Aerospace & Defense Deglobalization | vcfo

This article was co-authored by Carter Freeman, Merle Waterman, and Jens Mobius.

Navigating Deglobalization: The New Strategic Landscape in Aerospace & Defense

The aerospace and defense (A&D) industry continues to experience significant transformation both in the United States and globally. While U.S. defense spending remains substantial, policy shifts and signals have introduced uncertainty for contractors reliant on international supply chains and exports. At the same time, unprecedented technological innovation is creating new room for emerging companies and stimulating venture capital investments in the A&D space. Additionally, global demand for defense systems is surging due to ongoing conflicts and emerging tensions, prompting some nations to commit to massive rearmament initiatives. These and related factors are combining to accelerate the A&D industry’s trend toward deglobalization. In this post, we break down key takeaways from vcfo’s recent panel participation on A&D industry deglobalization.

The Shift from Global Efficiency to Strategic Resilience

The COVID-19 pandemic exposed critical vulnerabilities in global supply chains optimized for cost and efficiency. As a result of COVID and the recent tariff environment, the A&D industry is prioritizing supply chain resiliency. In tandem, nations, including U.S. allies, are seeking to build capabilities that reduce dependency on foreign suppliers. The changing landscape creates tension for U.S. firms that have long relied on international trade, especially as European partners increasingly look to homegrown technology and avoid overdependence on American technology.

Panelists generally agreed that, from a U.S. perspective, encouraging allies to shoulder more of the burden for their own defense is entirely appropriate. However, we do want to preserve alignment and interoperability. European nations, for instance, are motivated not by hostility but by caution: they want to ensure they can operate independently should circumstances demand it. The key challenge is to design parallel systems that allow nations to operate independently without losing the ability to work seamlessly together.

An Innovation-Driven Industry Rebirth

Rapid tech advancements are creating new opportunities for nimble startups and established players alike to solve real-world defense challenges through advanced, scalable, and dual-use technologies. One result of these advancements is a dramatic decrease in launch costs that has revolutionized access to space. What was once the domain of major governments and corporations is now fertile ground for startups and mid-sized firms that are generating a flurry of business models, products, and services. Defense experts are also mindful that China and Russia are contesting US dominance in domains including space and cyber.

While adversaries with centralized government models are adept at imitation, they struggle with innovation as compared with the free world. For example, China has long been known as a "fast follower," capitalizing on technologies pioneered by others. This was certainly the case with China’s second-mover absorption of drone systems originally developed in the U.S. One particular point of consensus among the panel of experts was that the U.S. A&D industry must stay ahead through relentless innovation. As Daniel Farber (CEO, Orbit Fab, Inc.) framed it, our adversaries’ "vulnerability is the catalyst that drives our innovation."

The A&D innovation cycle that used to span 15-20 years is now compressed into just 2-3. This accelerated cycle is reshaping the industry through a new wave of mergers and acquisitions, consolidating talent and capabilities.

Startups, Capital, and the Role of Venture Funding

Aerospace, especially, is at long last increasingly capturing the attention of venture capitalists, but significant funding gaps remain. Venture capitalists are moving away from a shotgun approach that had them placing $5M to $10M bets across a wide array of companies to now more targeted, high-conviction investments of $50M to $100M or more. Despite this trend, or because of it, small startups often struggle to raise capital.

Access to capital is especially problematic as smaller companies are often best positioned to innovate quickly in areas like AI-enabled systems, autonomous platforms, and software-defined hardware. The industry has shifted: big platforms aren't the only way to win anymore. Affordable, scalable, smart systems are proving themselves in operational contexts, often outperforming legacy solutions in agility and cost-effectiveness.

There’s also a dichotomy in how small and large firms fit into the broader landscape. Large primes remain dominant for “big” systems like aircraft and naval ships. In contrast, nimble startups can often innovate more rapidly but lack the support structures and market access that large firms enjoy. Consequently, access to capital by smaller companies can have a real impact on new technologies, making it from lab into the field.

Doing Business with the Government

A major factor influencing innovation speed is the interface between industry and government. The acquisition process in the U.S. Department of Defense is inherently deliberate. Programs like SBIR (Small Business Innovation Research) offer pathways to do business with the government, and can also incentivize "topic hunting" over solving real defense problems. Also, our current system puts mid-sized companies at a disadvantage, too big for small company incentives, but lacking the resources of the big primes. Amid calls for acquisition reform, leaders push for systems that can better match the pace of innovation.

Executives and entrepreneurs alike are well advised to align closely with end-user challenges as opposed to hawking a new technology without fully understanding the customer’s needs. The most effective pitch to the Department of Defense isn't a flashy demo—it's a clear, concrete solution to a known operational problem. Talking directly with program managers and immersing themselves in the customer's world and understanding their needs increases the odds of meaningful traction.

Implications of Tariffs, IP Concerns, and International Sales

Tariff policy and geopolitical shifts are also reshaping A&D. With rising prices anticipated from tariffs, companies are reconsidering supply chains and increasingly moving toward vertical integration and domestic sourcing. Meanwhile, European customers are more wary of relying on American technology that could be restricted in the future. Their concern drives further investment in European-developed alternatives.

The current environment also increases the importance of diplomacy, regulatory reform, and international confidence-building. The U.S. must find a way to promote ally self-sufficiency while remaining a trusted and essential partner. Redundancy can create resilience. The trick is to avoid fragmentation and loss of influence.

Charting the Course Forward

The A&D industry is in the midst of a strategic transformation unlike any in recent memory. Deglobalization is forcing a shift from efficiency to resilience, innovation cycles are speeding up, and traditional roles between big and small companies are changing. Venture capital is demonstrating greater interest, however, many early-stage disruptors still struggle to attract capital.

To win the next era of competition—both economically and militarily—U.S. industry must focus on solving real operational challenges, adapt faster than our adversaries, and work hand-in-hand with government and international allies. The coming years will define whether America continues to lead the world in aerospace and defense or loses ground to its more authoritarian rivals.

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