As of last month’s notes, the President was leaning toward expanding military operations against Iran. That has not played out, as his advisers pressed the case against a larger campaign, with the Chairman of the Joint Chiefs warning that a major operation would dangerously deplete interceptor inventories.
What changed is the shape of the conflict. Ukraine struck an Iranian vessel, pulling two conflicts that had run on separate timelines into contact with one another.
In response to the interceptor shortage, the Pentagon has continued to press industry to boost production of interceptors while the Army has opened test ranges to speed interceptor testing and development.
The war is settling into duration rather than resolution. Whether kinetic or not, we expect tensions in the region to remain high.
Beijing and Moscow Are Testing What the Alliances Will Bear
Overseas, our emboldened adversaries continue to probe our flanks. U.S. intelligence has assessed that Putin could test NATO’s resolve with a limited incursion rather than a general war within the next few years. China has announced a joint naval exercise with Indonesia in the waters east of Taiwan, which Taipei called “dangerous behavior that undermines the status quo.”
The responses tell us more than the provocations do. Taiwan is seeking to emulate Ukraine’s playbook, converging on the drone “hellscape” as its answer to an invasion fleet. Taipei has set a target of 100,000 drones a month by 2030 and is budgeting for procurement of more than 210,000 flying and seaborne systems for its own military.
While Taiwan has demonstrated its industrial bona fides with semiconductors, purging Chinese components from a drone supply chain is a different problem. In a timely example of this, cameras on the Royal Marines’ new Kraken-built drone boats were found to be sending signals to an internet address in China, traced to components sourced outside the UK. Even though the boats were British, the supply chain was not.
On the less glamorous end of the industrial base, a similar dynamic is playing out. Western governments are racing to bring explosives production back onshore after treating energetics as something someone else would make and outsourcing production to Asia and elsewhere.
Reversing decades of offshoring and rebuilding production and secure allied supply chains is slow, physical work. Our thesis has always had two halves: the autonomous, distributed mass these militaries now say they want, and the industrial base capable of actually building it. The examples above all sit on the second half.
NDAA Stalls in Congress over Iran War and Topline
Back stateside, Congress left for August recess without clearing a defense authorization bill. The House passed its version on July 22 by four votes; the Senate has not been able to open debate after a procedural vote failed in mid-July. There, the bill has largely become a referendum on war powers related to Iran. A second objection is the requested topline, which would push defense spending to historic levels while the administration cuts funding across other agencies.
Two takeaways are worth distinguishing for our portfolio companies.
First, the disagreement is over how much more to spend and whether to grant it while the war is unauthorized. Both bills authorize historically high levels. More importantly, acquisition reform, which drives most of what we underwrite, is among the least contested parts of the bills and maintains bipartisan support. Senate Majority Leader John Thune cited the multiyear procurement authorities on the floor as a reason to pass.
Second, timing is the real consequence. If authorization slips past October 1, a continuing resolution blocks new program starts and multiyear awards. That shifts award dates for some of our companies without changing the demand behind them, and it is less unusual than the coverage suggests: defense authorizations have arrived an average of roughly 45 days into the fiscal year since FY1977. Our portfolio companies are no stranger to government delays, and this is an additional reminder of the importance of remaining well-capitalized and managing runway.
While interceptor inventories are constraining U.S. strategy in the near term and Congress struggles to reach bipartisan consensus on next year’s defense authorization, the long-term direction of travel is clear. The articles below take each thread in turn.
Further Reading
The Pentagon Is Finally Buying (Some) Weapons From Startups The agency is using a surging budget to avoid choosing between startups and old-school contractors.
U.S. Intel Finds Putin Could Test NATO’s Resolve With Limited Incursion New assessment updates past forecasts that Russia’s leader wouldn’t provoke the alliance.
How a Drone ‘Hellscape’ Might Stop a Chinese Invasion of Taiwan Inspired by Ukraine’s battlefield gains, Taiwan is betting on drones to deter a potential Chinese invasion.
U.K. Discovers Component in Its Naval Drones Sent Signals to China No sensitive information was transmitted, but the finding underscores worries about military supply chains.
Western Powers Race to Bring the Production of Explosives Back Home At least 24 new projects are under way to reshore explosives or propellants across NATO countries.
House passes 2027 NDAA while measure remains stalled in the Senate Senate Democrats have blocked it over Iran war and concerns about the defense spending growth.