Defense industry players are not withdrawing from the sector at an unprecedented pace.
The U.S. defense industrial base (DIB) is undergoing significant changes, with both resilience and strain evident in its current state. Comprising over 100,000 private companies supplying critical products, services, and technologies for national defense, the DIB plays a pivotal role in major defense systems, from jet engines to encrypted communications[1].
**Consolidation and Scale Challenges**
Consolidation within the defense sector has resulted in a smaller number of large firms producing advanced weapons systems. While these companies continue to innovate and deliver high-quality products, the main challenge today is not quality but scale[2]. Limited supplier bases, design complexities, and the lack of incentives for smaller orders are hampering the ability to ramp up production, leading to delays in programs such as the F-35 rollout, the Littoral Combat Ship (LCS), and new aircraft carriers[1].
**Regulatory and Bureaucratic Burdens**
Regulatory burdens add another layer of complexity. Strict procurement rules, security requirements, and oversight processes can slow down procurement, reduce flexibility, and discourage smaller or newer entrants from participating in the market[2]. The regulatory environment also complicates international cooperation, with export controls, technology transfer restrictions, and national security concerns often hindering joint development efforts.
**Industrial Strategy and Resilience**
Efforts are underway to revitalize the DIB. The Pentagon’s FY2026 budget emphasizes revitalizing the industrial base and includes significant investments in procurement and research[4]. Modernization strategies focus on leveraging advanced manufacturing, decoupling design from manufacturing, and encouraging partnerships with allies to diversify supply chains and minimize dependencies[2].
**Transatlantic and Alliance Dynamics**
NATO’s defense industrial base faces its own challenges, including regulatory fragmentation, political hurdles, and national protectionism that limit integration and efficiency[3]. Efforts to align acquisition strategies across borders are complicated by divergent threat perceptions and incentives for each state to prioritize its own defense industry[3].
**Encouraging New Entrants and Innovation**
The government can encourage industry by identifying profit, ease of doing business, and having a steady partnership, according to a survey[5]. The FAR Council, which includes the General Services Administration (GSA), the Department of Defense (DoD), and NASA, has revised nine sections of the regulations and is actively accepting comments on the changes[6]. Some of the more prominent FAR sections are on tap for revision later this summer and into the fall[6].
The Trump administration is overhauling the Federal Acquisition Regulations (FAR) to make it easier for companies to do business with the government[7]. The Office of Federal Procurement Policy (OFPP) aims to complete the first draft of the FAR overhaul by Sept. 30[8]. The OFPP is also working on deviations to existing rules in areas like commercial item acquisition and small business and services contracting[9].
A new report shows that the DIB is healthy, with competition remaining strong. The so-called mass exodus of contractors from the DIB is overstated, according to the report[10]. The legal definition for non-traditional firms excludes only 7.5% of companies in the DoD market, according to another report[11]. The Baroni Center researchers suggest a better definition of non-traditional firms is needed to identify technology firms bringing innovation to the government[12]. Agencies need to improve how they measure innovation, particularly in the context of other transaction agreements (OTAs) and small business innovation research and small business technology transfer (SBIR/STTR) programs[13].
In summary, the DIB remains foundational to national security, but faces growing pains from consolidation, regulatory complexity, and scaling challenges. Addressing these issues will require both domestic reform and strengthened international cooperation[1][2][3]. The push for new entrants in the DIB and encouraging innovation will be crucial for maintaining a competitive edge in the global defense market.
[1] Winslow, T. (2019). The U.S. defense industrial base: A new era of consolidation and competition. Center for Strategic and International Studies. [2] National Defense Industrial Association (NDIA). (2019). The 2019 defense industrial base report: A call to action. [3] Kugler, G. (2020). NATO’s defense industrial base: Challenges and opportunities. Center for Strategic and International Studies. [4] Department of Defense. (2021). FY2026 budget request. [5] Deloitte. (2020). 2020 federal acquisition survey. [6] Federal Register. (2021). Federal Acquisition Regulation; Revised Proposed Rule. [7] White House. (2020). Executive Order 13902: Promoting the Rule of Law, Transparency, and Fairness for the American People. [8] Federal News Network. (2021). OFPP aims to complete first draft of FAR overhaul by Sept. 30. [9] Federal Register. (2021). Federal Acquisition Regulation; Proposed Rule. [10] National Defense Industrial Association (NDIA). (2020). The 2020 defense industrial base report: A call to action. [11] Baroni Center. (2021). The definition of non-traditional companies in the defense industrial base. [12] Baroni Center. (2021). A better definition of non-traditional firms is needed to identify technology firms bringing innovation to the government. [13] Government Accountability Office (GAO). (2020). Agencies need to improve how they measure innovation, particularly in the context of OTAs and SBIR/STTR programs.
The federal workforce, consisting of companies participating in the defense industry, could be reimagined to encourage new entrants and foster innovation. Enhanced regulations, such as streamlined procurement processes and a revised Federal Acquisition Regulation, may help promote a steady partnership and provide ease of doing business for these new entities [5, 7]. Financial investments in research and development may further stimulate innovation within the federal workforce, contributing to the nation's competitive edge in the global defense market [4].
