Australia’s defence manufacturing industry is in mortal danger if the government blindly pursues the “off-the-shelf” rapid acquisition policy outlined in the 2023 Defence Strategic Review (DSR).
The much-vaunted DSR did not guarantee a single extra dollar for defence or articulate any plans to nurture and expand the nation’s crucial defence industry sector.
With Australian expertise at the forefront globally in areas such as electronics, software production, unmanned systems (underwater and aerial), artificial intelligence, training and other high-value areas, the opportunities are enormous.
However, most experts agree that without substantial government investment and a sound industrial policy such opportunities will continue to be lost.
Leading strategic analyst Dr Alan Dupont said the solution to the acquisition conundrum involved large amounts of money.
He believes defence spending must increase from 2% to at least 3% of national economic activity (GDP) – from $50 billion now to $75 billion a year for at least the next 20 years.
“We also need to speed up the acquisition of what the war fighters require at an affordable cost which is the opposite of the current system,” Dupont said.
For example, he said the nation was completely unprepared for a Ukraine-like conflict because the army would run out of 155mm artillery shells in just four days.
In the post-DSR world Australian companies might be able to access lucrative contracts in areas such as submarine and ship-building, army vehicles and missile production, but only if powerful overseas prime contractors are forced to play ball.
As one former industry leader said, “You must negotiate acquisition and through-life support contracts together before you sign up, otherwise the big primes have got you by the balls.”
After decades of lost opportunities and poor acquisition outcomes, local firms cannot endure any further policy confusion.
Many regard the past decade as the lost years for Australian manufacturing with local companies making expensive plans and large investments on the basis of political promises for zero outcomes.
Given the uncertain strategic environment articulated by numerous experts and government reviews, including Labor’s DSR, there is little time to waste.
During 2022-23, 92% of the $12.3 billion Australian taxpayer dollars spent with defence companies went to foreign firms.
According to The Australian Financial Review, American defence companies last year received $4.4 billion under the foreign military sales umbrella from 42 contracts.
Only two of the top 10 projects were Australian-based and they split $987 million.
Defence has contracts in place for about $170 billion worth of work and its 10-year capital acquisition program is valued at around $270 billion.
On current trends that could mean less than $10 billion flowing back to Australian-based companies during the next decade.
Australian Defence Industry Network chief Brent Clark said there was an urgent need to alter government policy before Australian industry wilted further.
“If government wants Australian industry involved then it needs to tell Defence,” Clark said. “Without a national industrialisation plan, industry is left without direction and Australia remains at the mercy of overseas-based multinational defence companies. We have tremendous capacity in our manufacturing base but it is vastly under-utilised.”
A coherent, future-proof industrialisation plan would enable Australian firms to compete on equal terms with overseas companies for a role in major local and global defence contracts.
Clark said it made no sense for Australian defence industry to be stuck in the stone age when much smaller economies such as Sweden and Israel exported defence technologies around the globe.
Of even greater concern is the fact that the Australian Defence Force sits in a queue for overseas-made weapons such as US-built Tomahawk cruise missiles, but no one knows exactly where it sits in the queue or, more importantly, where it might be during a conflict.
Historically, Australian-based firms have had to make do with crumbs falling from the table of major prime contractors such as Lockheed Martin, Boeing and Northrop Grumman in the US and European firms including British Aerospace and Thales.
Under current arrangements, the nation’s biggest defence projects all involve billions of taxpayer dollars flowing offshore with little long-term benefit to Australia.
That is set to worsen under the proposed $360 billion AUKUS nuclear-powered submarine and cyber deal where American and British governments and their industrial behemoths will control the outcomes and where any Australian dollars are spent.
So far there are no concrete plans for local industry involvement in the AUKUS build and the US Congress is even showing signs of possibly abandoning the deal altogether.
The government’s defence purchasing and sustainment body, the Capability Acquisition and Sustainment Group (CASG), manages some 168 capital equipment projects valued at $130.5 billion.
Almost half or $59 billion of the acquisition and sustainment budget last year went to 21 approved major projects including $15.7 billion for Joint Strike Fighter jets, $6 billion for Hunter class frigates and $5.6 billion for army combat vehicles.
CASG employs about 7,000 people to manage Australia’s 10-year $270 billion acquisition and sustainment plan compared with Japan’s 1,800 staff managing a $500 billion five-year plan.
Several key boxes must be ticked to guarantee an increased level of Australian industry involvement in defence projects:
- Mandating intellectual property rights in all sustainment contracts.
- Adequate lead time to avoid necessary off-the-shelf solutions.
- Design activity in Australia to ensure a local supply chain.
- All contract risk to be shared between taxpayers and contractors.
The DSR sent shivers through local defence firms when it bluntly stated, “Defence must, where possible, acquire more platforms and capabilities via sole source or off-the-shelf procurement and limit or eliminate design changes and modifications.”
Given the sorry record of the military to “Australianise” or “gold plate” foreign-made equipment at great cost, there are strong arguments in favour of this approach, but Australian firms must be involved.
The DSR included a significant caveat: “Defence must consider Australian industry content when it makes sense and delivers capability outcomes on time.”
According to a former head of defence purchasing and sustainment, Dr Stephen Gumley, the government must play hardball when dealing with foreign-owned prime contractors.
He supports the concept of rapid acquisition and off-the-shelf purchasing, but only if the necessary IP rights for through-life support (and Australian jobs) are included.
“There is nothing the big primes like more than off-the-shelf deals, but we have still got to maintain the equipment for decades to come,” Gumley says. “You can only build stuff here if you negotiate appropriate IP rights for the Commonwealth at the very beginning.”
If that doesn’t happen the big players simply refuse to allow Australian contractors to do the sustainment work and then charge taxpayers vast premiums.
Australia learnt the lesson the hard way some 20 years ago when the government attempted to obtain the IP rights for the Collins class submarine project from Swedish company Kockums. The ensuing legal stoush cost millions and took years to resolve.
“You have got to use your pre-acquisition negotiating power to get appropriate IP for through life sustainment. It is too late once you have bought the thing,” he said.
He said that several other factors involved in achieving successful value for money and timely acquisitions include:
- Avoiding monopolies;
- Deciding precisely what you need;
- Locking in a delivery schedule to avoid delays.
Gumley also said it was crucial for Australian content figures for defence projects to be reported to the parliament every six months.
Dupont said Australian defence companies had been screwed for years by governments of all persuasions. In his view, Australia’s 20th-century defence acquisition system was broken due to an outdated mindset and an anti-change culture.
Australia, he said, should copy the American system known as “replicator” to deliver scalable mass in areas such as locally produced ammunition to underpin foreign-made high-tech weapons systems.
“We need an Australian equivalent and we need to spend money on it.”
