In An Age Of Innovation, Big Defense May Be The Closest Thing Washington Has To A Real Industrial Policy

The bloom is off the rose that was Big Tech. Share prices have fallen. Workers are being laid off. Anger at the sector is widespread in both political parties.

The biggest tech companies in China are facing their own headwinds, thanks to the increasingly intrusive rule of Xi Jinping. But that doesn’t change the fact that America needs to stay ahead of China in the business of innovation.

Innovation, the process of transforming discoveries into useful products, is widely viewed as the key to military and economic supremacy. The question U.S. policymakers may need to face in the years ahead is how to preserve a robust rate of innovation if companies such as AppleAAPL
and Google falter.

Part of the answer may lie in the defense industry, especially among the biggest players. These companies are sometimes viewed as innovation laggards in popular culture, even though they lead the world in warfighting technology.

But they may have a larger role to play in promoting economic progress, for two reasons. First, the most important military technologies today are mainly of the dual-use variety, meaning innovations that have relevance in the commercial world—microelectronics, 5G communications, autonomous vehicles, etc.

Second, there is a long tradition of federal funding for technology development in the defense industry. It is the one sector of the economy where the government is the sole customer, and for which it therefore is expected to have a genuine industrial policy. There seems to be a bipartisan consensus on that score that does not exist with regard to any other industry.

Some of the biggest military contractors, such as BoeingBA
and Raytheon, have extensive commercial businesses reflecting the fungibility of their skills across diverse markets. But even among pure-play defense companies, especially the leading system integrators, there is a great deal of innovation going on relevant to the civilian economy.

To illustrate that point, let’s consider the scope and pace of innovation within Lockheed MartinLMT
. I choose Lockheed because (1) it is the biggest military contractor, (2) it is as close to being a pure-play defense firm as any of the first-tier companies, (3) it is more vocal than rivals in discussing its innovation objectives, and (4) I have greater knowledge of its activities by virtue of a multi-decade relationship with the company.

Like other top military contractors such as L3Harris and Northrop GrummanNOC
, Lockheed keeps much of what it does secret. A casual observer might not realize its space unit is the world’s biggest builder of spy satellites, or that almost all of the work that its aeronautics unit performs at the famed Skunk Works innovation center is classified.

Nonetheless, much of what Lockheed Martin does in the way of innovation involves the utilization of technologies with broad relevance in commercial markets—technologies like digital engineering, rapid software development, additive manufacturing, industrial robotics and the like.

What follows are several examples of how defense companies like Lockheed help to keep the U.S. on the leading edge of innovation, and how their roles in that regard might grow if the pace of commercial innovation slows. We may be entering a period similar to the “spinoff” era of the 1950s and 1960s, when advanced commercial products are derived from military breakthroughs rather than vice-versa.

University research. Technology breakthroughs typically begin as basic research at universities. Like other big defense companies, Lockheed has extensive ties to major research universities, where it collaborates on technology projects and recruits many of its 60,000 engineers. In hypersonics alone, the company has relationships with a dozen universities to explore areas like aerothermodynamics and material science.

Lockheed CEO Jim Taiclet has publicly cited the importance of schools like Penn State and the University of Central Florida as feeder institutions for his company’s technical workforce. One facet of that relationship is the preparation of engineers to work in disciplines such as artificial intelligence and cybersecurity. The company employs 10,000 software engineers, virtually all of whom are university-trained.

Venture capital. Many of the first-tier defense firms have venture-capital arms that take a minority ownership in tech startups well before they bring products to market. Lockheed Martin’s organization is called LM Ventures, and it has investments in over five dozen small tech enterprises. Lockheed has recently doubled the amount of capital available for high-risk investments in tech startups, even though company managers acknowledge that 90% of such startups will eventually fail.

In a typical year, LM Ventures assesses 1,000 companies, performs due diligence on 30-40, and ultimately invests in 16-20. The goal of these investments in areas like space, AI, autonomy and digital thread is to bring the startups to a point where they are mature enough to collaborate with Lockheed business units. Relevance to Lockheed military markets is the core discriminator in determining where bets are placed, but the innovations receiving venture capital typically involve dual-use technologies.

Workforce training. CEO Taiclet describes his company’s approach to finding talent as a comprehensive recruiting system that begins at the high-school level and extends all the way up to experts holding doctorates in technical fields. However, much of the training required to participate in high-end engineering occurs within the company itself, where academic skills are translated into practical problem-solving capabilities.

The company has established dedicated internal training programs in cybersecurity, artificial intelligence, and other technical areas. Taiclet notes that unlike some Silicon Valley companies, Lockheed recruits and employs much if its technical staff in locations not known as cradles of innovation. It thus plays a role in bringing technology skills to regions that have been, so to speak, under-served by the information revolution.

Innovation incubation. Even in a business where the government customer often claims tech data rights, Lockheed Martin generates a great deal of intellectual property. The company holds 14,000 technical patents, and in a typical year applies for over 500 more. Some of its defense-industry peers, like Boeing and Raytheon, possess even bigger patent portfolios.

Each of the company’s four major business units has one or more offices that manage research and development in advanced technologies. For instance, the space unit’s Advanced Technology Center investigates innovations in optical sensing, data analytics, secure communications, advanced materials and lasers. Much of this research is classified, but by patenting the most important breakthroughs, the company makes key products and processes accessible to other parts of the economy.

Cross-industry collaboration. Jim Taiclet came to Lockheed Martin after two decades in the tech sector, and has been outspoken about the need to tear down barriers between the defense industry and other industries involved in high-tech innovation. Under the corporate banner of 21st Century Security, Taiclet has promoted collaboration with commercial companies in accelerating the application of digital technology to company products and processes.

Among the companies that he has developed teaming relationships with are IntelINTC
, Nvidea, Verizon and other technology leaders in digital networking, gaming, 5G communications and related fields. This is a logical path for defense companies to follow during an era when so much military technology is derived from commercial innovations, promoting cross-fertilization of ideas between diverse industries.

Smart manufacturing. Lockheed Martin isn’t interested in just applying digital technology to its products; it wants to use the same technology to transform its internal processes, including how it designs complex systems, how it manages supply chains containing thousands of suppliers, and how it sustains weapons once they are fielded. An important facet of this effort is the construction of several “intelligent” factories at places like the Skunk Works.

Smart manufacturing involves the digitization of every facet of manufacturing to decrease costs and save time. To quote the company’s website, “Investments in robotics, artificial intelligence and augmented reality reduce the need for hard tooling, elevating the human experience to speed production and improve quality.” Similar investments by Lockheed’s competitors have given the U.S. defense industry some of the most advanced manufacturing facilities in the world.

All of this is made possible by the fact that the government customer recognizes the need for a coherent industrial policy in managing the defense sector. That policy dictates funding of innovations when they make sense, and may be a model for the broader economy in future years.

However, CEO Taiclet is undoubtedly mindful of the recent complaint made by the Pentagon’s top acquisition official that Silicon Valley hasn’t been much help in supplying what Ukraine needs to defeat invasion. In the end, defense needs to be about actually producing things, and Taiclet has been careful to pursue innovations that are relevant to both his shareholders and his government customer. His goal is to transform defense, not reinvent technologies that originated elsewhere.

Lockheed Martin is a contributor to my think tank and a longtime consulting client.