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Musk-Trump tandem threatens big defense contractors

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Small defense technology firms seek to benefit

By Mike Stone, Joe Brock

SIMI VALLEY, California, Dec 9 (Reuters) -

P resident-elect Donald Trump's planned U.S. government

efficiency drive involving Elon Musk could lead to more joint

projects between big defense contractors and smaller tech firms

in areas such as artificial intelligence, drones and uncrewed

submarines, according to interviews with company executives.

Musk has indicated that Pentagon spending and priorities will be

a target of the efficiency initiative, spreading anxiety at

defense heavyweights such as Boeing ( BA ), Northrop Grumman ( NOC )

, Lockheed Martin ( LMT ) and General Dynamics ( GD ).

Smaller military technology companies such as artificial

intelligence software firm Palantir ( PLTR ) and drone-maker

Anduril have been buoyed by the prospect of Musk further

loosening the grip that defense giants have held on the

Pentagon's budget for many decades.

Participants at the Reagan National Defense Forum, a summit

in Simi Valley, California, that brought together corporate

executives, U.S. military leaders and lawmakers, said they

expect smaller tech firms to play a bigger role given that Musk,

one of their own, is entering a position of enormous influence.

Musk and many small defense tech firms have been aligned in

criticizing legacy defense programs like Lockheed Martin's ( LMT ) F-35

fighter jet while calling for mass production of cheaper

AI-powered drones, missiles and uncrewed submarines.

Such views have given major defense contractors more

incentive to partner with emerging defense technology players in

these areas, some having strong personal relationships with Musk

and his companies such as SpaceX and Tesla, according to

executives at technology and big defense firms.

One senior executive at a top defense contractor, speaking

on condition of anonymity, told Reuters that contract

negotiations by his company with smaller military tech providers

have been "on steroids" since Trump's Nov. 5 election victory.

The amount of money available for the newer defense

companies might be limited, however. Less than 20% of the

Pentagon budget buys weapons systems and, historically, only

around 1% goes to brand-new program purchases like those being

offered by these young market entrants, according to Tara Murphy

Dougherty, CEO of defense acquisition software company Govini.

These emerging firms could benefit from teaming up with the

big legacy contractors if the newer companies want to quickly

scale production of new weapons and deploy new technology

platforms in the field, according to executives at the summit.

"What we're locked into is a current worldview in defense

that everything is zero sum. If you're growing, that means I'm

shrinking. I don't think that's true," Shyam Sankar, Palantir's ( PLTR )

chief technology officer, told Reuters on the sidelines of the

two-day summit, which ended on Saturday.

"We need to help the Primes," Sankar said, referring to the

big legacy contractors, "once you get past a zero-sum mindset,

that actually everyone can be better off."

In a potential sign of things to come, Palantir ( PLTR ) announced on

the eve of the summit a deal to partner on defense AI with Booz

Allen Hamilton ( BAH ), a 110-year-old military contractor.

MUSK'S NEW ROLE

Trump, who takes office on Jan. 20, named Musk and Vivek

Ramaswamy, the founder of a pharmaceutical company, on Nov. 13

as co-leaders of a government efficiency initiative intended to

slash government spending, dismantle federal bureaucracy, cut

regulations and restructure agencies.

The Pentagon, with a budget around $850 billion, accounts

for half of U.S. discretionary spending - the money formally

approved by Congress during the annual appropriations process.

The Collaborative Combat Aircraft, or CCA, program is a

project that could offer more access to smaller defense players.

The CCA would be a smaller drone in a family of systems centered

around a sixth-generation fighter jet - the Next Generation Air

Dominance, or NGAD, program meant to replace the F-22 fighter

jet and give the United States the most powerful weaponry in the

sky.

Anduril and General Atomics were selected in April to

design, build and test prototypes for the CCA program -

demonstrating that smaller companies had innovative ideas for

the vehicle. A future production decision would lead to billions

of dollars, but a wider group including defense giants Lockheed

and Northrop Grumman ( NOC ) could also compete to win that contract.

Drone makers such as Kratos Defense, AeroVironment ( AVAV )

and Hermeus are also well-positioned if there is a push

to surge production of autonomous vehicles.

Software providers and services contractors such as SAIC

and Leidos Holdings ( LDOS ) may benefit because their

products can be deployed quickly to fill the bureaucratic

functions that Musk hopes to cut, according to industry sources.

It is widely expected that space will get a boost under Trump,

with SpaceX one obvious beneficiary.

Company executives, military leaders and U.S. lawmakers

debated at the summit the extent to which Trump and Musk would

be able to overhaul the Defense Department, given that its

budget funds 2 million American jobs and that many programs are

worth tens of billions of dollars and locked in for years.

Musk faces a major challenge to push through structural

changes given that the Pentagon budget is approved by lawmakers,

many of whom have defense programs in their states.

Republican U.S. Senator Deb Fischer during a panel

discussion at the summit said any major changes to the Pentagon

budget would have to be handled by Congress, not Musk. Fischer

offered a challenge to any defense firm advocating major

reforms.

"Every one of you needs to propose a program that you

personally benefit from that you'd be willing to cut," Fischer

said.