A Profi le of the Australian Defence Industry Helping align defence industry, defence industry policy, and defence strategic planning November 2004 COMMISSIONED BY: ■ The Australian Industry Group Defence Council; ■ The Australian Industry Defence Network; ■ The Department of Defence; ■ The Department of Foreign Affairs and Trade; ■ The Department of State and Regional Development (NSW); ■ The Department of State Development and Innovation (QLD); ■ The Defence Unit in the Department of Trade and Economic Development (SA); ■ The Department of Innovation, Industry and Regional Development (VIC); ■ The Department of Industry and Resources (WA) © ACIL Tasman Pty Ltd This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Permission for any more extensive reproduction must be obtained from Kelly Milne at ACIL Tasman on (03) 9600 3144. Reliance and Disclaimer The professional analysis and advice in this report has been prepared by ACIL Tasman for the exclusive use of the party or parties to whom it is addressed (the addressee) and for the purposes specified in it. This report is supplied in good faith and reflects the knowledge, expertise and experience of the consultants involved. The report must not be published, quoted or disseminated to any other party without ACIL Tasman’s prior written consent. ACIL Tasman accepts no responsibility whatsoever for any loss occasioned by any person acting or refraining from action as a result of reliance on the report, other than the addressee. In conducting the analysis in this report ACIL Tasman has endeavoured to use what it considers is the best information available at the date of publication, including information supplied by the addressee. Unless stated otherwise, ACIL Tasman does not warrant the accuracy of any forecast or prediction in the report. Although ACIL Tasman exercises reasonable care when making forecasts or predictions, factors in the process, such as future market behaviour, are inherently uncertain and cannot be forecast or predicted reliably. ACIL Tasman shall not be liable in respect of any claim arising out of the failure of a client investment to perform to the advantage of the client or to the advantage of the client to the degree suggested or assumed in any advice or forecast given by ACIL Tasman. ACIL Tasman Pty Ltd ABN 68 102 652 148 Internet www.aciltasman.com.au Melbourne office Brisbane office Perth office Level 6, 224-236 Queen Street Level 15, 127 Creek Street Level 12, 191 St Georges Terrace Melbourne VIC 3000 Brisbane QLD 4000 Perth WA 6000 Telephone (+61 3) 9600 3144 GPO Box 32 PO Box 7035 Facsimile (+61 3) 9600 3155 Brisbane QLD 4001 Cloisters Square Email [email protected] Telephone (+61 7) 3236 3966 Perth WA 6850 Facsimile (+61 7) 3236 3499 Telephone (+61 8) 9485 0300 Email [email protected] Facsimile (+61 8) 9485 0500 Email [email protected] Canberra office 103-105 Northbourne Avenue Darwin office Turner ACT 2612 2/23 Paspaley Place GPO Box 1322 Cullen Bay NT 0820 Sydney office Canberra ACT 2601 GPO Box 1000 PO Box 170 Telephone (+61 2) 6249 8055 Darwin NT 0801 Northbridge NSW 1560 Facsimile (+61 2) 6257 4170 Telephone (+61 8) 8981 2101 Telephone (+61 2) 9958 6644 (+61 2) 6249 7455 Facsimile (+61 8) 8981 2702 Facsimile (+61 2) 8080 8142 Email [email protected] Email [email protected] Email [email protected] For information on this report Please contact: Bob Wylie Telephone (02) 6240 8055 Mobile 0404 822 325 Email [email protected] A Profile of the Australian Defence Industry Foreword This Study of Australian defence industry undertaken by ACIL Tasman examines the role of Australian defence industry in supplying and supporting Australia’s defence capabilities. As ACIL Tasman shows in this Study, private sector enterprises – large and small - play critical roles in the provision and development of Australian defence capabilities. The viability and success of the industry is itself, an important defence capability. Defence is a specialised area that calls for a close partnering relationship between the public and private sectors. It is fitting, therefore, that this Study is the result of a cooperative effort bringing together sponsors from industry and government agencies both at the Federal and State levels. The Study shows the importance of ongoing assessment of, and improvements to, the relationships between the defence industry, government and defence agencies. In particular, the Study identifies a number of areas for Defence authorities and industry to explore possible improvements in contracting arrangements and it also points to the benefits of building better linkages between business and the Defence Science and Technology Organisation (DSTO). The Study confirms the impact on defence industry of the shortage of skills across a range of operational and managerial occupations. Skill shortages are already having widespread effect across industry making this an area of concern. One fundamental area impacting on all areas of the defence industry is that of contracting. Since completing this Study the CEO of the Defence Materiel Organisation (DMO) has indicated to Defence industry a desire to make substantial changes to the template for undertaking major project activity with Defence - ASDEFCON. Those changes are principally aimed at ensuring that contractors meet agreed work schedules so that major capabilities can be acquired on time, on budget, and to the required capability, quality and safety standards. While industry supports that goal, it is keen to ensure that contracting changes do not result in inequitable transfer of risk to industry. For this reason, representatives of the DMO Executive and the National Executive of the Australian Industry Group met in August and September 2004 specifically to discuss the proposed schedule management changes to the ASDEFCON (Strategic Materiel) template. In those meetings, industry expressed its views Foreword xi A Profile of the Australian Defence Industry on how risk could be shared between itself and Defence and how the parties could move towards a more cooperative and open contracting environment while achieving better contracting outcomes for all concerned. This area, like the many raised in the Study, illustrates the importance of close and open dialogue between industry and Defence authorities in seeking to further improve the effectiveness of the role played by industry in maintaining and developing Australian defence capabilities. Paul Salteri Chairman Australian Industry Group Defence Industry Council Foreword xii A Profile of the Australian Defence Industry Contents Glossary vii Foreword xi Executive summary xiii Recommendations xxi 1 Introduction 1 1.1 The Defence Strategic Industry Sector Plans 1 1.2 The Profile and the Sector Plans 2 1.3 The Study 3 1.4 The Profile Structure 3 1.5 Framing The Profile 4 1.5.1 Defining defence industry 4 1.5.2 A Defence capability-based framework 4 1.5.3 Defence strategic planning requirements 5 1.5.4 Communicating Defence strategic planning requirements 6 1.6 Shaping the Study 7 2 The Structure and Performance of the Australian Defence Industry 8 2.1 The Scale of Defence Industry 8 2.2 Function of Defence Industry 9 2.2.1 The service component of Defence business 9 2.3 The Location of Defence Industry 10 2.4 The Defence Business Environment 12 2.4.1 The profitability of the defence industry 12 2.4.2 Sources of finance 15 2.4.3 Defence business constraints 16 2.4.4 Role of government industry programs 18 3 Supply and Support of Defence Capability 20 3.1 Supply and Support of Defence Information Capability 21 3.1.1 The national electronics industry base 22 3.1.2 Electronics software and systems integration 23 3.1.3 Supply and support of current defence information capability 24 3.1.4 Supply and support of the future force 27 3.2 Supply and Support of Navy Ships, Boats and Submarines 29 3.2.1 The shipbuilding and repair industry base 29 3.2.2 Supply and support of maritime capability 30 3.2.3 Supply and support of the future force 33 iii A Profile of the Australian Defence Industry 3.3 Supply and Support of Army Land Transport 35 3.3.1 The land transport industry base 35 3.3.2 Supply and support of future field vehicles 38 3.4 Supply and Support of ADF Munitions 39 3.4.1 The munitions industry base 39 3.4.2 Precision and guided weapons 41 3.4.3 Supply and support of future munitions 42 3.5 Supply and Support of Defence Aviation Capabilities 42 3.5.1 The aerospace industry base 43 3.5.2 Supply and support of future aerospace assets 46 4 Managing Defence Demand 50 4.1 Defence demand management 50 4.2 Managing Defence Project Risk 51 4.2.1 The capability system life cycle 52 4.3 Defence Contracts and the Australian Industry Involvement Program 53 4.3.1 Linking preparedness and industry support 54 4.3.2 The Australian Industry Involvement Program 54 4.3.3 Defence industry flexibility and the cost of doing defence business 57 4.4 Managing Competition to Develop Industry 59 4.5 Modifying the Project-By-Project Business Model and Defence- Industry Partnering 60 4.5.1 Evolutionary acquisition and spiral development 62 4.6 Coordinating demand management 64 5 Defence Industry Enablers 66 5.1 Exports by Defence-Related Industries 66 5.1.1 Exports as a defence industry enabler 66 5.1.2 The pattern of Australian defence-related