The Government Role
The push to revitalize the U.S. Defense Industrial Base (DIB), expand industrial production, and maintain military capability advantages is being driven by Washington. As the Pentagon is the sole or dominant customer for many defense contractors, government policy, procurement, and budgeting are crucial to building and sustaining a viable defense industry.
Where these three elements are directed also determines whether private investment can be turned into durable military production capacity.
For several decades, the trend in aerospace and defense mergers and acquisitions was about achieving greater scale.
A pivotal moment came in July 1993, during the infamous “Last Supper,” when then-Secretary of Defense Les Aspin and Deputy Secretary William Perry met with around 25 chief executives from leading U.S. aerospace and defense firms.
Perry presented projections showing significant future defense procurement cuts. The message to industry was clear: consolidate to remain viable, with the government prepared to approve mergers and help cover restructuring costs rather than rescue struggling companies.
What followed was a decade of consolidation, as corporate leaders pursued greater scale to remain competitive. By the end of this process, 51 defense prime contractors had been reduced to five: Boeing, General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon (now RTX).
By the early 2010s, concerns were emerging about the consequences of this market concentration.
China’s expanding military-industrial capacity and technological advancements presented a peer challenge unseen since the Soviet Union.
Meanwhile, the effects of consolidation raised questions about industry's ability to surge production during a security crisis or open conflict. The growing concentration of defense procurement also created higher barriers to entry for commercial technology firms and nontraditional suppliers.
Russia's full-scale invasion of Ukraine in February 2022 reinforced the urgency of these concerns, demonstrating that great-power conflict remained a real possibility and highlighting the difficulty of sustaining a prolonged, intensive war without sufficient industrial capacity and resilient supply chains.
The challenge presented to U.S. officials therefore involves expanding defense production while encouraging innovation in advanced technologies and munitions at a lower cost per unit.
The U.S. government has utilized several tools to help address the problem.
Multiyear Procurement (MYP), long-duration offtake agreements, and nonbinding Memorandums of Understanding (MOUs) can provide signals about future demand. One example is the DoD's reported 10-year rare-earth magnet purchase agreement with MP Materials. By making demand more predictable, these arrangements can help businesses assess whether investments in new facilities, equipment, and production lines are commercially viable.
Financing mechanisms are equally important. The Office of Strategic Capital (OSC), established in late 2022, provides direct loans and small business investment companies (SBICs) debentures. The Industrial Base Fund also received $8.3 billion in multi-year funding under the One Big Beautiful Bill Act of 2025 to strengthen critical supply chains.
Beyond traditional procurement and financing, the Economic Warfare Unit (EWU), working alongside OSC and senior Department leadership, is described as taking a more active role in using financial mechanisms to advance national security priorities. Its stated functions include engaging capital-market leaders, influencing investment incentives, encouraging private investment ahead of formal acquisition cycles, and identifying and countering adversarial foreign capital in critical supply chains.
The underlying principle is that government can influence the risk-return calculations facing companies and investors. By aligning commercial incentives with national security priorities, it can help direct private capital toward strategically important capabilities and suppliers.
Public-private cost sharing provides a practical example. Under Title III authorities, government awards can help attract substantially larger private investments in critical industrial infrastructure.
One such example involves the creation of a $550 million e-VAC advanced magnets production facility. In September 2023, the Office of the Assistant Secretary of Defense for Industrial Base Policy awarded $94.1 million to Vacuumschmelze (VAC), a leading German manufacturer of rare earth permanent magnets, to partially assist in establishing this plant. The government award represented approximately 17% of the total cost and was reported to leverage $335 million in private equity capital.
Demand aggregation also plays a part.
Under the DoD's Critical Chemicals Pilot, the Manufacturing Capability Expansion and Investment Prioritization (MCEIP) Directorate has reportedly leveraged $177 million in private capital, representing a 25:1 private-to-public ratio, to develop domestic supply chains for 12 essential chemicals. By combining defense demand with purchases from U.S. commercial buyers, the DoD can expand the total addressable market (TAM) for chemical producers.
This matters because private investors evaluate opportunities based on expected risk-adjusted returns and the size of the addressable market. Government actions can therefore help determine whether capital flows into new production capacity or stalls because demand is uncertain, investment risks are too high, or administrative barriers remain.
Although some may question the government’s growing role in capital markets, today’s approach has a historical precedent.
Between 1940 and 1945, President Franklin D. Roosevelt's administration used the Defense Plant Corporation (DPC), operating under the Reconstruction Finance Corporation (RFC), to support industrial expansion ahead of and during U.S. involvement in World War II.
Faced with the need to expand production rapidly, the government committed financial resources to build industrial capacity, helping lay the groundwork for what became known as the Arsenal of Democracy.
After decades of military downsizing associated with the “Cold War dividend,” and an industry increasingly reliant on lean production and just-in-time delivery, the United States is once again seeking to rebuild its defense industrial base.
But the task is not simply about buying more military equipment. It is about developing greater industrial capacity, supply-chain resilience, and the production scale needed to sustain military power over time.
Public investment helps serve as an anchor for private capital, but the ultimate measure of success is whether that investment delivers sustained production at the scale and speed national security requires.
