The Factory Is the Product
Congress is used to buying ships and planes. It should buy industrial capacity, too.
NADIA SCHADLOW is a Senior Fellow at the Hudson Institute.
MISLAV TOLUSIC is a Managing Partner at Marlinspike, a defense-oriented venture capital firm.
Congress is debating anew whether to add billions of dollars to next year’s defense budget. But just as important as how much to spend is what those additional dollars should buy.
For decades, the answer was ships, aircraft, tanks, and other platforms. The Pentagon has long measured success largely by developing and buying sophisticated weapons and platforms like F-35s, nuclear submarines, and aircraft carriers. But an F-35 that does not have a steady supply of munitions is hardly a capability. A submarine awaiting critical spare parts cannot go out to sea and deter. A Patriot battery without interceptor missiles cannot defend a city or an airbase.
What matters is not simply the advanced platforms, but fielding capabilities that can be sustained, replenished, and adapted in combat. The ability to surge, adapt, and manufacture at scale will increasingly determine military advantage. Achieving that capacity will require harnessing the private sector and commercial manufacturing facilities. We are in the midst of a fundamental realization: the factory is the product.
Consider Taiwan. Admiral Samuel Paparo has argued that in the event of a Chinese invasion of Taiwan, the United States intends to create a “hellscape” of thousands of autonomous systems to delay Chinese forces. It’s highly questionable, today, that we can deliver. Doing so requires an industrial base capable of producing enormous numbers of inexpensive systems—capabilities—at operational speed.
Recognizing this reality, Congress and the Pentagon are emphasizing the importance of delivering capabilities to meet these gaps. That’s a welcome shift that will reshape military planning and acquisitions and will impact the way that billions of defense dollars are likely to be spent. In his November 2025 acquisition reform announcement, Secretary of War Pete Hegseth called for incentives to stimulate private investment, expand production capacity, and create an industrial base capable of rapidly delivering new capabilities as operational requirements evolve.
This plan is consistent with the 2026 NDAA and current versions of the 2027 NDAA. Both have provisions related to increasing production capacity and supporting the ability to surge during conflict.
The FY2026 NDAA expanded the Defense Industrial Base Fund to support investments in machine tools, castings and forgings, production modernization, and related industrial infrastructure. It established the Civil Reserve Manufacturing Network (CRMN), which allows civilian firms to register their manufacturing capacity so that the Department of War (DoW) can inventory the country’s surge capacity. It also required the DoW to produce a report that identifies the obstacles to maintaining or investing in surge manufacturing capacity. This last measure is significant because it acknowledges that existing acquisition rules discourage firms from maintaining surge capacity. For example, the existing Federal Acquisition Regulation (FAR) treats the costs of maintaining surge capacity as an exception that requires special justification or a separate agreement—rather than as something valued as part of military capability.
Negotiations over the 2027 NDAA suggest the emphasis on industrial capacity will continue. The House Armed Services Committee report (H. Rept. 119-698) includes a discussion of “policy test labs” to evaluate proposals to incentivize investment in surge capabilities and capacities.
While certain authorities exist in Title III of the Defense Production Act and the Industrial Base Analysis and Sustainment (IBAS) program to invest directly in production capacity, tooling, and facilities, they essentially operate as exceptions or special programs as opposed to a normal logic of acquisition. These newer provisions reflect a growing recognition that the means of production, not just the weapons they produce, are themselves strategic assets.
The next step is to make that logic central to defense acquisition. If the factory is the product, the question is no longer simply what equipment the Pentagon should buy, but what manufacturing assets it should own or incentivize so that industry can produce capabilities at whatever scale future conflicts require. How should the Department attract private capital into reserve manufacturing capacity? How should it compensate companies for maintaining unused but strategically valuable production capacity?
One way to broaden this approach and to draw in needed private capital is through a Capacity-as-a-Service (CaaS) model. This would have a similar logic to Software as a Service (SaaS), which aims to deliver software capabilities at the speed of relevance. Because software changes so quickly, the SaaS approach recognizes that one-time software purchases do not work. By the time traditional processes produce a full replacement, the product is obsolete. A SaaS approach enables customers to receive a continuously improving capability.
A CaaS model would apply the same logic to manufacturing capacity. If the objective is to deliver continuously improving operational capabilities rather than a single platform, a CaaS model would reward industry for providing capability over time—not just a one-time production run of hardware. The goal is to treat industrial capacity as a service that can grow, adapt, and surge as operational requirements evolve.
An inventory management strategy could focus on increasing the availability of necessary equipment in theater and creating a strategic bridge until industrial production ramps up. Recent events have shown that the strategic bridge to industrial mobilization is not sufficient and would be challenged to support long term peer-on-peer conflict. Under CaaS, the DoW would pay contract manufacturers annual retainers to offer rapid production scaling—much like DoW pays commercial shippers to ensure adequate shipping capacity is available in case a contingency develops. Financing contract manufacturers should allow DoW to lower strategic inventory levels while introducing profit incentives to lower the cost of capacity scaling.
Such a shift has the benefit of attracting private capital. Many investors are reluctant to back companies whose primary customer is the Pentagon due to uncertain funding and arcane acquisition rules. But financing flexible manufacturing capacity presents a much broader investment opportunity. Facilities, tooling, and production systems can support both commercial and defense markets, reducing risk while creating stronger incentives for private investment. Rather than limiting competition to a small number of traditional defense contractors, this approach could unlock a much larger pool of manufacturers, investors, and new entrants into the defense industrial base.
It also changes the economics of defense production. Instead of financing short production runs, companies can invest in scalable manufacturing methods, advanced tooling, and automation that lower costs and increase production rates over time. Because the underlying manufacturing capability can be continually upgraded and reconfigured, the Department gains not just additional capacity but the ability to adapt rapidly as our adversaries’ systems change.
There are tradeoffs, of course. Optimizing for mass production rather than exquisite performance may require accepting designs that are “good enough” but can be produced in greater numbers and at lower cost. This approach will not apply to every capability. The United States will always need a force built around high-end platforms that deliver unique strategic effects.
But as Congress heads into recess asking what the next generation of defense spending should buy, the answer should not be just more platforms. Advantage will belong to the nation that can build factories as quickly as it builds weapons, continuously improve production, and translate commercial innovation into military capability. In this age of rapidly evolving warfare, factories are strategic assets.
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