The following response was provided by Heather Ridout, Chief Executive of the Australian Industry Group:

Accessing Global Supply Chains

Ai Group’s Defence Council has worked closely with Defence to assist Australian companies, especially Small and Medium Size Enterprises (SMEs), to access global supply chains.

In 2009, Greg Combet told the National Press Club that the Government’s approach to defence industry policy is driven by “supporting the efforts of local companies to secure work from the prime (contractors) in large procurement and sustainment contracts, and to become integrated into global supply chains.”

Mr Combet said it was important to encourage international prime contractors to establish a significant presence in Australia, while also noting that large international corporations dominate the Australian defence industry.

The Government’s new defence industry policy – Building Defence Capability: A Policy for a Smarter and More Agile Defence Industry Base, released in June 2010, highlighted the level of activity in Australia by off-shore originating primes. BAE Australia, whose parent is UK-based, has total revenue amounting to 3.2% from Australian sales and exports. Boeing Australia accounted for 0.5% of total revenue sourced to Australia, Lockheed Martin less than 1%, Thales Australia 3%, Australian Aerospace less than 1%, SAAB Systems 3.1% and Raytheon Australia 1.3%.

ASC, fully owned by the Australian government, is the only Australian-owned defence prime contractor. All its work, on the Collins-class submarines and new Air Warfare Destroyers, is undertaken in-country, with its SME base beneficiaries.

In its submission to the defence industry policy statement process, the Ai Group Defence Council called on the Federal Government to work harder to provide opportunities for Australian defence companies to access global supply chains. Doing so is crucial to the long-term future of Australia’s industry base, including accessing high-technology and skills essential to support the ADF in an increasingly uncertain world.

Australian companies are generally SMEs that are largely sub-contracted to prime contractors. Many of them also contract directly with Defence, as well as undertaking non-defence work. A successful example is Sydney-based Thomas Electronics, which refurbishes cockpit display systems. It does work for the RAAF’s F/A-18 fleet, as well supporting many major commercial airlines, such as Qantas and Cathay Pacific. It also undertakes work for Thales Australia, including on light armoured fighting vehicles. There are other Australian companies with similar success stories, but many more are capable of similar success provided they’re given the opportunity to do so.

Defence plans to spend $100 billion over the next decade on re-equipping and sustaining the ADF. Around 40% of this amount will be spent off-shore, with prime contractors being the major beneficiaries. The other $60 billion of expenditure by Defence in-country will principally be channelled into, or through, Australian primes.

The Australian Government recently committed to acquisition of the first tranche of F-35 Joint Strike Fighter aircraft from Lockheed Martin, at a total estimated cost of some $16 billion. With most of this expenditure going off-shore, considerable effort is being made by Defence, in partnership with industry, to harness opportunities for Australian companies to win JSF global supply chain opportunities. A modest start has been made, with Australian companies winning around $170 million under this program.

The current deeds negotiated by Defence with Boeing, Raytheon and Thales, with more planned, has seen nearly $70 million of global supply chain contracts won. This is a reasonable start, but much more needs to be done to lift the value of such activity. The ball is squarely in the primes’ court to do so. Defence must publicly report regularly on progress. Both the ADF and Australia’s SMEs will benefit from doing so.

APDR at a glance