The (unnecessary) challenges for the Australian high technology SMEs supplying to Defence

Brent Clark | Canberra

A quick look at ADM’s list of the Top 40 Defence contractors reveals that it is dominated by local subsidiaries of foreign owned prime contractors, with only one single Australian supplier of high technology systems on the list (EOS).

One might be forgiven for concluding that Australian owned industry - generally SME's - are just not particularly good at developing high technology Defence systems, and that they are simply not competitive against overseas suppliers.

After all, Defence acquisition, is run according to competitive principles, so the list at face value would indicate that Australian suppliers are not up to the mark.

Is this really the case?

Australian higher education institutions are well regarded in the science and technology areas, and the basic human resources needed for a strong defence high technology sector are readily available. And we are prepared to invest in it and have the capacity to continue to invest.

So why is the acquisition of advanced Defence technology from Australian-owned suppliers not more prevalent?

The start of the problem appears to lie with the Departments interpretation of the Commonwealth Procurement Rules in relation to the consideration of project risk during tender evaluation. Proposals involving technical development appear to be actively marked down. This acts to advantage overseas suppliers (or the local subsidiary of a foreign owned prime) which may have an offering that is already in service with their own defence force, as a result of development contracts funded by that country's defence force. The risk has already been taken by another nation.

This immediately puts the Australian technology supplier behind the eight ball.

Yet the assumption that any need to undertake technical development poses a risk to project delivery is overly simplistic. After all, the technical risk to project delivery is not simply a matter of how much technical development is proposed but is also a question of how good the proposing company is at undertaking the relevant type of development.

For example, a local supplier might have an exemplary track record of delivering development intensive projects; yet even with such a record, a tendered proposal from this Australian company would still be ranked behind a proposal from an overseas supplier requiring a lesser degree of development.

The results of this approach are predictable. Local technology suppliers attain at best an intermittent stream of development projects from Defence in their area of expertise.

Unsurprisingly, this causes the technologies and products from the overseas suppliers, with continuous (rather than intermittent) support from their own defence forces, to further improve their competitive position.

The result is a self-reinforcing system. Australian suppliers are competitively disadvantaged, which reduces their ability to win projects with Defence, which then further reduces their competitive position.

The outcome is bad for all Australians.

The acquisition organisation believes it has eliminated technical risk - but is left with different risks: the impacts of export controls, forex fluctuations, and managing engagements with suppliers for whom Australia is not their most commercially valuable customer.

The Defence end user becomes even further bound to technology supplied from overseas, compounding further the vulnerability of the ADF to disruptions of supply and/or support.

The silver lining of this sorry state of affairs is that the solution becomes obvious.

Rather than having a system that self-reinforces in a negative way, Australia's acquisition system needs to self-reinforce in a positive way.

Where local technology suppliers have a strong record of delivery on projects involving further development, the technical risk of further tenders involving development should be rightly assessed as minimal. This will immediately improve the ability of local suppliers of technology to win further development contracts, which in turn further improves the competitive position of the offerings of those companies.

The ADF benefits through the responsiveness both during the delivery project and subsequent support arrangements that can only be attained with local suppliers; and it reduces its vulnerability to overseas supply disruptions.

Local industry, being placed on a better footing, will become a more attractive proposition for the investment capital accumulating in the nation's superannuation system, enabling further expansion and maturation of sovereign industrial capability.

But the key to inverting what is currently a negatively reinforcing system to become a positive reinforcing system is to address the approach to assessing the technical risk of tendered offers.

The risk associated with the existence of development within a tender can only be evaluated in conjunction with an assessment of the ability of the supplier to undertake development of that nature. Where local suppliers' track records indicate that they consistently succeed at undertaking such development, the technical risk must rightfully be considered to be minimal.

This simple and logical change will unleash material growth in the high technology SME sector of the defence industry and should be immediately implemented.

Australia needs to support a local defence industry. Now more than ever Australia needs to focus on our domestic economic growth. We also need to ensure that we are investing in fostering high technology knowledge through education – but without a vibrant and receptive industry sector to absorb, use and continually grow this knowledge it remains fundamentally impossible to achieve a self-reliant and sovereign industrial base.

Note: Brent Clark is the CEO of AIDN National.

Published in the Australian Defence Magazine on the 6th of August 2020

AIDN’s Perspective on the Strategic Defence Update and Force Structure Plan

By Brent Clark, 30 July 2020

1 July this year, the Prime Minister announced the strategic defence update and the associated force structure plan in order to achieve the outcomes required in securing Australia’s interests in an evolving and increasingly complex geopolitical environment.

AIDN’s remit is not to provide commentary on the changes in Australia’s strategic circumstances, this is the domain of others.

Where AIDN can contribute to the ongoing dialogue is in how industry can meet the requirements of the largest expenditure on capital equipment, support systems and sustainment since the end of the second world war.

The Morrison government has announced that it will be spending around $270B over the next decade, and this expenditure is multidomain, there are some large acquisition items in the maritime domain and some much-needed enhancements of Australia’s cyber security infrastructure to name but two areas of the announcement. Further to this the Government has given firm commitment to ensuring that the Defence budget remains unaffected by the declining economic forecast due to the COVID-19 pandemic.

This announcement indicates that around 2% of GDP will be spent on defence in 2020/21 and that this is forecast to rise to around 3.5% around 2029/30. This is a significant investment by the Australian Government on behalf of the Australian taxpayer. Furthermore this has to been seen through the lens that the government has announced on a number of occasions that a local build has 60% local content and the corresponding spend within Australia.

Whilst the Government is yet to publish an integrated investment plan, with usable program time lines so that industry can plan properly to undertake potential investments in additional employees and plant and machinery, the government has provide industry with some certainty to look to the future and the Government rightfully deserves praise for this.

This type of expenditure should provide a boost to the Australian economy and Australian industry, particularly the small to medium businesses.

That is assuming that a significant amount of this funding is returned to the local economy. It is important to understand the benefits to the Australian economy in local expenditure, by doing this there is a significant multiplier effect of the dollars spent, this effect ranges from one dollar creating an additional dollar, up to one dollar creating an additional two dollars of effect for the Australian economy.

There are now economic assessments finding their way into the opinion space and these initial assessments are of concern. The ANZ recently published an assessment and some of this data causes alarm; specifically, the amount of money being spent offshore verses locally. This analysis indicates that from 2021 to 2030 only around 48% of this funding is being spent locally, and a large proportion of that amount will be going to foreign owned multinational defence contractors.

It is important that the Government ensures that there is a significant proportion of this defence spend occurring locally, and with Australian companies, it should not be acceptable to Australian that only 48% of Australian taxpayer money is actually being spent in Australia. Especially when the government has made consistent statements about meeting and exceeding 60% local content on Defence programs.

If more money is spent locally, then not only is there a boost to the Australian economy overall, but the environment is created for research and development and investment in Australia’s domestic market, which fundamentally increases Australia’s self-reliance and therefore assists in the creation of a sovereign Australian industrial base.

OPINION: Government can do better for Australian industries in naval acquisitions

By Brent Clark, CEO-AIDN -29/07/2020

As a result of the release of the 2020 Defence Strategic Update and the 2020 Force Structure Plan which together outline a new strategy for Defence and the capability investments to deliver it, the Prime Minister has announced a commitment to spend $270 billion over the next 10 years on additional defence capabilities including $75 billion investment over the next decade for the Royal Australian Navy, building on the government’s 2017 Naval Shipbuilding Plan.

In this context, the Defence Industry Minister was quoted as saying, in part, “We’re talking about a generation of Australian jobs, and a substantial level of Australian industry involvement in these major acquisitions”. What has not been addressed in the Minister’s statement is any reference to the manner in which Australian industry involvement will be optimised as a fundamental and integrated part of a capability life cycle approach to both the acquisition and sustainment of naval capability over generations.

It has been reported that to support a larger and expanded fleet, up to $12 billion will be invested in developing the infrastructure necessary to support the capabilities of our naval fleet during construction, operation and sustainment, noting that the future of maritime sustainment in Australia is set to change with Navy’s Plan Galileo laying the foundations for an integrated and consistent approach to maritime sustainment by leveraging opportunities created under the government’s Naval Shipbuilding Plan.

Successive governments have, over time, undervalued the importance of optimising Australian industry involvement including the sustainment of naval assets. Aiming at achieving a substantial level of Australian industry involvement without the government mandating and contracting minimum levels on both acquisition and sustainment elements on a project by project basis does not do justice to Australian industry.

Taking a life cycle approach to the acquisition and sustainment of a naval project has to commence at the concept stage rather than the emphasis initially being on the acquisition of the capability – early consideration of sustainment of the asset can have a profound impact upon the quality, size and effectiveness of the industry program.

A strong government commitment to the early and integrated engagement of Australian industry, with emphasis on the significant role of SMEs in the ongoing sustainment activities, as part of the development of a project capability life cycle will achieve optimised levels of Australian industry involvement during the sustainment over extended periods.

The government has recently committed to placing significant additional emphasis and funding on enhancing Australia’s trade/technical and technological skills base. Earlier engagement by government with Australian industry will provide the incentive to industry to invest in their skills base and capability in order to optimise their participation in the sustainment of naval assets into the future.

Australian industry has demonstrated in the past that it is capable of cost effectively committing to and optimising its involvement in the sustainment of naval assets (e.g. Collins Class Submarines, ANZAC frigates and mine-hunters to name a few).

The government needs to do much better than to seek non-binding undertakings from overseas primes to maximise Australian industry involvement during the acquisition phase of naval assets.

The government needs to provide the incentive and appropriate guidelines to its procurement agency, CASG, and to Australian industry, for its binding and optimised involvement and sustainment outcomes.

Editor’s Note: Brent Clark is the chief executive officer of the Australian Industry & Defence Network. He served as a submariner and officer in the Royal Australian Navy before joining AIDN and has held a number of senior corporate positions, including with Thales; Saab; and Naval Group. Opinions expressed in the essay are his.

By Brent Clark | Opinion | 9 July 2020 | Australian Defence Magazine

There has been substantial media and discussion around Australian companies becoming part of the supply chain for the large number of Defence programs.

The Prime Minister recently announced expenditure of $270 billion over the coming decade, a number so large it overwhelms the public.

Maths tells us that if we only achieve 50 per cent Australian content, in effect that means $135 billion of Australian taxpayer money is heading overseas, a 10 per cent increase of Australian content means an additional $27 billion remains in Australia, multiplying throughout the wider economy.

AIDN requires Australian companies to be designed into the supply chain from the beginning of these programs. Do this and meaningful work packages can be contracted, IP exchanged and Australian companies can undertake the required investment to be in a position to compete in a fair and equitable manner in order to become suppliers into these massive programs. If they are not designed into the supply chain from the outset, then the stark reality is that they will not be included at some mythical point down the track.

The task of integrating Australian companies into supply chains becomes far more problematic when the supply chain for the initial batches of equipment is established.  Australian companies would still need to be qualified to provide supplies; there is a cost to undertake this activity, and that will impact schedule and overall program price.  This makes Australian companies appear less competitive than they truly are.

This places Australian companies at a tremendous disadvantage to ‘break into’ the incumbent supplier base. It also potentially allows for more foreign owned companies to establish 100 per cent owned subsidiaries to be created in the Australian market, effectively forcing the current domestic-owned companies out of their home market.

If we are in the process of qualifying overseas companies for the initial platforms this means that there currently is an activity involving qualification, proving supply chains, transfer of IP and all the other requirements to become certified into the supply chain.

Why is there no opportunity to qualify Australian firms into this supply chain? Why is there some need to qualify overseas suppliers first and at a later point qualify Australian-owned companies?

AIDN rightfully asks the question of BAE Systems, to name but one of the foreign owned multinational companies that have been awarded lucrative defence contracts, exactly how many Australian companies are they in the process of qualifying to supply tier 1 and tier 2 level supplies?

This question can also be asked of Naval Group, Rheinmetall, Lürssen, indeed all of the Defence Primes.

Reviewing the contracts associated with some of the larger programs, Naval Group reportedly has no actual percentage of Australian Industry included, BAE Systems reportedly has 54 per cent as a contracted requirement, Rheinmetall has best endeavours as does Lürssen.

If we specifically look at the Hunter Class Frigates example, assuming that the acquisition contract is $45 billion, then nearly $21 billion is heading overseas.

More concerning is that the Prime Contractor for this program could achieve 60 per cent of AIC without actually doing any work in Australia during the acquisition phase, assuming that they can achieve 90 per cent AIC during the sustainment phase.  This is highly likely given Defence claims a figure of 92 per cent AIC for the sustainment of the Collins Class Fleet.

AIDN proves this statement based on the maths: “The Prime Minister announced a budget of $45.6 billion for acquisition recently, applying the rule of thumb that sustainment is roughly twice the amount as acquisition, hence $91.2 billion, then the total cost of the program is $136.8 billion.

“Assuming a 90 per cent AIC result for the $91.2 billion of sustainment then this translates to $82.08 billion, i.e., $82.08 billion is spent locally thus achieving 60 per cent AIC over the full life of the program.”

Obviously, the Hunter Program will contract some percentage of AIC during the acquisition phase, but as demonstrated from the above concept it is possible to backend load the AIC through sustainment, allowing more of the acquisition work using their existing overseas supply chain.

It is difficult to believe this is what the Australian Government hoped to achieve when it stated it wanted to create a sovereign Australian Industry to ensure as a nation, we have a higher level of self-reliance. The COVID-19 pandemic has demonstrated the absolute need for Australia to achieve the highest possible levels of self-reliance.

At least BAE Systems has a contracted amount of AIC content (54 per cent) in the build phase. We can take some comfort that they have to achieve an Australian spend of at least $24.6 billion during acquisition, assuming that the AIC percentage is specified for the acquisition phase and not the total program life.

AIDN cannot identify what the other prime contractors will deliver in the AIC space, nor does it appear that Defence has a contractual clause to hold them to. The vagaries of ‘contractor best endeavours’ or ‘maximise’ do little to ensure that actual work packages are achieved in-country.

AIDN will continually advocate and highlight these issues with Government and Defence. We must ensure that the Prime Contractors are doing what they said they would during the bid phase of these programs.

We have this obligation to our SME community; this critical issue must be made right. The sovereignty of our nation depends upon it.

Note: Brent Clark is the CEO of AIDN National.

Its one thing to build war fighting capability it’s another to build industrial capability.pdf

AIDN Newsletter National 2nd Quarter Newsletter 2020.pdf

The Australian Industry & Defence Network (AIDN), Australia’s largest national defence advocacy group representing small business, has appointed Brent Clark as their new CEO.

Brent joins the organisation after a multi-decade career in defence and defence industry. He is a former submariner and has held a number of senior roles within Defence Industry.

“AIDN is thrilled to have Brent on board to help us develop as Australia’s voice for defence industry,” AIDN National chair, Lester Sutton said.

“Defence policy is an Australia wide concern and that obviously requires a strong voice in Canberra, which Brent will provide,” Mr Sutton said.

“The COVID-19 crisis has shown defence industry’s importance to the Australian economy, and that importance will only grow as the future submarine, future frigate and other significant defence programs ramp up,” Mr Sutton said.

“Our job at AIDN is to advocate as strongly as we can for our members to make sure they benefit as much as possible from the Federal Government’s defence spend to maximise sovereign capability.

“Beyond the benefits for AIDN members, ensuring a maximum level of sovereign capability is the right thing to do for our national security and the economy,” Mr Sutton said.

Brent Clark will continue in his role as CEO of Industry Voice, a complementary defence industry body that has taken a lead role in the debate around Australian Industry Capability (AIC) - particularly sovereign capability.

Industry Voice has joined AIDN as an Associate Member and signed onto the MOU to form a single national organisation representing small business in the sector.

“I congratulate Brent Clark on his appointment, and I look forward to working in collaboration with AIDN to jointly further the cause for Australian small businesses,” Industry Voice Chairman, William Hutchinson said.

AIDN National Newseltter 1st Q 2020.pdf

AIDN National hosted their Annual Dinner at the QT in Canberra on the 19th of February 2020.  The event with more than 300 attendees from Defence and Industry enjoyed a great evening of Networking and celebrating 25 years of AIDN.

 

The evening was coordinated by MC Graham Priestnall, and included presentations from Platinum Sponsor Lockheed Martin, Deputy Country Executive – Scott Thompson,  AIDN SME Success Story Products for Industry (PFI) – Nick Green (aka Rocket Man), and Guest speaker Chief of Navy – Vice Admiral Michael Noonan, AO, RAN.  The National Young Achiever Award celebrated 4 young finalists who have all made significant contributions to Defence Industry and have the opportunity to provide plenty more for the future. 

Alexander Bowen-Rotsaert, the Queensland YAA winner from Boeing Defence Australia was presented his award by Chief of the Defence Force General Angus Campbell AO, CSC, and Deputy Secretary, CASG Tony Fraser, AO, CSC. 

AIDN National Invites you to attend a panel discussion “National Suppliers – Are you Defence Ready?” as part of the Pacific 2019 International Maritime Exposition on Tuesday, 8 October 2019 . The panel session will provide SME’s with: 

• Practical guidance on entry points for SME’s into the Defence Industry, whether direct to defence, through Primes or their supply chains.
• Key concepts of opportunity assessment, tender preparation, contract negotiation and transition to deliver and sustainment modes.
• Analysis and insight into unsuccessful tenders. Why it is important to receive and reflect on Prime feedback.

Panellists include: 

Kerryn Smith – CEO AIDN-NT
Dr. Rodger Manning – Managing Consultant, BidWrite
Joseph Cardillo – BAE Major Contracts Manager SEA 5000 
Michelle Richard - Thales Procurement Director

See the AIDN National LinkedIn page for further details.