The share of Pentagon contracts held by U.S. Defense Technology companies has roughly doubled over the last year. However, they are still facing growing pains in their efforts to transform from startups to heavyweights that can build weapons at scale. The value of unlisted companies developing unmanned "wingman' fighter jets, autonomous AI software, and drone boats has risen this year. This coincides with a rise in the number of small Pentagon contracts. In February, the drone boat maker Saronic Technologies, who is building a Louisiana shipyard, was valued at around $4 billion. Anduril Industries - the drone and autonomous weapon startup headed by Palmer Luckey - doubled its value to $30 billion in late June. In a recent funding round, Chaos Industries, a radars and sensor company doubled its value to $4.5 billion. The Silicon Valley-backed firms now face a greater challenge, which is to move beyond research and prototyping contracts and compete with established defense companies. This was revealed in interviews and speeches given by over a dozen executives of the industry at this weekend's Reagan National Defense Forum, held in Simi Valley, California. The defense tech sector is booming. There are many people bringing innovation into the defense space," said Christopher Calio. He is the CEO of RTX. RTX is the defense giant that developed the Patriot missile defence system and the engine for the F-35 fighter plane.

"I'll say it, it's a different thing to innovate and design. Calio said that it is one thing to design and innovate, but another to scale up production.

SILICON VALEY GAINES A LARGER SHARE OF THE PENTAGON PIE According to Govini's data, an analytics company based in Virginia, defense startups won 1.3% of Pentagon contracts for defense firms during the first three-quarters of 2014, compared to 0.6% one year ago. The big defense companies, including Boeing, Lockheed Martin RTX, Northrop Grumman and RTX, have maintained their 92% share of Pentagon contracts. The share of European defense companies dropped to 6.6%, down from 7.4%. Anduril Chairman Trae Stevens said that more companies will need to compete for these large contracts. He added that "this is an extremely difficult business." The DOD (U.S. Department of Defense), however, will not create 10 new primes. "There's just not enough money." The annual Reagan Forum was a collision between eras. Four-star generals, Washington defense CEOs and baseball cap-clad drone and AI company founders debated how to scale up new technologies for battlefields against Simi Valley’s rolling hills. U.S. Secretary of Defense Pete Hegseth stated that the Pentagon will move away from a culture dominated by "prime", to a system in which nimbler, commercial companies will speed up weapon production to counter China's rapidly expanding military. Hegseth stated in his keynote address that "our objective is simple, even if it's monumental." "Transform the whole acquisition system in order to accelerate the deployment of capabilities, and focus on the results."

It's hard to change the culture of the Pentagon, according to defense executives. This is due in part, they said, because of entrenched political interest, a backlog for Pentagon mega-projects and a bureaucracy that has been accustomed with old ways. Also, powerful lobbying firms are able, among other things, influence government policy. Zach Shore, Chief Revenue Officer at Hermeus in Atlanta, a company that is developing a hypersonic unmanned military jet, says most defense tech companies are still a long ways from transitioning from a $10-$30 million prototype contract to a large program with production targets similar to those awarded by the Pentagon to big defense firms over decades.

Shore said, "That next level of bureaucracy is the next barrier that many companies will face." The Pentagon has awarded a large number of programs, including the $175 billion Golden Dome project, an Air Force fighter-jet initiative and a package of military aid to Ukraine, to legacy defense contractors. Jamie Dimon of JPMorgan Chase, who announced in October $10 billion in direct equity investments into defense, manufacturing, and tech companies, warned legacy defense contractors not to rest on their laurels.

He said that big companies also face a valley where they fall by the wayside. This is usually due to complacency and arrogance.

Newcomers and old GUARD FORGE partners

Many of the older guard in the defense industry responded to this call by expressing a willingness for partnerships with the next generation of defense companies. L3Harris Technologies' CEO Chris Kubasik said that as the defense industry base grows to support growth, it is important to use both the existing companies and new entrants. Shield AI announced a partnership with HII in September to build autonomous vessels. HII is America's largest shipbuilder. Anduril, a South Korean company called HD Hyundai Heavy Industries, announced last month that they would be collaborating to build ships both for military and commercial use. Zach Mears is Anduril's director of strategy. He said that the U.S. Defense Industry was nearing a tipping-point after decades where a small group of contractors dominated Pentagon contracts.

He said, "The light switch was in the middle of being turned." (Reporting and editing by David Jeans; Joe Brock, Mike Stone)

(source: Reuters)