Building a sovereign industrial capability

The volume of work predicted in the Australian defence industry needs no overstating, but how can manufacturing SMEs be involved? Connor Pearce reports.

From October 8 to 10, 2019, the four lower exhibition floors of the ICC Sydney were filled with 21,241 attendees and 657 exhibitors from 22 countries, the largest number ever for the event. Suspended from the ceiling were unmanned aerial systems, planted on the ground were cannons, and up the back was a full size, next-generation, tactical watercraft.

What had drawn this array of projects was a wholesale shift in the way that defence and industry in Australia interact as geopolitical relationships shift. Kerryn Smith, CEO of the Australian Industry Defence Network – Northern Territory, has championed defence suppliers 25 years, and sees the current landscape as a result of global dynamics.

“We have seen that the world is no longer a safe place and, in particular, across the Indo-Pacific region we’ve got lots of movement with some of those big countries starting to contest over who’s going to have the major power in that region.”

Australia sits at the crossroads of these two regions, as traditional alliances unravel, and new powers emerge.

“We now need to consider how we’re going to look after our own defence and national security and really start to step up in terms of our ability to increase our technology and our warfighting efforts so that we can play a role in not just keeping our own nation safe but keeping the Indo- Pacific region safe,” said Smith.

Structuring Australia’s approach to these geopolitical changes is the 2016 Defence White Paper, which began a new relationship between Australia’s industrial sector and its defence sector. In addition, the White Paper set out how Australia will place itself as global defence spending rises.

“In many respects we’re moving from a fourth-generation warfighting platform to fifth generation,” said Smith. “What that means is a significant increase in technology and expertise to be able to improve or increase our warfighting efforts alongside our allies.”

In this area, Australia already has significant industrial capabilities. While some have been developed within the defence industry sector, others have come from other industrial sectors. Chris Hess, head of industrial development at the Office of Australian Industrial Participation, Lockheed Martin.

“In the manufacturing space, advanced materials manufacturing, machined parts, heat treatment, and composites are areas that Australia has tremendous capability in. We’re also looking to the future to how AI, machine learning and Industry 4.0 concepts can help educate and help lift the manufacturing industry for that next generation of challenges.”

Hess lists other areas including data analytics, display technology, quantum computing, signals processing, and sensors as areas where Australia has a competitive advantage.

While these areas are already in demand, the next stage of Australia’s military capabilities will require a step-change in the interaction between Department of Defence and the defence industry, outlines Smith.

“We now have the beginnings of an industrial revolution in shipbuilding within our nation. What that’s going to take is every available resource nationally. At the heart of that are SMEs that need to work out how they can work together and collaborate, collectively showcase and promote their technical capabilities and capacity to service these bigger opportunities,” said Smith.

The end goal of this build-up of capability will be something new for Australia, the kind of which has not been experienced since World War II, when Australia had to design, build, and sustain its military capabilities. “We’re headed down the track to eventually becoming a sovereign industrial nation,” said Smith “We’re going to design build and maintain our own platforms but we’re a long way from there.”

Hess’s job is to find world-class the Australian manufacturers who can support Lockheed Martin technology solutions as it bids for contracts around the world. The F-35 Joint Strike Fighter, C-130J Super Hercules and MH-60R Romeo helicopter are all current cases in point, with Australian companies contributing to the respective global supply chains for each platform. In fact, every fifth-generation F-35 ever produced will include parts manufactured in Australia.

“We are seeing the depth and breadth of Australian industry, ranging from ‘low technology readiness’ level university concepts that researchers are wanting to find partners for and commercialise with, right through to the off the shelf, manufactured parts that we can utilise immediately once we’ve found an opportunity.”

Within this diversity, Hess and Lockheed Martin see a great potential for Australian industry to provide the capabilities needed as Australia goes through its largest re- capitalisation since World War II.

“We might find a great nugget of capability in Australia, but they mightn’t be ready for export or they mightn’t be ready to work with defence just yet, so how can we work with them, how can we work with our partners across the local and state government, our Commonwealth customer and industry associations? How can we get together to help these companies be the best company that they can be and get ready for the world stage and the defence industry space?”

While the headline contracts may still be held by the likes of Lockheed Martin, BAE Systems, and Rheinmetall, the commitment that Hess, and his counterparts at the other Defence prime contractors have to local SMEs is new, according to Sean Farrell, CEO of Australian Defence Alliance – Victoria.

“To give an indication of the type of expansion that the Australian defence industry is undertaking, the Future Submarine program is worth $60 billion, and opportunities exist for small and medium sized business who can provide niche capabilities such as precision tooling and engineering to items as simple as personal protective equipment and exit signs on vessels.

“A key feature of this re- capitalisation is creating a degree of sovereignty where there is less reliance on primes utilising foreign supply chains to provide their products, and rather a shift of focus to a reliance on local business to fill in gaps where necessary. Primes, guided by federal policy, now actively seek to engage and collaborate with local multi-purpose SMEs in Australia.

“The Royal Australian Navy’s SEA 1000 Future Submarine Program and SEA 5000 Future Frigate Program projects along with aerospace and land systems projects are creating a vast array of opportunities for many SMEs, particularly for manufacturers,” said Farrell.

Although these platforms are still being built, with the vessels not expected to enter service until the late 2020s, the incorporation of SMEs will continue well beyond the prototype and build stage, highlights Smith.

“These platforms will be forward- based around the nation, in the NT, Queensland, NSW, and WA. What the Navy is starting to think about is the next phase, which is maintenance, service, support, and supply phase and that’s where we’re talking about long term support for platforms which will go on for many years to come.”

Chris Hess, from Lockheed Martin’s Office of Australian Industrial Participation, says manufacturers need to articulate their point of distinction.

A new operating landscape
While the opportunities are there, connecting Australia’s manufacturing SMEs to global defence contractors involves an operating landscape that can be unfamiliar for SMEs used to working the civil sector. The relationship between governments, primes, and contractors is one area where relationships are key, as Smith points out.

“Defence rarely works directly with the SMEs, they’ll work through the primes, but they still need to be engaged with SMEs to identify what’s required. SMEs should be able to spell out from their own rationale why they do what they do and knowing what the end user wants provides a better connection between primes and suppliers throughout the supply chain.”

Rather than thinking about procurement as a linear supply chain, Smith encourages SMEs to see themselves as part of a wider network of relationships.

“Suppliers within the supply chain have got to move from this headset of being in a supply chain to being in a value chain. They need to be thinking about everything from relationships, to the business models that they have, and how they execute on them.”

How this works in practice is something that Hess is directly involved in. Lockheed Martin has run roadshows where technical, procurement, and engineering executives will travel around Australia looking for capable suppliers to meet a key opportunity that Lockheed has, either in Australia or in its overseas operations.

“They are executives who, for example, might have a real pain point in their supply chain and they’re looking for some solutions to that. Or it might be an early developmental program looking for supply chain partners, but these roadshows always occur around real opportunities. Once we’ve identified an opportunity and the procurement team has engaged and qualified the company then, if the capability is truly competitive, then a contract is awarded. The process for SMEs from beginning to end can be hard and complex, but it’s only hard and complex because it’s important.”

While this may appear to be a very quick process, behind the face-to-face meeting is established relationships between Lockheed and a network of manufacturing SMEs. With this in mind, Smith highlights that for SMEs wishing to engage in the defence space, success is about much more than technical capabilities.

“Knowing your own capability and capacity, and then knowing how to promote yourself as a supplier is essential, because you have to be able to step in at the right time and contest a great opportunity,” she said.

In some cases, a prime such as Lockheed Martin may identify a company with potential, and work with that company, without a contract in place, to develop their capacity to compete in the defence marketplace.

“A really good example is a company called ClearBox Systems,” said Hess. “They are the first participant in a program called the Mentor Protégé program which is where we provide training in an effort to help them become a better company and more competitive.”

These programs span HR processes, to ethics, product management, business development, proposal costing, and marketing. One area that is becoming increasingly important, however, is a business’s cyber security readiness. Due to the sensitivity of defence contracts, manufacturing SMEs which seek to engage with Defence and primes will be required to have stringent protocols in place regarding the security of information.

“Among the threats that we’ll be increasingly susceptible to are cyber-attacks. SMEs have to be good at securing their data and the things that are required within the digital arena, and for some businesses that’s a whole new thing,” said Smith.

AIDN has run events where manufacturers can connect with defence prime contractors.

Finding a path to growth
For those companies that are able to navigate these requirements, however, there is great opportunity for growth and expansion.

Bryan O’Connor, managing director of Moog Australia, explains how the company grew from its foundation in 1979, in Mulgrave, Victoria, to becoming selected to provide sustainment services for the F-35 program.

“Moog Australia was originally established to support the significant industrial economy
that Australia had at the time. While Moog Australia progressively grew over the years, mainly in the industrial business, the shift in the Australian economy meant that the  industrial business had waned and therefore in 2002 a new strategy to grow in other markets emerged, including Defence and Aerospace.”

This shift brought some success for the company and in 2012, the company outgrew its original site. Not only was size a factor, however, the business also knew that it had to streamline to compete in the defence sector.

“The new facility encompasses offices, research and development labs, machining, assembly and test (A&T), 5T overhead crane, warehouse and training facilities complete with defence grade security, video surveillance and access control system,” said O’Connor.

These changes, and the latest announcement of work on the F-35 program will allow Moog to double its workforce and invest in its own supply chains.

Navigating the demands of the defence sector requires not only advanced technical capabilities, but a different attitude to business, as Farrell highlights.

“Civil markets – particularly in regard to manufacturing – are open to any company with a capability that is in need. Defence markets require not only a series of approvals and accreditations but have needs that go beyond the normal timeframe for delivery. Some key certifications include ISO9001, ISO9100, ISO9002 and compliance with a number of security requirements, including cyber security are also necessary.”

These requirements require a different attitude to a business, as Smith points out.

“Historically, businesses will focus on their products and services and the way that they sell what they’ve already got. What we have been doing with our local suppliers in the NT region is saying it’s not about that, it’s about what does the customer want and how do you be more focussed on the customer and be more design led in what they’re looking for. Businesses need to think about defence from a completely different perspective and tailor their products, services, or technologies to meet with the customer’s requirement.”

From Hess’s perspective, the nature of defence contracting requires a commitment to relationships, unlike the transactional relationships that might be expected in other sectors.

“Working with the primes does take a lot of energy, resources, and commitment but if you have strong relationship building skills and you stick at it and you keep in contact with us and provide quarterly check-ins; for example, ‘Here’s what we’ve done recently or here’s a new product, technology upgrade, or piece of equipment that we’ve purchased, and this is how we think it’ll help Lockheed’. That’s all part of that relationship building.”

Australian manufacturers have contributed to the next generation of technologies, such as the F-35

“The ticket to the dance”
Still, highlights Hess, the core capabilities required in defence are similar to those in any other sector.

“The classic cheaper, faster, lighter, stronger, they’re all discriminators. If a company can put metrics around that, if they can tell us they’re 10 per cent cheaper than their competitors or their product is 5 percent lighter or 20 per cent stronger, then that goes a long way to helping us when we are talking to our program and our capture teams about Australian companies,” he said.

Hess calls this distinction a company’s “ticket to the dance”, and whether that is these metrics or qualifications such as AS9100 for the aerospace industry, a company’s ability to demonstrate its commitment will enable it to stand out as the defence marketplace only continues to grow.

“What is it that makes you special? What is it that makes you world class? Companies need the ability to articulate with metrics those things that discriminate them from their competitors,” said Hess. “Because again, a competitor is not just a local company in Australia, it is someone in India, the US or Canada, as it’s a global supply chain, that we are drawing from.”

Being up-to-date and engaged with the latest in defence procurement is also one way that a company can distinguish themselves. As Smith articulates, due to the size and complexity of projects, companies should be thinking about how they can communicate with collaborators.

“No longer will people physically sit in a room and walk around and hand a file from one desk to another, they’ll be linked on a digital system where they’ll be transferring their data to and from each other.”

Part of this requirement is the ability to be flexible, one aspect that is involved in the nebulous term of “value for money”, as Hess outlines.

“There’s a great manufacturing company that we’ve been talking to for many years with our space business and it will potentially be the first Australian manufactured part on Lockheed Martin space product. Their discriminator was cheaper, lighter, faster, stronger and their product was value for money. That encompasses a range of things, but also includes their ability to undertake work moving into a prototype stage quite rapidly.”

This agility is one area where Hess believes that Australia’s manufacturing sector stands apart from its global competitors.

“One of the niche strengths of Australian industry is that small volume space, a lot of Australian companies are very good at fitting into that rapid turnaround for small volume prototyping.”

Coupling this capability with an awareness of what a prime may be looking for, along with the ability to identify what makes a business distinct, and you have the recipe for success. To get there, however, there is support out there. And one of the first people to turn to may be similar SMEs or other manufacturers, says Smith.

“We need to learn how to be able to coordinate ourselves in a very complex environment from a project perspective,” she said.

Hess concurs, pointing out that with the volume of work coming, what is required will be bigger than what any one business can provide.

“There is a perception that it is very difficult to get a direct contract with a prime and that may well be the case, but under each direct contract there can be 5, 10, up to 30 SMEs that are involved in that supply chain as a result of that direct contract. So, part of my job is to not just tell companies how they can be part of the Lockheed Martin supply chain but also help identify complimentary capabilities in Australia where there might be opportunities for partnership or collaboration.”

To enable this networking, there exist organisations in each state which can help SMEs meet the requirements set out by defence prime contractors. These have been formalised in the Defence Industry Capability policy, which includes the Centre for Defence Industry Capability.

“The CDIC will give general advice on how defence works,” said Smith. “Then, they work
in conjunction with industry associations like AIDN, the Defence Teaming Network in South Australia, the Australian Defence Alliances in Victoria, the Henderson alliance in WA, and the HunterNet in NSW.”

Farrell, in his role at the Australian Defence Alliance Victoria provides this kind of support to manufacturers.

“ADA-Vic provide member companies, including manufacturers, with insights, mentoring, information sharing networking opportunities and advocacy in order to assist them in securing work in the Defence supply chain.”

For Smith, who coordinates AIDN in the Northern Territory, in addition to her national advocacy role, highlights how these networks are working towards being able to spread the benefit of Australian defence spending.

“We need these support mechanisms to be thinking about more about how they can collaborate around the nation to build an ecosystem that can support our local suppliers in every region to be able to take a role,” she said.

Indeed, the ingredients for a sovereign industrial capability may already be there, but it will take a rethink on the part of all participants to deliver the pipeline of work that is coming.

“We need to be encouraging those connections between the primes and suppliers,” said Smith. “To use those suppliers as agile nimble support mechanisms to support maintenance and service, as well as the design, manufacture, and build process and thinking about the role that SMEs can play.”