US defence industry faces uncertainty despite production ‘boomlet’

The US defence industry is enjoying a munitions “boomlet” thanks to jumbo aid packages for Ukraine, Israel and Taiwan, allowing it to better meet surging orders after years of declining demand.

Aid bills for the three countries allocated nearly $13bn for boosting weapons production at the US’s five biggest defence groups — Lockheed Martin, RTX, Northrop Grumman, Boeing and General Dynamics — and their suppliers.

But despite the jump in funding, defence experts warn that uncertainty around future contracts means the sustained, longer-term growth needed to supply its — or its allies’ — armed forces is not guaranteed.

“It is not quite a bonanza” for missiles and munitions “but it is, for the first time in a long time, a significant uptick in this area that has been sustained”, said Stacie Pettyjohn, director of the defence programme at the Center for a New American Security, a think-tank.

She added that the injection of aid funds “alone isn’t going to fix the problem [of inconsistent demand] or be a long-term solution, as these are sort of one-off Band-Aids”. 

The war in Ukraine revitalised global demand for weaponry as western nations donated their stocks to Kyiv, and moved to bolster their own defences and replenish their stockpiles.

The Ukraine bill set aside $5.4bn to develop and expand production of artillery, air defence munitions, anti-drone systems and critical munition components. The aid to Israel included $1bn to expand artillery production, while the Indo-Pacific bill allocated $3.3bn to expand the submarine industrial base, $2.5bn for a submarine and $133mn for making artillery and cruise missiles. 

Soon after the Ukraine war broke out, aerospace and defence executives warned that it would take years to ramp up to meet demand due to supply chain snarls, labour shortages and a fragile defence industrial base. They say they would like more multiyear contracts to allow them to invest in new facilities and expand production capacity.

Even with the extra funding, defence analysts say the US could still struggle to supply its allies should a conflict break out between China and Taiwan.

The structure of the industry has made it difficult to respond to sudden changes in demand. In the 1990s it began consolidating rapidly and eventually adopted “lean manufacturing” — a just-in-time delivery strategy. This left supply chains populated by fewer companies, leaving limited recourse should something go wrong at a supplier.

It also left the five big defence companies interlinked, with each subcontracting to the others on various programmes, which meant that a problem for one affected the whole industry.

As a result, when the war in Ukraine broke out, they quickly found their production lines stretched to the limit.

Mark Cancian, a former Pentagon procurement official now at the Center for Strategic and International Studies think-tank, estimates the aid funding will increase the Pentagon’s procurement spending by 5 per cent or 6 per cent between 2024 and 2030.

“This will be a boomlet” for defence companies, he said, adding that “for the defence industry, that’s nice . . .[but] it’s not a huge spike”.

Still, more than two years on, the sector is in better shape than it was before the Russian invasion. The industry is recruiting workers at the fastest clip since the end of the cold war. And US executives are bullish about their businesses’ top lines.

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Lockheed chief financial officer Jay Malave said late last month that with the current conflicts, the group’s missiles division is “going to be our highest grow over the next three or five years”, at an estimated $750mn annually. Revenue across the entire company is increasing more than originally anticipated this year.

Northrop Grumman has tripled its production of rocket motors — which propel tactical missiles — in recent years, and chief executive Kathy Warden said the new funds will allow it to boost capacity further.

Meanwhile, General Dynamics opened a new ammunition facility in Texas at the end of May, which chief executive Phebe Novakovic has said will increase production of sought-after 155mm ammunition rounds by 83 per cent.

But the long-term future of government funding for weaponry remains uncertain. While US President Joe Biden signed a 10-year bilateral security pact with Ukrainian President Volodymyr Zelenskyy this month, the agreement could be torn up by Donald Trump should he end up back in the White House. 

Republicans put up fierce resistance to passing the supplemental aid bill, and many US voters are sceptical about continued assistance for Kyiv, even though about 86 per cent of the military aid will be spent in the US.

The most recent FT-Michigan Ross poll found that nearly half of respondents think Washington is giving too much aid to Ukraine, while 45 per cent believe too much is going to Israel.

“It makes it really difficult for industry to plan with all the uncertainty,” said Elizabeth Hoffman, director of congressional and government affairs at CSIS. That and the systemic weakness “prevent industry from really ramping up probably in the way they — even Congress and the administration — would like to see”, she added.

Hoffman added that the Pentagon had yet to sign contracts from supplemental packages that would show its longer-term commitment to the industry.

The exception is in munitions production. New money has been going towards expanding production of High Mobility Artillery Rocket Systems (Himars) and the guided multiple-launch rockets (GMLRS) that they fire, as well as Javelin and Stinger missiles, rocket motors and AIM-9X Sidewinders, which are short-range, air-to-air missiles, among others. 

Almost everything in Lockheed’s missile portfolio “is increasing its rate of production over the next couple of years”, according to chief operating officer Frank St John. Production capacity for its Himars is expected to double from its 2022 level by the end of this year, while its annual production of GMLRS has jumped from about 6,000 to 10,000 this year, and is expected to rise to 14,000 by 2025.

Separately to the aid bills, the Pentagon allocated more than $2.8bn into expanding weapons — and particularly ammunition — production between February 2022 and January of this year.

The money is helping companies rapidly expand their ammunition production facilities, modernise plants to speed up the manufacture of propellant charges, hire more workers and add shifts. It will also be used to construct a new factory for producing metal shells.

Most of the funding — more than $2bn — will be used to boost production of 155mm artillery shells, which are vital for Ukraine’s frontline battles. With the injection of funds, defence companies could ramp up to a production rate of 2mn rounds in less than two years, far faster than the 12 years it would have otherwise taken, according to the US Government Accountability Office, the congressional watchdog. 

Last September, the Pentagon’s top procurement official, William LaPlante, said the US Army has a production goal of 100,000 155mm shells per month by 2025. The current monthly rate is about 40,000, up from 14,000 in early 2023.

The importance of the production for Ukraine’s war effort was seen during the congressional aid delay, when Kyiv’s frontline units had an ammunition drought and ran out of 155mm shells. The flow resumed soon after the new aid bill passed, but just weeks ago gunners were still rationing their rounds.

Additional reporting by Christopher Miller in Kyiv