The Invisible Industrial Base

Introduction

When you think about the defense industrial base (DIB), the companies that come to mind are likely ones such as Northrop Grumman, Lockheed Martin, Huntington Ingalls Industries, General Dynamics, or BAE. If you’re a defense tech denizen, you might think first of Anduril, Saronic, Mach Industries, Northwood, or Castelion.

These companies are different by almost every measure: age, number of employees, market cap, annual recurring revenue, operating profit, government revenue, number of locations, political contributions, and lobbying expenditures, to name just a few.

Despite those and many more differences, these companies share two important characteristics. First, they are all tier one prime contractors that sell finished products that soldiers, sailors, airmen, marines, and guardians use, shoot, fly, and drive. Second, none of them are 100 percent vertically integrated. In other words, they all rely to some degree on systems, subsystems, components, and subcomponents made by thousands of other companies in tiers two, three, four, five, etc., that most Americans have never heard of but that comprise the foundation of the DIB.

Even with an influx of tens of billions of dollars in private capital into defense and dual-use startups since 2020, the defense industrial base remains shallow and fragile. This is because the lion’s share of this capital has flowed to would-be tier one companies—and subtier suppliers are still reliant on uneven demand signals and appropriations. That’s not to say that the addition of so many new entrants into the defense market is not needed—they certainly are—but rather a caution that their presence alone, and the host of statutory reforms and regulatory improvements made in the last year, does not mean that all is well, or soon will be.

Key Takeaways

• The DIB is shallow and poorly understood, even by the Department of Defense (DoD) and prime contractors.
• Small subtier suppliers lack the capital resilience of prime contractors, making them highly vulnerable to disruptions in appropriations.
• Fixing the supply chain will require both cogent policy that extends beyond a single administration as well as a dual-use commercial-defense manufacturing base.

Supply Chain Fragility

Significant problems persist in the defense industrial base, mainly below the surface. In 2018, President Donald Trump’s first administration published a comprehensive report on the state of American manufacturing and the DIB, which found critical problems throughout the supply chain, including sole-source vendors for multiple programs and offshoring for key parts. To be clear, this is not a new problem and dates to the decline of U.S. manufacturing that accelerated in the 1970s. However, the situation continues to deteriorate.

The solid rocket motor (SRM) supply chain is a well-known bottleneck. Currently, there are two main suppliers of SRMs: L3Harris and Northrop Grumman. New entrants such as Anduril, Ursa Major, X-Bow Systems, and Firehawk are also trying to produce SRMs. The problem is that all these companies rely on the same supply chain for the parts that make an SRM. As recently as 2020, there was only one domestic source certified to provide the ammonium perchlorate that all the SRM makers rely upon. In 2021, a second company was certified, though demand still outstrips supply. SRMs are but one example: There are other bottlenecks with a dearth of suppliers too.

A recent article in War on the Rocks highlights the plight of companies operating in the lower tiers of the industrial base, noting that they live in a “very different economic universe than prime contractors. They tend to be privately held, thinly capitalized, and are heavily dependent on a small number of contracts. Their margins are narrow, and their access to external financing is limited.” These companies don’t have the capital to front all their costs while waiting for appropriations or contracts, and although prime contractors can weather those moments, they can’t also extend credit down to these suppliers, thus leaving them exposed and vulnerable.

Generally speaking, unless a supplier has developed some leap-ahead manufacturing hardware or software, they are not a good candidate for venture funding. The Silicon Valley Defense Group’s (SVDG’s) annual NatSec100, which catalogs the “top 100 venture-backed, dual-use and defense technology companies driving forward U.S. national security,” is a useful barometer. In the 2025 edition, only one hardware company, X-Bow Systems, was considered primarily a supplier. (Although the company might disagree with this characterization, given that it does make rockets too.) Another company on the 2025 list, Hadrian, is supplying automated manufacturing capacity to customers, so it’s a nontraditional supplier but a supplier nonetheless. That’s 2 out of 100. Maybe there are a couple more, but by and large, all the hardware companies on this list that sell directly to the government are tier one prime contractors. Of course, SVDG does not capture the entire venture ecosystem, and there are a few innovative, venture-backed companies operating in the supply chain, but they are very much the exception.

To use an analogy, if the thousands of small suppliers that make up the DIB supply chain are the foundation, then the legacy prime contractors and venture-backed new entrants are competing to build different portions of the house that sits on top. However, the foundation is cracked and in need of structural repairs. (On that point, there’s no disagreement by most observers.) If Congress and the Pentagon don’t take bold, coherent action to shore up the house’s foundation, it matters little what improvements or reforms they make to build the house bigger, faster, or cheaper.

What Should We Do About It

The good news is that the federal government can improve this situation, but it will take the executive and legislative branches working together across presidential administrations to implement an industrial policy that makes sense.

First, no actor in the ecosystem appears to have a complete understanding of the supply chains. The average DoD supply chain spans five to six tiers, but the DoD loses visibility beyond tier two. Prime contractors also generally lack visibility beyond their direct suppliers. The DoD has made some progress on this front in recent years, but there’s more to do. The Defense Business Board published a study in January 2025 with a series of recommendations to improve supply chain illumination. That’s a sensible place to start, but the ultimate goal should be a comprehensive supply chain map down to the lowest level for key portfolios such as space, aircraft, and munitions. This has been a rallying cry for many years, but Congress and the DoD can and should do more to enforce compliance. A full accounting of a program’s supply chain should be a necessary condition for a contract award and Congress should enshrine these authorities in statute if necessary.

Second, the DoD should use the data gleaned from supply chain illumination and request increased funding for the Industrial Base Analysis and Sustainment (IBAS) program. This initiative was created in 2014 to “ensure the resilience, security and technological superiority of the U.S. defense industrial base by identifying critical supply chain vulnerabilities, investing in workforce development and strengthening domestic production capabilities.” The Trump administration recently announced one such investment and has been making others outside the scope of IBAS to bulk up the supply chain more broadly. Although funding for this program has risen considerably in recent years, total spending since its inception is only $2.6 billion. Building a robust and resilient supply chain will take an order of magnitude more than the approximately $200 million per year the United States is currently investing.

Third, Congress can also help bolster vulnerable small businesses in lower tiers by attaching requirements that appropriations be passed directly down to suppliers or creating a pot of funds for certain critical supply chain vulnerabilities and funding those suppliers directly. The legacy primes have replaced the government as integrators and with that should come more responsibility to ensure the supply base is well capitalized. This could include legislating payment terms that directly favor suppliers. This would insulate suppliers from delayed appropriations and contracts and enable them to weather periods of uncertainty the same way that prime contractors can. Additionally, Congress can go further in mandating certain programs maintain two or more suppliers for certain critical components by providing funding or tax incentives to encourage new suppliers. This would create incentives for company creation in markets where there is only one supplier.

Finally, the DIB also just needs more suppliers. The country needs more founders willing to start companies in these lower tiers and more investors willing to bet on them. There is more opportunity here than investors currently realize. First, subtier suppliers can let their customers spend their resources on navigating the byzantine procurement process. Second, subtier suppliers can build products that will sell no matter who wins the prime contracts. This will not make sense for most venture capital firms, but private equity, investment banks, and, potentially, global investment management firms have a larger role to play.

Recommendations

To strengthen the supply chain bedrock of the DIB, Congress and the DoD should:

• Require supply chain mapping down to the lowest tier of a supply chain prior to awarding a contract award in portfolios critical to national security such as space, aircraft, and munitions.
• Increase funding for the IBAS program to scale investments in supply chain vulnerabilities.
• Bolster resilience by requiring that appropriations go directly to suppliers.
• Mandate dual-sourcing requirements for critical components to build market competition.

Conclusion

The story of the past decade is that billions in private capital have flowed into new defense technology companies but without any real organizing principles or coordination. Perhaps that’s why there are now 30 to 50 companies developing variations of attritable autonomous systems but only a tiny handful developing advanced sensors or receivers, or creating advanced manufacturing techniques for aerospace and defense—and even fewer dedicated suppliers.

Still, focusing attention and resources on a defense-only industrial base and supply chain is unlikely to be a winning long-term proposition. Due to the fact that the defense market has one buyer (and many sellers) and that the United States is not always preparing for or at war, this inevitably means that there will be contractions in defense spending. Furthermore, the recent phenomenon of defense-only primes is ahistoric. The arsenal of democracy has always depended on commercial manufacturing—the United States cannot wage industrial-scale war without it. Putting the industrial base on a true wartime footing would require Tesla and Ford Motor Company to temporarily cease producing Model 3s and F-150s in favor of aircraft and missiles.

The renaissance of defense technologists provides some promise. A feature of many of these new entrants is their plans to leverage commercial off-the-shelf technologies and thus in many cases separate supply chains. These supply chains are gaining new customers, which will hopefully bolster their survivability. Yet, only a coherent, multisector industrial policy will truly reinvigorate U.S. manufacturing capacity. A robust, resilient defense industrial base is only possible with a robust, resilient manufacturing industrial base. Any policies that pursue the former but not the latter will have short-term benefits but are unlikely to be sustainable over the long term.

About the Author

W. Jonathan Rue is a partner at MVP Ventures and an adjunct senior fellow with the Defense Program at the Center for a New American Security (CNAS). He previously served in a variety of roles in the Office of the Secretary of Defense, including as deputy assistant secretary for force development and emerging capabilities.

About the New American Industrial Base Series

This essay series, The New American Defense Industrial Base, features expert practitioners with experience in government, industry, and finance writing on the most pressing challenges in defense acquisition today. For more in this series, click here. The DIB series is made possible by general support to the CNAS Defense Program and corporate support for the series.

About the Center for a New American Security

As a research and policy institution committed to the highest standards of organizational, intellectual, and personal integrity, CNAS maintains strict intellectual independence and sole editorial direction and control over its ideas, projects, publications, events, and other research activities. CNAS does not take institutional positions on policy issues, and the content of CNAS publications reflects the views of their authors alone. In keeping with its mission and values, CNAS does not engage in lobbying activity and complies fully with all applicable federal, state, and local laws. CNAS will not engage in any representational activities or advocacy on behalf of any entities or interests and, to the extent that the Center accepts funding from non-U.S. sources, its activities will be limited to bona fide scholastic, academic, and research-related activities, consistent with applicable federal law. The Center publicly acknowledges on its website annually all donors who contribute.