Op-Ed: A sustainable and competitive defence industry for Australia

Many industries in Australia have been struggling to manage the coronavirus pandemic’s growing impact on its supply chains, with many companies relying on overseas manufacturers for components and materials for their projects.

So far, defence industry has fared better than much of the Australian economy because the government as a customer has been able to keep work flowing and maintain cash flow to these businesses.

Defence industry has also shown an ability to adapt and produce critical medical supplies at short notice because of their inherent high quality standards, advanced manufacturing technology and trusted relationship with government.

As Australia starts on the long road to recovery, there will be an overdue debate about the shape, security and resilience of our economy. The COVID-19 crisis is the catalyst but the analysis and response needs to consider a broader set of threats to our prosperity than a pandemic.

In a recent podcast, senator David Fawcett addressed the confusion of sovereign industry capability versus Australian industry content (and the other combinations of these words that appear from time to time). The distinction is important to this topic.

The 2016 Defence White Paper establishes three Strategic Defence Objectives and the 2016 Defence Industry Policy Statement recognises the fundamental role that defence industry plays in achieving them.

When we consider Australia’s defence industry, support to the Strategic Defence Objectives is at its heart and in particular the Australian Defence Force’s ability to ‘independently and decisively respond to military threats’ and maintain a ‘regionally superior ADF with the highest levels of military capability and scientific and technological sophistication’. Sovereign industry capability is that which must exist in Australia to meet this intent, including design expertise, rights to technical data, as well as production capacity.

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Government has been grappling with defining what activities constitute sovereign industry capability for some time because it is both complicated and multifaceted.

Australian industry content on the other hand is what we wish to do in Australia, all things being equal. We do not necessarily need to do the work in Australia in order to deliver our Strategic Defence Objectives, although it might serve a broader national interest.

For example, additional Australian industry content might underpin the viability of a company that provides a sovereign industry capability or alternatively might enable a company to transform its manufacturing processes to become globally competitive.

The greatest benefit to many Australian companies in the Joint Strike Fighter global supply chain program has been the transformation it has brought to their manufacturing processes.

The award of work that does not contribute to sovereign industry capability or a broader national interest to Australian companies should be purely on consideration of their global competitiveness.

Understanding the vulnerabilities in complicated supply chains that sustain the Australian Defence Force has always been a priority and subject to debate. The warnings about Australia’s low level of onshore fuel stock being the most visible example. What COVID-19 has bought into sharp focus is that global disruption of supply chains can happen more quickly and with less warning than most assumed.

Setting out the role of Australian industry in creating a capability advantage for the Australian Defence Force is a complex problem with many dimensions including debate over future capability needs, the degree of uniqueness in Australian requirements and the ability of industry to meet those requirements cost effectively.

The challenges are many and obvious, including an uncertain and constantly shifting security environment, the legacy of previous acquisition decisions, the pace of technology, financial constraints and vested interest.

The lowest priced compliant bid is the easiest although not necessarily an easy selection, and for most simple procurement cases remains the most appropriate.

The procurement regulations under which Defence operates must allow for the investment needed in sovereign capability to be appropriately weighted, including instances where the benefit of local industry involvement accrues outside of the project itself.

In Australia, as in most other countries, Defence is one of the largest purchasers and purchases the most diverse high technology equipment. Consequently, defence procurement is one of the levers the government can employ to transform the capability and capacity of the economy. In addition, defence procurement around the world never operates as an open market and so it is arguable that a strategic intervention is not compromising our trade principles.

Even before the COVID-19 crisis, there was a growing concern about the resilience of our economy to a change in external factors.

Should Australia emerge from the crisis well to our peers, we must not lose sight of vulnerabilities that have been uncovered. Vulnerabilities that could be exposed again in a different context.

Most commentators would now agree that the Australian economy has become too concentrated in the markets served and sectors supplied. Investment in the high technology and advanced manufacturing processes needed for our defence industry, as well as serving our sovereign industry capability needs, could expand to underpin a broader rebalancing of our economy.

Scale matters. In business, if you are not striving to grow you are waiting to fail. It is often said that SMEs are the source of innovation because they are hungry to succeed and grow.

Yet because SMEs lack scale, they rely on external investors to fund new offerings and, crucially, the marketing and business development costs.

Even a cursory study of the various directories of our defence industry directories quickly reveals a structural problem. The larger entities are subsidiaries of a global defence companies, we have a very broad base of small companies and very few mid-size companies with the capacity to invest from their own cash flow.

It can be argued that foreign ownership per se does not matter, but the degree of freedom under which local management operates does, particularly with regard to investment decisions.

Aside from commercial considerations, any technology investment in Australia may compete with activity at home. From experience, regardless of merit, preserving a sovereign industry capability for the parent’s country will win out every time.

To achieve the objective of ‘an internationally competitive and innovative Australian defence industrial base’, policy should apply in a way that encourages the scale-up of our most innovative high technology and advanced manufacturing SMEs.

So, what have we learned through this COVID-19 crisis? The issue of sovereign capability is a complex one which requires the consideration of many factors. The 2016 Defence Industry Policy Statement sets out a framework that is capable of delivering Sovereign Industry Capability and a broader national interest through Australian industry content.

Well thought out and sufficiently detailed, Sovereign Industry Capability Plans can support decision making at all levels of government and industry to achieve the policy outcomes by setting out in sufficient detail what is valued.

Richard Price is the chief executive of Defence SA.