New Defense Department Rejection of Chinese Money in the US Defense Industry «Breaking Defense

New Defense Department Rejection of Chinese Money in the US Defense Industry «Breaking Defense

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. 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.

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. 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.

“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.” 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. 

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

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. 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.

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

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