Trump’s defense budget, the hypersonic missile race, the world’s fuel war for jobs

One of the many lessons from the wars in Iran and Ukraine is that the supply of weapons and weapons systems is limited, and difficult to replenish. That led to a new way of doing business at the Pentagon, and a new battleground between states for jobs and economic development.

“We’re seeing a lot of growth from the Department of Defense, new programs, new initiatives, the SpaceX-ification, if you will, of the Pentagon,” said consultant Tom Stringer of Stringer Site Selection and Incentives in New York.

In fact, three alumni of Elon Musk’s local technology and AI company are behind the prototype of the new model. Castellion, a three-year-old startup based in Torrance, California, is trying to apply SpaceX’s business model to hypersonic missiles.

“This is going to be one of the most important capabilities in America’s arsenal,” founder and CEO Bryon Hargis said on CNBC’s Squawk Box in January. Hargis, a physicist by training, previously led national security product development for SpaceX.

The US military is well versed in hypersonic missile technology. The strategy, under the Pentagon’s new approach, is to be able to develop new missiles quickly, produce them at scale, and bring more of them to the battlefield.

The traditional defense procurement model – at least in recent years – has provided little incentive for contractors to do so. Instead, under so-called “cost contracts”, they can simply bill the government for their costs – including outsourcing work to subcontractors – and then pay a predetermined fee.

In contrast, Castellion, which has contracts to deliver at least 500 missiles a year and thousands more, is raising private equity rather than public equity — more than $550 million so far — to fund a large, vertically integrated production operation.

Castellion has contracts with each major service branch to deliver its first weapons system, called Blackbeard. But instead of cost-inclusive contracts, Castelion operates under so-called “fixed-price contracts” — the government pays the same price regardless of Castellion’s costs. That shifts the cost risk to the contractor from the government.

That’s a game changer, said Castellion founder and chief operating officer Sean Pitt, a former SpaceX sales director who previously served as an aide to Sen. Dick Durbin, D-Illinois, a member of the Defense Appropriations Subcommittee.

“We’re actually using standard commercial production techniques in an area that hasn’t been used in decades,” he said. “It’s not acceptable to come up with a design that we can only produce a few of. Instead, the production of thousands with each missile costing hundreds of thousands of dollars was our guiding light from the beginning, and it’s what we’re working against today.”

This is where economic development opportunities – and challenges – come into play.

How ‘SpaceX’s hypersonic missiles’ landed in New Mexico

Bringing Castellion’s vision to life, and doing so profitably, would require a large manufacturing facility, built quickly.

“We’re in a productivity crisis,” said founder and chief financial officer Andrew Kreitz. “We are not doing anything important until we produce high-quality weapons with our first weapons program,” he said.

Kreitz, a former Goldman Sachs investment banker who became SpaceX’s chief financial officer before leaving to start Castellion, led the year-long search for the space. He said it eventually landed in areas in Arizona, Tennessee and New Mexico. In January, the company broke ground on a 1,000-acre facility in Sandoval County, New Mexico, about 30 miles north of Albuquerque.

“The truth is, if you draw a Venn diagram of places where you can find a lot of land, the type that’s ready to shovel, that can move in a fast environment, and the talent base to actually work in a factory, there are very few places in America that can do that, and New Mexico stood out,” Kreitz said.

In addition to having the space – which quickly determined the expansion of the company’s California headquarters or its location in Texas – New Mexico has a long heritage of defense manufacturing, and a wealth of talent from Sandia and Los Alamos National Laboratories.

Stringer, the site selection consultant who helped broker the deal, said New Mexico also provided seamless communication across all levels of government, and across all parties.

“There was almost no red tape. That’s the best way to describe it,” he said. “Everyone was at the table from day one in New Mexico.”

The state and Castellion estimate the $220 million project will create 300 high-paying jobs and provide $650 million in economic impact over the next decade.

“Castelion chose our country because we have the people, technology and infrastructure they need to succeed,” Democratic Gov. Michelle Lujan Grisham said in January.

“This company will be very important to catch up and surpass China and Russia in hypersonic technology,” said Sen. Republican State Jay Block. “This is a race we will never win,” he added.

Stringer said there will be more opportunities for states to win similar projects, especially with the Pentagon’s unprecedented $1.5 trillion budget request.

“We need to build really amazing products that deliver and that we can scale and build and ship quickly at cost, and that’s a sea change,” he said.

Castellion, on the other hand, wastes no time in its production. The company says that just six months into construction, 15 of the 21 buildings on the New Mexico campus are already under construction, with 1.6 million cubic yards of waste moved.

In fact, Pitt noted that even before the company settled on the site, it had already purchased the steel to be built.

“Doing things like buying this weapon before we choose our location is what allows us to keep the time set to install our first weapon next year,” he said.

And, he said, that’s just the beginning.

“We are talking about 300 jobs in the state of New Mexico at this facility,” he said. “I expect we’ll be well past that, and then we’ll continue to look at other sites, in New Mexico and around the country.”

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