Sunday, April 26, 2015

Defence industry policy – why it matters

Why does defence industry policy matter? Why does defence industry itself matter? If it DOES matter (and successive Australian Defence White papers have stated this is the case), then it’s because of what industry can deliver to the Australian Defence Force (ADF).

However, much of Defence’s industry policy focuses on sustainment – the industry’s ability to maintain, repair and upgrade the equipment currently in service with the ADF, or about to enter service.
But there’s no explicit commitment to buying equipment from Australian suppliers, beyond niche requirements for indigenous industry capabilities – the ability to design, build and integrate equipment that can’t or shouldn’t be acquired from overseas.

I’ll deal with the industry policy shortly, but the diagram below helps explain the harsh realities facing both Australia’s defence industry and the Department of Defence.

This diagram maps in simplified form the landscape of Australia’s defence market. The vertical axis represents the number of customers there are for a particular piece of equipment; the horizontal axis represents the complexity of the equipment. The diagram includes a selection of equipment and platforms either in service with the ADF at the time this diagram was drawn, in late-2010, or likely contenders at that time for a future contract.

The Australian defence industry is generally positioned towards the bottom of the graph in the blue ‘Australian Industry’ ellipse. This contains those products developed entirely or mainly in Australia by local firms with the ADF as the launch (and possibly sole) customer. The complexity of some of this equipment along with the relatively small domestic Australian market and defence industry compounds the technical, schedule and financial risks associated with these products.

Defence is reluctant to court what it considers to be unnecessary risks associated with local development of new equipment when excellent equipment is available off the shelf from its close allies the UK and USA, and from other sources such as France, Germany and Israel. So Defence prefers to shop higher up the graph in the green ‘MOTS’ ellipse where more mature, lower-risk products are available, generally from overseas suppliers. These have all been developed initially for an overseas customer and then acquired by the ADF off the shelf, or may have been developed in a joint venture with that customer (eg Nulka, JSF and JLTV), or have been evolved from an existing, proven product (Saab’s Anzac frigate CMS, or Combat Management System). These represent relatively low technical, financial and schedule risk to the ADF.

In some cases, Australian industry is a major partner in the international team developing the equipment – for example, BAE Systems Australia leads the Australia-US Nulka decoy team: this is unashamedly an Australian product and a major operational and export success.

The highest risk for Defence lies at the bottom right of the graph, where Australia must either develop, or pay to have developed, a unique, complex and usually expensive capability not available anywhere else, such as a Wedgetail airborne early warning system, a Collins-class submarine or that submarine’s eventual replacement.

This diagram encompasses all the money that Defence will spend acquiring capital equipment for the ADF; it doesn’t include sustainment. It suggests a number of things. Firstly, if Australian industry wants more of Defence’s capital budget it needs to go where that budget is being spent.

Secondly, if Defence needs industry to develop and grow the high-end management, systems integration, repair and upgrade capabilities required simply to sustain equipment that it buys from overseas suppliers, then it needs to ensure local firms get access to the work that will create and grow those capabilities. That work is generally at the front end of a particular project: design, development, systems integration and manufacture. It’s easy from this diagram to see where such work might be in the future, and therefore where industry needs to be positioned to secure a sufficient share of it.
In my previous post I suggested that the greatest potential for change in the Australian defence industry’s circumstances would come through growing the market: by industry either exporting more or tackling defence’s risk-aversion so that it spends more of its money at home.

The latter is a long game and will require, among other things, Defence to lose its fear of becoming responsible, in some way, for industry outcomes and therefore needing to make judgements that will shape industry. The former may offer better prospects of a pay-off in the short to medium term. In order to win both the volume and quality of ‘noble’ work necessary to maintain and grow high levels of skill and capability, Australia’s industry needs to move ‘up the graph’ into the green MOTS ellipse and play a stronger part in developing and manufacturing the equipment in question.

Simple, but not easy. Defence won’t impose an offsets regime that forces overseas suppliers to give work to Australian firms. The current Australian Industry capability (AIC) program requires those overseas prime contractors to make their best efforts to do so but doesn’t mandate an outcome. The result is that nobody has a powerful incentive to help industry to flourish, and there are no real sanctions for failing to do so beyond the damage caused to companies that fail, and to their employees and the industry capabilities they embody.

However, defence industry policy needs to be based on an understanding of how certain specific and very complex skills and capabilities are developed and sustained within a relatively small manufacturing industry community. The fundamental inputs to industry capability include regular, challenging work. Defence’s current policy is based on the Team Australia construct that has worked reasonably well in the case of the F-35 Joint Strike Fighter project. It  needs to help Australian firms move up the graph – and not by simply shoving them up there and mandating work, but by encouraging the development of the industry attributes and behaviours that make choosing Australian firms the wise and rational thing to do. This approach worked fairly well in the F35 JSF project. It could and should work equally well in forthcoming projects such as Sea 1000 and 5000, Land 400 and others.

It would be nice to think the forthcoming Defence Industry Policy Statement will consider some of these factors.

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