Anduril, Palantir and SpaceX are changing how America wages war

Key topics:Drones expose costly limits of traditional missile warfare“Neo-primes” like Palantir, SpaceX, Anduril rise fastRisks: scaling limits, dependency, politicised defence industry.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..From The Economist, published under licence. The original article can be found on www.economist.com© 2025 The Economist Newspaper Limited. All rights reserved..The Economist.The Iran war may end up teaching America many lessons. One that it has learned the hard way is the woeful economics of using traditional weaponry against cheap Iranian drones. “The dynamics of the world have changed,” says Emil Michael, a former Silicon Valley executive who is now a senior official in the Pentagon. “You don’t want to spend a $1m missile to take out a $50,000 drone.”That is one reason why the Trump administration is turning to a new clique of defence upstarts that are reimagining how to wage war. They are led by Palantir, a software giant providing intelligence systems; SpaceX, whose Starshield satellite network provides reconnaissance and connectivity; and Anduril, an up-and-coming favourite that makes air and sea drones alongside anti-drone weaponry. This trio of so-called “neo-primes” have close ties with gung-ho figures in the Trump administration. And they are making the giants of the military-industrial complex increasingly nervous..Read more:.FT: Palantir turns poisonous on US campaign trail, a liability for candidates.America’s legacy “prime” contractors have, in the government’s telling, grown stodgy, overpriced and risk-averse as a result of their lucrative sinecures. “If the [newcomers] are good and they get their sea legs, they’re going to win some of that business that otherwise would have gone through a traditional prime,” Mr Michael says.This year the challengers have won some big endorsements. In January Pete Hegseth, America’s secretary of war, used SpaceX’s base in Texas as the backdrop to release a new artificial-intelligence strategy, promising that the Department of War (DoW) would draw inspiration from Elon Musk’s management approach and “accelerate like hell”. In March it said Palantir’s AI-infused command-and-control system, called Maven, would become a “programme of record”, locking in funding for years ahead (albeit with a good deal of red tape). In the same month America’s army streamlined multiple contractors with Anduril into a single one worth up to $20bn over ten years.Such commitments may look puny compared with, say, the F-35 stealth-jet programme, led by Lockheed Martin. The F-35 may end up costing the government more than $2trn over several decades. Last year America’s three biggest legacy primes—Lockheed Martin, RTX and Northrop Grumman—between them generated around eight times the combined sales of the three newcomers (and SpaceX and Palantir make much of their money from customers other than the Pentagon)..Even so, investors are bullish. The upstart trio are worth more than three times the three biggest legacy contractors, reflecting among other things optimism over their ability to shake up the arms industry (see chart 1). In the coming months SpaceX is expected to list its shares in the largest initial public offering of all time. Anduril, which makes nearly all its revenue from defence contracts, is said to be raising money at a valuation of $60bn, despite generating only $2bn of sales last year and making a loss..The price tag on the company partly reflects the record amounts of venture-capital money pouring into defence startups in America (see chart 2). Big cheques have also been written in recent months for a second-tier of startups hoping for a shot at the big leagues, including Shield AI, which develops autonomous pilots for air combat, and Saronic, which makes maritime drones.The buzz is helped by President Donald Trump’s quixotic quest to have Congress boost the next fiscal year’s defence budget by more than two-fifths from its current level, to $1.5trn. Those plans include increased spending on, among other things, drones, counter-drones and AI. Although the legacy primes will still receive the vast bulk of the procurement dollars, Mr Michael hopes that the 1-2% allotted to innovative challengers will rise by “percentage points” annually over the coming years in order to generate more competition.From the point of view of the Pentagon, one of the biggest selling-points of the newcomers is that, unlike the legacy primes, they mostly shun cost-plus contracts, through which the government reimburses all expenses and adds a profit margin on top. That model may be suitable for big, complex programmes for which it is difficult to estimate the cost upfront, but it is a recipe for sloth. Instead, the challengers often prefer fixed-price deals in which they cover the initial cost of research and development and earn fat margins if they deliver on time and within budget.The contract structure helps to keep them lean, and gives them an incentive to iterate quickly, rather than building weapons and systems from scratch each time. Anduril, for instance, wants to use a common rocket motor with solid propellants for use in various launch systems to keep costs down. As for speed, eight months after SpektreWorks, an Arizona startup, unveiled the prototype of a suicide drone called LUCAS, American forces deployed it in Iran. (The LUCAS is, ironically, a reverse-engineered copy of an Iranian Shahed.)Excitement about the Pentagon’s shifting approach is palpable. “It’s huge,” says Matthew Steckman, who oversees a significant share of Anduril’s business. “Every day I come in and you’re kind of reacting to the next version of how the DoW wants to move fast.” The bureaucracy around defence procurement is being slashed. “They’re cutting out paperwork like there is no tomorrow,” says Steve Blank of Stanford University.Yet there are concerns that too much haste could backfire in various ways. For the challengers, the risk is that they take on too much too quickly and are unable to cope as contracts get bigger. That is more of a problem for Anduril than it is for SpaceX and Palantir, both of which have large contracts with commercial customers and other government departments, giving them greater scale. Palantir’s focus on software also means it can expand its business relatively quickly. But for Anduril, along with many of the would-be neo-primes, scaling up manufacturing could be a challenge. Anduril has only just started building large production facilities (it recently opened a factory in Ohio on which it spent $1bn). The drone-maker talks a good game, but its ability to ramp up manufacturing to anything close to the level of the legacy primes is untested.There are dangers for the government, too. The Pentagon wants to move towards interoperable weapons systems, rather than the standalone platforms traditionally offered by the legacy primes. Yet some worry that it could become locked into SpaceX’s launch and satellite services or the battlefield-management systems provided by Palantir and Anduril.Indeed, although the Pentagon says that it wants to encourage more competition in the defence industry, there are signs that it is as hard as ever to get a foot in the door. Anduril, for instance, is a serial acquirer of smaller firms, including Blue Force Technologies, maker of the Fury unmanned combat aircraft, which it bought in 2023. Scott Bledsoe, inventor of the Fury, says that he sold his startup after realising it was too small to “bro its way” to a big defence contract. But he wishes it were otherwise. “There is a danger that all we are doing is creating a new breed of legacy primes,” worries Mr Bledsoe. An insider at one of the neo-primes, when asked whether his company might develop state-by-state lobbying efforts similar to the legacy primes, exclaimed: “Hell yeah.”A further risk is that, in becoming too starry-eyed about the merits of drones and the like, the DoW could deprioritise traditional weapons systems that would be vital in a future conflict with China, owing to their ability to traverse long distances and penetrate advanced defences..Read more:.SpaceX heralds a new era of mega IPOs, but history warns investors to be cautious: Jonathan Levin .For society at large, increasingly cosy relations between the Trump family and the neo-primes are also a cause for concern. When Palantir’s shares suffered from a short-seller’s attack this month, the president offered an unexpected defence of the company, complete with its ticker symbol: “Palantir Technologies (PLTR) has proven to have great war-fighting capabilities and equipment. Just ask our enemies!!!,” he wrote on Truth Social. Donald Trump junior, his son, is a partner at 1789 Capital, a VC firm that has invested in Anduril.“Every investor on the planet is an investor in Anduril,” retorts Mr Steckman. Still, any perception of partisanship could jeopardise the otherwise strong support among many Democratic politicians for defence startups, potentially putting the companies in danger if Republicans lose their grip over the federal government. The shake-up under way in America’s military-industrial complex is long overdue. It would be a shame for it to misfire.

Anduril, Palantir and SpaceX are changing how America wages war

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