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As primes through to family-owned defence companies strain under the weight of the COVID-19 outbreak, US lawmakers and Defence officials have warned that foreign investment might come with strings attached.
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Speaking at the Pentagon on Wednesday, the organisation’s top acquisition official Ellen Lord said that “foreign investment ... is something that I’ve been tracking for the last couple of years. There’s no question that we have adversarial capital coming into our markets”.
She added that it “is critically important that we understand that during this crisis, the [defence-industrial base] is vulnerable to adversarial capital, so we need to ensure that companies can stay in business without losing their technology”.
With many prime contractors dipping to record lows on US exchanges, major companies are at risk of being gradually bought out by foreign investors; at the same time, the historically pro-business climate in the country has given rise to many small defence start-ups, which are struggling to weather the storm. For the latter, many relatively low-capital start-ups in the US produce unique or high-tech products relied on by higher-ups in the supply chain, which could lead to catastrophic results if they are to fail.
In this vein, US lawmakers have proposed a series of restrictions on foreign investment in the US, in a defence spending bill that is expected to be unveiled in coming days. The laws would expand the purview of the Committee on Foreign Investment in the US (CFIUS) over Defense and Defense-adjacent matters, such as the broader industrial supply chain. Though Lord did not name any names in her Pentagon press conference, the elephant in the room was clear.
The issue
Over the last few years, US Defense officials have provided increasingly lucid accounts of the risks of foreign investment – particularly from China – into Defense-critical start-ups. A good example came in 2019, when then-chairman of the Joint Chiefs of Staff, General Joseph Dunford, took Google's AI division to task over its links to the Chinese state. Though Dunford didn’t point to specific examples of any collusion or indictable behaviour when asked in a Senate hearing in that year, he did make some suggestions at an Atlantic Council event more recently.
“Typically if a company does business in China, they are automatically going to be required to have a cell of the Communist Party in that company,” he said.
“And that is going to lead to that intellectual property from that company finding its way to the Chinese military. It is a distinction without a difference between the Chinese Communist Party, the government and the Chinese military.
“Ventures to help develop artificial intelligence in China are going to do one thing. They are going to help an authoritarian government to assert control [over] its own population. Again, our country exists for the individual. China exists for the Chinese Communist Party.”
If the American experience has anything to teach Defence, the ADF and the supporting industry back home in Australia, it is maybe a lesson limited to how to not do things. In countries marked by high degrees of economic freedom and innovation, contractors and innovators tend to respond to carrots better than sticks. Indeed, one could make the argument that maybe both are necessary in a defence capability context, but so long as the US government fails to extend government support to industries it ranks ‘critical’ to national security, even this argument is unlikely to hold traction.
Industry analysts have pointed out that the US government has a reputation for supporting primes first, and hoping that funding subsequently trickles down to SMEs and local operators. It is perhaps needless to say, however, that we are in an unprecedented economic climate, and if this tack is taken critical small businesses are likely to go bust long before that payday comes, if at all.
Though the Pentagon has indeed hinted that some of the US$9.4 billion due to be allocated by Congress this week will be dished out to small business, it hasn’t really provided any sort of clarity or framework on how much support will be given. Indeed, this left Wes Hallman, senior VP at the National Defense Industrial Association, seemingly miffed.
“I’m not worried about our big companies,” he said. “But on the supply chain, that drills all the way down to mom-and-pops, where there are one or two suppliers of capabilities. Should they go away, they’re unlikely to come back."
This runs counter to Lord’s assertion, where she said that “there is uncertainty especially with small businesses as to whether their contracts will continue ... to basically mitigate that uncertainty, that’s why we’re being forward-leaning and over-communicating, probably, to say: ‘We are open’”.
The lesson
Though the Australian defence industry operates in a markedly different environment than the US, we are perhaps just as vulnerable to the sorts of potential threats the Pentagon are citing – if not even more so. Writing in Defence Connect in mid-2019, former Rheinmetall Defence MD Adrian Smith put the number of Australian defence SMEs operating on a smaller-scale, transactional basis at roughly 1,500. In the wake of the continued economic downturn, government needs to identify critical small Australian businesses and extend financial assistance to prevent them from going under, or worse. If Australia is to learn from the US experience, we need to be forthcoming with our support to small business threatened at this time. Rather than dishing out vague overtures about financial aid to branches, we need to be clear on where, when, and in what amount this funding will come through to underlying industry.
On 27 March, a joint release from Defence Industry Minister Melissa Price and Defence Minister Linda Reynolds said that "Australian small businesses are the backbone of our defence industry and we will continue to do everything we can to relieve the current pressures they’re under”. The announcement made it clear that the government was in consultation with "major defence companies and industry groups" on what shape that assistance should take. Though laced with plenty of references to small businesses and operators, a cynic could interpret this as the style of "top-down" that has failed to deliver in the US.
We need to look to the coming months and years, articulating a plan beyond ‘day-to-day’ – which has been one of the main criticisms of the American approach. Rather than broad appeals to patriotism – such as that levelled against Google by Dunford last year – we need to properly assess the worth we place on Australian SMEs and the products they create, and extend corresponding levels of tangible support to help them traverse the biggest economic downturn of a generation.
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