Op-Ed: The importance of backing Australian industry capability

This support under a targeted stimulus plan by the government is important given the challenges export-heavy companies, such as EOS Defence Systems, are facing during this global pandemic.

At the top-line, this contract allows the company to maintain a steady level of business over the next 12-month period and continue a consistent level of activity for our extensive local supply chain, regardless of what has and what might happen internationally over that time. It will also allow our international programs time to regain their normal drumbeat of activity while our customers reopen.

However, apart from this important immediate outcome, this contract and the other stimulus efforts will support the longer-term global competitiveness of Australian industry during this difficult time.

As a society, we have come to expect the secure, predictable and low-cost freedom of movement of people and goods. The sudden fragility of the international logistic system has come as a surprise to many, as has the associated vulnerability of the supply of many important goods and services.

Now we have a better understanding of what it means not to have access to this and the incumbent challenges that this brings.

This in turn has renewed our understanding of the importance in having robust local and sovereign industrial capabilities, especially those critical to the support of the national security apparatus.

In this context, EOS Defence Systems can serve to highlight a number of very important messages about what true sovereign industry capabilities look like and why the development and maintenance of such capability is so important to a world where the economic and political systems of the last 50 years are facing new and surprising challenges.

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EOS Defence Systems produces precise high technology systems that consistently match or better competing products from around the world. Currently the company sources 83 per cent of all components from our local supply chain of 146 Australian SMEs employing over 1,100 Australian workers.

This large and competitive supply chain is critical to our current international success and it represents over a decade’s worth of planning and effort by the EOS Defence Systems team and our partners.

Without the ADF contract, EOS Defence Systems would have had to wind back spending with a large number of our partners, some of whom would have felt significant, possibly business-ending financial pressure.

Our local partners are companies that have spent many years and millions of dollars developing their capabilities to where they can optimally service the particular demands of EOS Defence Systems and other high-tech Australian manufacturers.

This commitment demonstrates that a supply chain is far more than a group of companies that feed manufacturing and development, it is a collection of relationships that have been formed, nurtured and developed over many years.

They have worked with us to fine-tune their production processes, purchase equipment, developed skills and educated their workforces all towards helping us take on the world. Any loss from this eco-system would have had far-reaching implications for EOS Defence Systems.

Such a loss would have also hurt the wider Australian industry as these SMEs have become something much more than just the EOS Defence Systems supply chain.

They have become part of the backbone to Australia’s high-tech, highly skilled and highly efficient technology development and manufacturing base.

Another area of investment the government has made through this contract and the other stimulus activities for Australian defence industry, has been in the building and supporting of Australia’s manufacturing industry technical development and international competitiveness.

The international RWS market is highly competitive and includes a number of very large, international companies, several of whom are state owned. Some of these competitors enjoy a steady stream of state sponsored funding, guaranteed purchasing and R&D support from their home militaries.

It is normal for Australian defence exporters that we have to accept and optimise for an uneven playing field in most overseas markets, so keeping ahead in this market requires innovative and efficient engineering and production; and above all money to invest. EOS spends over 10 per cent of its annual turnover on R&D and new developments designed to improve our competitiveness. This is a significant expenditure but is a key and necessary element in keeping the company ahead of our international competition.

What makes EOS relatively unique in the Australian defence arena is where the money comes from. Unlike many large defence industry businesses in Australia, EOS’ primary source of revenue is not the ADF and Australian government. Over the last 10 years, more than 90 per cent of the company’s revenue has come from overseas contracts.

In 2019, EOS generated $179 million in turnover and returned more than $140 million into the Australian economy through taxes, investments and direct expenditures. This money came from overseas contracts that EOS Defence Systems secured by making products that are technically superior and cost competitive on the international stage.

This success means that Australia’s armed forces now have the benefit of world-class indigenous technology that can be immediately responsive to its requirements without the vulnerabilities that come from exposure to international logistics and without having to fund the majority cost of local operations. Every year more Australian owned defence companies are emulating this effort utilising products developed from Australian IP.

Further success on this challenge will make the Australian defence industry not only better able to support the nation during times of crisis but will also help deliver better value for money outcomes to the nation during times of peace.

Unfortunately, the cascade of events from the pandemic threatened this standard EOS model because the flow of exports and the resulting positive international funds flow to Australia, is temporarily disrupted.

The commensurate 6-12 month delay of R&D investment that might have followed would have made the difference between being early to market, globally competitive and winning new business as the pandemic lifts, or not.

As R&D spending also flows down to the supply chain this double hit to the supply base would have been hard to rectify in the short-term. In the past, EOS Defence Systems has invested in helping local companies build capabilities that we previously could only acquire overseas.

We have well developed plans for further investment to assist in the local development of those limited components that despite our best efforts still have to be imported. These investments in continuing to build local industry capacity would certainly have been hit without the pro-active support shown by the government.

As the Australian government continues to grow its policy of greater sourcing from local suppliers, this virtuous cycle of investment, development and international competitiveness bringing in overseas funds to support local businesses will continue to deliver even better outcomes.

It is this long-term investment in building resilient, globally competitive technology and the wider industrial value that the government contract for the 251 RWS is protecting and supporting.

EOS Defence Systems will work hard to use this opportunity to deliver better outcomes for the wider Australian defence industry base and to take Australian innovation to the world.

Grant Sanderson is the CEO of Canberra-based Electro Optic Systems.