By Mike Stone and Joe Brock
SIMI VALLEY, California (Reuters) - President-elect Donald Trump's planned U.S. government efficiency drive involving Elon Musk could lead to more joint projects between big defense contractors and smaller tech firms in areas such as artificial intelligence, drones and uncrewed submarines, according to interviews with company executives.
Musk has indicated that Pentagon spending and priorities will be a target of the efficiency initiative, spreading anxiety at defense heavyweights such as Boeing (NYSE:BA), Northrop Grumman (NYSE:NOC), Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD).
Smaller military technology companies such as artificial intelligence software firm Palantir (NASDAQ:PLTR) and drone-maker Anduril have been buoyed by the prospect of Musk further loosening the grip that defense giants have held on the Pentagon's budget for many decades.
Participants at the Reagan National Defense Forum, a summit in Simi Valley, California, that brought together corporate executives, U.S. military leaders and lawmakers, said they expect smaller tech firms to play a bigger role given that Musk, one of their own, is entering a position of enormous influence.
Musk and many small defense tech firms have been aligned in criticizing legacy defense programs like Lockheed Martin's F-35 fighter jet while calling for mass production of cheaper AI-powered drones, missiles and uncrewed submarines.
Such views have given major defense contractors more incentive to partner with emerging defense technology players in these areas, some having strong personal relationships with Musk and his companies such as SpaceX and Tesla (NASDAQ:TSLA), according to executives at technology and big defense firms.
One senior executive at a top defense contractor, speaking on condition of anonymity, told Reuters that contract negotiations by his company with smaller military tech providers have been "on steroids" since Trump's Nov. 5 election victory.
The amount of money available for the newer defense companies might be limited, however. Less than 20% of the Pentagon budget buys weapons systems and, historically, only around 1% goes to brand-new program purchases like those being offered by these young market entrants, according to Tara Murphy Dougherty, CEO of defense acquisition software company Govini.
These emerging firms could benefit from teaming up with the big legacy contractors if the newer companies want to quickly scale production of new weapons and deploy new technology platforms in the field, according to executives at the summit.
"What we're locked into is a current worldview in defense that everything is zero sum. If you're growing, that means I'm shrinking. I don't think that's true," Shyam Sankar, Palantir's chief technology officer, told Reuters on the sidelines of the two-day summit, which ended on Saturday.
"We need to help the Primes," Sankar said, referring to the big legacy contractors, "once you get past a zero-sum mindset, that actually everyone can be better off."
In a potential sign of things to come, Palantir announced on the eve of the summit a deal to partner on defense AI with Booz Allen Hamilton, a 110-year-old military contractor.
MUSK'S NEW ROLE
Trump, who takes office on Jan. 20, named Musk and Vivek Ramaswamy, the founder of a pharmaceutical company, on Nov. 13 as co-leaders of a government efficiency initiative intended to slash government spending, dismantle federal bureaucracy, cut regulations and restructure agencies.
The Pentagon, with a budget around $850 billion, accounts for half of U.S. discretionary spending - the money formally approved by Congress during the annual appropriations process.
The Collaborative Combat Aircraft, or CCA, program is a project that could offer more access to smaller defense players. The CCA would be a smaller drone in a family of systems centered around a sixth-generation fighter jet - the Next (LON:NXT) Generation Air Dominance, or NGAD, program meant to replace the F-22 fighter jet and give the United States the most powerful weaponry in the sky.
Anduril and General Atomics were selected in April to design, build and test prototypes for the CCA program - demonstrating that smaller companies had innovative ideas for the vehicle. A future production decision would lead to billions of dollars, but a wider group including defense giants Lockheed and Northrop Grumman could also compete to win that contract.
Drone makers such as Kratos Defense, AeroVironment (NASDAQ:AVAV) and Hermeus are also well-positioned if there is a push to surge production of autonomous vehicles.
Software (ETR:SOWGn) providers and services contractors such as SAIC and Leidos Holdings (NYSE:LDOS) may benefit because their products can be deployed quickly to fill the bureaucratic functions that Musk hopes to cut, according to industry sources.
It is widely expected that space will get a boost under Trump, with SpaceX one obvious beneficiary.
Company executives, military leaders and U.S. lawmakers debated at the summit the extent to which Trump and Musk would be able to overhaul the Defense Department, given that its budget funds 2 million American jobs and that many programs are worth tens of billions of dollars and locked in for years.
Musk faces a major challenge to push through structural changes given that the Pentagon budget is approved by lawmakers, many of whom have defense programs in their states.
Republican U.S. Senator Deb Fischer during a panel discussion at the summit said any major changes to the Pentagon budget would have to be handled by Congress, not Musk. Fischer offered a challenge to any defense firm advocating major reforms.
"Every one of you needs to propose a program that you personally benefit from that you'd be willing to cut," Fischer said.