Dear Fellow Time Passage Bystanders,
My 35-year career has paralleled a three-decade macro trend: towards market economies, globalization and open borders. But the post-Cold War consensus – Open Markets and Free Trade – is vanishing. This is transforming our industry. I’ll sum up what I’m seeing in two monthly letters; this one on military markets, and next month on civil markets.
First, a two-paragraph history: In the ‘80s, Reagan and Thatcher helped de-regulate markets, open borders, end subsidies, tariffs, and state ownership. This was continued by Clinton, Blair, and others. For a time, China and post-Soviet Russia were big parts of this. Two manifestos, Thomas Friedman’s The World Is Flat and Francis Fukuyama’s The End of History and the Last Man, helped define this epoch.
Since 2016, this era has been ending. China went dark. Russia darker. The UK Brexited. The EU now likes funding goofball technology development schemes almost as much as it likes criticizing the US for funding goofball technology development schemes. If France’s Macron loses power, he’ll be replaced by a nationalist goblin of some sort. Every power seems to have an industrial and/or trade strategy, with subsidies and tariffs. As Franklin Foer said recently in The Atlantic, “Both Trump and Biden have positioned themselves as economic nationalists, self-consciously abandoning the precepts of the old order.”
There are many reasons – not all are bad reasons – for this shift. Post- pandemic supply chain concerns. Russia’s Ukraine war. Authoritarians rethinking market economies in favor of autarkic schemes (Make In China! Make In India!), for national glory or xenophobia. Great power rivalry, geopolitical tension, and other security considerations. Zero-Sum economics, with nations, regional blocs, and economic systems jockeying for victory, replacing a get-rich-together world.
How does this impact aerospace? Again, first, the military side. There are two big changes:
The first is a return to national self-sufficiency. The post-Cold War decades were defined by shrinking budgets and a willingness to rely on imported weapons. Prior to 1990, many countries – South Africa, Taiwan, Yugoslavia, Romania, Israel, Japan, and others – had a national fighter jet plan. When my career began, the Italian-Brazilian AMX looked like the future.
Most of these went away, and the F-35 was born. By the 2010s, it was going to inherit this shrunken market; countries wanted off-the-shelf defense solutions, even abandoning precepts of sustainment sovereignty, with spare parts shipped from some giant vending machine in Fort Worth. It seemed like The End of History and the Last Fighter.
Today, national combat aircraft are back. South Korea is leading the way, followed by Turkey, Japan again (with the UK), and Australia (with a Collaborative Combat Aircraft). India, which never exited, is re-emphasizing the concept, with LCA and other jets. I’m not sure how they’d participate, but the UAE and Saudi Arabia aspire to be program partners on Europe’s new programs. Even Taiwan is back, with a re-born Ching Kuo trainer/light attack version and a next generation fighter after that.
It’s more than national fighters. Medium powers are planning to bulk up on indigenous missile programs, space systems, munitions production, and sustainment capabilities. Offsets are back. My May 2008 letter lauded Australia for moving to abolish demands for local production and technology transfer; now, in a complete reversal, Australia wants partnerships to create industries for missiles (including hypersonics), drones, and, famously, AUKUS submarines.
Takeaway for contractors: There will be more opportunities for more programs in more countries. But business development will be harder, and the payoffs, in terms of production runs and contract sizes, will be smaller, with greater risks, too. Twenty years ago, winning a place on a new jet was a rare opportunity, but if you were on it, you won the lottery. Now, there are lots of KF-21s, MQ-28s, and TF-Xs; but if you win the rewards are likely much smaller.
The second big picture change is a much broader definition of national defense. Increasingly, defense, industrial strategy, and technology development roadmaps are now lumped together. The US RDT&E budget reflects this – it doubled over the last seven years ($74 b in FY2017 to $145 billion in the FY2024 request, with more to be added by Congress). Capital Alpha’s Byron Callan’s recent note (“Defense, the FY24 Budget, and Return of U.S. Industrial Policy”) observed, “It’s important to understand that in Administration thinking there is not a clear demarcation between defense and non-defense discretionary federal spending as it pertains to national security.” The many billions spent on civil technology and industrial strategy plans (CHIPS Act, etc.) will impact defense, too.
This is actually a return to historical norms. In grad school in the ‘80s, I read Maurice Pearton’s The Knowledgeable State, a history of how, after 1830, national security came to encompass cultivating and harnessing emerging technologies: railways, advanced metallurgy, aeronautics, etc. Today, we’re starting to see the same thing, with robotics, quantum computing, and of course the most hyped, AI. The US, and other medium powers such as Japan and Australia, are now viewing defense as part of a much larger process.
Takeaway for contractors: There will be more adjacent markets to pursue, but more competitive threats from contractors in those adjacencies. As Alexander Karp, Palantir co-founder and CEO, recently put it, “Our strategy on AI is to just to take the whole market. We have no pricing strategy.”
Takeaway #2 for contractors: If DoD and other agencies factor industrial policy into their thinking, then it may increasingly sway source selection decisions. For example, when a new C-X strategic transport program starts, will USAF simply give it to Boeing, rather than compete it?
Final military markets takeaway: Resurgent nationalism is great for defense spending, but not for defense spending effectiveness. Creating new industrial capacity and new systems for more countries, and funding multiple new technologies that may or may not pay off, is not as efficient as spending on people and off-the-shelf equipment. But for now, it’s the future.
In June, I’ll discuss the new macro environment’s impact on civil markets. Spoiler: not good.
Yours, Until History Ends Again,
Richard Aboulafia