Page 1 of 6 RUSI of Australia Website Presentation Transcript The Future Of Australia s Defence Industry Mr. Michael Ward, Managing Director of Raytheon Australia, spoke to the USI of the ACT in Canberra on 3 October 2012 The United Services Institute of the ACT hosted a presentation by Mr. Michael Ward, Managing Director of Raytheon Australia. He spoke of the history of Defence Industry supporting the Department in the past, and provided a perspective on the major challenges currently facing Defence Industry in Australia. The presentation was introduced by USI Vice-President Wing Commander Vern Gallaher. not products. And the support of those capabilities requires sophisticated integrated logistics systems not the commodity provision of individual logistic tasks. Of course, the industry capabilities required to deliver against these requirements take considerable time and investment to establish and develop; they also atrophy quickly and require a consistent throughput of work to maintain. Whilst there is plenty of scope for flexibility at the micro level, the generation of macro defence industry capabilities requires a strategic view and commitment. This is more important now than it has ever been and fundamental to any consideration of the future of Australia s defence capability. (Photo of Mr. Ward courtesy Raytheon Australia) Introduction It is a great pleasure to have been invited to speak to you today on the future of Australia s defence industry. Let me start by making the observation that, in the current era, indigenous defence industry is a key component of national defence capability. Defence industry is no longer just an armslength provider of commodity goods and services but rather one of the fundamental elements of the national security infrastructure. Whilst there will always be the requirement for Defence to purchase commodity goods and services, the generation of modern war-fighting capabilities requires enterprise architectures populated by interoperable, integrated systems History To properly consider the future industry it is important we understand a little of the history of defence industry in Australia. The industry has undergone a significant transformation over the past 20 odd years evolving to meet the needs of the Australian warfighter and shaped by two decades of government policy. It is fair to say the industry was in a parlous state during the 1970 s and early 1980 s. On the one hand we had government owned and operated industrial facilities that were terribly inefficient. On the other was limited commercial in-country investment. The non-government element of the industry, typified by rep offices from offshore defence companies, focused on selling into Australia rather than doing in Australia.
Page 2 of 6 The germination of the defence industry we know today can, in my view, really be traced back to the establishment of the Australian Submarine Corporation in 1985 to tender for the design and build of a new fleet of submarines for the Royal Australian Navy. The tender was successful and in June 1987 a $5B contract was signed, between the Commonwealth and ASC, for the design and manufacture of six Collins Class submarines. What is important here is that ASC was established as a joint venture with the two private sector partners, holding between them 51% of the joint venture, and the Australian Industry Development Corporation holding the other 49%. So we saw the Australian Government, through the Australian Industry Development Corporation, working with, and facilitating investment by, the private sector to develop the industry capabilities necessary to support Defence s emerging warfighting requirements. The other two significant events in the 1980 s were the opening of ASC s facility at Osborne in 1989 and the corporatisation of Australian Defence Industries or ADI in the same year. The 1990 s were the formative years for Australian defence industry. In the early 1990 s ADI began its move away from a public sector model to one more aligned with the private sector a move which had produced real dividends by 1994 and culminated in the privatisation of ADI in 1999. During the mid to late 1990 s the Australian Government publicly recognised the importance of a strong and capable indigenous defence industry and multinational defence companies began to see the potential of the Australian market beyond mere product drops. It was in this environment that a number of these multinationals began to invest in Australia on a significant scale and we saw companies like BAE, Boeing and Raytheon, all of whom had a long-term presence in Australia, establish full subsidiaries in country and begin the investment in local people, processes, tools, plant and equipment that continues today. The sale of ADI to Transfield/Thomson in 1999 was also a significant event during this period. It marked the conscious exit of the Australian Government from being part of the indigenous defence industry. It is interesting to note that this Government position was, in part, reversed in 2000 when the Commonwealth became the sole shareholder of ASC. Throughout the next decade or so the Government continued to encourage a healthy indigenous defence industry. On the back of this, and through considerable private sector investment, the capabilities of Australia s defence industry have continued to develop. The relationship between Government, Defence and defence industry also matured, with the three parties evolving to more of a partnership approach whilst retaining a suitable competitive environment. The last 15 years has also seen considerable consolidation across the industry. Whether through the collateral effects of overseas ownership changes or through local merger and acquisition activity, consolidation has been widespread. Some of this activity has been high profile like the transfer of ADI ownership to Thales in 2006 or the acquisition of Tenix Defence by BAES in 2008. But much of the industry s consolidation has occurred quietly without much fanfare. According to the Australian Defence Magazine there are only six indigenous companies whose annual revenue has consistently exceeded $300m over the past three years perhaps the minimum level of revenue to support necessary investment, capability and risk management to effectively function as a prime for major defence acquisition and sustainment programs. I believe there is limited scope for further consolidation. Today The history is important and certainly goes to our understanding of how our indigenous defence industry has evolved and importantly what it has become. Today, Australia s defence industry is a highly capable product of two plus decades of government policy and a couple of decades of private sector investment. It is an industry that, according to the DMO in August of this year, employs between 24,000 and 25000 people across Australia. It is no longer just an arms
Page 3 of 6 length provider of commodity goods and services but rather one of the fundamental elements of the national security infrastructure. That said, it is an industry that supports a single customer a monopsony. There have been some very successful defence oriented exports and the companies that have achieved these successes are to be congratulated, but defence exports count for a tiny amount of defence industry revenue in Australia. The predominant focus for Australia s indigenous defence industry is to meet the needs of the Australian defence customer. The Australian defence customer spends about 75% of its acquisition budget offshore with only 25% spent with indigenous defence industry. Most of that 75% is spent on product whilst the 25% spent with Australian defence industry will be focused on procuring enterprise architecture, systems integration, support system design, niche sub-systems and project management. This mix of acquisition spending is not surprising nor should it necessarily be challenged. For the most part Australian industry does not produce the type of modern warfighting product that is required by Australia s Defence Force. The exception to this is in ship building and perhaps in protected vehicles. I remarked earlier that the generation of modern warfighting capabilities requires enterprise architectures populated by interoperable, integrated systems not products. Our indigenous defence industry capability needs to provide the high value add elements of acquisition - enterprise architecture, systems integration and support system design. It is with some satisfaction that I can note that Australia s indigenous defence industry has world-class capability in these areas. Quite contrary to the acquisition budget, Defence spends about 75% of its sustainment budget onshore. The 25% offshore element is a mix between contracts for specific support and the offshore support elements of contracts let to indigenous defence industry largely for specific sustainment tasks for which there is no capability in Australia. Again, this mix of sustainment spending is not surprising - indeed it is sensible and practical. The support of modern war-fighting capabilities requires sophisticated integrated logistics systems not the commodity provision of individual logistic tasks. Australia s defence industry can, and does, provide these sophisticated integrated logistics capabilities. Our national capability in these areas is again world-class. Key issues I have a firm view that Australia s defence industry is fragile. It is focused on supporting the Australian warfighter and it operates, largely, with a single customer. In that environment it is very much at the mercy of changes in customer demand for its ongoing existence. There is no doubt that the last couple of years have been challenging for the Australian defence industry. The flow of work has been slow and this has put considerable pressure on individual companies as well as on the industry as a whole. I accept that we are not alone in having a tough few years. Defence and defence industry across the western world are in a period of turmoil. The ongoing global financial challenges, the rapidly evolving geopolitical environment, the rapid advance of technology and the changing balance of the elements of national power have caused nations around the western world to review their strategic defence posture, to reevaluate defence budgets and to reconsider their plans for future defence capabilities. The sweeping changes in the UK and the emerging developments in the United States provide excellent examples of this turmoil. Since mid 2009 changes in demand have resulted in the loss of 15% of Australia s defence industry workforce. In just three years the workforce has fallen from 29,000 people to somewhere between 24,000 and 25,000 according to the DMO in August. Contrast today s reality to where we expected to be following the release of the 2009 Defence
Page 4 of 6 White Paper. In his July 2009 speech to the Defence & Industry Conference, the then Defence Minister, John Faulkner, predicted a defence industry workforce of 34,000 by 2013. Much has changed since then but the reality is we will soon have a defence industry workforce some 30% smaller than the Government expected. It is important to note how much industry depends upon the Government s strategic guidance. As an example, in the late 1990 s the guidance was clear that the Government wanted industry to have the ability to perform work in Australia. This resulted in company strategies to invest in Australia that, in many cases, took five plus years to be implemented. The 2009 White Paper outlined substantial capability revitalisation for the Australian Defence Force and triggered adjustments to investment strategies industry wide. The slow implementation of the 2009 strategy has caused considerable pain across the industry and this has been exacerbated by the 2012 budget cuts. There is no doubt that the current fiscal environment has put considerable pressure on Defence and defence industry. This is a significant strategic consideration for defence industry but not the most significant. The business of defence is a slow and ponderous one. Despite flexibility being one of the principles of war it is far more evident in the uniform element of Defence than in the bureaucratic element. Defence industry is one of strategic decision-making, investment and preparation for future requirements. We need lead-time. Indeed the master principle of war selection and maintenance of the aim - may be a far more applicable principle when discussing how Defence and defence industry should engage. The challenge for industry is not necessarily in what is being decided, whether that be modifications to the defence budget or a significant change in the strategic outlook for the Australian Defence Force (e.g. a new White Paper) that may require a new capability mix. Industry could, and should, be able to deal with these types of strategic changes. It is short notice changes to strategic planning that cause industry angst - program cancellations, short notice delays to acquisition projects, abrupt withdrawal from service of existing capabilities. These are the types of actions from our single customer that cause difficulties. In short, industry cannot turn on a dime but needs time to adjust to minimise the impact on capability and cost. At the strategic level I am not always convinced that the impact of a short notice change on defence industry is understood or its impact realised. I remarked earlier that the type of industry capabilities required to deliver against modern war-fighting requirements take considerable time and investment to establish and develop, they atrophy quickly and require a consistent throughput of work to maintain. Whilst there is plenty of scope for flexibility at the micro level, the generation of macro defence industry capabilities requires a strategic view and commitment. This is more important now than it has ever been and is fundamental to any consideration of the future of Australia s defence capability. Let me be clear: defence industry in this country must, and I repeat must, exist to support the nation s required defence capabilities, not the other way around. There is no free ride and industry should not be looking to government for hand-outs. Notwithstanding, the characteristics of a highly capable indigenous defence industry, and the need to sustain it, should be a consideration in any strategic decision about defence posture, capability or expenditure. Future considerations Australia s defence industry was created largely as a function of government policy in the 1990 s. It was government policy of the late 1990 s through to 2009 that encouraged defence industry investment and facilitated the development of indigenous capability. The strategic guidance provided in the 2009 white paper further encouraged industry investment and predicted considerable growth across the ensuing decade in order to support a range of new defence capabilities.
Page 5 of 6 That growth has not come, return on investment has not been realised and the fragility of Australia s defence industry has been exposed. There is no doubt we need to work through the tough fiscal times new projects will be few, sustainment budgets will be squeezed and the industry will feel the pain. It will be painful for the primes, it will be painful for major subcontractors, it will be particularly painful for small to medium enterprises, and it will be painful for providers of services to the industry. When we examine what needs to be considered when planning for the future of Australian defence industry our aim should be to limit the pain and to ensure we emerge from these challenges with an industry that remains strong and capable. The key to retaining a strong and capable industry is ensuring a predictable flow of new work, and the best way to achieve that is for the Commonwealth to adhere to publicly announced timings for the approval of projects over the 2012 2014 window. Industry has geared up to bid and deliver those projects on the strength of government guidance, and, just as importantly, a higher degree of certainty will allow industry to maintain capabilities in enterprise architecture, systems integration and support system design - the capabilities we need to maintain and develop to support future war-fighting requirements. Concurrently, updated government guidance, in the form of the 2013 White Paper, will be developed and released to enable the next phase of industry strategic planning. Next, let s think about growing our current defence industry capability. At the macro level, I believe we need to decide what we are doing in the area of naval shipbuilding. There has been a lot of commentary about what we, as a nation, should do in regard to future naval programs. I am firmly of the view that we should build Australian surface combatants and submarines in Australia. I believe we should capitalise on the investment the nation has already made in Australian shipbuilding particularly on the back of the Air Warfare Destroyer program and consider naval shipbuilding as a core component of Australia s manufacturing sector. We must all recognise that this is much more than just a decision on one or two individual projects. I believe Australia needs a national shipbuilding strategy; a long-term program to build Australia s surface combatants. We should draw upon the design, integration and construction capabilities established for the Air Warfare Destroyer program and consolidate that capability through a national shipbuilding strategy. A national shipbuilding strategy will do more than just deliver world-class warships to the Royal Australian Navy. It will ensure we never again encounter what Ministers Smith and Clare recently referred to as the Valley Of Death where jobs are lost and skills disappear. A national shipbuilding strategy will provide the bridge across the Valley Of Death and ensure Australia has the necessary skills to build and integrate our future submarines. The Government is currently in the process of examining all options for Australia s Future Submarine capability from off-the-shelf to design-and-build in Australia. I do not want to go into a drawn out examination of the options but suffice to say that, in my view, there will be a level of design, construction and integration carried out in Australia. How much is yet to be determined but the wherewithal to do that work in Australia goes to the core of a sovereign future submarine capability. The plan to build (read some level of design, construction and integration) Australia s future submarines in South Australia will both benefit from and complement a national shipbuilding strategy. Let me move on to sustainment. Australia s defence industry has world-class capabilities in integrated logistics and a very strong capability to provide in-country support to ADF systems. We should take full advantage of this. We should be transitioning the support of ADF systems procured offshore to in-country arrangements as soon as practicable. This will take advantage of industry s capabilities and deliver cost and schedule dividends to Defence. It will also mitigate the risks inherent in having mission essential sustainment activities
Page 6 of 6 outsourced to non-sovereign third party suppliers. We need to look at the sustainment picture holistically. This means an integrated logistic view across engineering, maintenance and supply support to ensure we efficiently address availability and cost of ownership. We also need to allow that integrated view to encompass both traditional customer and traditional industry functions. This sounds simple but it is not an approach that is widely embraced across Defence and industry today. This sort of approach will deliver benefits to Defence in terms of cost, capability and availability; and to industry by providing longterm work, in partnership with Defence, which in turn will allow for continuing private sector investment targeted at generating greater benefits in cost, capability and availability. Conclusion Today we have a highly capable defence industry that is focused on meeting the needs of the Australian warfighter. It is an industry that continues to mature, to develop its capabilities and to build a strong reputation for performance. However, there is no doubt that the industry is somewhat battered by the slow down in work over the last few years and apprehensive about the impact of the recent cuts to the defence budget. We need to work through the current tough fiscal times and accept that we will not emerge from them without some pain along the way. To lessen that pain, the Commonwealth should adhere to the publicly announced timings for the approval of projects over the 2012 2014 window. In addition to ensuring this predictable flow of work, the Commonwealth can provide critical support to Australia s defence industry through firm strategic guidance on the capabilities the nation needs to acquire and sustain over the next decade. I believe a key element of that guidance should be a national shipbuilding strategy. Australia s defence industry is a key component of our national defence capability - one of the fundamental elements of our national security infrastructure. We should recognise its importance and do what is necessary and reasonable to retain and develop it. Thank you, and I m now happy to take questions. Biography: Mr Michael Ward is Managing Director of Raytheon Australia and is responsible for the executive management of Raytheon operations in Australia and New Zealand. Prior to assuming his current position, Michael served as Raytheon Australia s General Manager, Strategy and Business Development, where he was responsible for business growth and operational efficiency. Before joining Raytheon, Michael was employed as a Defence Adviser to the Parliament of Australia. Michael s service in the Parliament of Australia came at the end of a 20- year career with the Australian Military. While at Raytheon, Michael has been employed in a range of management roles within Raytheon Australia. In addition to his Strategy and Business Development role, Michael also served as General Manager, Support Services. A native of Australia, Michael is a graduate of the University of New South Wales and a Fellow of the Australian Institute of Management. He studied for a bachelor s degree in information technology before completing a master s degree in business administration.