Since the coronavirus pandemic began, the Defense Department has seen a small increase in predatory foreign investment in U.S. companies, such as small drone manufacturers, the Pentagon’s head of industrial policy said Wednesday.

“In general terms, there has been of an uptick, but it’s always been pretty high,” Jennifer Santos, deputy assistant secretary of defense for industrial policy, said Wednesday during the C4ISRNET Conference.

The Pentagon has become increasingly concerned about what it calls “adversarial capital” — a tactic whereby foreign nations, particularly China, make investments into U.S. technology startups that are part of the defense market. Once those countries make their investments, they could own or have access to unique American technologies, while the Pentagon loses its own access due to security considerations.

With the U.S. economy increasingly fragile due to COVID-19, the Defense Department must be vigilant about potential risk to American companies, Santos said. “We simply cannot afford during this period of economic uncertainty the loss of American know-how in critical tech.”

But Santos stopped short of saying the uptick in predatory foreign investment was a direct result of the pandemic, instead noting that the Defense Department recently expanded its existing tools to monitor adversarial capital.

One tool, known as the Committee on Foreign Investment in the United States, or CFIUS, allows the government to block a foreign investment attempt on national security grounds. The jurisdiction of that tool increased in February, so the Defense Department has seen a boost in the number of cases it is tracking, Santos said.

“Twenty percent of our [gross domestic product] is foreign direct investment, which is fantastic. But there’s some areas where there are threats associated with some of that capital, and we want to protect those industry partners,” she said.

Over the past eight weeks, the Pentagon hosted 25 teleconferences with industry to help guide companies that might be experiencing financial distress caused by COVID-19. Some of that outreach, such as a webinar held last week, centered around avoiding adversarial capital, Santos said.

While her comments on adversarial capital did not center specifically on the small drone industry, she noted that the pandemic has made supply chain vulnerabilities in that sector more apparent to the department.

“The market for UAS [unmanned aerial systems] in the United States is dominated primarily by foreign companies, especially Chinese companies,” she said, adding that Chinese firms hold 97 percent of the small UAS market, with about 75 percent of sales in the U.S. commercial market coming from Chinese drone maker DJI.

“U.S. firms have struggled to compete in this drone area,” she said. "Even commercial drones manufactured in the United States often use components made in China. We don’t know what the exact effects of COVID will be on this small UAS sector, but I know one thing: We will emerge from this stronger.”

Brent Ingraham, the Pentagon’s unmanned systems technical director, pointed to the American Drone Security Act currently under proposal by Congress. If passed, the legislation would apply the same security restrictions on UAS used by the Defense Department to the rest of the federal government, which would secure industrial opportunities for U.S. vendors that have a trusted supply chain, he said.

As the Defense Department looks to expand its base of small UAS manufacturers, one of the military’s legacy providers offered a word of caution.

"We as a community are all in favor in faster, cheaper, better, but we need to have an exercise in caution when you do that,” said Gorik Hossepian, AeroVironment’s vice president of UAS product line management. “Our past is full of examples of when we do those kinds of things, we tend to sacrifice one versus the other. We need to not lose sight that what we need is a balance.”

"At the end of the day, the war fighter at the edge of the battlefield ... needs to have a product that is trusted,” he said. “Members of some of our community, to some extent, have that as some of our DNA — the DNA of working with the end user to solve those problems.”

Aaron Mehta in Washington contributed to this story.

Valerie Insinna is Defense News' air warfare reporter. She previously worked the Navy/congressional beats for Defense Daily, which followed almost three years as a staff writer for National Defense Magazine. Prior to that, she worked as an editorial assistant for the Tokyo Shimbun’s Washington bureau.

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