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The importance of early engagement with Australian companies

Thursday, July 09, 2020 7:33 PM | Alanna Mahlakolisane (Administrator)

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.


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