An Assay on Defense Tech

America can win the “Great Power Competition.” Here’s how.

Prelude

If you fully want to understand the thinking behind this piece, I recommend reading these articles here in the order they are listed before reading any further:

1. American Dynamism — Or Inertia?

2. The $3.5 Trillion ‘Catch 22’ of Re-Globalization

3. SpaceX — The Promise and Potential of U.S. Industrial Policy?

4. Red Planet Capital: The NASA-backed VC Firm That Never Was

5. The Most Important Schism Within The U.S. That No One Is Talking About

6. What Happened To Optimism In America’s Tech Industry?

Introduction

Amid today’s raging geopolitical conflicts, I came across this quote from George Kennan, one of America’s preeminent diplomats who architected the US’s containment policy towards the USSR:

“It is rather a question of the degree to which the United States can create among the peoples of the world generally the impression of a country which knows what it wants, which is coping successfully with the problems of internal life and with the responsibilities of a World Power, and which has a spiritual vitality capable of holding its own among the major ideological currents of the time.”

Kennan’s deep, pensive reflection on the purpose of American hegemony was common for his time but rare for ours. For weeks, I’ve asked myself, who today within the US foreign policy establishment could deliver an equivalent rumination with confidence in America’s current capabilities and position in the world?

I finally got my answer from Ben Rhodes, former Deputy National Security Advisor under President Obama, in his latest piece in Foreign Affairs, “A Foreign Policy for the World as It Is.”

I was not impressed. 

I found Rhodes’s perspective and elaboration wanting. 

This quote, in particular, is the principal axis of his piece: “Meeting the moment requires abandoning a mindset of American primacy and recognizing that the world will be a turbulent place for years to come.”

Where did this sudden belief in the end of American primacy emerge? I first saw the provocative claim raised in Fareed Zakaria and Hemant Taneja’s Feburary 2023 article, “Geopolitics Are Changing. Venture Capital Must, Too.”

The two authors argue, “The era of American hegemony is ending. It is being replaced by a new geopolitical world order defined by great power competition and increased nationalism, a transition that will have enormous consequences for the global economy.”

Jake Sullivan, National Security Advisor to President Biden, stated in his April 2023 address, “But the last few decades revealed cracks in those foundations. A shifting global economy left many working Americans and their communities behind. A financial crisis shook the middle class.  A pandemic exposed the fragility of our supply chains. A changing climate threatened lives and livelihoods.  Russia’s invasion of Ukraine underscored the risks of overdependence.

So this moment demands that we forge a new consensus.”

Is this an admission that the old Washington consensus failed?

More recently, Bloomberg columnist Andreas Kluth nakedly states in a nihilism-drenched headline, “US Exceptionalism Is Dead No Matter Who Wins the Election.”

Where the hell did all of this pessimism come from all of a sudden? It’s almost like Thiel’s pessimism about the tech industry has spread to all corners of life within America’s power centers.

Except for Wall Street. 

JPMorgan CEO Jamie Dimon produced an unapologetic defense of America in his 2023 Annual Report to the firm’s shareholders:

“There is no alternative to American leadership.

In the free and democratic Western world, and, in fact, for many other countries, there is no real or good alternative to America. The only other potential superpower is China. Other nations know they can rely on the founding principles of America. If we reach out our hand, most nations will happily take that hand. America is still the most prosperous nation on the planet, which not only can guarantee our military strength but also positions us to help our allies develop and grow their nations (though we should minimize the “our way or the highway” type of behavior).”

How refreshing to hear. 

Dimon is right. America can still lead and win amid a changing and challenging geopolitical landscape. 

The banking chief’s faith lies in America as it is today, stating, “America still has an enormously strong hand — plenty of food, water and energy; peaceful neighbors; and what remains the most prosperous and dynamic economy the world has ever seen, with a per person GDP of over $80,000 a year. Most important, our nation is blessed with the benefit of true freedom and liberty. See the sidebar on the amazing power of freedom later in this section.”

It seems we can overcome Thielian pessimism with Dimonian optimism. Pax Americana doesn’t have to end; the eight decades it has sustained can become eight centuries.

There is a path for America to continue to win. 

As Thiel said, “It is a paradox of our time that the path to radical progress begins with moderation.”

But will we take the first step towards material progress in the world of atoms and not bits?

I now present to you that path. Welcome to my Assay on Defense Tech. In this Assay, I’ll highlight the key trends in technology and international relations that venture capitalists and the government will invest in for years and decades to come, provide a market map, and then summarize this piece with a detailed conclusion.

Overarching Trends:

Industrial:

• Drones have changed the nature of warfare. They are playing a pivotal role in the war in Ukraine on both sides.

• The promise of autonomous vehicles nears as liDaR technologies continue to drop in cost, making them no longer cost-prohibitive to integrate into the latest car models that rely on radar and cameras currently.

• Connectivity continues to grow unabated. Materion states, “5G connectivity is currently enabling and fueling growth in mobile communications, data computing, autonomous/connected vehicles, the internet of things (IoT) and smart industry. Mobile network data traffic grew 40% from 2021 to 2022, reaching 118 EB (exabytes = 1 billion gigabytes) per month.”

Geopolitical:

• The US continues its small yard, high fence approach to technological national security by levying tariffs on China in early May.

• Despite U.S. sanctions on China’s semiconductor industry, the latter still progresses in its development.

• As conflict rages on in Eastern Europe, the Middle East, and the South China Sea, the US defense industrial base falls under more strain. From the WSJ: “U.S. officials worry that the conflict is simply not sustainable for the U.S. defense industrial base, already strained by the demands for weaponry from Ukraine and Israel.”

Market Map:

Courtesy of Pitchbook.

Notable Standouts: Andruil, Palantir, Skydio, Hadrian, Varda, Factorial, and Sila.

Conclusion:

There are many promising opportunities within the defense tech sector that the U.S. government and venture capital firms can support with funding.

However, will we see a renaissance of the nation’s defense industrial base?

There are three major obstacles to overcome.

First, Thiel finds such a task impossible because our nation lacks belief in rational planning - led by our government and supported by the private sector - to achieve long-term, capital-intensive goals. As he explains in a 2012 conversation with Francis Fukuyama, “If there is going to be a government role in getting innovation started, people have to believe philosophically that it’s possible to plan. That’s not the world we’re living in. A letter from Einstein to the White House would get lost in the mail room today. Nobody would think that anyone would have that kind of expertise.”

Second, Dimon is not a fan of massive industrial policy, relaying his preference in the 2023 Annual Report (emphasis added): “Industrial policy is now necessary, but should be carefully constructed and limited.”

Finally, the Pentagon itself isn’t that keen on opening up its pocketbook (read: procurement contracts) to startups. Per the Wall Street Journal (emphasis added):

“Venture-backed companies were awarded less than 1% of the $411 billion Defense Department contracts awarded in the government’s fiscal year through September, according to data compiled by Govini, a defense software company. That is only a slightly larger share than in 2010 when venture-backed companies received a half percent of the $373 billion the department spent, when only a small number of startups were building military technology.”

Wall Street and Silicon Valley are at odds with the US Government for different reasons when all three must be aligned. Only the government can coordinate long-term innovation across various technological sectors that fall under national security.

Industrial policy should not be limited but pursued with reckless abandon.

The U.S. can win this “great power competition,” but only if its decision-makers understand the true nature of the power and the competition at stake. Dimon is bullish on America compared to Rhodes and Thiel because America is the undisputed financial superpower. Being the de facto financial superpower gives the US a great deal of leverage in managing geopolitical conflicts in its favor. Our nation’s global hegemony rests on this “exorbitant privilege.”

However, as I wrote in one of my prior pieces, America’s monetary advantage may not last forever:

"What will happen to America if China succeeds in becoming a financial superpower and displaces our nation’s role as the financial center of the world?”

The competition isn’t military in nature, given that the major conflicts unfolding right now are proxy wars, not direct wars, between the armed forces of the Great Powers.

It’s financial.

Thus, America has a limited time to act before the true “great power competition” begins.

However, the US already has everything it needs to win because it already has a successful industrial policy in the form of SpaceX and Tesla. The government contracts and subsidies, respectfully, that the US government either issued or distributed to Elon Musk’s companies led to some of the greatest industrial success America has seen in the past two decades.

In SpaceX’s case, its positive collaboration and support from NASA enabled the former to stay alive during the 2008 Great Financial Crisis and ultimately become a reliable prime contractor for the latter. The public-private sector partnership pioneered by Michael D. Griffin and Musk was so successful, that in 2013, NASA’s Aerospace Safety Advisory Panel stated, “we would encourage NASA (and other Government agencies) to consider adopting similar approaches where possible.”

Unfortunately, VCs use SpaceX’s success as a cudgel against the government’s ineptitude and sloth. The government only considers the short-term benefit of having a new vendor serve its needs.

Both of these perspectives are shortsighted and flawed. Producing just one SpaceX, Tesla, Andruil, or Palantir is insufficient. We need multiple industrial champions in every critical technology sector related to America’s national security concerns.

The task now becomes: how does the US government refine the process of supporting and maturing defense tech companies to produce multiple industrial champions in each technological area of national security?

The US has an existing industrial blueprint with NASA and SpaceX! The Department of Defense’s Office of Strategic Capital should study, replicate, and scale on NASA-SpaceX’s existing success within the defense industrial base in the key technology areas it has identified.

If the US gets this wrong, the consequences are dire. National Security Advisor Jake Sullivan aims to protect “our foundational technologies with a small yard and high fence.” This is currently being done through sanctions - but there’s a risk of this backfiring against China and Russia.

America cannot, and should not, sanction or tariff its way to supremacy. Hegemony can only be won by outcompeting our geopolitical adversaries through raw, large-scale industrial might.

Chinese VC and political scientist Eric X. Li provided a different perspective on Sullivan’s “small yard, high fence” approach (emphasis added): “I'm in the technology business, and there is a term invented by the Americans that has to do with my business called 'small garden, tall walls.'

It means that they want to keep the best technology in the small garden and erect very tall walls so the rest of us, or people they don't like, cannot access it. I borrowed that concept and took a look, asking, 'Who are in the small garden? Who are outside the walls?'

[The West] form a small number of countries that, at the moment, account for about half of the world's GDP but maybe only a third of its growth.

If you look at BRICS or the rest of the world, we're about half the world's GDP but 60% to 65% of growth. We now trade amongst ourselves more than we trade with them.

Since last year, I think, the Global South trades more amongst ourselves than with the so-called Global North. I want to turn the idea upside down.

I think the Americans first came up with the idea called 'the West and the Rest.' The reality is actually the world and the West.

We are the world, my friends. We are the world. They are the West, which is a small garden, and they want to erect high walls.

That's great. Keep them inside."

Li’s words are something to think about.

The US already has everything it needs to win, but internal strife between Wall Street, Silicon Valley, and the Pentagon complicates matters and makes the possibility of America losing tangible.

It’s almost as if it’s not America versus China…but America Against America.

Global hegemony is not China’s to win but America’s to lose.

George Yeo, former Foreign Minister of Singapore (and Class of 1985 Harvard Business School, Baker Scholar!) elaborates (emphasis added):

“China doesn't want to be number one politically, [...] it doesn't want to take on the burden of being the global hegemon, the global policeman. So in a multipolar world, the US can still be Primus Inter Pares, first among equals, because of the English languages, because of standards, because the US itself is a metasystem.”

As Kennan implied, we can’t have hegemony for hegemony’s sake - it has to make sense for the US and the rest of the world.

Putin’s war against Zelensky and Ukraine has woken the U.S. and the West from its historical slumber. Journalists foolishly claim that the Ukrainian-Russian war has restarted history or is the return of history.

Have they ever thought that history never ended, that it never left?

Other nations continued to progress in pursuing their political projects “all while we, [America], slept,” Dimon bluntly reflects.

Was Fukuyama wrong? Did history truly end back in 1989?

He is right. But not for the reasons you think. I’ll leave you all with one last parting question:

Real ones know the answer.

As always, thank you for reading!

Soda