Australian shipbuilding - worth the effort?

So Australia’s naval construction program is risky. No sh*t Sherlock! Why did nobody say anything before?

With a decision imminent on which of the three bidders will build Australia’s Future Frigates, the majority of people who are fairly close to Australia’s shipbuilding plan have always accepted that it’s a risky venture that’s going to cause a lot of short-term pain. Are the rewards worth the pain? Let’s think about that for a moment.

Are we going to buy those submarines, frigates and patrol boats anyway? Yes. So if we don’t build them ourselves, and if we don’t insist on the highest reasonable level of Australian industry involvement, then most of the money we plan to spend will go overseas. 

But that’s supposed to be okay: the economists argue that we get the benefits of another’s efficiency. Some other country’s shipyards and equipment suppliers have been building ships for ages, so they’re good at it, so we don’t need to be good at it – we’ll just buy stuff from them. 

Really? Are we really going to spend $90 billions-worth of Australian taxpayers’ money enriching the taxpayers in another country?

What if we want to build that stuff ourselves? Well, the argument goes that we haven’t done much so we’re not good at it. So because we’re not good at it, we shouldn’t do it – it’s cheaper and easier to get it done by somebody else overseas (whatever ‘it’ happens to be - in this case ships and submarines; but the argument seems to be applied universally by pundits in Australia). But you don’t become good at something unless you practice. 

And what happens if you practice? You get better. At the end of the day, you might be better and cheaper than an offshore supplier; or you might be about the same, all things considered; or you might be slightly worse. The ANZAC frigate, Huon-class minehunter and AWD projects demonstrated that we actually get very good very quickly at building ships in this country – world-class, in fact. That’s the benefit of the learning curve effect, and it applies across other sectors of the defence industry as well as the wider economy. Yes, market volumes matter, which is why exporting and diversification are both so important. Guess what? The Commonwealth is trying to encourage defence companies to do both.

If you’re doing the job – building submarines and warships, or something else – in-country, and reaping the economic benefits that flow from designing, building, testing and maintaining stuff, and developing the industry-wide skills that can be applied to other projects and industries, you may be considerably better off. Especially if you then avoid, in down-stream phases, the financial and reputational costs of repeatedly starting up an industrial enterprise to build a few ships and then allowing it to shut down again, only for the process to be repeated. Each time you do that you almost guarantee delays and over-runs, not to mention quality issues, resulting from trying to mobilise an under-utilised, under-skilled and inexperienced work-force and customer. (Let’s not forget the customer plays a role in all this too.)

People who argue for the status quo tend to look narrowly at a specific project, ignoring the wider context. Yes, it’s expensive to either buy or build a submarine or a fleet of warships, but designing as much of them as possible in-country, building them in-country and designing and building in-country as much as possible of the equipment that goes into them can generate significant spinoff benefits beyond the project itself. No, there are many things we shouldn’t even contemplate trying to do ourselves, but that still leaves plenty that we can do, and the better and more efficient we get, the more of this stuff we can credibly claim for ourselves.

In a small-ish country with a small-ish population individual industry sectors generally aren’t big enough to support all of the specialist capabilities needed for self-reliance, let alone self-sufficiency in that specific sector – think of things like specialist metal coatings; specialist surface treatments; high-speed titanium machining; manufacture of high-end electronic chips; manufacture of high-strength metal alloys or carbon-fibre composites; highly specialised welding techniques; high-end industrial robotics, to name just a few. While an individual industry sector may not be able to sustain all of these capabilities in-country, a group of sectors with overlapping technologies and markets might – but they depend on each other to thrive. 

Even a struggling industry sector may still help underpin a technology pillar providing essential support to a bunch of other industry sectors. Without it those other sectors become less competitive. That’s the broader context that many commentators and policy makers ignore.

Conversely, if you invest in a new sector, or in reviving an existing one, you create spin-offs that benefit every adjacent industry sector. In this case we’re talking about manufacturing – that’s the smart stuff that people do with low-tech commodities such as iron ore, bauxite, titanium ore, coal and natural gas. And when they’ve done that clever bit, traditionally they have sold the resulting products back to the source of the coal, gas and ores – us.

So what’s the problem with investing in a new national shipbuilding plan? Andrew Davies in ASPI’s ‘The Strategist’ blog, said the process is a ‘shambles’. It’s certainly untidy but that, I suspect, is because the Government is having to make up six years of lost ground when the Labor governments of Kevin Rudd and Julia Gillard refused to make a single decision or invest a single dollar in building submarines and ships for the Navy. 

Now, we as a nation are trying to make up for lost time by building up enough momentum to clear the so-called ‘valley of death’ that’s resulted from those years of inactivity, and the picture isn’t pretty. Apart from the understandable concerns over the submarine and future frigate contracts, both of which are massive and will run for decades, there seem to be other areas of concern.

One of them is the decision to split the build of the Navy’s 12 Offshore Patrol vessels: two will be built in Adelaide by ASC, the remaining 10 in Fremantle by CIVMEC. Yes, that looks untidy and inefficient, but it has a couple of benefits: firstly, CIVMEC (or AMSEG, as it is now called) still gets a 10-ship build program at its Henderson yard – that’s important because it helps them develop management, engineering and construction skills and infrastructure which can then be turned efficiently to other projects. Secondly, it helps maintain engineering and shipbuilding skills at ASC that would otherwise be lost pending the start of the Future Frigate build. Remember how Australia’s shipbuilding industry atrophied after the finish of the ANZAC frigate program, and the costs and delays that resulted when we started re-mobilising the national workforce to build the first AWD? That’s the sort of problem the Government is trying to avoid here. Yes, it’s untidy and inefficient, but down-stream this approach ought to pay dividends. Read p.47 of the Naval Shipbuilding Plan: 

“The Government announced on 18 April 2016, that naval shipbuilding in Australia will be centred on two yards: Osborne Naval Shipyard in South Australia for major surface combatants and submarines; and Henderson Maritime Precinct in Western Australia for construction of minor naval vessels. This consolidation will focus investment, industry and workforce in an effective and efficient manner.”

That’s the intent: getting there will be a bit like making an omelette, leaving a mess in the kitchen and plenty of broken eggshells. Sorry, but given where we’re coming from that’s probably unavoidable.

This whole shipbuilding plan is about husbanding and growing efficient naval construction resources. The nine future frigates will be built in Port Adelaide in the same yard where ASC built the Navy’s AWDs. That yard is now in the Commonwealth’s hands but the workforce – from project managers and design engineers to welders and shipwrights – will still be there. 

Of course, we don’t know exactly what the submarines and frigates will cost us. The Future Submarine design hasn’t been finalised as yet. And the Future Frigate hasn’t even been selected yet, so we don’t know what the program will cost, nor what industrial arrangements will be put in place to build those ships. Meanwhile, the commentariat are already talking about ‘cost blowouts’ and ‘delays’. Really? 

As for the future of ASC, let’s wait and see what transpires after the Sea 5000 decision is made. My personal suspicion is that the Future Frigate program will have a rapid and significant bearing on ASC's future, but that’s just me. We don’t have room to discuss it here and I suspect I’d only be speculating wildly in any case.

Andrew Davies’s celebrated ‘shambles’ will start to resolve itself once the Sea 5000 decision is made and technical and schedule risk factors can be identified and quantified properly; the process will advance still further once the Future Submarine design is completed. Things are messy, which public servants and policy analysts hate passionately, but we always knew that would be the case. What’s different today is that we have defence industry policy being shaped by a strategic outlook, rather than a succession of narrow, transactional decisions devoid of any broader context. Does that make the rewards worth the pain? If we as a nation can reap the rewards of thinking strategically and becoming more pro-active globally, then yes it does in my opinion.