The US Defense Department (DoD) has been actively trying to give new players access to the ground floor of its acquisition process, but it has struggled to get them to the upper levels. DoD and the US Air Force tried to remedy that recently by choosing designs for the Collaborative Combat Aircraft (CCA) project from privately held Anduril and General Atomics Aeronautical Systems over those of traditional heavyweights.

Newer players have gained share in more experimental areas involving the cloud, cyber, proliferated low Earth orbit satellites, and data analytics. But the CCA choice represents an unusual foray into the world of core warfighting capabilities. The Department’s selection sent a clear message that it plans to draw on a wider vendor base moving forward. As Air Force Secretary Frank Kendall told War On The Rocks recently, “we just awarded two [CCA] contracts . . . and the three big primes lost. We’re putting our money where our mouth is on that.”
What’s behind the strategy? The pick is obviously a disappointment to the major primes, but DoD hopes the extra pressure could drive innovation and price competition.

Key signals from the US defense department’s collaborative combat aircraft decision

With this CCA decision, DoD has sent critical signals on several fronts:

Amplifying market competition

DoD wants more players to drive innovation and price competition, even in areas like combat aircraft that have become concentrated among a few primes.

Embracing private capital

Given that both Anduril and General Atomics are privately owned, their selection indicates DoD’s interest in leveraging different financial models and more private capital to augment DoD’s own research and development (R&D) resources.

Encouraging industry co-investment

DoD also wants industry to bring funding to the table to (at least partly) match its own. In its CCA announcement, DoD clearly referenced the winners’ willingness to invest their own capital. This puts pressure on more traditional suppliers to sweeten their bids as well as to sustain their own R&D efforts on CCA if they want to be viable in future related bidding rounds. 

Promoting risk-sharing

Private firms may be more willing to take on fixed-price R&D contracts if they believe there is a real potential for serial production. Many firms will even develop solutions with no customer sponsorship, gambling on their ability to shape the customers’ future requirements and sense of value.

Prioritizing digital engineering and manufacturing agility

Anduril (and Blue Force, which it acquired in 2023) has sought to differentiate on software-enabled and rapid prototyping/low-cost manufacturing. Anduril’s limited experience versus the other CCA players in manufacturing aircraft at scale indicates the USAF is acting on earlier plans to prioritize digital engineering and manufacturing innovation for attritable aircraft (and other) programs.

The Department’s effort to advance these goals, using a variety of acquisition approaches to do it, will force various players to confront key questions.

Emerging players in defense technology — General Atomics and Anduril

For General Atomics and Anduril — and lots of defense startups aiming to serve other DoD needs — the CCA award is great news. But they must now figure out how to make good on the expectations of DoD – as well as their own investors.

While it is easy to lump Anduril and General Atomics together, they are quite different. Anduril is a classic venture capital-funded startup, where General Atomics has existed for decades — first as part of defense supplier General Dynamics and then in 1986 as a spinoff. General Atomics pioneered the remotely piloted vehicle sector in the 1990s. The company has been designing uncrewed aircraft and manufacturing them at significant volume for decades. By contrast, Anduril is relatively new to defense hardware, after making a series of acquisitions since 2021 to expand beyond its original focus on defense software. The company has been aggressive in investing to develop solutions to apparent customer needs, usually well ahead of DoD’s own requirements process. This willingness to invest is now beginning to pay off.

Both of these companies face an array of questions moving forward, now that they’ve won a big project. First, there’s project execution. The two firms now have about two years to deliver prototypes of the increment 1 CCA aircraft. Among the tools they are likely to use to succeed are digital engineering, such as model-based systems engineering (MBSE) and digital prototyping and simulation, and novel design and manufacturing techniques such as modular production and full-size determinate assembly. Next, the privately held status of General Atomics and Anduril provides the companies more flexibility than most publicly traded companies are afforded on return on investment — one of the reasons DoD is attracted to them. For General Atomics, the fact that it is owned by a single family gives it the luxury of making financial calibrations that allow it to take a longer view on return on investment.

The same is true for Anduril, which raised over $2.3 billion in funding from venture investors since its founding in 2017. But while venture investors are more patient than private equity, Anduril still must calculate how much rope it has before it must provide some ROI. Some investors, like co-founder (and Oculus VR creator) Palmer Luckey, may be content to watch upstart Anduril continue disrupting the accepted way of doing things in the defense industry. But other investors may have different expectations. It may be that only an initial public offering (IPO) or rapid scaling of revenue will be enough to repay their investment.

Finally, the successful twosome must start to analyze other segments of DoD’s modernization program for them to target. If the US Air Force is willing to take a risk on non-traditional players in its most core capability — combat aircraft — where else will DoD reach beyond its usual prime contractors?

Traditional defense competitors in a changing landscape

Traditional DoD prime contractors need to confront key questions underpinning the tried-and-true DoD prime contractor business model. Given that the competition may no longer be the same, what changes can they make to better meet the new challenges? 

Investment approach — balancing reward with risk

If customers increasingly expect co-investment in high-growth areas, should traditional players consider taking development risk? A higher rate of investment would erode shareholder returns. Most primes have said they will avoid fixed price development contracts. But are there conditions in which they might invest their own resources to position for a particular opportunity?

There may be ways in which traditional players can leverage their investment more effectively. Drawing on partnerships in key technologies and sponsoring start-ups using their own VC arms, some of the “usual suspects” are expanding the reach of their investment dollars.

Competitive field and opportunity space — embracing non traditional players

DoD has gone out of its way to contract with non-traditional firms, like JetZero, Palantir, X-Bow, and many others. This suggests that the Department is willing to take risks to embrace a wider array of providers. In the realm of military aviation, Boeing, Lockheed Martin, Northrop Grumman and other mainstays may find themselves increasingly competing non-traditional players (see Exhibit 1).

Design/Manufacturing — a glimpse into the future of aviation

Beyond the capabilities of the CCA prototypes themselves, the technologies and processes used to design and manufacture the aircraft may also reveal a lot about the direction of the aviation sector.

The department of defense — navigating challenges in supplier diversification

The progress that DoD is making in expanding the supplier base to a wider range of firms will require officials to wrestle with a series of follow-on questions and challenges:

Contracting and profits balancing costs and innovation

Many contractors aim to sell solutions to DoD under fixed price commercial contracts at margins that are considerably higher than DoD commonly pays. For some, this is key to recouping significant privately funded R&D efforts. Will DoD and the Congress be comfortable with this outcome as part of its new acquisition approach?

Fostering a more competitive defense market

The CCA award is a step toward greater competition in more areas of the DoD program. But Anduril is just one of thousands of firms that have tried to use the SBIR program as a gateway to scale in the DoD market, but it is the only one so far to have succeeded in elbowing its way to a prime role on a major weapons system.

International collaboration and exploring partnerships

DoD could have chosen the Boeing CCA offering, which was developed by the company’s Australian arm, in part for a strategic reason: To join a close ally in a closely related R&D project. For reasons we cannot know from the outside, DoD did not go in this direction. But it points to a possible future of cooperative operations with NATO, AUKUS, and other partners. 

DoD has been trying to embrace new suppliers

DoD’s objectives go beyond just CCA. These motivations and new approaches are shaping the Department’s behavior across many sectors. DoD’s recent decision should also not come as a surprise as it has been signaling a desire to expand beyond longtime DoD contractors in many areas for several years.

Combat aviation and the rise of JetZero

In August 2023, the USAF picked JetZero to design a blended wing body (BWB) full-scale demonstrator. JetZero, which was teamed with Northrop Grumman for production, beat out Boeing for the BWB prototype design work.

Command and control with Palantir’s success in the TITAN program

In March 2024, the Army chose Palantir as the prime contractor on the Tactical Intelligence Targeting Access Node (TITAN) program. Palantir, one of the early defense/intel-focused startups, beat Raytheon for the Other Transaction Agreement (OTA) for the TITAN prototyping effort.

Rocket motors and X-Bow Systems’ innovative approach

DoD has awarded X-Bow Systems, another venture capital-funded startup,  several contracts for advanced rocket motor technology using its 3-D printing approach. X-Bow (and others) could help DoD get past the duopoly that currently dominates most of the solid rocket motor market.

Space and the rise of non-traditional firms like SpaceX

The examples are too numerous to list here. SpaceX is the most well-known, space startup, but there are dozens of others. DoD has availed itself of a wide array of commercial and other non-traditional firms as it revamps its approach to national security space capabilities.