DoD’s New Pushback Against Chinese Money In US Defense Industry

WASHINGTON: Faced with a massive spike in Chinese companies burrowing into the US defense manufacturing base, a new Pentagon effort has approved more than $311 million in potential partnerships between US venture capital firms and small tech firms since January in an attempt to keep Chinese money — and influence — out.

In recent years, Chinese investment in small US tech and manufacturing firms has increased by a staggering 420% according to one analysis, an avalanche of money that could directly impact national security if that spigot were turned off in a time of crisis.

In an attempt to reverse that trend, in January then-Pentagon acquisition chief Ellen Lord established the Trusted Capital program to marry vetted US investors with small tech firms focused on areas like artificial intelligence, biotech, and other emerging technologies, an effort that has been picked up by the Biden administration.

Its work will likely be something of a cat-and-mouse game between the US and various state-backed Chinese and Russian companies. “Our adversaries are very well aware of how we’re trying to find ways to avoid having them” involved in US critical supply chains, said Katie Arrington, chief information security officer for the Pentagon’s acquisition office.

The issue is vast, and vastly complex, given the latticework of global companies and investors involved in global supply chains.

Between 2010 and 2019, the presence of Chinese investment in the US defense supply chain increased by a staggering 420% according to Tara Murphy Dougherty, CEO of Govini, a decision science firm.

“They’re just as adept to trying to find out ways that they can get in there without us seeing it, so that’s why this is has to be a whole of government approach. We need to work together, because the likelihood that a supplier of any sort is only involved with one federal agency or one particular company is slim to none.”

On Feb. 24, President Joe Biden signed an Executive Order targeting semiconductor manufacturing, batteries for electric vehicles; pharmaceuticals, and critical and rare earth minerals used in electronics for year-long studies to find ways to bring some of those manufacturing capabilities to the US.

Supply chain breakdowns over the past year of Covid shutdowns and disruptions have driven the issue home, as has the wider recognition that critical components like semiconductors used commercially and in military programs are manufactured almost exclusively in just a few countries: China, South Korea, and Taiwan. That makes them extremely vulnerable to any disruption in manufacturing or shipping caused by US/China tensions. 

As far as the Pentagon program goes, about 50 venture capital firms have already been vetted to take part in the effort, with others in the pipeline.

Once the investors and companies are approved, they can access the Trusted Capital Marketplace portal which allows investors to search for companies with promising technologies looking for investment.

The DoD has long had issues with luring some of the most innovative small companies into its orbit due to the very unique and relatively limited market it can offer.

Arrington says one of the first questions the DoD is asking firms is, “what is your capability to create dual use? How can we help you get to dual use, can we get you to somewhere where you can commercialize this to some degree to reduce the cost and to create an enduring capability for your company to succeed?”

There has been some unhappiness from the major prime contractors that they haven’t found a way to participate, something Arrington acknowledged. 

“I would assume some of the grumblings will be about the due diligence,’ she said. Publicly traded companies have investors spread across the globe, making it hard to validate them. “But [the office] is working daily to get through that to bring them in.” The big defense firms “are absolutely critical to this;  we’re just starting the process. It takes a little bit to work through the nuances, but absolutely they’re trusted partners in our development and we wouldn’t think to not bring them in.”

The effort is a small part of a vastly wider issue that the White House and Congress is trying to address.

“As you can imagine, the largest amount of foreign direct investment has been China, and then followed closely by Russia,” said Colin Supko, director of the Trusted Capital program at the DoD. While the number fluctuates, “t’s still pretty substantial.”

Last month, a new bipartisan House Armed Services Committee task force set down roots in an attempt to get language into the coming 2022 defense budget to shore up support for domestic supply chains.

Led by Democratic Rep. Elissa Slotkin and Republican Rep. Mike Gallagher, the work is focused on making sure their final report and legislation actually makes a difference in how money is spent on the domestic manufacturing base. 

“The trick is really just finding that right balance between what capabilities we absolutely must be able to make in the USA, what we can buy from our close allies, and what we can afford to source from broader networks of partners,” Gallagher told reporters last month in rolling out the initiative.

While the major prime contractors for the Pentagon are overwhelmingly US-based, that domestic presence “just plummets” when it comes to parts and supplies, Dougherty added. A good number of those investors and supplies are Chinese-linked, “and that just speaks to the compelling economics of doing business with China when it comes to core components and raw materials.” she said.

Efforts like the Trusted Capital program and the House study are the culmination of several years where supply chain security “has mostly just made for a really good conference panel,” with little in the way of actual results, Dougherty said.

There currently is no centralized mandate or guidance for what needs to be done across the DoD to get their arms around the problem, and there is no dedicated funding in the budget to re-shore some manufacturing capabilities. But Slotkin and Gallagher’s urgent push to remedy that in the 2022 budget could change that, if they manage to cut through the cacophony of voices during this year’s defense spending debate.

For Dougherty, “it’s pretty clear” what DoD needs to begin to work its way out of the problem. “They just need leadership, a centralized approach…and things like centralized data and centralized reporting,” to grapple with the depth of the problem. 

If some sort of conflict does arise and supply chains are put at risk, Dougherty said, “the proactive, nefarious work coming from China and Russia in particular [will make US policymakers] “realize that we don’t have control over everything that we think we have control over.”