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Opinion: With the Trump administration doubling down on its “America First” agenda and Australian industry now well within the crosshairs, how Australia’s defence industry pivots will be critical, explains KordaMentha partner Mike Kalms.
It’s been just over a month since Donald Trump’s inauguration and a fortnight since our Deputy Prime Minister passed an AU$800 million oversized novelty cheque to his US counterpart as a “submarines down payment”.
It does feel like a month of theatre. But frankly, the consensus opinion around the future of AUKUS under Trump has been predictable and tame. To summarise for you: “The AUKUS agreement should be OK” is the expert on-balance assessment.
But for the several thousand small to medium defence businesses (SMEs) in Australia – collectively employing over 65,000 Australians and contributing over AU$10.5 billion gross value to our economy – doing as best they can in a choppy local market, what strategy adjustments should they be weighing up?
Of course, the Defence primes like Lockheed Martin, Thales and BAE Systems will be fine. They’ll have teams of international strategists mulling the options, largely targeting AUKUS and other multi-billion-dollar procurements they assess “cannot be stopped” by domestic or international politics. They will slowly pivot to capture the new European defence spend.
But what does it mean for the routinely under-invested, downplayed and misunderstood domestic supply chain, a layer of industry that is simultaneously experiencing record federal spending (>AU$52 billion in FY2024–25), but with little revenue trickling down to local sovereign players.
If AUKUS isn’t in their order book, what does Trump 2025 mean for them, what hedges might they erect?
Trump beyond AUKUS
I should note that Trump’s AUKUS effect is a serious concern for local Australian Defence industry players today. The arithmetic is simple: will the US submarines sector lift its production from 1.2 boats a year to >2 in the next four years? Answer yes, and Australia has a chance of purchasing second-hand Virginia Class hulls (and operating them as a de facto US squadron – there is no scenario where we take ownership and ignore USN mission sets).
But if US submarine production remains low, there is no US president who will further denude the USN of its prized assets – even if Australia is a best mate. Importantly, all this doesn’t matter to Australian SMEs in the near term.
The Western Australia and South Australia infrastructure work, the heavy maintenance, the global supply chain niche roles, the trade training, the nuclear investments – they all continue and remain a lucrative opportunity for the sector. The boats will be based in Henderson in 2030, they just might not have a Kangaroo painted on.
Hedging Trump in 2025
But beyond AUKUS? I sense there are four issues to consider:
- US subsidiaries: If you’re a business owner in the Australian defence sector, you’ve invested time and (likely) money to build a US subsidiary. For the last two decades this has been good strategy; “the fastest route to an Australian Defence sale is to sell it firstly to the USA”, the saying goes. In the past, this was enough to ensure US Department of Defence research and development and panel arrangements, but under Trump, more is more. Each time Australian businesses step forward to play, the question will be, “What have you done for me lately?” Expect US subsidiaries to draw more and more capital to hold a seat at their table.
- A rising QUAD: But as the price to play rises in the US, we might find that similarly disenfranchised businesses outside of the US come together to create opportunities with lower cost-to-play requirements. These nations will be responding to the Trump 3 per cent+ of gross domestic product ask, so there will be money on the table. How quickly can Australian businesses build local relationships in Japan, India and (perhaps) South Korea to assist their ramp-up? Forward-thinking businesses might prioritise non-traditional defence markets – which will attract Australian government support given the geostrategic frameworks they underpin.
- Domestic manufacture: This one is tricky. On the one hand, you could argue that Australian local manufacture will accelerate as US capacity is consumed and they leverage AUKUS and the US determination that “Australia is the USA” from a domestic manufacture policy perspective. But on the other hand, will a Trump government ever see jobs outside the US as a positive? Isn’t his answer always going to be “US first”? Why would constrained capacity, full employment or treaties cause him to drop his mantra? More likely defence jobs on US-operated equipment will be drawn into the US under Trump, not Australia. Missiles, drones, quantum, AI, cyber, small ships – the pressure to build in the US (point 2 above aside) will win out.
- Europe: Lastly, there is the rest of NATO and their response to Trump. I sense they will proudly opt out of ITAR-constrained US procurements and use their expanding Defence budgets to create European programs that build defence capability as Trump demands, but with European societal benefits (jobs, IP etc.) at their core. Expect enhanced national collaborations, an extended MBDA, wider EADS and another wave of European national champion tie-ups. And in this climate, Australian niche players will be welcomed – without the US-first small print. These international programs protect themselves from political attack by having a range of “externals” in their consortium. Much harder to reduce a program when a range of Asian, African and Pacific nations are co-investors. This will be fertile ground for agile Australian SMEs.
History rhymes
Like many, I find myself reflecting on what the next four years will most resemble in recent history. The overt layering of national economic interest we’ll see from the US feels unusual, but not radical when one reflects on European industrial policies of the last 30 years, or more recently the behaviours of Indo-Pacific nationals using defence to bootstrap domestic outcomes.
What’s new is it’s the US doing it. And what’s odd is they’re doing it from such a position of industrial strength; no nation can point to a better post-COVID-19 record.
For the Australian defence sector, it is not the lack of opportunity (the spend numbers have never been stronger) rather it’s the strategic choices it makes – where to play, why it will win and how to protect positions in the swirling world of Trump 2025.
Early moves beat late reactions, with the right coaching from government and our vibrant PE sector, we could be a nation of winners come 2029, much to Trumps chagrin.
Mike Kalms is a partner at KordaMentha.
