Chapter 5 - SME suppliers
5.1
Modern naval ships are complex systems that rely on a range of sub
contractors specialising in particular aspects of naval shipbuilding to deliver
the required capability on time and on budget. Thus, during a major naval
shipbuilding project a significant part of the work is undertaken by a network of
second and third level suppliers and subcontractors. As chapter 4 noted, the
existence of an efficient and effective supply chain is critical to the naval
shipbuilding and repair sector. An important consideration in determining the
capability of Australia to build naval ships is the role of the many smaller
companies that support the industry. These small to medium size enterprises
(SMEs) provide specialist services and bring significant technology, innovation
and skills to the maritime industry, particularly during upgrades and
through-life support programs'.[1]
This chapter looks at the capability and reliability of the supplier base in Australia.
It seeks to identify the strengths and weaknesses in the network of SMEs
servicing the industry.
Supply network in Australia
5.2
While shipyards are the high profile hubs of shipbuilding activity, they
are supported by a substantial industrial base spread throughout the country. Particularly
with modular construction, firms located at a distance from the shipyard are
able to participate in a ship build providing a range of materials, equipment,
and ships' parts and components. One SME told the committee that the country's
shipbuilding capability is only:
...possible by leveraging the capabilities of shipbuilding primes
that will have overall platform build, enhancement and support responsibilities
with the range of skills provided by established local enterprises that will
provide the more detailed systems support and linkages to overseas equipment
suppliers.[2]
5.3
Indeed, the supply chain is estimated to provide between 60 and 70 per
cent of the net value of any new ship, naval or merchant.[3]
Mr Michael Gallagher, Nautonix, stated that this figure of 70 per cent by
value of a project that is expected to be outsourced by the prime can
'invariably be higher'. He stated:
In fact, if I recollect correctly, the submarine program
achieved 77 or 78 per cent. I would like to think as we go through the Air
Warfare Destroyer Program, given the way they have approached that task and
encouraged Australian industry to get on board early, that potentially we will
see a much higher percentage of Australian industry participation and
involvement, as we have done with our electronic charting systems.[4]
5.4
The Government of Victoria also highlighted the extent to which a
shipbuilder relies on a wide and diverse network of local suppliers to
construct a naval vessel:
Modern shipbuilding now rarely involves construction at a single
site; rather, it involves a wide network of sites for construction of ship
modules, which can include up to 80 per cent of fit-outs and then assembly of
modules at a launch site. Consideration of a sustainable industry must
therefore take into account a viable industry in the enabling sector, which
includes the construction of components, fit-out components and manufacture of
inputs. A successful industry in this regard requires a strong and diverse
industry base which spans more than just defence manufacturing and access to a
deep skills market. It is important to note that none of these activities need
necessarily be located near to the final assembly of ships.[5]
5.5
In Australia, suppliers tend to have niche capabilities and their
contribution ranges from 'quite small nuts and bolts to systems and
electronics'.[6]
There are well over 1000 small-to-medium domestic enterprises and a number of
sophisticated systems houses that support Australia's naval shipbuilding
projects. Some are subsidiaries of international companies. Indeed, the
Australian Industry Group Defence Council spoke in glowing terms about the
depth of Australia's shipbuilding supply chain especially since the Collins class
submarine. Mr John O'Callaghan, Australian Industry Group Defence Council, said:
...we now have a huge reservoir of small to medium sized
enterprises in this country at the forefront of activity that are not only
capable of being involved in ship construction activity but also have the wit
to be involved in other things related to it. There are certain systems that
are involved in ship construction which are very similar to aircraft activity.
Various SMEs move between the two from time to time. In the main that is not
the case, but we now have a reservoir of thousands of SMEs in this country
which we never had before, capable of doing all that advanced integration systems
activity which the JSFs and warfare destroyers of the world put before us.[7]
5.6
The Chamber of Commerce and Industry was in no doubt that Australian
companies are 'more than capable' of building naval vessels. Observing that Australia
could build on existing capability gained from projects such as the ANZAC and
minehunters, Gibbs & Cox Australia Pty Ltd maintained that:
...now is the right environment to grow capability in Australia
and focus on the positive side of it.[8]
5.7
Suppliers also assume a key part in supporting the vessel through its
life. The Government of Western Australia noted that:
In supporting the ANZAC ships home ported in Western Australia,
Tenix Western Australia is able to tap into a comprehensive supply chain in
Australia and New Zealand that was already conditioned by extensive involvement
in the construction of the ANZAC ships. The availability of a tested supply
chain greatly reduced the cost, schedule and technical risk inherent in local support
of the ANZAC ships. Specifically, under the ANZAC Ship build contract, Tenix contracted
directly with original equipment manufacturers (OEM) for provision of such
major items as, for example, propulsion engines. This enabled Tenix to extend
these relationships in the provision of in-service support of the ANZACS,
either directly by the OEM or by establishing dedicated local agents for the
support of specific items.[9]
5.8
The 2000 Tasman Asia Pacific report on the ANZAC ship project estimated
that the project called on the resources of over 1300 companies in Australia
and New Zealand which accounted for over 60 per cent of the subcontractor
companies.[10]
More recently, Mr Miller advised the committee that:
The current contract value of our largest program, the Anzac
ship project, is about $A7.2 billion. Of that amount, over 80 per cent was
subcontracted to about 3,000 suppliers in Australia and New Zealand. Stated
differently, almost $5.6 billion flowed into small to medium enterprises in Australia
and New Zealand as a result of the government’s decision to construct those
ships in Williamstown. It should further be noted that many of those businesses
are now exporters themselves.[11]
5.9
Although the supplier base may extend across the country, industries
tend to congregate in the vicinity of the lead shipyard. For example, the 2005
Allen Consulting Group study noted that a substantial chain of supplier
companies was established in Victoria during the ANZAC project. The Victorian
government recorded that there were about 600 firms in Victoria as part of 1300
that were part of the supply chain assisting the Anzac frigate project.[12]
It noted that of the 416 suppliers on its register (February 2005), 383 were
based in Greater Melbourne, many in proximity to Williamstown, with 10 located
in South Australia. It stated:
While it is difficult to quantify, Tenix at Williamstown also
derives some benefit from the existence of a broader cluster of companies with
related skills in the Williamstown/Port Melbourne/Fishermans Bend area relating
to the automotive, aerospace and defence research areas. Tenix is able to draw
on this common infrastructure and skill base. The presence at Fishermans Bend
of the DSTO’s naval platforms researchers also is of considerable benefit for
Tenix at Williamstown.[13]
5.10
Similarly, the Garden Island shipyard enjoys support from a whole range
of SMEs spread through Western Sydney, Newcastle and some in the Illawarra that
feed into and subcontract into projects undertaken by ADI.[14]
The network is well established. The 2002 Tasman Economics report noted that
nearly 85 per cent of businesses supplying the Minehunter project were located
in New South Wales.[15]
Former Director of Naval Sales and Marketing, Mr Geoff Smith, told the committee
that, for the Minehunter project, ADI brought together a skilled workforce of
some 600 ADI people with more than 2500 subcontractors and SME suppliers in the
Newcastle area.[16]
5.11
Indeed, the Hunter Economic Development Corporation drew attention to Newcastle
which it argued 'has a strong heritage and demonstrated capability for the
shipbuilding and repair sector with over 300 vessels built and with many
hundreds more vessels repaired and maintained in the region. It concluded:
The region has credentials in managing defence projects, and
undertaking technically challenging projects on time and to budget.[17]
5.12
Chapter 2 noted the growth in centres of excellence. Both the South
Australian and Western Australian governments are actively encouraging the growth
of an industrial complex adjacent to their state's key shipbuilding facilities.
They are investing in developing centres of excellence, which include large
technology parks, designed around a common user facility. These are intended to
attract a range of smaller companies to the site in order to create a high
technology precinct. For example, Mr Michael Deeks, Nautronix Ltd, explained:
...the West Australian government is trying to support local
industry to win a significant portion of the air warfare destroyer modules.
Rough figures: I think there is going to be something like 28 modules per ship
for the air warfare destroyers of which about seven or eight, I think, are
going to be constructed in South Australia. We are expecting and hoping that
local industry will win up to half of the remaining modules or more, perhaps,
to be constructed locally. We are trying to set up infrastructure to allow them
to do that. We wish to see the amphibious ships consolidated and assembled here
in Western Australia. We expect that some of the modules will be constructed...We
have done quite a significant amount of economic modelling to support the case
to government to spend the money they are spending on the current
infrastructure at around $80-odd million. That stands on its own two feet
regardless of whether we win the amphibious ships or not because the state is
looking for economic development, employment, growth et cetera and also as an
offset to other industry sectors such as the mining and offshore oil and gas sector.[18]
5.13
It should be noted that these industrial estates are not intended solely
for shipbuilding related activities. A more detailed description of these
centres of excellence is given in chapter 6.
5.14
It is beyond the scope of this inquiry to examine the potential of Australian
suppliers to meet all of the many and various needs of a naval shipbuilder. A
number of witnesses, however, used steel fabrication to demonstrate the
capability of Australia's supply chain and its capacity to meet Navy's demands.
Steel fabrication—an example of Australia's
capability
5.15
The Navy's shipbuilding program will be a significant test for Australia's
steel fabrication and shipbuilding capability. The Queensland government
believed that Australian suppliers could meet that challenge. It stated:
Queensland's module fabrication capabilities are considered
highly competitive for the current naval shipbuilding program. The State's
heavy industry has the capacity and track record to cope with an increased
share of the steel fabrication activity. The continued developments targeting
the common user infrastructure, engineering capabilities and skilled trades
will further strengthen the case for retaining this work within Australia.[19]
5.16
To support the contention that Australia has the capability to satisfy
the demands created by defence's capability plan, the Western Australian
minister, the Hon. Francis Logan, cited the potential residing in his state. He
noted the massive support facilities that currently exist for all the other
sectors of the economy that work with very complex areas including nickel-processing
facilities in the goldfields, gold-processing facilities and LNG-processing
facilities. He told the committee:
The types of steelwork in these facilities, from exotic steels
through to normal, mild steels, are second to none in the world. When
specialist welding is required for any of these facilities, whether it is here
in Australia or around the world, they come to WA to get the welders because
they are the ones who can weld titanium and who can weld the various exotic
metals that are required. The ships of the future will include those types of
materials.[20]
5.17
The Australian Association for Maritime Affairs Incorporated noted that
Australian steel makers have no match in the world as demonstrated in the
Navy's submarine project. It stated:
The steels used in these vessels were required to have unique
qualities and proved to be better than anything then available in the world.
Warships built in Australia must be fabricated from the best steel and fortunately
Australian steels have been shown to be equal if not better than steels
manufactured overseas. This is more than a question of economics: it is an important
factor in relation to 'shelf life' of Australian warships which can be as long
as 40 years.[21]
5.18
Steel making provides one example of the potential that exists in Australia's
supply chain to support a domestic naval shipbuilding industry.
Tasmania and its supply chain
5.19
As noted earlier, an established chain of local firms cluster around the
shipyards at Williamstown, Victoria and Garden Island, New South Wales. They
have a proven record of meeting the needs of the industry. The main Western
Australian and South Australian shipyards also have local supplier networks and
with government assistance are developing high technology centres of excellence
to attract local business to their locality.
5.20
The construction of ships using modules means that increasingly firms
located at a distance from the shipyard can contribute to a shipbuilding
project. To explore further the potential and capacity of Australia's supply
chain, the committee considers the sometimes forgotten and probably underrated
Tasmanian companies. Unlike the larger states, Tasmania does not have the
advantage of a prime naval shipbuilder operating in the state.
5.21
Tasmanian industries acknowledged that their state was not in the same
league as Victoria and New South Wales with their established shipyards and Western
Australia and South Australia who can boast of their impressive manufacturing
and engineering precincts which surround a state-of-the-art common user
facility. Nonetheless, they argued that local Tasmanian firms have enormous scope
to support the larger shipyards.
5.22
The Tasmanian government was confident that Australian industry has both
the capacity and capability to build the AWD and LHD in Australia to the
desired schedule. It also acknowledged that the two programs would stretch Australia's
resources but was of the view that the success of the projects would depend on
drawing on Australian industry capability from all over the country and
additional capability from non-traditional ship fabricators. With regard to Tasmania,
the government submitted that it together with Tasmanian industry believed that
the State has the capability to produce modules for both projects and is ready
to participate. It informed the committee that Tasmania has about 1800 skilled
personnel likely to be available to manufacture component parts for the AWDs
and LHDs:
This skilled workforce is stable and focussed; residing in Tasmania's
regional centres and with a proven track record of meeting industry schedules
during heavy industrial shutdowns; meeting shipbuilding delivery deadlines and
providing programmed maintenance to large mineral and food processors. Utilisation
of this type of capability throughout regional Australia would ease pressure on
prime contractors to deliver on these key defence projects.[22]
5.23
Mr Rhys Edwards, Deputy Secretary of the Industry Development Division
in the Tasmanian Department of Economic Development, told the committee that Tasmania
is not seeking to become 'a centre for naval construction'. It approached Australia's
naval shipbuilding industry from a different perspective:
I think the Tasmanian government has not been, and probably is
unlikely to be, in a position to invest tens of millions of dollars in
common-user heavy infrastructure such as you have seen in some of the other
states. Indeed, as I mentioned, our ambition does not lie in being a centre for
naval construction in that way, in being the shipyard where it all gets put
together. But I think the modularised methodology of modern shipbuilding means
we are ideally placed, with some of our firms, to be providing substantial
components. We do have...a big heavy engineering sector. I think the future lies
in developing those firms to be able to be part of that. That is about getting
to the level where they are comfortable as the tier 2 and tier 3 contractors in
a relationship with a prime contractor and are seen as being able to provide
quality work on time, at a good price—all the things that come out of the
requirements of Defence and other customers. [23]
5.24
Mr Christopher Edwards, Chairman of the Tasmanian Marine Network, gave
an impressive account of the achievements of companies in Tasmania that are in
some cases leading the world in innovation.[24]
He stated that:
...Tasmania’s leading edge marine industry makes a considerable
and growing contribution to the Tasmanian economy...Tasmania’s marine industry
relies on quality and technological innovation, and this is becoming more and
more important as the years go by. If Tasmania is small in size, we in the
marine industry are not slow to take up new challenges. What is more, we are
more than ready to use our combined strengths to the advantage of all, as is
evidenced by the success of the Tasmanian maritime network—taking the world by
sea.[25]
5.25
A number of companies have formed the Tasmania Maritime Network (TMN) made
up of approximately 15 highly skilled exporters and manufacturing companies with
expertise in marine manufacture and fit out, such as Incat Australia Pty Ltd.
Described as 'a mutual beneficial society', they have banded together to help
promote Tasmania's maritime industry. In total, it has a turnover of about $250
million to $300 million a year.[26]
Noting that shipbuilding is a cyclic industry, Mr Edwards stated that employee
wise at the moment the TMN 'would be around 1,200 to 1,500, depending on what
ship builds are going on'.[27]
5.26
The network is looking to provide completed module sections which
provide the steel fabrication as well as the fit-out of mechanical, electrical
and other componentry. The network would be able 'to provide not only the
fabrication skills but also many other trades and get as much work into that as
we possibly can'.[28]
Mr Edwards explained:
...we are all fairly high technology oriented in what we do, even
from our ship provedoring to, in our case, antenna manufacturing. We tend to
all be at the leading edge. Unfortunately, in Australia, we do not use any of
that leading-edge stuff very much. We tend to buy overseas. That is a real
shame, I think, but that is the way of things. We often find with our antennas
that we will be selling them to the Malaysians or the US before Australia even
looks at them. It is not always the case, but it often is the case.[29]
5.27
The TMN also forms part of a larger strategic working group of Tasmanian
organisations endeavouring to maximise their potential to capture a share of
work generated by the naval shipbuilding industry. The organisations are
particularly keen to contribute to the LHD project.[30]
According to the Government of Tasmania:
Tasmania has an active AIDN (Australian Industry Defence
Network) membership. The membership includes the majority of companies from the
TMN and other leading companies with defence industry capability as well as the
Australian Maritime College. In addition to these capabilities a number of
niche manufacturers are able to provide products/services directly to prime
contractors or tiered suppliers.[31]
5.28
The Tasmanian government has offered to provide logistical support to
this consortium. Haywards Group and North West Bay ships Pty Ltd are the lead
contractors.[32]
In addition, a number of specialist and related Tasmanian companies have
indicated their support for the project. These include all significant
Tasmanian heavy steel fabrication companies, duplex stainless foundries, CNC
machine shops and toolmakers and members of the Tasmania Maritime Network (TMN)
as well as precision engineering specialists, technical engineering service
providers, composite manufacturers, electrical and air conditioning
installation experts.[33]
5.29
A working party for this group has investigated and identified suitable
sites for final fabrication and shipping from Tasmania. The Tasmanian government
stated that the 'newly formed Tasmanian Ports Corporation, arising from the
recent amalgamation of the three major ports, will be closely associated with
any Tasmanian bid'.[34]
5.30
In summary, Mr Christopher Edwards believed that Tasmania has the skills
and capacity to fabricate for AWDs and LHDs concurrently.[35]
He stated:
...we have a very long tradition of shipbuilding in the state, and
that is retained here. One of our big advantages in Tasmania has always been
that we have a very stable workforce. If there is a bit of a downturn, for
instance, in the shipbuilding industry, they are quite happy to move to the
building industry, and then come back again.[36]
5.31
The Tasmanian government explained that there is significant interest in
this project and reiterated that Tasmanian industry clearly has the capability
to produce a number of modules for the project.[37]
Committee view
5.32
Australia has an extensive and widespread chain of suppliers who have
supported, and are looking forward to continuing their involvement in Australia's
shipbuilding industry. The industrial base in Tasmania, although small and
remote from the major shipbuilding centres, is an example of the scope and
extent of the nation's capability, notwithstanding the small ship market it
supplies. The modular construction of ships means that increasingly more firms
or clusters of companies in regional areas or in states removed from the
assembly site can participate in the shipbuilding projects.
5.33
There is no doubting the enthusiasm of the states and their local
industries to participate in the AWD and LHD projects and their conviction that
Australia has the capability to meet the demands created by the projects.
Before further considering whether Australia's supply network has the capacity
to satisfy the requirements of Navy's shipbuilding program, the committee
examines in greater detail the capability of locally based companies and the
contribution they make to the shipbuilding industry in Australia.
SMEs and their contribution to the industry
5.34
The role of SMEs in the local supply chain is integral to the
construction of a ship and ranges across all aspects of a ship's build. They
are in a unique position to add considerable value to the goods and services
they provide to the naval shipbuilding industry. Nautronix told the committee
that to get the systems set up when and where the shipbuilder wants them,
Australia needs a raft of companies and organisations to form the 'backbone of
that capability—the nuts and bolts suppliers through to...the acoustic
suppliers—the whole nine yards'.[38]
Value adding
5.35
The contribution of SMEs, however, does not stop with the delivery of
goods or services to a particular project. Defence through the prime
shipbuilder is looking for the capability to meet its requirements including
quality as well as quantity, the long-term reliability of the supplier, the
cost effectiveness of supplying the product and the degree of dependence on any
one major supplier.
5.36
Some of these 2nd and 3rd tier companies are able
to provide services involving complex naval systems. Gibbs & Cox submitted
that:
Currently there exists an established industrial base in Australia
experienced in the detail design and construction of surface combatants. Much
of this base resides within the Australian shipbuilders, small, medium and
large independent design firms, and Commonwealth design and research
authorities. This base has recent experience in the design of the Collins Class
submarines, the ANZAC Class frigates and the modernization of the Adelaide
Class frigates.[39]
5.37
Mr Derek Woolner, who is researching the Collins class submarine project,
cited the world class innovative work of some companies that were involved in
the submarine project. For example, he informed the committee that:
The anechoic tiles for the submarine were made by a company in
Mordialloc that was close to the Maribyrnong materials research laboratory that
did the research work. They got contracts to provide rubber components that we
use to isolate the decks within the modules of the submarine. Not only did they
do that but, once they got going, they redesigned those components and made
them more effective. A similar thing happened with the building of the hull
modules that were done around the country—some in Newcastle and some elsewhere.[40]
5.38
CEA Technologies is a major Australian company of 220 employees that
specialises in the design, development and manufacture of radar and
communications systems. Its success also demonstrates the ability of Australian
companies to develop expertise in a specialised field and to be highly
competitive on the global stage in a niche area. The growth of the company also
highlights the role that Defence contracts can have in assisting fledgling enterprises
in Australia and the importance for such firms to form strategic alliances with
overseas companies.
5.39
An initial contract of about three months with Defence and worth
approximately $60 000 gave CEA Technologies the necessary foothold to
build a thriving business with export potential. Mr David Gaul, President, CEA
Technologies, explained the company's incremental increases that were based on
a continuous stream of Defence contracts:
It is just a step up each time—bigger, more difficult, a more
stretching project— and as long as we deliver, we get the next one. You keep
moving up the chain, as it were, to where we are now with the AUSPAR
development, which is a high-powered active phased array missile system that
both the Australian and US governments are funding. [41]
5.40
The company took the opportunities offered by Defence and built on them
gaining global recognition on the way. Its first export, which was an antenna
developed for the Collins submarine, was arranged through Argo Systems in the U.S.
to a couple of customers. CEA Technologies have formed a partnership with Saab
to take the system for the ANZAC frigate ASMD upgrade to sell to European
navies. Northrop Grumman has also become a minority shareholder and is going to
open up the U.S. markets for the same product. The company has ambitions to
expand into the Canadian and UK markets. Mr Gaul believed that these
relationships are critical to enable the company to move forward. He was
confident that other areas of Australian industries could emulate their
example:
To have a global reach, you must have global partners, because
we do not have a global company in Australia, apart from BHP. Getting the right
partners becomes an essential element. It was a very deliberate process that we
went through to get Northrop Grumman on board. We first of all got two big brothers—the
US government and the Australian government—and we got IP agreements. So they
were standing next to us. Then we went out and selected our gorilla, basically,
and we went through a very vigorous process to do so. Saab was also considered
as part of that process, but obviously the American market is much more in our
foci than is the European market. You can understand why. Saab are very
comfortable with the outcome of where we are at now, and so we have two
partners moving forward.[42]
5.41
Mr Gaul stressed the point, however, that an SME must be in a position
to attract the interests of larger internal companies and that CEA Technologies
could not have done so without the 'involvement of the U.S. and Australian
governments in IP agreements and things like that'.[43]
5.42
Natronix Ltd, a large SME, provides another example of an Australian
company making a valuable contribution to Australia's shipbuilding industry. It
has grown significantly from its origins in Fremantle in the mid-1980s to a
publicly listed Australian company with 'a strong global capability in key
acoustic technologies'. It was acquired by a leading Oil and Gas company in
2002 and its headquarters transferred to Aberdeen, Scotland. The company
continues to operate from four strategic centres in Australia, the UK and U.S.
The largest of the four Nautronix companies is located in Australia which
remains 'the central focus for the conduct of research and development as well
as Defence related systems and solutions'.[44]
5.43
In Australia, Nautronix currently employs over 85 people with key
specialisations centred on software and systems engineering with a primary interest
in acoustic technologies. Increasingly it is moving towards military systems
integration. It explained:
From various external assessments, the Company has been identified
as a large SME being ranked in the top 5 Australian SME for the last 2 years.
Nautronix is often recognised for 'fighting above its weight' a fact that is
evidenced by the investment of over $A20 million in Research & Development
over the last 10 years with the majority of those funds being spent in Australia.[45]
5.44
Another important consideration is the ready availability of local SMEs to
provide a product or service in Australia. The Western Australian government
linked navy preparedness and by extension the credibility of Australia's
maritime strategy to a dependency on local industry support.[46]
It used the Anzac ship program to demonstrate how local industry involvement in
the construction of the AWDs 'will help establish and condition the supply chain
required to maintain an acceptable degree of preparedness once they enter
service'.[47]
5.45
The potential that resides in Australian SMEs not only to deliver a particular
good or service but to add value to the shipbuilding industry is beyond
dispute. Even so, a shipbuilder requires the skills, knowledge, experience and
capabilities covering every facet of a ship build. As noted in chapter 2, even
the U.S. is not totally self-sufficient in the construction of its warships and
must look to overseas sources to supply certain goods or services.[48]
The following section examines how Australia's shipbuilding industry goes about
acquiring all it needs for the successful construction of a modern naval ship.
Gaps in capability
5.46
A number of submitters referred to Australia having niche capabilities
in shipbuilding but not a capability that encompasses all aspects of ship
design and construction.[49]
The Tasmanian government said:
In some of the more complex systems engineering, software
systems and communications and things, we just do not have those types of
companies here, by and large. Indeed, when you look at the amount of off-the-shelf
systems that are purchased overseas and then integrated in a vessel, you will
see that there is quite a high proportion of that as well. So the Australian
capability is not necessarily there either. [50]
5.47
Mr Michael Gallagher, CEO, Nautronix, was of the view that there are
certain areas where Australia 'does not have the expertise to bring
capabilities to the table'. He cited large turbine type engines.[51]
Along similar lines, Saab Systems Pty Ltd also noted that there would be times
when the services of foreign systems developers were required to meet the level
of capability sought or the specific technologies needed. It cited the combat
system in the AWDs.[52]
5.48
ThyssenKrupp Marine Systems, a wholly owned subsidiary of Blohm+Voss, also
recognised the limitations of Australia's shipbuilding industry. It questioned the
capability of Australian firms 'to perform the full spectrum of design work
involved in the development of large, complex warships and submarines without
the direct support of well-established and experienced overseas designers'.[53]
For example Mr Peter Hatcher, CEO ThyssenKrupp Marine Systems Australia
Pty Ltd, noted that 'there is no way in the foreseeable future that I can see
Australia ever becoming a developer for air-independent propulsion systems...that
sort of technology is always going to need to be brought in'.[54]
5.49
Raytheon Australia, cited the development and production of highly complex
systems such as a combat management system as an activity where Australia lacked
capability:
Due to the size and nature of the Australian defence market the
majority of these systems will come from overseas. Although there are some
sensors and control systems developed and made in Australia it is most unlikely
that a world class naval combat management system would be developed here in
the future. There is simply not the expertise within the local defence industry
to produce a system that could equal those produced in the United States or Europe.
[55]
5.50
In such cases, Australian shipbuilders have no option but to look to
outside sources to fill the void left vacant by Australian companies.
International companies filling a void
5.51
Large projects undertaken in Australia have the potential to attract
international companies to Australian shores. By locating in Australia they may
fill a capability gap and indeed from an initial commitment go on to develop an
indigenous skill and knowledge base in this capability and to establish an
Australian business. Raytheon Australia noted that:
Systems engineering and systems integration are areas where
local subsidiaries of large international companies make a substantial
contribution to raising the level of knowledge and improving the techniques,
processes and tools utilised through the transfer of best practice from their
parent companies.[56]
5.52
A 2005 report by the Allen Consulting Group identified a number of overseas
companies with major systems capability that have a presence in Australia
including BAE systems Australia, Honeywell, Lockheed Martin, Raytheon Australia
and Saab systems.[57]
It stated that:
The ability of these firms to build and maintain effective
company networks and attract skilled personnel will be a factor in the success
of the forward program of naval procurement.[58]
5.53
The committee took evidence from a number of Australian based companies
whose origins or parent company is overseas. They have demonstrated their
belief in the viability of an Australian naval shipbuilding industry and a
commitment to employ and train Australians. For example, Gibbs & Cox
indicated its confidence in Australia's future naval shipbuilding by recently
establishing a wholly owned subsidiary, Gibbs & Cox Australia Pty Ltd (GCA)
in Adelaide. It saw scope for further development of the Australian Ship Design
and Build sector in meeting the demands of Defence's future naval acquisition program.
It stated:
We have supported various Commonwealth surface combatant
shipbuilding and modernization programs for over 30 years. Our response to the Committee’s
inquiry reflects our expertise, our experience in Australia and, in particular,
our plans for supporting the AWD Project and future shipbuild and modification
programs.[59]
5.54
Raytheon Australia, however, pointed to the importance of ensuring that
overseas companies contribute to the development of Australia's industrial
base. It noted:
...simply contracting the work to an overseas company, or hiring
overseas workers without ensuring the transfer of knowledge to local people,
results in little or no increase in Australian industrial capability.[60]
5.55
Without doubt the Australian subsidiaries of large overseas companies
are working side by side with local firms to provide the shipbuilding industry
with an extensive, reliable and capable network of enterprises supporting the
construction of naval ships. As noted by Raytheon Australia, their role should
extend beyond providing goods or services to participating actively in the
growth and development of the industrial base.
Overseas companies—fostering local industry
5.56
It should be noted that overseas companies operating in Australia also
rely on the local supply chain to compensate for shortfalls in their own capability.
They actively search for, identify and engage SMEs that have the capability they
want. Raytheon advised the committee that it has about 30 SMEs, all Australian
companies, working for it in the capability area.[61]
5.57
Mr David Bonner, Weir Strachan and Henshaw Australia, informed the
committee that the company, established in Australia in 1988, initially
seconded staff from Bristol to start the office but 'by a constant process of
recruitment and business growth in Australia the business is now operated by an
experienced local work force'.[62]
5.58
The Anzac ship project gave the Saab company in Australia the foundation
on which it has broadened its activities throughout defence, leading to $1.1
billion of business. The company employs 300 staff involved in successful
operations in the domestic and export sphere.[63]
It sees itself as one of the fledgling companies that was given a kick start by
local construction. Now in its 16th year of operation and employing
a large workforce, it believes that it is making a significant contribution to
the Australian economy.[64]
5.59
Raytheon, the fourth largest defence company in the United States, is another
overseas company employing significant numbers of Australians in the
shipbuilding industry. It has had a presence in Australia since the mid-1950s
and has been a major supplier of weapons, sensors, command, control and
communications systems to the ADF.[65]
As a result of the government’s Defence and Industry Strategic Policy
Statement, Raytheon Company decided in 1998 to invest further in Australia and
establish a local capability. Since then, Raytheon Australia, a wholly owned
subsidiary of Raytheon Company, has grown to a workforce of over 1100, with
operations in all mainland States and Territories. It had an annual turnover
for indigenous business (not including product sales from the U.S.) of $390
million in 2005.[66]
The company's core business in Australia is Mission Systems Integration, which it
is in the process of expanding into Mission Support.[67]
Overseas companies—technology
transfer and indigenous innovation
5.60
Companies such as Weir Strachan and Henshaw, Saab systems Pty Ltd, Gibbs
& Cox Australia and Raytheon Australia not only create employment
opportunities in Australia but have helped raise the level of capability of
Australian employees, encouraged technology transfer and attracted further
investment in technology development. These companies, according to Saab 'go on
to sustain the technology providing a world class service and Australian
oriented support for Australian military forces and spin-offs over civil and
dual use technologies'.[68]
They also broaden the industrial base and in so doing enrich the industry.[69]
5.61
The ability of these companies to reach back and tap resources from the
parent company adds to the capability of those employed in Australia and
assists in the transfer of technology.[70]
Saab Systems Pty Ltd noted that 'Many successful companies have continued to
work in Australia providing an ongoing conduit for global technology into Australia
and giving Australians the experience that hones world-class skills. In many
cases the companies are stand alone enterprises'.[71]
As explained by Weir Strachan and Henshaw:
We are an autonomous company, and part of our strategy is to
become more autonomous. Because of that we are expanding our engineering
activities here. We are building new facilities and moving to larger
facilities. In that respect we are autonomous, but we do rely on our company in
the UK to provide us, when necessary, with support. As they are an international
defence business, they supply us with a lot of solutions. Quite often they are required
to develop solutions on submarine systems by the MoD. They pay for all the development
and are able to offer a proven solution here in Australia. The relationship we
have is that they are still our technical counsel. In our transition to our own
design authority status here, we have a couple of years to go along that road,
so we rely on them for that technical counsel and technical oversight and also
design data for systems they operate worldwide.[72]
5.62
The benefits of this transfer of technology and close exchange of
information are substantial. Again, Weir Strachan and Henshaw demonstrated the
advantages to this collaborative approach:
One of the things we are looking at is reciprocal working.
Because we operate in two different time zones, it is actually quite useful at
times to have them work on project problems which crop up in the afternoon, and
sometimes we can have an answer in the morning and vice versa. We in Australia
are not yet at the stage to be able to offer a lot of technical assistance to
the Spanish submarine project. However, part of our development is that an exchange
process has been set up where we are going to have engineers from Australia
work in the UK, and possibly in Spain, and engineers from the UK working in Australia.[73]
5.63
According to Raytheon, its success and growth in Australia has been the
ability and willingness of its parent company to strengthen the capability of
its local subsidiary by transferring technology, knowledge, skills, and
processes.[74]
Reach Back has strengthened the knowledge and skill base
of the Raytheon workforce in Australia and effectively extended the capability
available to the Australian defence customer to that of Raytheon Company
overall.[75]
It also works in reverse with the
parent company benefiting from advances made in Australia. For example,
Raytheon Australia is now the company’s centre of expertise for integrating
combat systems into conventional submarines and has developed an innovative way
of interfacing United States-designed combat systems to existing sensors in
conventional submarines.[76]
5.64
Raytheon has expertise in the area of combat systems and stated that it
was working with DSTO and others, such as the University of Melbourne, who have
expertise in that area. Dr Terrence Stevenson, Chief Technology Officer for
Raytheon Australia, added 'so there are areas...where we can add our
expertise—and, if we are good at a particular area, we can enhance that
system'.[77]
5.65
Mr Gallagher, Nautronix, explained how the work of his company in electronic
charting systems has enriched Australia's industrial base:
We have brought that knowledge and technology to Australia. It
becomes more than just a representative role; it becomes part of that
Australian industry base. As I go down the track and achieve accreditation by
the IMO as a certified place of production for these systems, I am no longer
just a representative. We now have a workforce that is building, supporting and
upgrading that capability in Australia with a significantly reduced reliance on
the overseas supplier.[78]
5.66
The gaps may not only occur in technology but in special skills
required. In this regard, companies are able to second or recruit specialists
from their overseas company.[79]
Committee view
5.67
Clearly, in some specialised areas involving complex systems, Australia
may have to seek overseas assistance to augment identified deficiencies. In
many of these cases, overseas companies have established subsidiaries in Australia
that have gone on to become valuable participants in the country's shipbuilding
industry. Without doubt, many are contributing to a vibrant and innovative
naval shipbuilding industry offering employment opportunities and driving
advances in science and technology. The committee underlines the need for the
government to ensure that Australia takes full advantage of their presence in Australia,
especially in the area of technology transfer.
5.68
For highly complex systems or specialised services, Australia may have
to turn to overseas based companies.
Overseas companies meeting special requirements
5.69
Australian companies do not stand alone or unassisted in determining and
achieving the capability needed to satisfy Navy's demands. ASC told the
committee that in preparing for the AWD contract, it accepted that it was not
the world's best builder of air warfare destroyers so it approached Bath Iron
Works which was deemed by ASC to be the best. Mr Tunny explained:
We commissioned Bath Iron Works to do a study on us, to tell us
in as unflattering detail as they desired, how imperfect we were and what they
believed we needed to do to rectify that circumstance. So we got that report.
We took on board all of their observations and recommendations. We would put in
place either actions or planned actions. In the thousands of pages in which we
responded to the government, the DMO and its expansive evaluation team which
drew on shipbuilding consultants from around the world, we convinced them that
we had put in place the ability to deliver the air warfare destroyers.[80]
5.70
The purchase of Aegis as the core combat system for the AWDs is another
example of Defence having to rely on the expertise and experience of an
overseas company to provide a capability that Australian companies could not.[81]
Lockheed Martin will supply the system and services to the U.S. Navy for
transfer to Australia. According to Defence, Aegis has been proven in service
with the U.S. Navy across a range of operations and has been regularly upgraded
and improved to meet the changing requirements of naval operations. It
explained:
The AWDs will be fitted with the latest open architecture
version of AEGIS which will provide the RAN with the opportunity to upgrade the
system over coming decades and benefit from the fact that there will be around
100 AEGIS equipped warships operating globally by the time the AWDs enter
service.[82]
5.71
The purchase of Aegis and its critical role into the future as the core
combat system for the AWDs underscores how important it is for Defence to
maintain and effectively manage a sound and mutually beneficial business and
professional relationship with Lockheed Martin, and Raytheon Australia, the combat
systems integrator. The difficulties for Defence and the Australian government
in ensuring that such alliances run smoothly and that Australia's interests are
fully protected is considered in Part IV of the report.
5.72
Australia is not alone in its reliance on overseas companies to assist
in certain aspects of a ship's construction. As noted in chapter 2, even the U.S.
'may struggle to retain a wholly independent national capability in all areas
of defence'.[83]
Conclusion
5.73
Clearly the success of a naval shipbuilding and repair programme relies
heavily on the existence of an extensive chain of reliable, efficient and
skilled subcontractors. The committee has no doubt that SMEs in Australia have
the skills, knowledge, experience and drive to provide a solid base upon which
to build Australia's naval shipbuilding program. Some are at the cutting edge
of world class developments and are contributing to innovation and driving advances
in technology. In some cases, a Defence contract was the catalyst that set the
company on its successful trajectory.
5.74
It is important that the wealth of local talent residing in Australia is
properly harnessed and nurtured. The committee believes that Defence has a key
role in developing this network and that considerations such as how best to
nurture local SMEs should be part of Defence's overall strategic planning.
5.75
The committee is aware, however, that Australian companies cannot
provide all the goods and services necessary for the construction of a naval
ship and rely on overseas countries to fill the gaps. Many overseas companies
have established subsidiaries to make up for the deficiencies in Australia's
industrial base. Although initially reliant on their parent company, some have
grown and developed a degree of autonomy to the point where in particular areas
of specialisation they outshine their parent. Over time they have built up a
local workforce meeting the special needs of Australian shipbuilders.
5.76
Furthermore, the committee notes the potential and actual contribution
that Australian subsidiaries of international companies make to innovation and
improved technology.
5.77
The committee believes that it is important for government to ensure
that the Australian industry is able to take full advantage of the presence of
these companies in the country. They must be part of the growth and development
of Australia's industrial base. Also, Australia's reliance on overseas
companies for a particular product or service raises a number of matters
touching on Australia's national security interests and the desire for
self-sufficiency in its defence capability. Chapter 12 of this report explores
these matters.
5.78
While the committee believes that Australia's network of suppliers,
including the subsidiaries of international companies, is capable of supporting
the country's major shipbuilders, it is aware of the challenge posed by the AWD
and LHD projects. They will test the capacity of local companies to deliver. The
following section examines the infrastructure requirements of the shipbuilding
industry.
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