who runs the office, highlighted how the loans provide a return to the government—albeit a modest one, in line with Treasury bonds—and play a big role in helping U.S. companies innovate and modernize production. That decreases reliance on China or other countries for supplies. It’s the sort of financing  the private investment sector could make, but often doesn’t. 

“These are not inexpensive endeavors, and so the companies who want to move to be competitive but are operating on razor-thin margins don't have the capital access to be able to do that. They struggle to raise that capital for now. We're not talking about venture-style companies. We're talking about tier two, tier three suppliers, lower-middle market or middle market companies that have been around for decades. That's where some of our first funding went” under the office’s manufacturing lending program, Rathje said. 

The office is looking to expand its loans to firms that want to modernize the way they build things. Creating a more secure supply chain for U.S. manufacturers could strengthen the United States’ supply chain, which would be critical in a war with China. 

“Now that we've launched this equipment finance loan product and we're looking at: when we are providing financing for equipment, what type of advancements in manufacturing can we finance against? Right? We're not financing, you know, 20-year-old equipment. We're financing state-of-the-art stuff. So I think whether that's additive or advanced, it is really allowing companies to access the strategic financing they need to be able to accelerate U.S. manufacturing.”

Shyu’s office is also focused on decreasing vulnerability to China, she said, in terms of manufacturing and materials, such as the rare earth minerals that go into electronics. That includes efforts to develop replacements for key elements like cesium and other materials that are in short supply and under Chinese control. 

The department and the rest of the government have also been working to increase domestic microelectronics and chip production, Shyu and Rathje said, as a Chinese invasion of Taiwan could lead to a major supply shortage. 

But expanding chip manufacturing isn’t easy, and it’s not an attractive investment for many private lending institutions. 

“These are capital-intensive industries. [It] takes eight times more investment to invest in a Series A semiconductor company than it does in a fintech or crypto company,” Rathje said, adding that microelectronics and chips will continue to play a key role in the office’s upcoming strategy.

“We can help [make it] work by providing guaranteed loans to investors to catalyze the additional capital required to make those kinds of large-scale, early stage investments. And then by time those companies drive from [product to market] then we have additional sources of financing to help scale fabrication, manufacturing or assembly, test packaging or material development.”

All of these efforts would appear to fit into a presidential agenda focused on rebuilding U.S. manufacturing capacity, something Trump vowed to do previously but struggled with during his first term. However, the future of all government spending and research programs is still very much in flux, as is the question of who will lead those innovation-focused areas related to dual-use tech and manufacturing.

Still, the need to continue such efforts speaks for itself, Shyu said. “Why would you want to cede microelectronics to all the foundries in Asia?”