Industry to the rescue? Defence industry presents ‘action plan’

Since the 1980s, Australia, like many comparable nations across the Western world, has borne witness to the successive hollowing out of our respective industrial bases as the triumph of the US-led post-Second World War liberal economic order gave rise to the phenomenon of globalisation.

The tentative early stages of globalisation that emerged in the final years of the Cold War gave rise to rapid acceleration during the early-1990s, as much of the developed world was caught up in the “End of History” theory championed by US academic Francis Fukuyama.

In doing so, we saw the largest transfer of industrial capacity and economic diversity in history as the developed world led by the United States – flanked by nations like Australia, Canada, the United Kingdom and parts of Europe –gladly waved goodbye to the industrial bases that had kept them at the forefront of the global economy since the Industrial Revolution.

This global transition also coincided with the advent and mass adoption of the internet, giving rise to the “knowledge” economy, driven in large part by services including education, finance, and health care, among others.

Against this backdrop, the “developing world”, spearheaded by rising powers like Deng Xiao Ping’s reinvigorated People’s Republic of China, alongside the other “Asian Tigers”, embraced the economic opportunities, while domestic consumers across the “developed world” embraced cheaper products and a rapid acceleration of our standards of living.

But what does all of this have to do with Australia’s “sovereign defence industrial base” and the development of a robust, competitive, and sustainable manufacturing base in the modern context?

By now, it is well known that Australia’s economy is a shadow of its former self, with much of the nation’s traditional industrial base now skating along on a subsistence level, as the nation rapidly slides towards banana republic territory as predicted by former Singaporean statesman Lee Kuan Yew in the 1980s.

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Yet while of Australia and much of the Western world embraced the opportunities of globalisation and the optimism of the “End of History”, the world’s autocratic nations used this period as an opportunity to build economic and industrial strength and capacity to further their own ambitions and designs for the global order.

To this end, when released in 2016, the Defence white paper, the “Defence Industrial Capability Plan”, released in 2018, and the supporting Sovereign Industrial Capability Priorities (SICPs) were designed to fundamentally reshape the Australian defence industry landscape and reignite the fires of industry in the country.

The then-Morrison government detailed the importance of these interconnected strategies, stating, “The 2018 Defence Industrial Capability Plan outlined the government’s long-term vision to build and develop a robust, resilient, and internationally competitive Australian defence industrial base that is better able to help meet Defence capability requirements.

“The Defence Industrial Capability Plan introduced 10 initial Sovereign Industrial Capability Priorities (the Priorities), and noted Defence would develop implementation plans for each priority. These implementation plans outline critical industrial capabilities for each priority, describe the existing Australian defence industry sector and outline the actions to be taken by government to support the development of each priority.”

Going further, the 2020 Defence Strategic Update and now the 2023 Defence Strategic Review have all sort to build on the priorities, while we wait for the Albanese government’s signature defence industry strategy, the Defence Industry Development Strategy (DIDS), establishing a competitive defence industrial base.

With this collection of strategies, plans, and objectives, it is easy to understand why industry remains reluctant to trust governments of all stripes when it comes to establishing a competitive, resilient national defence industrial base to proactively defend the nation during a period of heightened geopolitical and strategic competition.

In response, a collection of Australian industry partners used an address at the National Press Club to present a comprehensive report titled, Developing Australia’s defence industrial base: A time for urgency, optimism and action.

Emphasis on building national resilience

With successive governments emphasising national resilience and security as the central priorities, the proposals presented by the industry partners reinforce the importance of national resilience as one of the key priorities for delivering a robust and competitive defence industrial base.

Central to this, Nioa told the gathered audience, “Today, I’m calling for urgent action to strengthen Australia’s national security. For years, I have been observing what Australian policy documents rather dryly call a deterioration in our regional security. Europe is enduring the largest and most destructive war in generations. The Middle East is in turmoil. In the Indo-Pacific region, a large authoritarian power, China, is challenging the status quo, seeking regional domination.”

With this background, the industry group’s report builds on the recognition articulated in the Defence Strategic Review, which states, “Resilience requires the ability to withstand, endure and recover from disruption. Resilience makes Australia a harder target and less susceptible to coercion.”

Developing the national resilience and defence industry that would enable it isn’t without it’s challenges, particularly given the year-on-year decline in Australia’s overall manufacturing capability and industrial base since the 1960s, highlighting this, the report states, “Australian manufacturing peaked in the early 1960s at around 30 per cent of the economy and has declined since. The Productivity Commission says that ‘manufacturing value added declined about $10 billion between 2010 and 2020. By June 2020, the sector contributed $108.4 billion. [Manufacturing] employment declined by about 100,000 workers between 2010 and 2020; by May 2020, manufacturing employed just over 863,000 Australians.”

Unpacking the implications of this on national security and national resilience, the report adds, “This 30-year downward trend in manufacturing puts Australia last among all Organisation for Economic Co-operation and Development (OECD) countries for manufacturing self-sufficiency.”

This uncomfortable reality only became more prominent and at least somewhat understood and accepted in the public consciousness throughout the COVID-19 pandemic, the devastating bushfires of the 2019–20 fire season, and the floods which ravaged large parts of the country through 2021–22, each of which have devastating implications on the nation, from the micro level of the individual, through to the macro level across the economy.

In order to respond to these challenges, the report highlights a collaborative approach, stating, “We urge the government to find more ways to bring the business community into this discussion. In the defence and security sector...

“Our view is that the best way to shape new approaches to defence industry policy is to bring senior industry players to the table to collaborate in the process. We recommend that a government Australian defence industry steering council be established, reporting directly to the minister for defence. The council must have representatives from across the local Australian defence industry landscape.

“A steering council must not become a large bureaucracy. Instead, it should draw on existing public service resources. Its key value is to bring industry into a trusted and senior-level policy discussion with government. For too long, Defence has driven industry policy in isolation from its commercial partners. That must change," the report articulates.

Highlighting the power of this approach, Nioa told the audience gathered at the National Press Club, “The government has the power to deliver this outcome. Government sets the rules and makes the decisions. It needs to create the signals to which industry can respond.

“As Winston Churchill urged the Americans in 1941, ‘Give us the tools and we will finish the job’,” he said, echoing the defiant sentiment of the British wartime prime minister.

A hand up, not a handout is essential

It is easy for critics to revert to a reductionist, tried and true political response of “these businesses are asking for special considerations and special interests” as was often weaponised throughout the 1990s and into the new millennium (think Australia’s local car industry for example) and rightfully so.

Every time we have sought to introduce a policy of industrial development, we have reverted to this tried-and-true method, and indeed, arguably, despite the narrative of liberalisation and deregulation championed in the late-1980s, one could successfully argue that our industrial and economic diversity, competitiveness, innovation, and capability have steadily been routed.

He explained the need for a new approach, one focused on creating the environment necessary for success, telling the audience, “In our case, the tools are the conditions that will allow strong Australian owned and run defence prime companies to emerge.

At the core of this push, Nioa said, “We need a national defence industry policy. Industry policy for our nation’s defence is no longer the Department of Defence’s industry policy alone. It must be directed by government and designed and delivered by central departments including Treasury and Finance, as well as the Department of Industry, Science and Resources with the Department of Defence.

“And let’s be clear. You can’t develop a successful defence industry policy without talking with defence industry. We need to be a larger part of this conversation,” Nioa added.

But what do these “conditions” look like?

Well, as I am often fond of saying, success leaves clues and in the case of building a sovereign and resilient defence industrial base, the industry report recognises this, citing the successful models established by similar nations like South Korea, Israel, Sweden, and Turkey.

The report states, “Israel, Sweden, South Korea, and Türkiye offer useful lessons. All are small-to-medium economies that have built robust defence industries. Indeed, they have become export powerhouses. Size is not the key factor; Australia has the largest GDP of the five and the second-largest defence budget. Nor have they developed their defence industries by becoming modern versions of Sparta. Israel does spend a large percentage of GDP on defence at 4.5 per cent, but South Korea is the only other country over 2 per cent. Sweden and Türkiye are well below.”

Importantly, each of these nations present “tried and true” methods for establishing the conditions to nurture a viable defence industrial base, without it becoming a “handout” as previously mentioned.

Nioa explained, “Nations like Israel and Sweden – both much smaller than Australia – have vibrant domestic defence industries that not only provide their own militaries with essential military capabilities, but provide their friends and allies, including Australia and the US, with systems we need.

“Combining this requirement with the broader objectives of building domestic Australian production presents an opportunity for Australian companies to lead local industrialisation activities. This will allow us to build the necessary scale to not only produce interchangeable products locally, but to also develop uniquely Australian products, technologies, and supply chains.

“Defence’s interaction with Australian medium and small firms must also recognise that cashflow is essential for business viability. Reasonable profits and a strong balance sheet enable these firms to deliver and develop more successful capabilities for our military,” Nioa added.

In the second part of this short series we will take a closer look at the full list of recommendations identified by the report and, the signals Government needs to provide to create the environment necessary for Australia's defence industry to succeed in this era of great power competition.

Final thoughts

Australians are going to be asked to accept a number of uncomfortable realities in coming years. First and foremost, we will have to accept that while the world is increasingly becoming “multipolar”, the Indo-Pacific, in particular, is rapidly becoming the most hotly contested region in the world.

This has been underpinned by the emerging economic, political, and strategic might of powers like China, India, Pakistan, Thailand, Vietnam, and the established and re-emerging capability of both South Korea and Japan, in particular, are serving to create a hotbed of competition on our doorstep.

Second, both the Australian public and our policymakers will have to accept that without a period of considered effort, investment and reform, or as I like to colloquially refer to it, our rocky montage moment, current and future generations of Australians will be increasingly impoverished, living in a nation pushed around by the region’s now rising powers.

Recognising this array of challenges and opportunities, both the Australian public and its policymakers need to look beyond the myopic lens of short-termism that has traditionally dominated our diplomatic, strategic, and economic policy making since Federation.

Ultimately, we need to see Australia begin to play the long game to fully capitalise on the opportunities transforming the Indo-Pacific.

The most important question now becomes, when will we see a more detailed analysis and response to the challenges and opportunities facing Australia and when will we see both a narrative and strategy that better helps industry and the Australian public understand the challenges faced and opportunities we have presented before us?

As events continue to unfold throughout the region and China continues to throw its economic, political, and strategic weight around, can Australia afford to remain a secondary power, or does it need to embrace a larger, more independent role in an era of increasing great power competition?