Growing Australian industry involvement in the supply chain

In August 2015, Tony Abbott and Kevin Andrews (then respectively prime minister and defence minister) committed to a continuous build of warships in Australia, stating: “It’s the first time that any Australian government has committed to a permanent naval shipbuilding industry.”

The 2016 Defence White Paper (DWP) reaffirmed the government’s intent to implement a continuous build of both frigates and offshore patrol vessels (OPVs).

Prime Minister Malcolm Turnbull launched Australia’s long-awaited naval shipbuilding plan in May 2017, including the construction of submarines, frigates, and offshore patrol vessels, costing AU$89 billion, in Australian shipyards.

“This is a great national enterprise. This is nation-building. This is an end to the boom-and-bust pattern that we’ve seen with shipbuilding in Australia,” Turnbull said. “This is the largest investment in our defence capability of our Navy ever in peace time.”

Under the plan, the government planned to invest in the rolling acquisition of 12 conventionally powered submarines under Project SEA 1000 (Future Submarine), the continuous build of nine frigates under Project SEA 5000 (Future Frigate) and a follow-on class of surface combatants; and a continuous build program for minor naval vessels.

The construction of the submarines and frigates would occur in the South Australian shipbuilding hub and the minor naval vessel projects would be constructed in the Western Australian shipbuilding hub.

The realisation of this continuous naval shipbuilding plan has resulted in contracts being awarded in the intervening years to various prime contractors, all with corporate headquarters outside of Australia.

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The Future Frigate (Hunter Class) is currently being designed in the UK by BAE Systems, the OPV (Arafura Class) is being designed in Germany by Lürssen, and the Future Submarine (Attack Class) was being designed in France by the Naval Group prior to the cancellation of the contract in September 2021, in favour of AUKUS (a trilateral security pact between the United States, the United Kingdom, and Australia).

The outcomes of this AUKUS announcement have been far reaching for Australia at a diplomatic level, however, it is yet to become clear if any of the nuclear-powered submarines will ultimately be built in Australia, this announcement does speak to some level of co-design activity, which if followed through, is a fundamentally important activity for the creation of a sovereign Australian capability. The technology associated with the construction of nuclear submarine reactors only resides in the UK and the US and is unlikely to be developed in Australia.

The implications for Australian industry of a reliance on European prime contractors

One thing that is clear with each of these offshore prime contractors is that a portion of the contract overhead and the margin will flow out of Australia and will not be re-invested in the Australian business.

The Hunter Class design is being undertaken in the BAE facilities in Scotstoun and Govan with up to 50 Australians working in the UK on secondment. The Type 26 detail design team undertook design modifications to address the project specific design requirements of the project, there is some level of design activity being undertaken in South Australia.

The Arafura Class design is based on the existing Darussalam Class, operated by the Royal Brunei Navy. The design of that vessel was principally undertaken in Germany, with limited involvement by the shipbuilding subcontractors, ASC and Civmec.

The now cancelled Naval Group contract saw 50 Australian engineers deployed to Cherbourg to participate in the submarine design process.

These three examples illustrate that the design authority for the projects during the development of the functional design, and often the complex detailed design, resides outside of Australia.

There is clear intent to transfer the design to Australia as the projects progress, but the fundamental problem for Australian industry is that by the time the design authority transitions to Australia, the key design decisions are already made.

Future design modifications and upgrades provide opportunities for AIC insertion, but this comes at a significant cost to the Commonwealth associated with each engineering change.

BAE, Lürssen, and Naval Group all have decades of experience and existing European supply chains, which are designed into their vessels.

The path of least resistance and lowest cost for them is to continue to use the materials and equipment suppliers already included in their designs. The insertion of alternative Australian suppliers requires redesign activity and the establishment of a project specific procurement organisation to identify alternative supply options with the same capability as those already included in the design and it is this effort that is largely baulked at or used as a reason to not include Australian companies into the program.

An enhanced AIC framework

During 2021, Defence has been working on an enhanced AIC framework at the direction of the minister for defence industry. This new framework will improve the clarity around AIC but will not be retrospectively applied to the significant programs which have already been contracted.

Some of the improvements will include an audit element that will have consequences for companies that do not deliver on their AIC promises.

There clearly needs to be an expectation that international primes will market test and engage Australian industry, this must be a commercially enforceable requirement. The clear issue is around whether it is cost effective to substitute Australian supplied materials and equipment or just maintain the status quo.

The most effective way to address this issue is to undertake the functional design in Australia, with Australian designers who will typically select materials and equipment from their existing Australian supply chains.

A timely acquisition process

The frequently sited reason for a reliance on military off-the-shelf foreign designs is the risk and time required to develop a truly indigenous Australian design solution.

A recent example is the Pacific Support Vessel, which was first slated as a requirement by Minister Pyne in 2018 but is now planned to be procured offshore due to time constraints.

This simple vessel could have been designed and delivered by the Australian industry in the time it took to decide in October 2021, that the capability now needed to be awarded to a foreign supplier, however it is not just this vessel, the Australian ice breaker and the vessel Ocean Shield are both further examples of what could have been a comprehensive mid-sized ship program.

There are many examples of Australian businesses developing world-leading design solutions for export markets, which illustrates that the Commonwealth could realise Australian-developed design solutions, if the contracting schedule provided adequate time and funding. Some examples of world-leading Australian businesses supplying defence capability are provided below for reference:

EOS (Electro Optic Systems) is an Australian company which is a world leader in space information and intelligence services, optical, microwave and on-the-move satellite products, optical sensor units, and remote weapon systems for the land sea and air. EOS typically derives 95 per cent of revenue from exports.

CEA Technologies is an internationally recognised, world-leading radar and communication systems supplier. The company continually endeavours to expand its reach into the international market and successfully exports to the USA, Europe, the Middle East, and Pacific countries. Continuous corporate growth has resulted in a corporate staff of almost 400 people located across its four facilities in Australia and one in the USA.

Austal has grown from a commercial Australian shipbuilder into a global shipbuilding defence prime contractor, currently delivering two programs to the US Navy. The business employs around 5,000 people and is the only shipbuilder listed on the Australian Stock Exchange. The annual revenue of the business is around $1.6 billion and around 80 per cent of that revenue is derived from export contracts.

To allow Australian businesses like the ones listed above, the opportunity to develop Australian design solutions in support of future capability, there needs to be funded design activity in advance of any final acquisition contract. 

The figure below illustrates the shipbuilding projects planned to be undertaken in Western Australia in the coming decade. 

If there is a genuine commitment to increasing opportunities in these projects for Australian industry, then there should be investment now in design solutions for joint support ships, undersea surveillance support ships, replacement LHDs, an ocean protector replacement and forward support vessels. 

Investment in Australian design now will pay large dividends for Australian industry when those projects commence construction.

The future acquisition approach

In Australia, the default acquisition approach is to select an existing proven offshore designer and make that organisation responsible for the delivery of that capability in Australia.

As long as this approach endures, it will be impossible to develop a truly sovereign shipbuilding capability and grow the capabilities of the entire industry. The design authority must reside in Australia to maximise the opportunities for the Australian industry and to maximise the Australian industry capability.

This approach will also grow the sovereign capability of the industry in support of new capability in the future.

The following are the key recommendations to deliver an increasing level of Australian industry capability on future projects:

• Ensure that adequate time is allowed for requirements definition and design development prior to the source selection. A lack of time always dictates an off-the-shelf solution which may not address the unique requirements of the end user.
• The design activity needs to occur in Australia rather than just requiring the design authority to move to Australia during the project, to ensure the Australian supply chain is designed into the first of class.
• The contracting structure should consider the level of risk associated with the project and share that risk between the Commonwealth and the contractor as appropriate. This contracting structure will promote a level of collaboration between the stakeholders. If a design is developmental, then a firm fixed price contract for the entire design and construction scope of supply is unrealistic.

With a career spanning over 30 years in both the Royal Australian Navy (RAN) and defence industry, Brent Clark has held a variety of senior roles from project management to executive management in small, medium and large defence companies including BAE Systems Australia, Thales Australia, SAAB Systems, and Sonartech Atlas.

In November 2018, Clark established his own consulting company, working with the Canadian government and a variety of both Australian and foreign-owned companies.

In May 2020, Clark accepted the role as CEO of AIDN National, an Australian industry advocacy organisation. Clark was appointed as interim CEO of Naval Group Australia in March 2016, prior to this appointment, he was the chief operating officer (COO) and director for strategy and communications and human resources (HR) at Naval Group Australia. In his role as COO, Clark was responsible for managing Naval Group’s relationships with the Department of Defence and State and federal government officials. Clark also acted as the spokesperson for the organisation and liaised regularly with Australian trade and daily media and presented on behalf of Naval Group at external conferences and industry briefings.

Prior to joining Naval Group, Clark worked for BAE Systems as the head of business development, strategy and communications, Maritime, before joining BAE Systems, Clark was the vice-president, Thales Naval Business Group for Thales Australia. Clark has also worked for SAAB Systems and Sonartech Atlas. Clark served in the Royal Australian Navy for 11 years and qualified as a submariner, serving in HMA Submarines Onslow, Farncomb, Ovens and Otway, as well as serving in a variety of other surface naval vessels.

Clark is a board member of the Australian Maritime College, which is part of the University of Tasmania and a director of Hockey Australia.

Clark is a graduate of Queensland University, and holds a master of business administration. Clark has four daughters and lives in Canberra.