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Before and after the recent passage of military aid for Ukraine, Israel, and Taiwan, The Center for Strategic & International Studies (CSIS), Defense-Industrial Initiatives Group, The German Marshall Fund, and the Wilson Center (amongst other credible outlets) offered wide-ranging perspectives on the impact on the domestic U.S. defense industrial base by continued aid to the world from the “Arsenal of Democracy.” Details here.
Exponential Organizations’ (ExOs), platforms, ecosystems, and sources of new value creation are based on the disintermediation (innovation that undermines established or incumbent structures) of a market, organization, or industry sector.
There is an argument that some of the information-enabled kinetic technologies, intelligence operations, and cyber warfare activities in Europe signify the disintermediation of war (i.e., the role of commercial drones in the war in Ukraine, the democratization of access to open-source intelligence tools typically only available to intelligence agencies or the powerful cyber war weapons available to non-nation-state actors).
A strategic suggestion to organizations experiencing the disintermediation of their industry and/or marketplace is to aggressively self-cannibalize (early and assertively), with ecosystems and platforms as the new value creation and capture architectures of a new business model (or—to start—a standalone but scalable business unit).
Based on direct experience and history, we know for a quantifiable fact that most stakeholders in traditional industries and markets have shown a strong cognitive bias against disintermediation as a “thing” and the idea that self-cannibalization is actually a “thing” as well – and even necessary. Call it market or company hubris or the result of “The Worst-Case Scenario is the Least Probable and Other Cognitive Biases.”
For more on our research and framework on the disintermedation of the defense industrial base, go to this link.
While some argue that Ukraine aid is a drain on the US economy, the numbers suggest that sustained support is a win-win for Ukrainians and the American people. A large portion of the money designated for Ukraine is being reinvested at home, bolstering the defense industry and sustaining American manufacturing jobs. This translates to more business for US companies and sustained employment for rural communities in which they operate.
Amid claims that the United States cannot foot the bill of a long, drawn-out war in Ukraine, a faction of Republican lawmakers is threatening to shut down the US government if further Ukraine funding is included in a continuing resolution. But this approach does not take into consideration the benefits to US strategic interests and the American economy. A large portion of the money designated for Ukraine is being reinvested at home, bolstering the defense industry and sustaining American manufacturing jobs.
So far, the American people have provided the lion’s share of Ukraine’s military aid—$46.6 billion with an additional package of $10.5 billion now under consideration. This support has been essential to Ukraine’s war effort, enabling its forces to reclaim occupied territory. And, critically, it serves key US interests—first and foremost, by defeating Russia’s imperialist ambitions and preserving territorial integrity in Europe. Beyond this, supporting Ukraine brings its own economic benefits.
For instance, Lockheed Martin, maker of the HIMARS—which has been central to Ukraine’s counteroffensive—plans to increase its Camden, Arkansas facility’s workforce by 20%, and recently announced increased profit projections through the end of the year. Similarly, General Dynamics has committed to building new production facilities in Mesquite, Texas, bringing money and jobs to the region. Change like this takes place only when the Pentagon sends strong and stable market signals to the defense industry, giving it the confidence to expand and hire.
Boost for US defense industry
Major gainers
Between the lines
The defense industry’s boom underscores a wider economic narrative where geopolitical conflicts inadvertently fuel industrial growth. European spending on US military hardware is described as “a generational-type investment,” with recent years’ expenditure matching the total of the previous two decades. Beyond immediate defense sector gains, the conflict and subsequent US aid to Ukraine are reshaping global economic landscapes. The WSJ report said that from surging LNG exports to Europe to increased foreign direct investment in the US, the war’s economic implications are vast, albeit with a nuanced impact on national employment and income levels.
The summary above provided by the Times of India is based on the following SWJ report (subscription required): How War in Europe Boosts the U.S. Economy.
…much of America’s military aid comes in the form of in-kind contributions, such as arms and ammunition taken from existing U.S. stockpiles. If Congress votes to finance more support for Ukraine, the lion’s share of this funding will go to domestic firms tasked with replenishing the Pentagon’s own armories.
Viewed in this light, aid to Ukraine starts to look a lot more attractive to people who adopt a narrow definition of the national interest. Who could oppose billions of dollars being allocated to U.S.-based businesses and their workers?
But while there are many good reasons to put U.S. resources behind Ukraine’s war effort, boosting the economic fortunes of ordinary Americans is among the very weakest.
The two primary mechanisms through which the United States is sending military support to Ukraine include presidential drawdown authority (PDA) and the Ukraine Security Assistance Initiative (USAI). PDA allows for the rapid transfer of weapons and defense services directly from U.S. stocks in the face of unprecedented crises. The value of equipment transferred to Ukraine under PDA is not a part of the $113 billion appropriated by Congress. Since PDA uses existing weapons stockpiles, this equipment has long been paid for, and in some cases has been sitting in U.S. warehouses for decades. As such, the value of the defense articles is assessed using what is called the “net book value,” or the historical cost of the equipment minus depreciation based on use life. As of December 2023, nearly $24 billion worth of equipment had been transferred to Ukraine from stockpiles under PDA. The benefit of PDA transfers to the United States has been the ability to clear out old stock and replace it with newer, more modern equipment.
As old equipment leaves the warehouses, substantial sums have been appropriated to replenish U.S. stockpiles that have been drawn down. As of November 2023, $25.9 billion had been appropriated, of which $16.8 billion had been obligated to replace equipment taken directly from U.S. inventories. Typically, and according to statutory authority, these items are not replaced with exactly the same systems; they frequently include older models that may no longer be in production and may no longer represent leading-edge capabilities. However, replacement and replenishment strategies are critical to ensuring that U.S. stockpiles are prepared for future conflict.
The second mechanism through which the United States has provided military assistance to Ukraine is through USAI, which allows the Ukrainian government to contract directly with U.S. industry, such as Lockheed Martin or RTX, for weapons procurement. The challenge for Ukraine with this approach is the timeline, as weapons manufacturing takes months or years. Ukraine is expending systems such as 155 mm ammunition at a very high rate, and current production rates and the long time required to ramp up production will mean that they do not have the requisite capabilities for self-defense. USAI will likely be most useful in refreshing Ukraine’s stocks postwar. Congress has obligated $10.5 billion for USAI, bringing total obligations, including PDA, to over $27 billion.
Regardless of the funding mechanism—whether replenishment for PDA or for USAI—this money flows into the United States’ DIB. This has direct, and substantial, impacts on what the DOD has identified as “prime vendors and critical suppliers in 37 states.”
From the CSIS report: Ukraine-Relevant Defense Spending by Congressional District | Created with Datawrapper
Source: The Department of Defense
The Inevitable Acceleration of Reshoring and its Challenges: The momentum towards reshoring, nearshoring, and friendshoring signals a global shift towards regional self-reliance. Each region will emphasize local manufacturing, food production, energy generation, defense, and automation. Reshoring is a complex process, with numerous examples of failures stemming from underestimating intricacies. Comprehensive analyses encompassing various facets, from engineering to finance, are essential for successful reshoring endeavors. See: Opportunities for Advantage
What is the Defense Industrial Base Consortium?: The Other Transaction Agreement (OTA) was also used recently by the Department of Defense (DoD) to award Advanced Technology International (ATI) “to serve as the consortium manager for the Defense Industrial Base Consortium (DIBC). This DIBC OTA will enable rapid research and allow access to commercial solutions for defense requirements and innovations from industry, academia, and non-traditional contractors.” As a result, we set out to learn more about the DIBC for the OODA Loop community. Details here.
The Inaugural U.S. National Defense Industrial Strategy: The first-ever National Defense Industrial Strategy (NDIS) was released last week by The United States Department of Defense (DoD). THE NDIS “offers a strategic vision to coordinate and prioritize actions to build a modernized defense industrial ecosystem.” Details here.
The Current Debate on ‘Forging the Defense Industrial Base for the Digital Age’: Overall, the war in Ukraine has acted as an accelerant in a clash between a wide range of points of view in the debate surrounding the future of war and the future of the defense industrial base. A sampling of various voices on the issues is captured here which have been curated from an archive of sources from Q422 (a timeframe which appears, in hindsight, to have been a crucial period in the debate) along with a vital hearing from just last week.
The Disintermediation and/or Self-cannibalization of the Defense Industrial Base: A strategic suggestion to organizations if they are experiencing disintermediation is to aggressively self-cannibalize, with ecosystems and platforms as the new value creation and capture architectures of a new business model (or – to start – a standalone, but scalable business unit). Exponential Organizations’ (ExOs), platforms, ecosystems, and sources of new value creation are based on the disintermediation (innovation that undermines established or incumbent structures) of a market, organization, or industry sector.
Designing, Quantifying, and Measuring Exponential Innovation: The Exponentials Framework is a proven framework for the design of a technology ecosystem built to sustain the exponential scale and speed of the current technological and scientific era. Exponentials are not futurist high-level concepts. They are not intellectual bugs, but the central organizing feature of the technological road ahead.
Technology Convergence and Market Disruption: Rapid advancements in technology are changing market dynamics and user expectations. See: Disruptive and Exponential Technologies.
The New Tech Trinity: Artificial Intelligence, BioTech, Quantum Tech: Will make monumental shifts in the world. This new Tech Trinity will redefine our economy, both threaten and fortify our national security, and revolutionize our intelligence community. None of us are ready for this. This convergence requires a deepened commitment to foresight and preparation and planning on a level that is not occurring anywhere. The New Tech Trinity.
The Revolution in Biology: This post provides an overview of key thrusts of the transformation underway in biology and offers seven topics business leaders should consider when updating business strategy to optimize opportunity because of these changes. For more see: The Executive’s Guide To The Revolution in Biology
Quantum Computing and Quantum Sensemaking: Quantum Computing, Quantum Security and Quantum Sensing insights to drive your decision-making process. Quantum Computing and Quantum Security
AI Discipline Interdependence: There are concerns about uncontrolled AI growth, with many experts calling for robust AI governance. Both positive and negative impacts of AI need assessment. See: Using AI for Competitive Advantage in Business.
About the Author
Daniel Pereira is research director at OODA. He is a foresight strategist, creative technologist, and an information communication technology (ICT) and digital media researcher with 20+ years of experience directing public/private partnerships and strategic innovation initiatives.
Informing your decisions with actionable intelligence
Informing your decisions with actionable intelligence