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Defense Contractor Proposes Cost-Cutting Reforms to Elon Musk and DOGE Leadership

Emilia Wright | January 16, 2025

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This Defense Contractor Penned a Letter to Elon Musk on Cutting Costs

The defense sector is poised for transformation under the second Trump administration, and a leading figure in the industry has presented some groundbreaking ideas to facilitate this change. L3Harris CEO Christopher Kubasik recently circulated a letter to the leaders of the Department of Government Efficiency (DOGE), the newly established quasi-government consultant intended to minimize government waste.

In mid-November, President-elect Donald Trump appointed Elon Musk and Vivek Ramaswamy as co-heads of DOGE, signaling a fresh perspective on government spending and efficiency. With the Defense Department operating on an annual budget close to $1 trillion, it is likely to face scrutiny and reform initiatives from DOGE in the upcoming years.

L3Harris stands out as a major player in the defense electronics and hardware landscape, boasting more than $20 billion in revenue. Kubasik is proactively addressing potential budget cuts by advocating for a revamped defense acquisition system. He stated, “America’s current defense acquisition system is slow and bureaucratic and does not provide our warfighters with new capabilities at the speed of relevance to the threats they are facing.”

The Case for Reform

Kubasik’s letter outlines a multifaceted approach to reform that emphasizes accelerated acquisition and more efficient program implementation across all military branches. He proposes several key changes to the current system:

  • Increased focus on software and artificial intelligence: Kubasik argues for integrating more AI-enabled hardware, allowing the military to stay ahead of evolving threats.
  • Creation of a contracting arm within the Defense Secretary’s office: This new entity could streamline acquisition processes, thereby improving efficiency and program execution.
  • Reform of certified cost and pricing data: By addressing issues with data collection and auditing, the military can eliminate exorbitant costs that have fueled scrutiny, such as the infamous “$600 hammer.” The efficiencies gained through better cost data management could result in significant savings.

While many of these recommendations could indeed benefit L3Harris as a prominent defense contractor, they also signify an opportunity for the entire defense industry to innovate. “Reform doesn’t have to be detrimental; rather, it can lower development costs and accelerate technology deployment,” Kubasik noted.

Market Reactions and Future Outlook

Despite signaling optimism regarding defense spending, the announcement of DOGE leadership has left investors apprehensive. On Tuesday, during his confirmation hearing, Secretary of Defense nominee Pete Hegseth mentioned spending at least 3% of U.S. GDP on defense, which suggests there would be no significant budget cuts and potential growth in the sector. However, the shares of major defense contractors have shown volatility, with L3Harris, Lockheed Martin, Northrop Grumman, Huntington-Ingalls Industries, and General Dynamics experiencing an approximate 12% decline since Musk and Ramaswamy took the helm at DOGE.

In comparison, the S&P 500 has dipped less than 1% in the same timeframe. The aerospace sector, particularly Boeing, wasn’t included in this decline due to its ongoing challenges in the commercial airplane market. Notably, Musk has been critical of manned jet fighters, favoring unmanned systems. This shift in opinion has positively impacted shares in Kratos Defense & Security Solutions, which specializes in unmanned and hypersonic weapons technologies. Since mid-November, Kratos’ stock has surged by approximately 25%.

Conclusion: Opportunities Amid Uncertainty

The incoming administration is set to bring about both challenges and opportunities for defense investors. While reforms may induce some anxiety regarding future defense funding and allocations, it’s essential for stakeholders to recognize potential benefits. As Christopher Kubasik of L3Harris advocates for essential changes, the industry may see a smoother pathway to innovation, reduced costs, and improved efficiency, ultimately serving the dual purpose of enhancing national security and benefiting industry stakeholders.

As the new administration approaches, investors should keep a close eye on developments within DOGE and the broader defense contracting landscape—balancing caution with recognition of the potential for positive outcomes in the rapidly evolving market.