American tech and the American military find each other, again…maybe?
The House Armed Services Committee’s “Future of Defense Task Force” issued a report this week faulting the Pentagon for remaining tethered to outdated weapons programs that have absolutely nothing to do with power competition with China. The very first recommendation: that the U.S. government focus funding and talent toward developing the world’s strongest artificial intelligence capabilities, “(u)sing the Manhattan Project as a model.”
The commercial market should monitor what follows. The Pentagon has a lot of money. Money to spend on technologies and talent. Where might the Department of Defense go to find the strongest AI engineers? Not where you might expect.
Last August the Defense Advanced Research Projects Agency (DARPA) hosted an open competition for engineers to design an artificial intelligence (AI) algorithm capable of beating a human F-16 pilot in simulated combat.
One entry went undefeated, winning all five rounds. The algorithm was written not by Google but by Heron Systems, a small contractor based in Maryland, about 60 miles south of Washington, D.C.
Heron is a small, family-owned company based in a strip-mall next to an Autozone. I note their humble foundation with the greatest amount of respect. They took on competition that included an entry from Lockheed Martin, and won. But it’s quite notable that the Pentagon now turns to this small company for such a promising technology. Heron’s victory gives us a window into a rapidly evolving defense technology market, one increasingly driven by small suppliers and startups.
This matters not only for the Pentagon, but for entire American technology economy.
The two communities — the American technology community and the U.S. military — have a long history together. As recounted by Steve Blank’s “Secret History of Silicon Valley” lecture, the relationship between the Pentagon and the American technology sector dates back to World War II.
A group of large contractors have long sat at the intersection of the American military and technology community. Multi-national defense companies have been an essential element not only of America’s defense industrial base, but of the entire American innovation engine. They spared no expense to hire the top engineers and take on the highest-risk, highest-reward R&D projects.
The commercial airline industry, the internet, even the home microwave can trace roots back to American defense companies.
The market changed in 1993 after new Clinton Administration Defense Secretary Les Aspin urged the Pentagon’s 15 largest defense contractors to merge with one another ahead of looming Pentagon budget cuts. And so they did. A wave of mergers reduced the Pentagon’s suppliers to five mega-contractors: Lockheed Martin, Boeing, Raytheon, Northrop Grumman, and General Dynamics.
These mergers and acquisitions removed competition from the sector and undermined incentives for supporting R&D, and that’s a problem for the U.S. military. High-risk research projects take time to demonstrate profitability, more time than the short-term interests of shareholders allow.
The large contractors are now far more likely to leave R&D to smaller firms, then acquire the firms once the technology is validated. Firms like have Heron stepped into the void left by the big contractors. No wonder that M&A activity has skyrocketed in recent years.
This is less than welcome news to the Pentagon. In leaving itself to the whims of the market, the U.S. military is virtually powerless to stop acquisitions that can also stop progress of R&D projects done by the acquired firm. If continuing development of a technology does not make business sense for the acquirer, the R&D will end, regardless of the technology’s national security importance.
With an eye toward working around the large contractors, the Department of Defense has dramatically increased use of smaller, nonconventional grants and contracts to sustain smaller, nontraditional contractors and acquire technologies. According to Govini, a research and analytics firm, a full ten percent of the Department of Defense R&D budget is spent on Small Business Innovation Research (SBIR) grants and contracts issued with Other Transaction Authority (OTAs), a flexible contracting tool federal acquirers can use to skirt onerous federal acquisition regulations.
Is this a sustainable model to support American innovation? Can it stay ahead of the innovation model built in China?
The Future of Defense Task Force report follows a spate of events that have a common theme: A U.S. national defense community suddenly alert to a closing Chinse technology base that may soon take the global lead.
Two weeks ago the CIA introduced its first laboratory, CIA Labs, making it the newest member of the federal laboratory system.
The U.S. Government Accountability Office dinged the Pentagon for failing to properly manage the $4 billion to $5 billion it spends annually to reimburse outside entities that conduct independent R&D, noting about a third of that R&D spending is misaligned with the Pentagon’s technology needs.
And former Vice President Joe Biden has promised more than $300 billion in additional funding for R&D, an eye-popping sum that could (should) mean that the United States will spend more than 3 percent of GDP on R&D, putting the U.S. alongside South Korea on the global leaderboard.
Taken together, there seems to be a national sense of urgency and maybe some regret. American lawmakers and industry leaders have moved beyond the silly charade that spawned a successful TV show (“Shark Tank”) but failed to maintain American technology leadership.
As the United States built a comical startup culture that (hopefully) ended with the WeWork IPO crashing like the Hindenberg, China has built the world’s strongest 5G network and arguably taken the lead in AI and biotech. They did it through R&D and a strong industrial policy, not a bunch of pitch contests to win $10,000 seed checks.
In short, we built hype; China built a superpower.
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Supplementary reads:
“The Economic Defense Capital Fund: A tool for the economic void” by Brandon Bodor and Thomas Day (The War Room).
“Palantheil: The Uncola” by Scott Galloway.
“Five Ways the GAO Fails to Understand Defense Industry Independent R&D” by Loren Thompson (Real Defense News).
Additional reads on the American research base:
“Scientists advance on one of technology’s holy grails” by Matthew Hutson (New Yorker).
“Compact Nuclear Fusion Reactor is ‘Very Likely to Work,’ Studies Suggest” by Henry Fountain (The New York Times).
