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$LMT acknowledges that the US defense industrial capacity can't sustain Ukraine's demands
In their Q1 2023 earnings conference call, executive James Taiclet mentions this excerpt that caught my attention:

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The key phrases that we need to focus on are:
  • "...the expenditure rates of munitions is much higher than most of our existing war gaming models would imply."
  • "...the U.S. and its allies are going to need to, first of all, demonstrate to a potential adversary that they have the stockpiles to defend themselves for a long period of time if need be."
  • "So we hope the conflict in Ukraine ends quickly but the lessons and the future demand for these kind of products is going to stay elevated for a very long time, we think."

What picture do these phrases create? They create the image that:
  • The rate at which munitions are being used in the conflict in Ukraine is much higher than expected based on war gaming models. This implies munitions stockpiles are being depleted faster than anticipated.
  • The US and its allies need to demonstrate they have sufficient munition stockpiles to sustain a prolonged conflict if necessary. This may require ramping up production and building larger reserves.
  • While there is hope the Ukraine conflict ends soon, demand for munitions is expected to remain high for a long time even after it ends. The conflict has revealed vulnerabilities in munition stockpiles and the need to be prepared for potential future conflicts.

With China continuing to ramp up its aggression on Taiwan and the US sending more troops and warships near Iran, it's concerning to see the US defense industrial base struggling to ramp up production to keep up with demand that's already coming from Ukraine. In a way, the US isn't prepared for a three-front war. As for the European allies that the US has, they too are enduring weapons shortages because of the war in Ukraine. What's worse is that the European nations don't have a strong defense sector to quickly build replacements and many rely on the American defense industry, which is busy balancing between giving more weapons to clients in one region over another.

Some will say that because American weapons are high tech, the advanced tech aspect of them will allow the US to remain dominant globally in terms of military power. Sure, the US spends the most on defense but consider what happened in June 2019 when Iran, an adversary of the West that is portrayed as the poorest and weakest of the three main adversaries, was able to shoot down a $200 million surveillance drone. Or consider the result of the largest and most expensive war-game exercise in Pentagon history when a US general that played the Iranian side sank an entire carrier battle group in the first two days of the war games. For those curious, the war game was called Millenium Challenge. The general that led the Iranian side recognized that the Iranian military was built around utilizing their assymetric warfare capabilities against their enemies. Those playing the US side never thought of Iran's military as masters of assymetric warfare and in the war game, they were caught off-guard and lost the war game badly. Even worse, the Iranians in the war game were able to win with far inferior weapons technology compared to the Americans. Technology prowess isn't going to be enough to compensate for the lack of production capacity in the US defense sector.

Until the US starts taking the the munitions supply and industrial capacity issues seriously, we will see the weapons shortages intensify. Outside of producing weapons, the US has issues with shipbuilding, which makes it harder for the US to be able to defend Taiwan and fight China in the Pacific. With geopolitical tensions brewing globally, the need for the US to step up the capabilities of its military has never been bigger. There are issues that the US has with recreating the massive boom in military production from WW2 but those thoughts will require another memo. In the meantime, we should see more acts similar to the CHIPS Act for defense companies like $LMT $NOC $BA $RTX and $LHX.
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