The final presentation to be re-published from the ANI’s Seapower Conference 1987 is by Mr Greg John*, the Director Australian Chamber of Manufactures. His paper was titled “The Challenge To Industry”.
Thank you very much for that introduction. It’s a great pleasure for me to be here to give this keynote address. It is an important task to make some comments on the very necessary interaction between industry and the defence community. Vice Admiral Hudson has commented on that already, and I hope that in the paper I am about to give you, you will see some points of agreement with what Vice Admiral Hudson had to say.
There can be no better advice to a speaker called upon to tackle a complex subject than that given by the King to the White Rabbit in Lewis Carroll’s Alice in Wonderland, “Where shall I begin, please your Majesty?” asked the White Rabbit. “Begin at the beginning”, the King said gravely, “and go on till you come to the end: then stop.”
What I have been asked to do today in addressing “The Challenge to Industry” is certainly a complex task and though there may be argument with my point of beginning I will nonetheless attempt to outline what I see as the task facing Australian manufacturing in satisfying the needs of national defence.
One of the hallmarks of a fully developed industrial society can be found in its ability to produce from its own resources the essential elements of equipment to meet the requirements of defending its national interests. While Australia has developed many items of equipment and other elements which have been taken up in our Defence Forces, we share with most other medium powers a necessity to rely on the larger players for vital areas of our defence.
The recent White Paper on Defence and the Review of Australia’s Defence Capabilities have provided the defence debate in this country with some of the firmest footing it has ever had. Industry has welcomed these contributions and has contributed to a general improvement in the quality of the debate. The overall thrust of a more self-reliant stance in the final determination of defence procurement decisions is also welcomed.
Australian manufacturers are more competitive domestically and internationally now than they were at the beginning of this decade. They are capable in a more diverse range of activities than they were at the beginning of the decade. This increased competitiveness does not rely on devaluation of the Australian dollar or on an increased volatility in our currency. Such factors, while embraced by the private sector, are only part of the story. Development of the new technology from Australian sources, adaptation of Australian circumstances of foreign technology obtained through technology transfer or license arrangements, investment in new plant and equipment, investment in human capital (i.e. training and eduction), skill enhancement and diversification, and innovation have all played and are continuing to play a major role in the overhaul of Australian industry.
There are some realities to be accepted. Perhaps the greatest of these is that Australia’s ability to supply a complete range of defence equipment at requisite levels of technology, within acceptable lead times and at acceptable cost is at present limited and with substantial alteration to national priorities may remain relatively limited.
This reality does not preclude Australia from seeking to maximise the comparative advantage of its local manufacturing industry and enhancing the likelihood of that industry developing further areas of comparative advantage by supporting a self-reliant policy which involves local equipment purchase at high levels.
Development of the capabilities of the private sector is crucial to the achievement of a true self-reliance for Australian defence requirements. These capabilities should not be thought of only in terms of plant and equipment but also in terms of human capital, such as training and education, as I already have mentioned. They should also be thought of in terms of management systems and controls and the attitude of management to defence work.
What are the Dimensions of Defence Business?
The Department of Defence has a budget allocation of $7.4b in the 1987/88 fiscal year, around 9.5% of the entire Commonwealth budget. Of this amount, over $1.8b was allocated for the purchase of approved capital equipment.
The 1987/88 allocation is nearly $200m higher than in 1986/87. However, it is 4% under the previous planning guidance of 3% real growth per annum. Looking at the Five Year Defence Programme (FYDP) it is expected that the 1% real growth in Defence expenditure proposed for the 1988/89 year may be expanded to 1.5% with latter years running at around 2% real growth. This would just about satisfy what has been expected under the FYDP.
Any manufacturer should be interested in getting a slice of that sort of cake. Particularly when one realises that the spending contained in it is by no means limited to big ticket items. There is plenty of room for small manufacturers satisfying the day to day “hiring” requirements of the defence establishment.
In September 1984 the Economic Research and Analysis Department of the Australian Chamber of Manufactures completed an assignment for the then Department of Defence Support which was aimed at looking at the defence/industry interface.
An analysis of Department of Administrative Services data showed that defence purchases were made from 114 different manufacturing industries at the 4 digit ASIC industry class level. Over the 1981/82 – 1983/84 period these purchases totalled almost $1.2b. In addition a further $63m in orders were placed with wholesale retail and service businesses in the private sector.
This data has a number of limitations. For example, it does not include orders under $10,000 sub-contracts based in Australia by overseas prime contractors and defence exports (including co-production) from Australian suppliers nor whether orders were placed locally or overseas. However, it does provide an indication of the wide range of industries participating in defence work.
As I have sought to indicate, defence outlays are a substantial part of overall aggregate demand in the Australian economy. The two major components that have a direct impact on manufacturing industry are capital equipment and running costs. The latter includes replacement and stores, repair and overhaul of equipment, repair of buildings and work and administrative expenses.
In 1983/84 $379m or 30.9% of capital spending was local. In the other cost category $1224m or 85.8% was sourced locally. Combined total capital spending and running costs ($2654m) was equivalent to 1.5% of GNFP in 1983/84. Average capital expenditure sources locally in the period 1979/80 – 1983/84 was 37.3%.
This locally sourced capital equipment expenditure covers selective local design and development and equipment; Australian adaption of overseas technology to meet particular Australian requirements; local manufacture or construction under licence of overseas designed capital items; and purchasing for military use of Australian manufactured commercial products.
In 1985/86 the Defence portfolio spent $2.7b on industry related activities fl which 58% was spent in Australia – a pretty big cake.
How does the Department of Defence Approach Dealing with Australian Industry?
When a project is approved and the purchasing stage is commenced, current policy guidelines require that the Defence line of thinking will have already been focussed on “buying Australian” as the first preference. There are obvious reasons for this, such as:
- The Government’s desire to maintain a high level of local content which supports Australian industry and keeps the dollars in country;
- The urge to promote a background where industry is encouraged to keep abreast of advances in technology;
- The advantages inherent in maintaining local expertise for through life support.
Even where existing local products cannot ostensibly compete directly with a foreign product, today’s climate of a fundamental emphasis on Australian Industry Involvement (or “AII”) means that Defence purchase policy is still geared to making the most of the situation through such things as:
- Licensing Agreements – Negotiations with overseas manufacturers can result in a local firm becoming licensed to make a foreign company’s products in Australia;
- Preference Policies – The Commonwealth will pay a premium to make the cost of an Australian (or New Zealand) equipment more compatible with the cheaper overseas product il the local items are equivalent in quality and performance; and
- Offset Policies – Despite inducements and incentives to place as much of the contract work as possible with Australian firms, some proportion of the contract may still necessarily be placed abroad. For such proportions of the contract which go abroad, the foreign contractor will be obliged to place work of an agreed value and “quality” with Australian companies as an “offset”.
The purchasing and contractor methods employed within Defence to meet the essential terms of acquisition are controlled by the policies of the Capital Procurement Organisation (CPO).
The CPO was created within the Department of Defence in 1984 as part of a move by Government to improve the administration of defence procurement. It has sought to delegate procurement responsibility and authority, reduce complexity and duplication and simplify lines of control. Under its auspices clear lines of authority have been established for major equipment acquisition through every stage of a project.
Anyone intending to do business with Defence should make themselves familiar with the CPO’s “Terms and Conditions” and then be prepared to come forward to illustrate their ability to meet those stringent conditions which emerge as compulsory factors in contracts.
Another publication which every manufacturer with interests in or aspirations in the defence business field should obtain and study is the recently published (June 1987) information booklet, Doing Australian Defence Business. This contains a lot of simple and clear information which is of value, not just for “first timers” but for people who have been in the field to refresh the memory.
Current Major Opportunities
There are two high profile high value projects which have dominated discussion on defence expenditure over the last few years and which will continue to command centre stage over the next few years. Both are naval projects – the New Submarine Construction Project and the New Surface Combatant or ANZAC Ship project.
While many in industry have concentrated on these undertakings I repeat the message I have already sounded. Many on-going business opportunities exist elsewhere in defence and a businessman looking for work and profit in the defence field will not serve his interests well if he fails to monitor the needs of the Army and Air Force.
As with all things, however, it is inevitably the big projects which draw all the attention. In this area naval projects have been and still are at the top of the score table.
The submarine project – that is the purchase by the Commonwealth of six diesel-electric submarines over the period 1987-1999 with logistic support included at a cost of $3.9b (June 1987 values) on a fixed price basis with normal (if there is any such thing) escalation – is the largest, most complex defence project ever undertaken in Australia. It offers unparalleled opportunities to spark real and deep technological development in the metal and engineering segments of Australian manufacturing. It is a project which stands astride of the self-reliant policy which now underpins Government policy in the defence arena.
The commitment to a 70% All in the total contact is a dramatic illustration of the change in procurement practice wrought by this single project. No-one involved in the project is under any misapprehension about the pressure on industry to deliver. The bottom line will not be filled in by words; it will only be completed by performance.
The project has been marked by what many in industry see as the first time one of the Defence Forces came to industry at the beginning of a project; made an effort to establish an interface; made an effort to understand the way industry viewed defence work; sought to establish a better idea of local capability and illustrated an openness which made it easier for industry to approach the colossus we know as the Department of Defence.
Communication efforts to expose the purpose and structure of the project and to explain the goals of All were extensive.
Through the 4/5 years of the project up to contract award the level of maintained industry interest was high.
Pressures applied to Project Definition Study contenders to achieve the required All levels produced foreign groups which formed joint ventures with Australian interests; considered capability studies on industry carried out by the consortia and high levels of interest from European traditional suppliers to the Swedish and German principal consortia members.
Australian companies visiting European firms began to notice something new – a hesitation, a new interest, a querying “We have had a engineering/sales team in Australia looking at the submarine programme. You have developed some interesting capabilities. We did not realise that there was a metal and engineering industry of such sophistication in Australia. Of course there are quality problems and you do not have adequate technology but more than the basics are in place”.
The sort of attitude is producing on-going business for firms that will not see anything from the submarine programme.
It has seeded in important areas of foreign industry the beginnings of a view that Australia might just be worth considering in technological manufacturing. Many aggressive Australian interests are discovering just how difficult it is to get overseas interests to accept the fact that Australian manufacturers are credible sources of reliable supply of high technology products.
The experience of the submarine programme is already a positive benefit in dealing with this. Increased utilisation of Australian manufacturing, engineering, design and project management expertise in the satisfaction of Australia’s defence needs is vital to the production of a full and lasting answer to the question.
The submarine programme represented a watershed for defence project management in Australia. In the past twenty years or so there have been a number of badly managed projects. Government and the Defence community were sick of getting it wrong. A new way had to be tried, a last chance if you like.
We do not have a proud history in being able to develop and maintain a cost effective warship construction capability. Sure, there have been some successes and great single achievements but we have not got it right. Management – Private Enterprise, Service and Government – has failed. Poor industrial relations have strangled efforts in this area as have poor project management and poor work performance.
Many would see the reaction of Defence to this state of affairs as a simple logic which involved a decision whether or not local industry could be trusted with a project. If the judgement was a project too risky to do in Australia then you either bought overseas or didn’t do it
The changes which have taken place in procurement policy have put an end to that approach. The challenge to industry is to develop to meet the new demands.
A project as large as the submarine project has a terrifying capacity to produce deep misunderstandings and misconceptions amongst those involved. It does no one real advantage to pursue a course of allocating blame for these events. They must be faced and they must be dealt with, but a great deal of effort needs to be put constantly in to the communication processes between all of the parties involved in these undertakings.
Australian industry understood that all six of the new submarines would be built in Australia. The recent announcement that the Australian Submarine Corporation would be building the first bow section in Sweden has not been well received in some circles. Rightly or wrongly, many in industry believed the Government’s commitment was to build all six hulls in Australia. The ASC move is seen as watering this down and creating a two-learning curve situation even with the involvement of Australians in Sweden.
This is a controversial point and may touch a few nerves. I am not a technical person and there may be sound reasons behind it. If there are and they can be simply explained, I have not heard them.
Those who miss out on big projects often complain in their disappointment. However, that fact of human nature can be used to divert attention from the need to look at the substance of issues when they are raised.
Industry operates on confidence and if goals are changed or altered without full and proper notice to all concerned then that confidence wanes.
Manufacturers and others in industry have a concern to become involved in all areas of a project – design, engineering, project management, material and equipment supply, as well as production and through life support.
The Institution of Engineers Australia has been a strong advocate of increased local involvement in design and engineering and their advocacy has a lot of industry support.
The debate currently being conducted within the Metal and Engineering Industry Council concerning the approach being taken in the ANZAC Ship Project is one which is a sign of the strong desire of industry to be involved and to aid in establishing a sound basis for defence projects.
The success of the submarine project is yet to be realised but no industry person can deny that the alignment of the project with commercial attitudes has not provided a better balanced project basis than has been achieved in the past projects.
Like it or not, in these days of budget constraints it is a commercial attitude to project management which will in the end prevail. Commercial attitudes require a rigorous examination and questioning of long held traditional practice. If tradition is found wanting then tradition goes, to be replaced by the foundation of a new tradition.
I am not here to argue for a particular course of action but I do make the observation that the desire of many in industry to see proper investment in the pre-production phase of projects is based on sound commercial practice. Industry has learnt to its cost that low investment in the commencement phases of a project is counter to proven principles of sound project development and project management.
The ANZAC Ship Project is a mega project indeed and will run concurrently with the submarine project. I have already highlighted the fact that industry and Government cannot afford to get that project wrong. The prospect of messing up the New Surface Combatant is equally unthinkable.
Industry & Defence Opportunities
The opportunities for work offered by defence projects are not different to any business opportunity. They require industry to aggressively pursue them. The Department of Defence has to be seen by industry as just another client and like all clients it must be wooed.
Defence has an obligation to maintain a monitor on Australian industry and to register and catalogue its capabilities. However, with the best will and with a sound system of active staff involvement, it must be recognised that Defence will have real difficulty in maintaining much more than a broad general understanding of industry.
Aggressive self-promotion of corporate interests is an essential element in securing new business in any field. To be successful in defence business companies must be able to deliver the essentials their commercial client look for:
- an innovative drive;
- financial soundness;
- efficient and modern management systems;
- modern technology;
- product efficiency;
- competent and skilled workers; sound industrial relations;
- a track record of reliability in project completion and delivery.
In the past both Government and Industry have tended to be slow to develop a positive and forceful approach to the maximisation of local content. However, today this scene is changing and Defence is endeavouring to respond to the initiatives of progressive contractors by being swifter and more practical in its own actions. Specifically referring to shipbuilding, because this gives current examples of where high value contracts are envisaged, Defence has shown a willingness to move with the times and accept that traditional ideas, methods and constraints are ripe for challenge. Now, consortia embodying a broad spectrum of industrial capabilities under a strong management team are being encouraged to form to take on major shipbuilding projects. Pure management of these very complex projects is seen as being a major challenge to be met by management teams of proven ability, regardless of past specialisations: in this context the requirement for specific shipbuilding expertise is seen as an important factor in the choosing of membership of the consortium rather than being a driving factor in the whole project.
All these changes are welcomed by industry. However, it is wise to bear in mind the fact that those companies who are aggressive in the pursuit of defence business and who meet the profile I have outlined are going to be demanding in their expectations of how the Department of Defence deals with them on projects. They are going to expect to see evidence in performance of the new “commercial” attitude in Defence; they are going to want to see sound management practice being followed in projects; they are going to want to see decisions being made and responsibility taken by the officials they deal with; they are going to want to see less evidence of management by committee.
The Case of All In a Wider Context of Value
The benefits of defence projects have frequently been seen in a narrow context – jobs to be provided by prime and sub-contractors; opportunities for technology transfer; increased investment via joint venture activities; skills enhancement; offset opportunities.
It is clear that All has a wider and deeper significance.
Defence spending, as I have said, is not an insignificant part of overall demand in the economy, and defence industry policies provide a mechanism for an upgrading of technologies being utilised or available for utilisation by Australian industry, management approaches, techniques, project and other skills and quality in manufacturing. All can be affected. As such, they exist as an important linkage with more general industry policy objectives for the economy as a whole.
The development and revitalisation of Australia’s manufacturing base has emerged as the most pressing priority in national efforts to secure a lasting reduction in current economic difficulties. Defence industry policy can contribute to this.
In pursuing the All goal, Defence has required that work delivered by local industry should be competitive in price, quality and delivery with overseas sources.
It has also recognised that it may be necessary to accept some cost premium in some areas of All. Now justification for any cost premium must be weighed against:
- the strategic benefits of self-reliance that could be expected to result; and
- the risk of the alternative strategy of stockpiling and seeking assurances of overseas supply.
It is also accepted that cost premiums associated with the establishment of new capabilities would be more highly regarded than those associated with additional utilisation of existing capabilities.
These views of All and cost premiums are almost entirely within the sweep of the defence interest alone. While that is perfectly proper and to be expected because of the interests and concerns of the Department in which they were formulated, they take too narrow a view of the contribution to wider industry policy objectives which All can contribute to.
I firmly believe in the proposition that All in defence projects has a general industry policy connotation as well as its defence industry policy connotation. As such, the premium which may have to be considered for maximum All in the defence projects should not just be viewed against the defence policy constraints. If the prime cost constraint of a particular project is to remain within a pre-determined cost structure with, say, a 20% premium guide tor All, then the achievement of maximum All may require funding from defence sources and from general industry policy sources because of the recognition of the benefits which flow from defence work being undertaken by Australian manufacturers.
Overseas industry assistance in the defence areas has concentrated on two particular sectors -shipbuilding and aerospace. Canada’s aerospace policy provides some comparisons with Australia. Much of the assistance of the Canadian aerospace industry has been directed through general industry support measures (research and development incentives, export assistance etc.). However, the companies involved have a high public sector involvement and assistance has also been substantial in areas such as underwriting of loans and equity investment.
These are the benefits which I believe can flow from defence related manufacturing activities being given a greater chance in the local market and they are all outside the defence strategic requirements:
- increased orders to local manufacturers;
- additional employment associated with these contracts;
- development and retention of a design capability;
- transfer of technology both of a product and process nature;
- improvement in project management, quality control and technical standards both for companies who are direct contractors to Defence and those who are involved in related (or unrelated) offsets work;
- upgrading and strengthening of CAD/CAM capability;
- access to export market opportunities through contact with overseas prime contractors;
- improved knowledge of local and overseas defence tendering procedures; and future collaboration potential with other companies both local and overseas.
All these benefits are consistent with the objectives of general industry policy.
Australian industry has to go through a number of steep learning curves in the defence area – a broad curve associated with the common factors in all defence work which differentiate it from civilian work and a series of specific leaning curves mainly project related. We must recognise that if we are to develop and sustain local capability local industry must be given the opportunity for broad scale involvement. Learning curves are about mistakes. Mistakes cost money, work has to be done again and delays arise in meeting project goals. Part of the premium we have to pay tor All is about learning curves. The premium is not only about cost comparisons between local sourcing versus overseas sourcing. Overseas industry has, in its local environment, gone through the learning curves involved and possesses a tremendous advantage Significant cost competitiveness (lows from having had experience in military work and knowing that as a result you hold a greater chance of doing the job right the first time.
The importance of the linkages between defence projects and a policy commitment to All involvement in them and general industry policy can be illustrated by the role of quality assurance and quality control in current naval projects. It clearly is of vital importance. Unless local industry can meet the QA standards then its involvement in defence business is under a dark cloud to say the least. Recognising this, the RAN and the Defence Department have put a great effort into activities such as seminars on these issues in order to provide for local industry a framework in which to structure up an acceptable level of QA.
This work, however, has been seen only in the context of the requirements of the two main projects, submarines and the ANZAC ships. It has a far wider general industry policy relevance. There can be little doubt that one of the generators of better performance from Australian manufacturers will be a greater commitment to quality in manufactured goods. This is not lost on Government. The Department of Industry. Technology and Commerce Is already actively supporting programmes aimed at improvement of industry quality standards.
The costs involved in bringing industry up to scratch on QA for defence projects are therefore not only to be borne by the defence vole when the wider industry policy benefits are taken into account.
The fit between All goals in the defence area and national goals for industry development must be recognised as of significant relevance to the cost penalties associated with All.
Summary
The contribution to the revitalisation of Australian manufacturing industry that defence projects can make is of great importance. Manufacturing industry is in a difficult situation for many reasons. It must be recognised that it is being asked to respond to the specialised demands of defence projects from a debilitated base. To add to the problems of lack of experience in defence work and the uncertainty about the future even in the general commercial arena, there is the fact that defence work is more costly for industry to bid on because of the requirements to be met and the detail necessary to support a bid; the fact that the conversion of bids to orders is low even amongst experienced defence contractors; and the fact that, at best, any successful manufacturer will only utilise a small part of his overall productive capacity on defence work, thereby making investment in that work face the burden of producing returns only from that area. While it is true that capital investment to establish defence production capacity may be able to be utilised in non-defence areas, it may not be easily made available for non-defence work without having to bear some costs flowing from the overall cost associated with its purchase for a defence project or projects.
Industry has to work hard to satisfy any client that it is worthy of being awarded business. The measure of the maturity of Australian manufacturing in the defence field will finally be in our performance.
We have been given a chance to perform. We are seeking a wider involvement. Delivery is in our hands.
*Mr Greg John, was the Director of Australian Chamber of Manufactures (ACM). Since 1982, ACM took a significant interest in defence matters. It played an early and important role in establishing industry understanding of, and interest in the New Submarine and Anzac Ship projects. In 1985 Greg John visited the UK and Europe and the Netherlands, West Germany and Sweden, in connection with the involvement of the Australian manufacturing industry in the submarine project. He was a member of the Minister of Defence’s committee, which was established for the New Submarine Construction Project.
In 1998 the ACM merged with the Metal Trades Industry Association Australia (MTIA) to form the Australian Industry Group (AI Group) which continues to this day.
