A Fiscal Crisis: The West is on the Wrong Side of Cost Curve

Photo:  U.S. Army Soldiers crew an M1A2 Abrams Systems Enhanced Package V3 tank while engaging targets with the 120 mm gun during experimentation at Fort Irwin, Calif., March 17, 2024. Project Convergence - Capstone 4 is a U.S. Army-hosted, Joint, and Multinational experiment integrating modernization capabilities at multiple echelons providing a critical venue to transform and ensure future war-fighting readiness. (U.S. Army photo by Pfc. Ivan Hernandez) 

In simple financial terms, the West is on the wrong side of the cost curve. Imagine the defense industry as a normal business. In economics, a cost curve illustrates the relationship between production costs and quantity. Successful businesses achieve economies of scale, reducing costs through efficiency. But the West's defense enterprise is operating on the wrong side of this curve. Production costs are high, and output is low, pushing Western nations into diseconomies of scale.

The recent aerial attack on Israel and the war in Ukraine expose this vulnerability. Iran’s 300 plus airborne weapons that targeted Israel amounted to less than $200 million dollars whereas the Western response exceeds billions of dollars. In Ukraine, multi-million dollar weapons platforms are destroyed by uncrewed aircraft systems (UAS) that range from hundreds to thousands of dollars, and Russia’s prized Black Sea Fleet has been devastated by inexpensive maritime drones. Defense analysts estimate the cost ratio is easily 100:1.

Traditional procurement models in the West, to include the U.S. and NATO, are no longer fit for purpose. They are failing. Decades-long development cycles are obsolete in a world of rapidly evolving threats and disruptive technological change. Let’s say an adversarial nation has a four year cycle to produce a capability and, in the West, it takes ten years. In this scenario, in twenty years’ time the adversary-to-West ratio for innovation and capability development is 5:2. This all but guarantees that our adversaries will field a greater range of innovative capabilities, potentially leading to overmatch.

Rapid technological advancements are outpacing the military's long-term development programs, rendering them obsolete as cheaper, more effective alternatives emerge. Program managers, those with the responsibility, authority, and personnel to deliver programs (e.g., ships, planes, software), lack both the incentive and the means to adapt to this fast-changing landscape. The ingrained culture of preserving existing programs stifles innovation and adaptability. It is unlikely a program manager will kill their program for the greater good. Likewise, the political representatives of states where these programs sit will lobby heavily to keep these programs (i.e., jobs) alive irrespective of any negative strategic impact.

To overcome this, the military and the broader defense enterprise must urgently rethink their approach. Early and aggressive testing, integration, and prototyping of innovative warfare concepts are essential to gain an edge in modern conflicts. SpaceX’s rapid trial and error prototyping to develop rockets and OpenAI’s early release and testing of ChatGPT are examples of this approach to develop capability faster.  Waiting for "perfect" solutions, or clinging to lengthy development cycles, leads to unpreparedness on the ever-evolving battlefield. Keeping this approach is akin to relying on horse cavalry in the era of mechanized warfare.

There is movement in the right direction. Nations like Estonia, Latvia, Lithuania, Poland, Norway, and Finland are leading the way. Their "drone wall" initiative leverages affordable, networked sensors to safeguard their sovereignty. They will do this by keeping costs down to achieve economies of scale.

The U.S. Department of Defense is also taking steps in the right direction with its Replicator initiative. Thousands of drones have been delivered, demonstrating a shift toward rapid, warfighter-centric innovation. This could be the necessary spark to ignite essential change.

Other promising initiatives in NATO are the Defence Innovation Accelerator for the North Atlantic (DIANA) and the NATO Innovation Fund (NIF). Both complementary initiatives provide access to deep tech start-up communities, but the challenge for these programs will be transition. How do they transition capability into warfighters’ hands to be relevant going forward? As expressed above, it cannot take decades.

To survive, the West must revolutionize its military procurement and production processes. We need a laser focus on swift prototyping and deployment of cutting-edge technologies. These systems must be affordable, easily updated, interoperable, and adaptable to new threats. The era of billion-dollar projects that risk obsolescence must end. A more diverse approach is not just needed, it is compulsory if we want to win wars and preserve peace.

The conflict in Ukraine serves as a stark warning. Clinging to expensive, slow-moving defense systems will leave the West vulnerable. We must out-innovate, not outspend, our adversaries. Our Alliance, made up of free and democratic nations, must unleash the creative capital present within our societies to find cost wise off-sets that can be immediately integrated into our collective defense system.

The future of warfare demands a fusion of accessible technology, rapid innovation, and scalable production. The West must adapt or face the consequences of falling behind an axis of aggressors who are united in their pursuit of strategic advantage and wish to see the West decline.

Matthew Van Wagenen is a major general in the U.S. Army currently serving as the Deputy Chief of Staff for Operations (DCOS OPS) in the NATO Supreme Headquarters Allied Powers Europe (SHAPE).

Arnel P. David is a colonel in the U.S. Army currently serving as the director of the Strategic Initiatives Group (SIG) in the NATO Supreme Headquarters Allied Powers Europe (SHAPE).

The views and opinions expressed are those of the authors and do not reflect any entity or organization of the U.S. Government or NATO.