Palantir and SpaceX Are Teaching America a New Way to Fight War—How Powerful Is It?

The Iran war is likely to offer numerous lessons for the United States (US). One that is already becoming apparent is the exorbitant cost of using conventional weaponry to counter far cheaper threats, such as Iranian-made drones.

Citing The Economist, Emil Michael, a former Silicon Valley executive now serving as a senior Pentagon official, stated that the dynamics of modern warfare have changed. According to him, it no longer makes sense to use a US$1 million missile to shoot down a drone worth around US$50,000.

This situation is one of the reasons why the Trump administration has begun approaching a new group of defence companies aiming to transform the way the US wages war. This group is led by Palantir, SpaceX, and Anduril.

Palantir is known as a software giant supplying intelligence systems. SpaceX provides surveillance and connectivity capabilities through its Starshield satellite network. Meanwhile, Anduril is gaining prominence through the production of aerial drones, sea drones, and anti-drone weapons.

These three companies are often referred to as ‘neo-primes’, the new generation of prime defence contractors. Their closeness to figures in the Trump administration is now making the old major companies in the US military-industrial complex anxious.

The US government views traditional defence contractors, or legacy primes, as too slow, expensive, and risk-averse. This stems from their enjoyment of large, profitable contracts over the years.

Michael said that if these new players can prove themselves, they will begin to capture portions of business that previously almost certainly went to the old defence contractors.

New Players Starting to Gain Ground

Throughout this year, these challenger companies have begun receiving significant support from the US government.

In January, US Secretary of Defense Pete Hegseth used a SpaceX base in Texas as the backdrop for launching the latest artificial intelligence (AI) strategy. On that occasion, he promised that the US Department of War would emulate Elon Musk’s management style and move much faster.

Then in March, the government declared Palantir’s AI-based command and control system, named Maven, as a programme of record. This status locks in funding for the project over the long term, though it will still be overshadowed by considerable bureaucracy.

In the same month, the US Army also consolidated several contracts with Anduril into a single large contract worth up to US$20 billion, equivalent to Rp342.7 trillion (assuming an exchange rate of Rp17,135/US$1), for a 10-year period.

In terms of value, this commitment still appears small compared to the F-35 stealth fighter programme led by Lockheed Martin. The F-35 programme is even estimated to cost more than US$2 trillion over several decades.

Last year, the three largest traditional US defence contractors—Lockheed Martin, RTX, and Northrop Grumman—collectively recorded sales about eight times larger than those of the three new players.

Moreover, most of SpaceX and Palantir’s revenue comes from non-Pentagon customers.

The Reputation of Neo-Primes Continues to Rise

Nevertheless, investors remain highly optimistic. The combined valuation of Palantir, SpaceX, and Anduril is now more than three times that of the three largest defence contractors mentioned.

This optimism arises partly because the market sees them as having a significant opportunity to disrupt the arms industry.

In the coming months, SpaceX is even expected to go public through the largest initial public offering (IPO) in history.

Meanwhile, Anduril, which derives nearly all its revenue from defence contracts, is reportedly raising funds at a valuation of US$60 billion. Yet, its sales last year were only about US$2 billion, and the company is still operating at a loss.

This high valuation also reflects the strong influx of venture capital into US defence startups. Not only the three major names, but second-tier companies aiming to advance are also flooding with funds.

Among them are Shield AI, which develops autonomous pilots for air combat, and Saronic, which produces maritime drones.

This enthusiasm is also supported by President Trump’s ambition to have Congress increase the defence budget for the next fiscal year by more than 40% from current levels to US$1.5 trillion.

Under this plan, the government aims to expand spending on drones, anti-drone systems, and AI. Although traditional contractors will still receive the largest share, Emil Michael hopes that the budget allocation for innovative challengers, currently around 1-2%, can rise by several percentage points each year to foster greater competition.

The Pentagon’s Way of Procuring Weapons Is Starting to Change

From the Pentagon’s perspective, one of the main attractions of the new players is that they generally dislike cost-plus contracts, a model where the government reimburses all costs incurred by the company and then adds a profit margin on top.

This model is indeed considered suitable for large and complex projects where initial costs are hard to estimate. However, on the other hand, this pattern is also seen as encouraging inefficiency and making companies sluggish.

In contrast, the new challengers prefer fixed-price contracts. In this model, they bear the research and development costs upfront but can enjoy large margins if the project is completed on time and within budget.

This contract structure helps them stay lean and provides incentives to move faster. They are also driven to continuously refine their products.