Local firms sink $120m on subs

Ben Packham
Foreign Affairs and Defence Correspondent, The Australian 

Small and medium enterprises face an estimated $120m hit from the cancellation of the Attack-class submarines, after investing in new systems, equipment, security and personnel to win contracts with France’s Naval Group.

The defence industry estimates the 600 contractors that had qualified as Naval Group suppliers, including 400 with signed contracts, spent an average of $200,000 each in the hope of securing 30-plus years of work on the $90bn program. The Australian Industry & Defence Network surveyed its 1500 members to determine the impact of the government’s submarine decision on domestic firms, finding many had invested heavily on the expectation of rich returns.

One firm said it had outlaid $3.4m on new systems, equipment and personnel to become a Naval Group supplier. It said it would now have to sack about 50 per cent of its workforce, because “all the employees brought on to this program are no longer required”.

Another said: “We have invested considerable time and money into the Attack-class program, in the order of $1m. We will now need to substitute other business to cover future expected business losses (due to) the cancellation.”

A third said: “To date the company has invested $400,000 to qualify to obtain contracts on the Attack-class program. This is now sunk investment with no opportunity to recover costs.”

All of the companies declined to be named, fearing they would miss out on future defence business if they spoke out publicly.

AIDN chief executive Brent Clark said companies that had been strongly encouraged by the government to pursue opportunities on the Attack-class subs program were now counting the costs.

“For member companies entering and concluding the pre-qualification phase and then implementing the upgrading and upskilling as advised by Naval Group, this figure appears to be in the general order of $200,000,” Mr Clark said.

Naval Group sources said $200,000 was a reasonable and “possibly conservative” estimate of the average investment by firms that had achieved qualified supplier status. A termination process is under way for firms that had progressed to contract stage, but qualification costs are unlikely to be recoverable.

Mr Clark said firms that qualified as suppliers should be prioritised for other Defence programs.

The government’s decision to buy nuclear-powered US or British boats that won’t enter construction until the end of the decade at the earliest has left the government’s defence industry agenda in disarray.

It has vowed to build the nuclear boats in Adelaide, but many defence experts say rising strategic threats mean some or all of them should be built overseas.

Defence Industry Minister Melissa Price said firms that had contracts with Naval Group and combat system supplier Lockheed Martin would not be abandoned.

“I want to assure those businesses that I have their backs,” she told The Australian.

“As has been flagged previously, Australian SMEs with contracts with Naval Group or Lockheed Martin will go through a contract termination process.

“There are also SMEs that did not have contracts … but were preparing their business to compete with other SMEs for opportunities in it. We must ensure that they are fully supported as they seek out those opportunities.”

Ms Price said an “SME support cell” had been created within Defence to help affected firms bid for other contracts. She said there was “no doubt immense” benefits would flow to Australia’s defence industry from the decision to acquire nuclear submarines.

Australian industry and Australian N-subs

By Brent Clark

The Morrison Government fundamentally changed the approach to Australia’s submarine acquisition with the announcement that the Government would be terminating the Naval Group contract for twelve conventionally powered submarines and that there would be a period of up to eighteen months consultation with the US and UK Governments on Australia’s ambitions to acquire eight nuclear powered submarines.

It is important to understand that the Government has not decided on anything other than terminating one contract and commencing a dialogue with two countries to understand the how Australia could best obtain / buy / build the nuclear-powered submarines without breaching the Nuclear Non-Proliferation Treaty.

Apart from a line in the PM’s announcement stating that ‘the Government’s intention is to build the nuclear-powered submarines in Australia (at Osborne), maximising the use of Australian workers’ there is no other mention of Australian Industry, or even the acknowledgment that Australian Industry will be included. Prime Minister Morrison acknowledges the loss of jobs of Naval Group, and he makes mention that workers from Naval Group will not be lost to the enterprise.

There is no mention of the loss of work to the Australian subcontractors to Naval. There is no mention of ensuring that Australian Industry will be supported so that it remains viable to take a role (if any) in this new program. The Prime Minister has so far failed to acknowledge the large investment undertaken by hundreds of Australian companies, an investment they were encouraged to make by Government, Defence and Naval Group.

The change in strategic circumstances that we as a nation now find ourselves in warrants a robust and comprehensive discussion on national industrial resilience. We need to ask the question; What is it that we need as a nation to ensure that we can do what we want to do independently to ensure the Defence of Australia.

One of the planks to ensure national resilience must be a sovereign industrial capability. The COVID 19 pandemic exposed Australia to the reality that our supply chains were controlled by foreign governments, foreign corporations, or a combination of the two. Australia as a nation was exposed to other nations requirements. As an example, Italy denied the export of vaccines to Australia as it had a need for its own citizens to be vaccinated. Access to Personal Protection Equipment was difficult and not resolved until Australian companies began to produce the equipment. If we do not have the ability in-country to ensure that our defence equipment is, serviceable, maintainable, and therefore useable, we simply do not have a sovereign operational capability. If our future submarines, ships, aircraft, and vehicles cannot operate then they are of no use to the nation.

The Government has announced several independent areas of focus for a sovereign industrial capability. The new Strategic Direction afforded by AUKUS requires that those capabilities be rigorously reviewed and expanded to ensure the greatest possible degree of self-reliance.

Presently, some commentators are calling for the construction of the future submarines to be done offshore to bring a capability to Australia as soon as possible to meet Australia’s changed strategic circumstances.

We have seen commentary from the UK that they expect this to be a modified (British) Astute class submarine, indeed as recently as the 6 October the British Defence Secretary expressed his ‘confidence’ that the submarines would be built in the UK.

It is vital that the Australian Government make its intentions for Australian Industry involvement clearly and quickly known. We do not need foreign politicians pre-determining Australia’s sovereignty.

As of today, we have no idea of how Australia intends to proceed with the move towards nuclear submarines. The Governments nuclear submarine task force has eighteen months to develop options and recommend a path forward, so it is premature and fundamentally incorrect to be saying that the inclusion of Australian industry cannot be justified.

What we need Government and those involved in this process to ensure is that the access to intellectual property, the access to technical data, the access to the knowledge and the technical know-how and know-why are commercially guaranteed.

Government has consistently said that it wants to create a sovereign and sustainable industrial base within Australian, and this desire is exactly what Australia needs to do in these uncertain strategic times.

To achieve a sovereign industrial capability, it is important to ensure the involvement of Australian Industry at every opportunity in defence acquisition and in the sustainment phase of these programs.

What Australian Industry needs is leadership from the Government to ensure that Australia can create this nationally important capability.

Where we don’t have a capability then strategic and value for money assessments need to be undertaken to determine whether we should create the capability indigenously or ensure that there is a mutually beneficial creation of an industry using an overseas partner.

The Federal Government in conjunction with the State and Territories Governments, needs to invest in the infrastructure and training, to create this industrial capability within Australia, on an enduring and sustainable basis. The exact mechanisms need to be worked out. The levels of contracting and direct investment need to be established.

This is a multi-generational program that must be locked in to prevent future tinkering and disembowelling of the sovereign industrial capability.

Australia needs to build upon our innovative culture within our industrial base. The full enterprise needs to incorporate all levels of education to achieve the workforce and capability to achieve a successful outcome for Australia. By combining both the industrial and education sectors Australia would be able to achieve the same types of successes that countries such as Sweden, Israel and South Korea have.

To create this outcome there ultimately needs to be politic will and vision. If we do not commit to this undertaking, then individuals like the British Defence Secretary are allowed to make the type of statements that were reported on 6 October in effect making announcements about the acquisition of Australian equipment. This statement from a foreign government should alarm all of us, if left unchallenged then industry can only draw the inevitable conclusion that we are surrendering our sovereignty.

https://navalinstitute.com.au/

Duration: 2min 56sec
Broadcast: Fri 1 Oct 2021, 6:00am

View the Broadcast here.

Australian defence suppliers fear a decison to harness US and UK defence technology to build nuclear-powered submarines could see jobs go offshore.

They are demanding the government again commit to 60 per cent Australian industry content.

More Information

Featured:

• Jean-Yves Le Drian, French Foreign Minister
• Bronwyn Evans, CEO, Engineers Australia
• Brent Clark, CEO, Australian Industry and Defence Network

By defence correspondent Andrew Greene, ABC News
1 October 2021

Australia's switch to nuclear-powered submarines is prompting a government push for the fleet to be built faster, possibly at the expense of local industry content, to make up for time lost under the now-scrapped French deal.

The federal government last month dumped its $90 billion contract with France's Naval Group to design and construct conventionally powered submarines, in favour of a nuclear fleet.

Sources familiar with recent discussions involving Prime Minister Scott Morrison and senior colleagues claim the government is now open to relying more heavily on "proven" overseas suppliers to get the project completed sooner.

"Schedule is what the government is talking about now, Australian Industry Content (AIC) is not the priority it once was," one official said, who spoke to the ABC on condition of anonymity.

Another figure claimed recent discussions between the government and officials in the United States "made it clear that Australian defence industry was not as high a priority as it previously was".

Inside government ranks, the region's rapidly deteriorating strategic environment is cited as the main reason why Australia is focussed on schedule and may need to have a greater reliance on foreign defence suppliers, particularly in the early stages.

However local defence companies fear the decision to use the new AUKUS alliance with the United States and United Kingdom to acquire nuclear submarines will see significant amounts of work go offshore.

Brent Clark from the Australian Industry and Defence Network says it's crucial the government commits to keeping as much work in this country as possible.

"Making sure that the government sticks to its mantra of creating a sovereign industrial capability in Australia, and not just export opportunities for UK and US industry".

Under the previous deal, up to 12 Attack-class boats were to be built at Adelaide's Osborne facility, with the French promising an Australian Industry Content (AIC) of 60 per cent.

Mr Clark says while the nuclear project is still in its infancy, the government must again commit to a similar target the French had for conventionally powered boats.

"Clearly we would not think that anything less than 60 per cent is acceptable".

"We would really need the government to explain to its partners in the US and the UK that we need to have access to the intellectual property, the technical knowledge, the technical data, the know-how, the know-why."

The ABC has approached Defence Minister Peter Dutton for comment.

The country's peak engineering body is also expressing concerns that the necessary skills requirements for building, operating and maintaining a nuclear-powered submarine fleet have not been adequately addressed.

"We may not have the requisite engineering skills in Australia," says Bronwyn Evans, the CEO of Engineers Australia.

The time it takes to develop those skills is quite a long gestation, including up to five to ten years, to have the sort of industry that we would need to support these nuclear submarines."

Bronwyn Evans predicts Australia will be heavily reliant on overseas expertise for the new nuclear submarine endeavour, particularly in the first decade of the project.

"Always when you have a skills shortage you can build the capability, you can buy it in, you can borrow it."

"My thought is that we'll need to do all those things, in the long term we absolutely need to build this capability in Australia."

https://www.abc.net.au/news/2021-10-01/defence-suppliers-fear-nuclear-submarine-jobs-overseas/100504356?utm_source=abc_news_web&utm_medium=content_shared&utm_campaign=abc_news_web

Media Release - Friday 24 Sept 21

AIDN and SIDM Sign MOU

The Australian Industry & Defence Network (AIDN) and the Society of Indian Defence Manufacturers (SIDM) have signed a memorandum of understanding (MOU) establishing a framework of cooperation between the two Defence Associations.

This agreement will facilitate the discussion of mutually beneficial cooperation in several key areas such as manufacturing, research and development to promote bilateral cooperation between Indian and Australian companies.

The associations will work closely with their respective Governments to establish an enabling ecosystem to promote bilateral cooperation between the two countries.

Importantly SIDM and AIDN agree to work closely together to ensure an open dialogue between both association memberships and to enhance mutually beneficial opportunities.

Both organisations will exchange information of interest and seek opportunities for both Indian and Australian companies to work closely together.

“The MOU between SIDM and AIDN will enhance bilateral defence industry cooperation; plethora of opportunities for both countries with shared interests and a common vision of a free, open, peaceful, prosperous and rules-based Indo-Pacific region.” Captain (IN) Akhilesh Menon, Defence Attaché, High Commission of India, Canberra.

Mr Graham Priestnall, Chair of AIDN said, “this agreement will ensure that Australian and Indian companies can develop close arrangements that will benefit industry in both countries, our members are looking forward to having the opportunity to work with their Indian counterparts.”

The signing was the culmination of several months’ worth of effort between AIDN and SIDM.

AIDN National 3rd Quarter 2021 Newsletter

Creating a fairer defence industry for Australian SMEs

Published in Defence Connect 3 August 2021

Let’s make sure that primes and Australian SMEs are able to work together to support Australia’s sovereign defence industry, writes Brent Clark, CEO of the Australian Industry & Defence Network.

It is the responsibility of AIDN to set out matters of policy that impact AIDN’s members – the Australian owned defence sector businesses that support the ADF – AIDN has in previous articles highlighted a series of behaviours from certain prime system integrators that need to be challenged.

It is also important to note that AIDN is not “anti-prime”, AIDN is opposed to certain behaviours that some primes have exhibited. AIDN seeks a change in the current defence industrial structure where poor behaviour is accepted and becomes the standard modus operandi.

AIDN wants primes to engage with the Australian supply chain, in contract, in the same manner as the prime claimed it would engage during the tendering process.

For instance, where a prime contractor tendering for a program makes commitments to Australian companies that they will be awarded subcontracts for nominated work scopes within the program if those prime win the contract. It is AIDN’s expectation that if that prime does win that tender and is awarded a contract for the program, then they will do as they said they will do – they will award those subcontracts to the Australian companies.

What AIDN seeks is honesty and integrity - Honesty and integrity should be standard practice.

The feedback we have from our members indicates that this is not always the case. Certain companies offer one thing to Australian businesses during the tendering process, but once in contract, backtrack, and behave in a different way.

This is the behaviour that AIDN wishes to remove from our industrial landscape.

To achieve this, it is first necessary to understand who benefits, and who loses from this practice.

This practice benefits companies who promise one thing at tender and do something else in contract. These companies can provide offers to Defence that look attractive in terms of Australian industry content; possibly more attractive than tenders offered by competitor companies that are genuinely offering Australian industry content.

They are not concerned with the commercial implications of managing the local supply chain that they are promising as they know that they will be able to back out of those commitments in contract. This approach rewards them with contracts for programs that they may not have won if they had tendered what they planned to do.

The losing side of the ledger is more crowded.

Clearly Australian businesses – lose out because they do not receive the subcontracts that they were promised during the tendering phase.

Defence loses out, as the industrial capability that it needs to sustain the ADF during operations is not developed in-country. In our changed strategic circumstances, the ability to sustain operations without needing access to offshore facilities or industrial resources is now essential, as access to offshore resources may be compromised during high level conflict.

The Australian taxpayer loses out, as subcontract revenue for supply flows not into Australian businesses, but offshore into the alternative supply chains outside Australia, reducing employment and taxation benefits for the Australian economy.

AIDN wishes to highlight that there is an additional party that loses out due to these poor practices.

The companies that behave honestly towards their Australian suppliers. They make commitments to Australian businesses during tender phase that they intend to keep yet miss out on winning tenders.

How can the commitments made to Australian industry gain a comparative advantage during tender evaluation if any company can tender commitments, without being troubled by needing to meet those commitments?

This behaviour deprives the honest companies of a competitive market advantage they are rightfully entitled to.

At the root of this is the need for Defence to stop facilitating this behaviour. Defence must stop accepting changes to tendering responses saying one thing at tender about engaging with Australian suppliers, and then doing something quite different in contract.

Defence’s message to companies must be clear – if you want Defence business, you must deliver what you say you are going to deliver.

Words are important, but for the message to be received in a manner that will lead to the desired changes, there needs to be enforcement.

Defence knows specific cases of primes whose behaviour reflects what we have been discussing. AIDN calls for Defence to stop issuing contracts to the contractors that have reneged on their workshare commitments to Australian controlled suppliers.

Defence simply cannot further reward these companies and must instead start creating real commercial advantage for the companies following through on their commitments.

The current Defence AIC policy, in which in contract primes only need to show “best endeavours” when engaging Australian suppliers must be dispensed with. This policy emboldens poor performance, whilst removing commercial advantage for those companies doing the right thing.

If a company can make promises of local industry engagement at tender, yet back-track in contract then a company knows that all that must be said in contract is “we put in our best endeavour to work with the Australian supplier, but it didn’t work out”.

Any faith in the “best endeavours” mechanism can only be regarded as rank commercial naiveté. This policy does not constitute an effective tool to induce good behaviour.

Anything other than firm contractual obligations for local workshare will continue to lead to work share atrophying offshore.

AIDN is calling for Defence policy that ensures a measurable and agreed contract value to be placed into local Australian controlled businesses, and for all the work within a prime contract that is identified as a sovereign industry capability priority (SICP) to be undertaken within local Australian controlled businesses.

AIDN appreciates that there will always be unusual cases that do not fit neatly into this construct – but these must only be exceptions rather than the rule. AIDN’s position is that such exceptions should only be allowed with the prior approval of the National Security Committee of cabinet.

AIDN notes that this firmer approach is consistent with what some companies are in any case doing; these companies will not have any problems with this policy. This policy acts as an effective incentive, in offering commercial rewards only to those primes acting appropriately.

However, this policy will undoubtedly be challenging for some companies.

These policy changes get to the heart of the flawed framework of the Australian defence industry sector, and it is necessary that our elected leaders lead on this.

Encouragingly, in one of his first interviews following his as appointment as Defence Minister, referring to Defence’s major programs Peter Dutton stated he was “determined to ensure Australia, and particularly Australian industry, received value for money from the investments”, and further stated “I want to make sure there is a very clear message to the primes here. We are not going to tolerate slippage in relation to Australian content” (The Australian, 4 April 2021). AIDN applauds the clarity of the Defence Minister’s message.

AIDN will work constructively with any company seeking to improve their practices in this regard, and with both sides of the political divide to improve their defence industry policies.

The poor behaviours described have been allowed to prevail for too long. Too many part measures facilitating the continuation of the unacceptable behaviour have been offered on too many occasions.

The time has now come for this to be addressed.

Brent Clark is the chief executive of the Australian Industry and Defence Network (AIDN).

AIDN National 2nd Quarter 2021 Newsletter

Assessing AIC commitments under the Hunter Class program

By Brent Clark, AIDN CEO
Published in Defence Connect, 22 June 2021

There have been numerous articles circulating around the Attack Class Submarine Project and Naval Group, and whilst it is proper to apply appropriate levels of scrutiny on that project, it is equally important to apply proper levels of scrutiny on the Hunter Class Frigate Project.

A significant issue is emerging with the Hunter Class and the associated supply chain. The Department of Defence appears to be accepting that primarily the existing Type 26 supply chain will be utilised for batch one of the program; in other words, the first three ships.

This is explained away under the banner of schedule pressures, coupled with additional risk to include Australian suppliers.

The Department then explains that for the second batch of ships a competitive process will be undertaken involving Australian companies and that they will be able to compete for opportunities in this program.

It is unclear as to why there will be less schedule pressure or risk by following this strategy, arguably there will be greater risk introduced as you not only have all the requirements to have Australian companies in this supply chain, you are now also adding the risk or replacing an incumbent supplier.

It is unclear how an Australian company will be able to compete with this incumbent supplier as it can only be assumed that risk to schedule, cost and value for money remain driving principals for selection.

In other words, if an Australian company isn’t on the reference ship today, the likelihood of it forcing its way into the supply chain seems remote at best.

Ron Finlay AM, a member of the Naval Shipbuilding Expert Advisory Panel, made the following comment at Senate estimates on 1 June this year: “I will pick a very simple example — if you are going to pick a foreign generator for ship one and then switch to an Australian generator for ships two and three, you as a shipbuilder are creating a risk. So the plan would not be to change suppliers from ship one to ship two, for example. The target would be to get into the Australian content as soon as one could to avoid creating a risk for yourself as a shipbuilder.”

And yet this appears to be exactly the plan that BAE Systems is following with endorsement from Defence.

None of this is what BAE Systems proposed in the numerous industry engagements that they undertook prior to the down selection process and none of this aligns with the Morrison government's strategy to develop a sovereign industrial base.

From what AIDN is seeing and hearing we can only be nervous about BAE Systems Maritime Australia back tracking on AIC.

BAE Systems has stated in recent ADM articles, “The Prime Mover equipment, the Category A and B that BAE refer to, were always things that Australia does not manufacture domestically. We don’t make gas turbines, we don’t make gearboxes, we don’t make shafts in country”.

This, of course, will be disturbing to Australian industry and rightfully so as we actually do produce these types of equipment in-country, what we need to do is invest in the capability that we have, rather than investing in overseas companies, in order to be able to produce the equipment to the standard required.

If we further unpick the Category A and B items, as classified by BAE, there seems to be equipment such as; propellers, valves, HVAC systems, LV switchboards, funnel exhausts, ships doors and shaft lines (to name only a few) that existing companies in Australia have been designing, manufacturing and selling both domestically and internationally on a variety of platform types — both commercial and military.

So, the question that AIDN is asking is — why, when these items actually exist in Australia, being produced by Australian companies as many of these items are simple platform systems, are they being classified as CAT B items by BAE Systems?

Further to this, the question needs to be answered as to why Australian companies aren’t being included in these simple platform items.

There is sufficient time to make these decisions and undertake the required transfer of technology, IP and know how in order to ensure that Australian companies are included into the initial platforms.

BAE Systems itself has stated in their online Australian Industry Plan that they have engaged with and have some 1,600 in-country suppliers, and for the main part, they have utilised many of these companies in their maritime sustainment programs and shipyard operations.

Expanding further on this let’s take HVAC as an example, there are multiple companies located in Australia supplying maritime heating, ventilation and air-conditioning on a variety of Australian military and commercial shipping, including companies based in Western Australia that are already supplying to BAE Systems for their Defence maritime projects in the companies Henderson facility.

Why are these companies not at the very least being provided the system specifications in order to allow them to be pre-qualified for the Hunter Class supply chain?

This activity will ultimately be required if these companies are going to be allowed to compete for batch two equipment, or will this simply become yet another reason to exclude Australian industry from the program.

After all, a company cannot be considered for the supply chain if it is not qualified to be part of the supply chain.

Ultimately, it is for government through the Department of Defence to ensure that Australian industry is treated fairly on these matters.

Defence needs to reject BAE Systems’ current plan and expect a revised plan that includes Australian industry from the outset, anything less than this is doing a disservice to Australian industry.

Brent Clark is the chief executive of the Australian Industry and Defence Network (AIDN).

To see the article click here.