European powerhouse Germany has rocked the boat following a Dutch company securing a US$6.7 billion shipbuilding deal for the German Navy, forcing a major rethink within Germany about the way it protects its local defence industry.
Germany has long enjoyed its position as premier industrial powerhouse of the European Union, with unrivalled access to the common market, the industrial titan has muscled many competitors out of the lucrative market.
Driven heavily by exports, the German economy has gone from strength-to-strength on the back of its position within the European Union, seeing the nation exporting nearly US$1.5 trillion worth of goods and services in 2017 across sectors including vehicles, financial services, machinery, chemical goods, electronic products, electrical equipment, pharmaceuticals, transport equipment, basic metals, food products, and rubber and plastics.
As a military power, Germany largely draws on its close and collaborative industrial relationships with other European powers including France, Italy, Spain and the UK to provide it with some of the latest military equipment in the world.
This includes close collaboration and partnerships with the likes of Airbus, Rheinmetall, Howaldtswerke-Deutsche Werft, Heckler & Koch and MBDA, resulting in equipment from the globally operated Eurofighter Typhoon and Airbus A330-based KC-30A Multi-Role Tanker Transport, various MEKO-type naval frigates, Type 212, Type 214 and Type 218SG submarines, the Boxer combat reconnaissance vehicles and a range of small arms and other munitions.
However, it appears that Germany's dominance of the European defence market and, in particular, its industrial dominance of small European nations has finally come to the point of push back, with Dutch-based Damen launching a successful bid to supply the German Navy, or Deutsche Marine, with a US$6.7 billion contract to provide a fleet of MKS 180 frigates.
The 155-metre MKS 180 frigates will displace up to 9,000 tonnes, with berth for 110 permanent crew and up to 70 additional passengers, which will make them the largest warships in the German Navy fleet. With an expected lifespan of 30 years, the vessels are designed to be capable of worldwide operations.
Expanding the national security/industry links
This surprising win by Damen, in partnership with partners Blohm + Voss will see "around 80 per cent of the total net investment as added value in Germany". It saw German Naval Yards, which partnered with Thyssen Krupp Marine Systems (TKMS), miss out on the deal. In doing so, Germany appears to be moving towards a new phase of what could be considered a protectionist shift for its defence industry.
Despite Germany's industrial and manufacturing dominance of the European bloc, the German government has kicked off the early stages of drafting a new, multi-ministry policy to establish the construction of surface ships as a "key technology area in Germany's security-industry fabric", a move that could see Germany exempt from certain EU acquisition legislation.
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This shift is part of a review of the 2015 'Strategy Paper of the Federal Government on Strengthening the Defence Industry in Germany' , the core launching point of the shift in German policy making and would remove the requirement for national programs be tendered across the bloc, thus protecting German industry from interlopers.
The original strategy outlined in 2015 saw heavy focus on promoting closer collaboration between German and European defence industry partners, stating:
"In order to retain key enabling technologies that are needed in the defence sector, both at the national and European level, and to make them more economical in the long term, we need to improve consolidation in industry and increase competitiveness in the national and European defence sector. First and foremost, this is a matter for the companies themselves. The federal government will live up to its responsibility and will back and support the necessary processes as far as possible.
"The federal government is increasingly relying on European co-operation. This even includes companies of different member states joining forces with one another without losing sight of their own national interests. Pooling technological strengths will have a decisive and positive impact on the economic significance of European projects in the face of international competition."
However, the 2015 strategy also stressed the importance of "defining national key enabling technologies for the defence industry" as a core principle for Germany as a central pillar in the European bloc, a far cry from the shifting goal posts following the success of Damen.
While the review is still some way off and would require cabinet approval, the shift towards a "purely national competition" for future surface warship contracts marks a dramatic shift in the approach of Germany's broader industry policy.
Lessons for Australia's Naval Shipbuilding Plan
Australia's Defence Industrial Capability Plan and the $95 billion Naval Shipbuilding Plan set out how the government is delivering on the commitment to build a strong, sustainable and innovative Australian naval shipbuilding industry, stating:
"The goal of the Naval Shipbuilding Plan is to ensure that the regeneration of the Royal Australian Navy over the coming decades will ensure both a cost-effective solution for the government [and] provide Navy the assured capability to fight and win. The National Naval Shipbuilding Office has been established to implement the Naval Shipbuilding Plan."
Germany's move to formalise "key technology areas" for the 'security-industry fabric' provides an interesting model for consideration should Australia consider the development and introduction of a a National Strategic Industry Act to support the development of the nation's naval shipbuilding industry and broader reindustrialisation of the Australian economy using defence industry as a best-of-practice model to draw examples from.
Supporting the development of Australia's naval shipbuilding industry also requires the legislative power of government to counter-balance industry development policies of allied, yet still competitor nations like South Korea – which leverages the industrial development policies of export oriented industrialisation (EOI) to develop its economy into a major economic and modern, advanced manufacturing powerhouse.
Korea's industry development is driven by a range of government incentives for industry, including corporate tax incentives, employment incentives and payroll tax incentives.
As a result, in order to develop Australia's own naval shipbuilding industry, similar innovative and adaptive policy making is essential to developing a competitive domestic naval shipbuilding industry.
Defining Australia's role in the domestic and allied supply chain
Australia has a number of naval shipyards beyond those located at Osborne and Henderson, such as the Williamstown facility just outside of Melbourne and the former-Forgacs naval shipyard located in Newcastle, which were responsible for the fit out of the Canberra Class and construction of the Anzac and Adelaide Class frigates, respectively.
These existing facilities, combined with the model established by the temporary BAE Systems Australia acquisition of ASC Shipbuilding throughout the life of the $35 billion Hunter Class construction phase, provides an ideal model for the Australian government to collaborate with local or international naval warship designers and builders to develop specialised 'warship centres of excellence'.
Developing these centres of excellence across the full spectrum of naval shipbuilding operations, including research and development, design, production and through-life sustainment, can leverage the policy levers used to develop other national naval shipbuilding facilities and integration within global supply chains.
Additionally, this can be leveraged to support the development and rehabilitation of local naval shipbuilding capabilities with a focus on capitalising on the growing demand for warships in the Indo-Pacific and Middle East in particular.
Australia's 'value add' proposition fits in the edge of acquisition and operational cycle of naval acquisition – namely in the research and development and design phases, with production costs impacting the bottom line due to small economies of scale (which have been discussed at length here), and through life support, modernisation and sustainment, adding value throughout the life of warship and submarine development and acquisition programs.
Diversifying Australia's naval shipbuilding capabilities beyond focusing on Australia's own shipbuilding requirements is a necessity should the broader naval shipbuilding plan be successful – targeting growing export demands in the region and Middle East, combined with international industry collaboration and partnerships, is central to this.
Developing and implementing a cohesive, innovative and long-term vision for Australia's sovereign defence industry capability can also serve as the basis for developing, and in some cases redeveloping, a robust, advanced manufacturing economy taking advantage of Australia's unrivalled resource wealth – supporting the broader national security and interests in the Indo-Pacific.
So, let's ask the question, what is the long-term goal for Australia's naval shipbuilding industry and capability, what does it look like and what does it involve? How can Australian industry work collaboratively with government beyond the 2030s?