Conquering the barriers to the US defence market

By any account, the United States is the world giant in military capability.

The US is the highest military spending jurisdiction in the world, outlaying more than US$700 billion a year, or more than 3 per cent of its gross domestic product.

In contrast, Australia’s annual defence expenditure of around AU$44 billion (US$31 billion) is roughly about 2 per cent of GDP.

For Australian contractors, the sheer size of the US defence industry represents a major sales opportunity and one that many seek to access.

After all, the US and Australia – with New Zealand – have co-operated as part of the ANZUS defence pact since the early 1950s.

In recent months, Australia’s defence links with the US have also been reinforced with the creation of the AUKUS partnership, ostensibly to source nuclear-powered submarines with the help of the US and the United Kingdom.

In short, Australia is regarded as a reliable defence partner and trusted natural ally of the US.

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But Australian defence companies should beware: the nation’s traditional links with the US do not automatically open doors into the US defence sector.

There are, in fact, several landmines in the US that can trip up Australian players who don’t undertake their due diligence before braving the American defence market.

Before considering an expansion into the US market, Australian companies should be aware of a range of factors that could block or hinder their sales efforts.

Internal US defence market

Defence in the US is a mature industry. There are whole cities and towns that were established to service the US defence industry and have spawned a host of defence suppliers. These companies protect their market and naturally do not want to be usurped by a foreign provider, no matter how friendly.

Defence industries in the US also have strong and entrenched local connections that cherish the “Buy American” brand, with the “made in America” designation carrying as much if not more weight, than the famous green and gold “Australian Made” triangle.

There may, however, be opportunities where a foreign company can provide a component or element that is not readily available in the US. But those opportunities have to be well-researched and proven.

For smaller Australian firms seeking to enter the market, it should be understood that the US contracting system incorporates contract allocation for small and minority owned American businesses, potentially restricting the ability of foreign companies to win some of the smaller contracts to get the start.

Regulatory constraints

The US may be known for its laissez-faire economy, but when it comes to defence contracts, regulation is paramount.

Even for US companies, the regulatory landscape is a significant hurdle, requiring a raft of licences, credentials and registrations. In some instances, three or more licenses, registrations or assessments must be attained to join an approved defence association, which then allows the prospective contractor to view available defence contract opportunities.

Obtaining the relevant credentials will take time, effort, patience and homework. It’s a long road, and one that can be better navigated with an in-market presence on the ground.

Relationships will need to be built to engender trust from US defence authorities and can often fast-track the internal introduction and review of a foreign technology by the desired end-user.

Locational politics

In the US, defence spending is dominated by the two most populous states, California and Texas. But in a large-spending defence budget, all states get a share.

That means US defence expenditure is directed to all corners of the country, and more specifically, to the constituencies of a host of members of the US House of Representatives and the Senate.

Even a small defence contract can be crucial for the employment and economic profile of a town or small city represented by an influential Senator or Congressional representative.

There are few hometown votes in awarding a defence contract to a foreign supplier.

Again, knowing the political sensitivities of the local landscape is crucial for any Australian firm seeking to win a defence contract.

Political independence

Australia’s political system is generally based on party composition, with Liberal, National or Labor MPs usually voting along party lines while most legislation is passed in some form.

In the US, however, the political system is somewhat more fluid, and members of Congress and the Senate can and do often vote contrary to official party positions. Members of Congress also typically fight very hard for federal money to go to their district. In defence industry, government contracts are awarded to a particular congressional district or state on the basis of political horse trading in the legislature.

This is an added complication for foreign companies entering the American market who may not be plugged into the vagaries of the US legislative process.

Taxation

Australians may think that its taxation system is confusing, with its mix of direct and indirect taxes. But to be successful in the US, any Australian defence contractor will need to understand the complexities of the US tax system across three levels of government.

In Australia, income tax is collected only by the federal government. In the US, both federal and state governments may impose income tax, while municipalities may impose a range of local taxes. The US does not have an Australian-style uniform goods and services tax, but in the US, state sales taxes will vary across the country, with some states charging no in-state income or corporate tax, but instead making up for it in terms of property taxes.

To attract industry and create employment, some states may offer low-tax incentives to lure companies. On the reverse side, some companies may be deterred to invest in certain locations by higher-taxing state governments.

Again, potential Australian suppliers to the US will need to do some serious homework on taxation options available in state and municipal jurisdictions.

Perceptions

Another potential barrier to US defence industry penetration may be American perceptions of Australian industry capability.

Many Americans know Australia best for its primary export industries, such as mining and agriculture, as well as its inbound tourism.

Less is known about Australia’s manufacturing and technological capability.

Defence contractors hoping to do business in the US will need to reassure or even educate defence industry chiefs on Australia’s defence supply chain potential.

And a proven military solution or product in Australia or in other parts of the world may not necessarily be the right fit in the competitive US marketplace.

Summary

The recently formed AUKUS partnership demonstrates the trust in which the US holds Australia as a defence ally.

But the agreement does not signify that the US defence market has thrown open its doors to Australia, or UK, defence suppliers.

The US defence market is established and competitive. In some cases, it can be guided by parochialism and political imperatives.

In some defence applications, there may be scope for Australian contractors to supply a niche product.

But no contract will be secured in the US without extensive on-the-ground research, a close examination of domestic political considerations and a thorough appreciation of the regulatory and taxation barriers.

Emily Minson, co-founder, Lunik and Josh Schmidt, business strategy manager at Supashock USA.

Emily Minson is the co-founder and head of the North America division of Lunik, a strategic communication and bipartisan public affairs firm. Emily specialises in providing advice to Australian and international companies on sensitive and potentially contentious commercial transactions and government policies, multi-stakeholder campaigns, and reputation and crisis management counsel. As head of Lunik’s North American division, Emily has strong experience and focus on market entry for Australian companies into the US.

Joshua Schmidt is an internationally awarded innovator, with a strong focus on strategy, relationships and international business. Josh works in the defense industry in North America for Supashock USA. He has a strong understanding of market conditions and compliance, as well as a wealth of relationships and an ever-expanding network within the Defense industry. Josh is a seasoned entrepreneur. He invented, patented and sold a proprietary product globally and brings a strong understanding of innovation, commercialisation and product lifecycle to his design of products to meet end-user requirements. Josh holds an MBA from the University of South Australia, class of 2019.