Trump defense budget, hypersonic missile race, fuel state war for jobs

One of the many lessons learned from the wars in Iran and Ukraine is that ammunition and weapons systems are in limited supply and difficult to replace. This has led to a new way of doing business at the Pentagon and a new battleground in the battle for jobs and economic development among the states.

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

In fact, three graduates of Elon Musk’s space technology and artificial intelligence company are behind a key example of the new model. Castelion, a three-year-old startup based in Torrance, Calif., is trying to apply SpaceX’s business model to hypersonic missiles.

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

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

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

By contrast, Castelion, which has agreements to deliver at least 500 missiles a year and potentially thousands more, is raising private capital rather than government grants (more than $550 million to date) to finance a massive, vertically integrated manufacturing operation.

Castelion has contracts with each of the major service branches to provide the initial weapons system, called Blackbeard. But instead of cost-plus contracts, Castelion offers so-called “firm fixed price contracts” — the government pays the same price regardless of Castelion’s costs. This shifts cost risks from the government to the contractor.

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

“We’re really applying standard commercial production strategies to an area that hasn’t been applied in decades,” he said. “It is unacceptable to put forward a design that we can only produce a few dozen of. Instead, manufacturability in the thousands at a cost per missile measured in the hundreds of thousands of dollars was our guiding light from the beginning, and we oppose it today.”

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

How did ‘SpaceX’s hypersonic missiles’ land in New Mexico?

Realizing Castelion’s vision, and doing so profitably, will require a massive, quickly built manufacturing facility.

“We are moving full speed ahead to scale production,” said co-founder and chief financial officer Andrew Kreitz. “Nothing we do matters until we get into high-rate production with our first weapons system,” he said.

Kreitz, a former Goldman Sachs investment banker who was a senior finance executive at SpaceX before leaving to found Castelion, led the search for a location for a year. He said it eventually came to locations in Arizona, Tennessee and New Mexico. In January, the company broke ground on the 1,000-acre campus in Sandoval County, New Mexico, about 30 miles north of Albuquerque.

“The reality is that if you draw a Venn diagram of places where you can get a lot of land, be shovel-ready, move quickly, and have the talent base to staff the plant, there are very few places in America that can do that, and New Mexico stands out,” Kreitz said.

In addition to having space that quickly rules out expanding the company’s California headquarters or facility in Texas, New Mexico has a long heritage in defense manufacturing and a wealth of talent from Sandia and Los Alamos National Laboratories.

Stringer, the site selection consultant who brokered the deal, said New Mexico also offers seamless coordination at all levels of government and across parties.

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

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

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

“This company will be critical to catching up and surpassing China and Russia in hypersonic technologies,” said Republican State Senator Jay Block. “This is a race we can’t lose,” he added.

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

“We need to build truly extraordinary products that we can quickly scale, build and distribute at cost, and that is a big shift,” he said.

Meanwhile, Castelion is wasting no time in starting production. Just six months after groundbreaking, 15 of the 21 buildings on the New Mexico campus were under construction and 1.6 million cubic yards of soil had been moved, the company said.

In fact, Pitt noted, the company was purchasing the steel for construction even before settling on the site.

“Doing things like purchasing this steel before selecting our site allows us to maintain our timeline of fielding our first weapon next year,” he said.

And he said this is just the beginning.

“We’re already talking about committing 300 jobs to the state of New Mexico at this facility,” he said. “I expect us to exceed that significantly and then we will continue to look for additional areas both in New Mexico and across the country.”

CNBC will announce America’s Best States for Business in 2026, our 20th anniversary, on July 9.