Investing in Defense: Supply Chain and Sustainment
In my first post, I provided a high-level overview of the emerging defense investment space amidst the great new power conflict of our time. Last month, Pentagon leaders penned an article redefining military “readiness” for this new age. In our transformation to a more modern and digitally native defense force, a major area of focus (and vulnerability…) for the DoD will be it’s supply chain.
A military that leverages both advanced digital technologies and traditional systems will require an increased volume of affordable materials, a shift in manufacturing and sustainment practices, and a new cohort of suppliers.
1. Over-dependency on adversarial supply chains
Given their decreasing cost and portability, lithium-ion batteries are quickly becoming the chosen power source for vehicles across numerous domains. Yet, the chart below shows that China dominates the lithium-ion battery supply chain in every production-focused category.
As we move towards a greater number of DoD assets being battery powered, the current supply chain puts the United States at great risk. At any moment, the Chinese Communist Party (CCP) could ban or reduce lithium-ion battery exports to U.S. defense suppliers. Even the U.S. Congress could mandate that national security assets can only use batteries manufactured domestically.
This certainly sounds like a dark possibility but just a few years ago, we experienced similar incidents surrounding a different power source — the Russian RD-180 rocket engine. After Russia invaded Crimea in March 2014, the U.S. imposed sanctions on Russia which included restricting purchases of the RD-180. Russia countered with a ban of their own and said they would only sell the rocket engine to the U.S. for non-government launches. The U.S. Government quickly came to realize that losing its primary rocket engine supplier left a huge vulnerability in our national security space launch capability. After a heated debate on the Senate floor, the sanctions were ultimately lifted with Sen. Richard Shelby saying, “While I strongly believe that we should not be dependent upon any foreign power for access to space, it is far too risky to ban the RD-180 until we have a domestically-produced engine that has the same capabilities.”
In the years following, SpaceX’s pursuit to surpass and replace the RD-180 helped further pronounce the company and earn a valuation north of $60 billion. Two years ago, Elon Musk tweeted his excitement for the engineering feat of the SpaceX team.
The military is likely to rely on the tailwinds of the EV industry for battery technology. Domestic companies like Sila Nanotechnologies and Enovix are using silicon anodes to produce powerful industrial grade batteries and are quickly becoming leaders in this sector. Earlier stage companies are also getting involved — TexPower is developing a cobalt-free, lithium-based battery, thus limiting supply chain reliance on the Congo and Summit Nanotech is taking a clean tech approach to lithium extraction. We’ll need more startups to follow suit to build up a reliable battery infrastructure critical to our national security.
The current chip shortage in the automotive industry should also serve as a warning sign. Last September, the U.S. placed restrictions on China’s largest foundry, SMIC, which forced customers to shift their orders to other companies such as TSMC in Taiwan and Samsung in South Korea. Amidst a surge in demand, transitioning production lines and supply chains is no trivial task and despite investments to increase manufacturing capacity, the chip shortage will remain in the near term.
2. Supply chain hardening and combating counterfeit parts
The adoption of digitally native technologies creates a new challenge for verifying the authenticity of our supply chain and protecting our system from counterfeit parts. It’s one thing to have counterfeit machine parts, but another level of danger to have counterfeit microprocessors.
In 2012, the Senate released a report uncovering over one million counterfeit parts used on U.S. military aircraft and a few years prior, U.S. Customs seized 5.6 million counterfeit microchips destined for defense contractors and commercial aviation suppliers. The DoD deeply scrutinizes new software for vulnerabilities, especially for classified systems. Now that hardware and software are so tightly coupled, it’s time that all of our equipment receives the same treatment.
DoD prime contractors are required to have anti-counterfeit systems in place and the U.S. Army has a 93-page guidebook detailing procedures for documentation inspection, visual inspection, and lab testing to combat this problem. Unfortunately, these processes are laborious and not scalable.
In my opinion, this is perhaps the most attractive whitespace opportunity for a startup to tackle. Counterfeit products are specifically designed to overcome the preventative measures in place and today, those measures rely heavily on human detection. With millions of parts in the system, only a very small percentage go through extensive lab testing.
The existing process could surely be enhanced and automated through blockchain, smart tagging, computer vision, and other advanced tracking solutions. Los Angeles based Elementary Robotics is on the cutting edge of QA and inspection technology with their AI machine vision system and multi-axis robot.
DARPA’s SHIELD program is working to solve this problem for counterfeit integrated circuits and microelectronics. However, as with most technology developed in Government labs and research facilities, it’s going to take an outside firm to productize the technology.
3. Existing infrastructure’s sustainment challenge
As excited as we are for initiatives like AFWERX’s Open Topics to yield aggressive innovation akin to the early days of the Predator Drone development, we can’t lose sight of readiness for our existing platforms. In the FY2021 Defense Budget, over $250B in funding is allocated for the procurement and ongoing sustainment of existing air, land, and sea platforms.
By continuing to field multi-decade life-cycle systems and a history of delaying retirement of assets, sustainment operations grow increasingly complex. In 2018, F-35 aircraft were unable to fly nearly 30% of the time due to spare parts shortages and limited repair capacity. In the following year, 2019, Turkey’s expulsion from the F-35 program forced the Pentagon to find new companies to produce 1,005 parts that were previously manufactured by Turkish companies. In 2021, sustainment still remains an issue.
Additive manufacturing provides surge capacity and on-site custom tooling capability. For these larger platforms, maintaining metal die casting lines for every component over periods of decades is neither affordable nor practical. Startups like Alloy Enterprises are solving this problem by developing the next generation of 60/61 aluminum additive technology to produce fully dense, low cost, and high quality parts. Desktop Metal (NYSE: DM) can quickly turn a variety of metal powders into a custom shaped object at a rate nearly 100 times faster than existing laser-based systems.
Along with 3D printing, the industry requires 3D data for proper sustainment. This concept of digital twinning allows engineers to use computer-aided design programs to manipulate data and enable practices like condition-based maintenance, eliminating weapon systems’ unnecessary downtime.
Candelytics’ military veteran led team is pioneering a 3D LIDAR data management solution and recently completed a very successful product demonstration with the U.S. Coast Guard. This technology could also serve tremendous purpose in practices like aircraft depot maintenance (pictured above). Every 5–10 years, aircraft are completely stripped down and gutted to check for corrosion and other safety hazards and then subsequently repaired and put back together, a process taking months and costing millions of dollars.
Wrap Up
To be successful in our military modernization efforts, the underlying manufacturing, supply chain, and sustainment infrastructure must be in place. Yesterday’s practices aren’t built for tomorrow’s challenges and we must lean on advanced technologies to usher in a new-era of military readiness.
As always, if you’re building an advanced technology business with applications in defense, we’d love to connect with you to learn more (ryan@riot.vc).
