A strategic inflection point: How geopolitics and technology are reshaping aerospace & defense

Executive Summary

The aerospace and defense industry is entering 2026 at a pivotal inflection point – one that is not defined by familiar budget cycles, or the predictable rhythm of program ramp-ups and drawdowns. Instead, the sector is experiencing fundamental change – the explicit and implicit rules that governed the industry for more than three decades are being rewritten in real time.

More specifically, geopolitical shifts – including strategic competition with China – have elevated from abstract concern to an immediate priority, reshaping U.S. and global defense spending and, by extension, commercial and industrial architecture. This shift has reordered industrial policy, with economic security representing the defining element over supply chain efficiency. Supply chains once optimized for cost now represent weak links in light of geopolitical challenges. A defense industrial base built for the Cold War is increasingly misaligned with the realities of emerging great-power competition. Meanwhile, technology is advancing faster than acquisition processes can adapt. While only illustrative, the numbers reveal key trends: global defense spending reached ~$2.7 trillion in 2024, with the U.S. and China accounting for roughly half,¹ whereas commercial aerospace faces production backlogs stretching beyond a decade at current rates.² Crucially, while the U.S. aerospace workforce grew to 2.21 million in 2023, attrition remains near 15% as companies struggle to retain critical skills and institutional knowledge.³

The crux of the strategic inflection point is how these forces are collectively reshaping competition, shifting where value is created, and determining which capabilities are becoming strategic and national security differentiators. Industry stakeholders who recognize this inflection point and act decisively will capture disproportionate value over the next decade – while those who ignore it will find themselves facing structural disadvantages.

The Geopolitical Imperative

The 2025 U.S. National Security Strategy (NSS) is explicit: the Indo-Pacific region is the strategic center of gravity for American national security, driven by competition with China. Beijing’s focus is the First Island Chain – the arc from Japan through Taiwan to the Philippines – which it recognizes as critical to its regional ambitions. Taiwan represents the nexus, not only due to its criticality as a semiconductor hub but also because it provides direct access to the Second Island Chain, effectively separating Northeast and Southeast Asia into distinct “theaters”. Over one-third of global shipping transits the South China Sea annually, confirming its strategic and commercial importance beyond purely military concerns.⁴

China follows a three-step military modernization strategy with publicly stated goals:

1. Mechanization by 2020 (completed)
2. Modernization by 2035
3. A “world-class” military capable of fighting and winning by 2049.⁵

To achieve this end, the resources required are substantial – China’s 2024 defense budget exceeded $310 billion, and civilian-military fusion spending likely pushes the real figure higher.⁵ The collective investment is focused on capabilities designed to counter U.S. advantages, including anti-ship missiles to threaten carriers, integrated air defenses to deny access, cybersecurity and space capabilities to disrupt command and control, and a growing nuclear arsenal.  

The strategic calculus is straightforward: deterring aggression requires maintaining conventional military overmatch. As the NSS states, the United States must be “so strong that aggression is not even considered, and that peace is therefore preferred and preserved”.⁴ Yet deterrence demands more than capabilities alone – it also requires a defense industrial base with greater domestic concentration, capable of producing at scale and supported by supply chains that do not rely on potential adversaries.

Consequently, economic security now enters the picture. The post-WWII system, optimized for growth through trade liberalization, must adapt to align economic interests with national security objectives. While once considered distortionary, industrial policy is now reshaping domestic capacity and investment decisions in strategic sectors. Key policy and economic alignment steps include:

• Tariffs reducing dependencies on adversarial parties and geopolitically tenuous regions – extending beyond traditional industry protectionism
• Export controls preserving indigenous knowledge and strategic advantages in semiconductors, AI, and quantum computing
• Investment screening through CFIUS (Committee on Foreign Investment in the United States) preventing foreign influence over critical infrastructure

Reinforcing this trend are China’s recent actions, which have accelerated this shift. Beijing’s subsidies aimed at dominating critical supply chains – including rare earth minerals, batteries, and advanced manufacturing – directly threaten U.S. technological leadership. When China imposed export restrictions on gallium and germanium in 2024, two elements critical for military electronics, the vulnerability was exposed.⁷ This creates a clear implication: concentrated supply chains dependent on adversarial relationships create strategic vulnerabilities that efficiency gains cannot justify.

In addition, defense spending is rising globally, but the nature of demand is shifting. Russia’s invasion of Ukraine and Indo-Pacific tensions prompted NATO allies to pursue the 2% GDP spending target, while Asia-Pacific nations accelerate military modernization.⁸ But increased spending doesn’t mean business as usual. Demand is migrating toward autonomous systems, drones, advanced weapons platforms, and AI-enabled capabilities.² “Speed-to-field” has become the unifying metric – the traditional model of developing a perfect system over 10-15 years has exposed a reality where 80% solutions deployed in months outperform perfect systems that arrive too late.  

Recent geopolitical dynamics have exposed critical gaps – illustratively, U.S. missile consumption supporting Ukraine and Israel exceeded production capacity, potentially leaving the military unprepared for peer conflicts.⁸ America’s stockpiles are thin by design – years of counterterrorism focus led to underinvestment in precision munitions and limited surge capacity, as production requires two to three years, plus additional time to scale manufacturing. An even starker example exists in Europe, which struggles to produce interceptors while Russia produces more than 1,000 missiles per year.⁸

In response, defense departments are fundamentally changing acquisition – they are no longer willing to wait years for custom systems when commercial solutions that meet 80% of requirements can be fielded in months.⁹ The rapid adoption of commercial drones in Ukraine drove equally rapid counter-drone innovation and the deployment of AI-piloted systems.⁹ This operational urgency is reshaping how capabilities are developed and acquired.

The Industrial Capacity Crisis

The aerospace and defense industrial base faces a structural challenge: demand is surging while capacity remains constrained. This is not a short-term bottleneck – it requires fundamentally new approaches to unlock constraints.

Commercial aerospace carries 10+ year production backlogs, yet manufacturers struggle to increase output.² Supply chains are the limiting factor: persistent demand meets material shortages, labor constraints, and geopolitical disruptions, keeping the industry under pressure through at least 2027.² The paradox is stark: supply chains must simultaneously become more efficient and more resilient – objectives that often conflict.

For example, tariffs on titanium and copper added complexity that rippled through component sourcing. Over half of manufacturers cite tariffs and policy changes as top challenges.¹⁰ Semiconductor disruptions in 2025 further demonstrated that supply chain risk extends beyond exotic materials: production cuts across automakers affected ordinary parts as well.¹¹ The aerospace supply chain’s global reach creates vulnerabilities at every tier – from Tier 3 fastener suppliers to Tier 1 fuselage manufacturers – with each link susceptible to geopolitical instability and economic shifts.

Similarly, defense faces parallel challenges, often carrying higher stakes. The U.S. Government Accountability Office (GAO) analysis reveals that the Department of War invested $6.5 billion in 828 projects from FY2020-2024 to restore domestic production capacity for critical components – including domestic sourcing of chemicals, expanding rocket motor production, and funding advanced manufacturing for sensors and optics.⁷ Crucially, key gaps still remain.

Even with healthy supply chains, the industry faces a binding constraint: people. Nearly a quarter of the aerospace workforce is over 55, creating both a retirement wave risk and potential loss of institutional knowledge.³ High early-career attrition compounds the problem as younger workers leave for better pay and flexibility elsewhere. Overall, industry attrition stayed near 15% in 2024 despite retention efforts.³

The challenge is most acute in skilled trades. Attrition rates for assemblers, welders, electricians, and metal workers run 1.3-1.9x higher than for engineers.³ Assemblers face 11% annual attrition, welders 10%, electricians 9%, compared with 6% for aerospace engineers. Twenty-eight percent of manufacturers expect labor shortages to limit reshoring efforts, with nearly half reporting it will take one to three years to staff reshored operations.¹² Seventy-two percent say that outdated technology – legacy manufacturing systems, manual processes, and aging equipment – prevents them from attracting and retaining talent.¹²

The arithmetic is unforgiving. For a median-sized A&D company, closing the talent gap alone could unlock $300-330 million in annual value.³ Yet talent is only one dimension: supply chain disruptions, material shortages, and the need to simultaneously improve efficiency while building resilience create compounding challenges that incremental fixes cannot solve. Hence, the industry requires a fundamentally different approach – one that leverages technology to multiply worker productivity, applies advanced manufacturing to enable competitive domestic production, and deploys digital tools to compress timelines. Mitigating these challenges demands a reimagining of operations for an emerging environment where speed, resilience, and domestic capacity are strategic imperatives.

Technology as Strategic Leverage

While geopolitical pressures and capacity constraints define the challenge, technology represents a key path forward. Specific capabilities can directly address binding constraints: increasing output with fewer workers, reshoring manufacturing without sacrificing competitiveness, and compressing development timelines.  

Additive Manufacturing Enables Reshoring

The case for reshoring is increasingly clear: geopolitical risk, tariff exposure, and fragile supply chains all point toward domestic production. But reshoring poses its own challenge – how do you bring production home when labor is scarce and costs are rising?

Additive manufacturing (AM) partially addresses the challenge. Unlike traditional manufacturing methods that require complex global sourcing, AM enables local production using digital files with minimal infrastructure.¹³ During COVID, Stratasys printers produced millions of nasopharyngeal swabs domestically, scaling to 190,000 per day when overseas supply chains failed.¹³ This foreshadows today’s reality: resilience is no longer optional.

Illustratively, Northrop Grumman adopted AM to replace traditional tooling for solid rocket motor casings, cutting lead times from months to weeks while enabling faster, cheaper iteration.¹³ Spanish aerospace supplier Indaero used 3D printing to reengineer a critical helicopter assembly tool, delivering a product nine kilograms lighter, reducing manufacturing time by 66%, and cutting tooling costs by 50%.¹³

For aerospace and defense applications requiring extreme precision and quality control, AM excels at producing high-performance parts with complex geometries that traditional methods struggle to achieve. GAO reported that America Makes and LIFT institutes supported innovations including industry qualification of plastics for printing military aircraft replacement parts and the reuse of battlefield scrap metal to 3D print new components.¹⁴

Importantly, the strategic advantage extends beyond cost. AM enables production adaptability – quickly adjusting to new designs, different parts, or changing volumes without retooling entire lines. In an environment where “speed to field” is paramount and requirements evolve faster than traditional cycles, this flexibility becomes a critical competitive differentiator, supporting reshoring, resilience, and rapid deployment of capabilities.

Digital Transformation Multiplies Productivity

Because aerospace cannot hire its way out of the labor shortage, companies must extract significantly more productivity from the workforce they already have. Research suggests productivity gains of 30-40% are required to meet demand.³

Achieving this requires holistic transformation, not point solutions.

Digital tools – AI-powered planning, automation, real-time analytics, and digital twins – offer clear value: eliminating repetitive tasks, accelerating decision-making, and enabling smaller teams to manage greater volumes of work. Ninety-six percent of manufacturers believe technology will significantly transform operations within five years, with operational time savings as the primary benefit.¹²

AI and digital transformation are moving beyond back-office efficiency to become core enablers of design, engineering, sustainment, and mission assurance.² Digital twins – virtual replicas that update in real time – enable predictive maintenance, optimize performance, and reduce unplanned downtime. Model-Based Systems Engineering (MBSE) helps manage complex supply chains and system interdependencies, improving visibility and risk management across programs.⁹

For workforce development, technology creates leverage. With the right tools, new engineers can become productive in weeks rather than months through guided automation and AI-driven systems. Rather than replacing jobs, automation helps teams accomplish more by focusing human expertise on higher-value activities such as complex problem-solving, design optimization, and quality assurance.¹²

Digital transformation also enables data-driven quality. In an industry defined by stringent compliance requirements, real-time metrology and digital inspection provide actionable insights that reduce inspection time while increasing confidence.¹² As tariffs and material costs rise, scrap and rework become increasingly intolerable – data-driven workflows shift quality from reactive inspection to predictive assurance.

Compressing Development Cycles

Timeline compression may represent the most strategically impactful capability. Traditional aerospace development follows a sequential pattern: design, prototype, test, refine, certify, then manufacture – a process that can take decades. Famously, the F-35 entered development in 1997 and did not reach full-rate production approval until 2024 – more than a quarter century later.¹⁵ To accelerate, digital tools can enable concurrent engineering, rapid iteration, and virtual validation before physical prototypes are built.

Production virtualization – highly realistic computer simulation – allows engineers to test thousands of design variations digitally, optimize designs before cutting metal, and avoid costly physical redesigns.¹⁶ These models enable validation before reaching the shop floor, resulting in reduced downtime, material waste, and operational risk.¹²

The Department of War has begun adapting acquisition to this reality. Reforms now emphasize speed, commercial solutions, and broader vendor participation.² Expanded use of Other Transaction Authority (OTA) attracts nontraditional suppliers and compresses contracting timelines, while the Software Acquisition Pathway creates dedicated routes for outcome-focused procurements, allowing software-centric firms to scale rapidly.²

Companies building electronic systems to common standards can now integrate new technologies in days or weeks rather than years. For example, German defense contractor Rheinmetall built a modular electronic architecture that achieves compressed timelines⁹ – a shift reflecting a broader trend: speed is now the defining metric, and digital tools enable faster delivery without sacrificing quality.

Companies that invest in digital infrastructure, train their workforce on modern tools, and fundamentally redesign how work is performed will deliver faster, at lower cost, and with greater flexibility than competitors bound to legacy processes. This is not marginal improvement – it is a durable competitive advantage in an environment where speed and adaptability are strategic differentiators.

Strategic Positioning for the New Era

As outlined, the aerospace and defense industry is not facing temporary disruption but instead navigating a true inflection point where the underlying assumptions that guided strategy for three decades are being upended.

Geopolitical competition is driving demand, but that demand has evolved to favor speed over perfection, production at scale over exquisite systems, and capabilities fielded in months rather than years. Economic security has displaced efficiency as the organizing principle, resulting in supply chains that need to prioritize resilience even at a higher cost. Put simply, a defense industrial base strained by rising demand and chronic capacity constraints cannot meet requirements using legacy approaches.

Technology provides a key path to address these challenges – but only for companies willing to invest decisively. Additive manufacturing enables reshoring while lowering cost. AI and digital tools multiply workforce productivity. Modern engineering environments compress development cycles. These are no longer optional enhancements – they are becoming competitive necessities.

The Implications are Straightforward:

Invest in advanced manufacturing capacity to participate in a wave of renewed domestic production. Waiting for long-term commitments before expanding capacity only deepens bottlenecks and cedes advantages to first-mover competitors. Reshoring is no longer an uncertainty; the question is who is positioned to capture value in a changing environment.

Modernize operations with digital tools that multiply productivity and compress timelines. The workforce shortage is structural, not cyclical – companies cannot hire their way out of it. The path forward requires redesigning how work is performed, leveraging technology to enable smaller teams to accomplish more, and creating environments that attract and retain talent.

Build supply chain resilience through strategic partnerships and selective vertical integration. Efficiency-optimized supply chains are giving way to resilience-focused networks. Invest in redundancy, supplier development, data integration, and digital visibility to mitigate risks from tariffs, demand surges, and geopolitical disruption. For critical components, vertical integration can make strategic sense even when it increases near-term costs.

Embrace speed as a competitive differentiator. The traditional model – lengthy programs delivering optimized systems – is being challenged by an environment where requirements evolve faster than conventional timelines. Companies that field solutions meeting 80% of requirements in months rather than perfect systems in years will capture the bulk of defense growth. In commercial aerospace, success favors firms that ramp production quickly and adapt to changing demand.

Position for where demand is headed, not where it has been. Defense spending is rising, but it is concentrated in autonomous systems, AI-enabled capabilities, and large-scale munitions – not traditional platforms. Commercial aerospace growth depends increasingly on aftermarket and sustainment as backlogs work through. Align capabilities with projected 2030 demand, not antiquated 2020 patterns.

Companies that move decisively – investing in the right capabilities, modernizing operations, and aligning with the demands of the great-power competition – will capture disproportionate value over the next decade. Those treating this moment as cyclical rather than structural will find themselves disadvantaged.

Aerospace and defense is at a strategic inflection point. Transformation is underway. The question is who will shape it or be shaped by it.

Footnotes:

1. Stockholm International Peace Research Institute (SIPRI), “SIPRI Military Expenditure Database”
2. Deloitte, “2026 Aerospace and Defense Industry Outlook”
3. Aerospace Industries Association (AIA), “Accelerating progress: Maximizing the return on talent in A&D”
4. The White House, “National Security Strategy of the United States of America November 2025”
5. U.S. Department of War, “2025 Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China”
6. Council on Foreign Relations, “U.S. Economic Security Winning the Race for Tomorrow’s Technologies”
7. U.S. Government Accountability Office (GAO), “Defense Industrial Base: Actions Needed to Address Risks Posed by Dependence on Foreign Suppliers”
8. Morningstar, “Defense: Geopolitical tensions are driving a new supercycle for global defense markets July 2025”
9. KPMG, “Emerging trends in aerospace and defense 2025”
10. Hexagon, “Advanced Manufacturing Report”
11. 3DPrinting.com, “America’s Manufacturing Crossroads: 2026 Is The Year Excuses Run Out”
12. Advancedmanufacturing.org, “Reshoring Aerospace Supply Chains: A More Resilient Future”
13. Stratasys, “How Additive Manufacturing Will Help Industries Navigate New Economic and Geopolitical Realities in 2025”
14. U.S. Government Accountability Office (GAO), “Advanced Manufacturing: Aligning Strategies and Improving Agency Reviews Could Help Institutes Achieve National Goals”
15. U.S. Congress, “F-35 Lightning II: Background and Issues for Congress”
16. Inter-American Development Bank Group (IDB Group), “Aerospace Industry: Current Status and Trends of the Global Value Chain”