Thursday, 17 August 2017

State governments, defence exports and industry development

I was struck by a recent article in Defence Connect about the detrimental effect of State vs State competition on the prospects for Australia’s defence industry. The article cites some key industry players, including Chris Jenkins from Thales, Mark Burgess from Quickstep and Victorian defence advocate and former cabinet minister Greg Combat. They all agree that the State vs State model is ‘less than optimal’, to use Combet’s words.

The subsequent conversation on LinkedIn was driven by Grant Sanderson’s comment: “If the Federal Government is intent on building a self sustaining, export oriented defence industry then it needs to internalize two critical lessons. Firstly locally developed IP is the well spring of innovation and international competitiveness. Buying overseas designs where local capability exists is detrimental to their strategy. Secondly there needs to be a constructive approach to the development of strategic centres of excellence rather than a Darwinian free for all between states and regions.”

I couldn’t agree with Grant more, and I’m encouraged that recently appointed State government defence ambassadors and advocates such as John Harvey and Peter Scott (NSW) and Raydon Gates (WA) understand the need for a strategic, national approach.

I’d like to make a couple of points of my own, however.

Firstly, State governments will always try to look as if they’re doing something useful for their voters. That usually means chasing exports or winning something off another state – essentially, treating business and industry development as a zero-sum game.

Secondly, State governments have often stepped in where the Federal government has been conspicuously absent in supporting industry’s efforts to grow and become exporters. They’ve been trying to fill a vacuum that doesn’t exist (at least to anything like the same degree) in most other industrialised nations. However, competition between the States has sometimes confused potential export customers, especially when there hasn't been a moderating Federal government presence.

Thirdly, The Federal government has turned on a sixpence (in strategic and policy terms) by suddenly becoming a vocal (and I believe committed) champion of industry development, innovation and exports, across all sectors of manufacturing and related industry. This has happened over little more than 18 months, since December 2015; the defence focus dates back to the release of the Defence White Paper and Defence Industry Policy Statement in February 2016.

So there’s been a bit of a perfect storm: we suddenly have a defence shopping list that’s worth nearly $300 million over the next quarter-century; we have a government that’s committed to spending as much of this money as possible in Australia (alright, still a minority share, but more than we could have hoped for previously); a government acknowledging that a competitive industry needs to broaden its mental horizons and pursue innovation; and a university and research sector that’s woken up to the fact that there’s likely to be unprecedented and growing demand for its research and knowledge ‘smarts’.

Oh, and we need our new submarines, frigates, patrol boats and armoured vehicles in a bit of a rush, which goes counter to the idea of a measured, integrated whole-of-Australia approach. It should be noted that we’re only facing this rush because the Rudd and Gillard governments shamefully refused over some six years to commit any money towards the Navy’s submarine and frigate programs, resulting in the current ‘valley of death’ and the haste to get design and construction work under way.   

So my response to Grant’s comment was this: “You don’t build export-ready industry capability without addressing the local market first and we haven’t seen the REAL money flow through the looming maritime and land projects as yet. And turning around the Australian government’s previous deliberate policy of allowing market forces to shape industry – and then refusing to act as a market player – will take time. Meanwhile, the Navy needs submarines, the Army needs new armoured vehicles and the urgency of those requirements doesn’t sit comfortably with the deliberate, concurrent development of industry capability across many technology domains and industry sectors. We’re talking about trying to achieve a generational task in only a few years.  I think we need to calibrate expectations and achieve the greatest leverage possible for every bit of industry activity over the next 5-10 years.”

Export-ready means having world-class product. That takes time to develop. It also requires an understanding of the market and the customer. That doesn’t happen overnight. Today’s exporters started on their journey years ago; tomorrow’s exporters need to start now – or better still, yesterday.

So what’s the role of the State governments in all this? They don’t sign contracts with the Federal government. They don’t build ships and submarines and armoured vehicles. They don’t re-paint and service warships. They don’t train soldiers, sailors and airmen and women. At best, they can help create local business conditions that favour investment decisions by industry and the Federal government.

They can invest in education and training; they can adjust local taxes and charges to make a city or region more attractive; they can support investment in market knowledge and a physical market presence at trade shows domestically and overseas; they can be advocates for an entire industry sector – and South Australia is the standout example of this. But they can’t award defence contracts and they can’t make promises to export customers on behalf of either the Federal government or industry. 

Ultimately, their power is limited.

The Federal government is looking to become more engaged with industry, to support industry development by championing both innovation and exports. It is filling the vacuum previously exploited by the State governments.

If the current business environment persists and develops the way that industry hopes, it seems to me the States need to re-consider their roles. If the Federal government is looking, for the first time in ages, to think and act strategically, then there’ll be more work around than Australian industry can handle in its present state. Helping to increase industry capacity by growing the trained workforce, and increasing capability by enhancing innovativeness, is a critical role the State governments must play. This isn’t a zero-sum game any longer: all States can share a much bigger prize, but they must be willing to work for a common benefit.