Defence opportunities on the way up

Australia’s defence needs are growing, and the opportunities for companies to supply those needs are expanding rapidly. Whether you are an established player in the defence field or have never considered it before, exploring the new possibilities should be on everyone’s ‘to do in 2008’ list. Derek Parker reports.

ANY way you look at it, $9.6bn is a lot of money. That is the amount allocated for defence procurement from the Australian private sector for 2008, and the figure is likely to increase over the next few years.

The figure will be divided roughly evenly between capital goods and consumable, or ‘life-support’ purchases. While big-ticket items such as jet fighters and naval ships get the headlines, very significant amounts are spent on purchases as diverse as food, computer software, machine parts, and even things like bottles and plastic crates, as well as maintenance and upgrade contracts.

About 210 major projects, and 200 minor projects, are under way or in the advanced planning stage. Even though there has been a change of government and a new ministerial team is in place at the Department of Defence, any major changes in defence policy are unlikely.

The previous government made a point of giving preference to Australian-based companies in defence purchasing wherever possible; the policy of the new government is to continue this pattern.

The growth in defence spending is being driven by changes in Australia’s growing geopolitical role, such as a contributor to international peacekeeping forces, and to expanded military spending by other countries in the region.

India and China, for example, are upgrading their military, and moving away from manpower-heavy forces towards high-tech systems. In another case, Indonesia recently announced that it will buy two advanced Kilo-class submarines from Russia.

Australia’s defence forces are also increasing their role as a provider of emergency relief in other countries, whether to maintain law and order, deliver supplies, or evacuate Australian nationals from trouble spots.

No-one is anticipating that this role will diminish in the foreseeable future, and consequently there is likely to be growth in purchases of emergency equipment such as tents, generators, medical kits, and water purification equipment.

Defence expenditure involves staggering numbers, with large projects spread over many years. The $8bn contract for three air warfare destroyers is the largest naval shipbuilding project undertaken in Australia, for example.

Construction of two 27,000t landing dock ships is another huge task, involving $3.1bn. The multi-nation Joint Strike Fighter (JSF) project, the new air defence command and control project, and upgrades to the helicopter force also stand out as particularly large and complex undertakings.

At the ministerial level, the key figure is Greg Combet, former ACTU leader and now Parliamentary Secretary for Defence Procurement. He underlines the need to ensure that taxpayers receive value for money.

“We have to ensure that the ADF has the capability it needs to train and operate effectively within Australia and as a deployed force overseas,” he said.

“There have been problems in the past, regarding delivering in time and on budget. We want to put in place improvements in the procurement process so that, in the longer term, we don’t confront the same legacy issues we are confronting now. We need to continue the progress that has been made since the Kinnaird Review.

“One of the biggest barriers we face is that the defence industry is losing skilled people to other sectors of the economy. As a result, we need to ensure that programs like Skilling Australia’s Defence Industry continue to expand,” Combet told Manufacturers Monthly.

The policy of the Australian Labor Party states that the government will develop defence industry sectoral plans for shipbuilding, aerospace, electronics, and land and weapons; the form of these plans, however, is not yet clear.

Another mooted policy is to give the Australian National Audit Office the power to oversee defence acquisition projects, assessing them for compliance with time, cost and quality outcomes.

Lead agency

For companies seeking to become suppliers to the Department of Defence (DoD), the key agency is the Defence Materiel Organisation (DMO).

Controlling about 45% of the overall defence budget, the DMO handles the bulk of defence-related purchasing, although there are specialist units dealing with DoD property and information technology.

Defence supply contracts are made with the DMO. The DMO also has an oversight role of contract arrangements between companies involved in large projects — known as ‘primes’ in the jargon of defence procurement — and subcontractors.

The oversight relates not only to quality control but aims to ensure that small companies are treated fairly by the primes.

Another function of the DMO is to facilitate Australian companies in defence-related exports. Australian-designed and -built equipment like the Bushmaster combat vehicle and CEA radar systems are finding important markets in Europe and the US, and a specialist office, the Defence Exports Unit, was recently established within the DMO to assist Australian exporters.

Warren King, General Manager Programs for the DMO — and a person with direct experience both of the military and the SME community — points to the great changes that have recently been seen in defence procurement.

“In the past few years, the DMO has sought to become more efficient and more responsive, especially in dealing with SME-type companies,” King told Manufacturers Monthly.

“We have tried to become more like a best-practice private sector company than a government bureaucracy, if you like.

“We are very aware of the innovative spirit and operational flexibility that small companies can bring to the table. We see it as important for us to tap into that, especially for our ‘rapid acquisition’ program.

“There is, for example, a specific entry portal for SMEs on the DMO website. The large multinational companies that work on the big projects might make the headlines, but that is really only one aspect of the defence procurement story.

“In terms of looking at suppliers, we start from the point that Australia’s military forces deserve the best possible equipment, and the Australian taxpayer deserves value for money.

“But we also acknowledge the unique nature of defence supply — that as much materiel as possible should be sourced from within Australia, and from a geographic spread of companies.

“One example of the size of the projects currently in train is the Joint Strike Fighter project. It has, by our estimates, generated $160m of flow-on business to Australian firms already, and more would be anticipated if the government approves full participation in the program,” King said.

“The fact that we are interested primarily in local suppliers should not be taken to mean that defence supply is some sort of gravy train. We assess contracts on a competitive basis, looking at cost, quality, and the capacity to deliver on time.

“We don’t just go for the lowest bid — we go for the best value for money bid. If you think you can win a contract with a ‘good enough for government work’ attitude, think again. In the end, people’s lives might be at stake.”

King notes that much has been done to streamline DMO contract procedures, which he says reflect the broad procurement rules of the Commonwealth government.

“It’s true that highly specialised equipment entails complex contracts, but I don’t think it’s much different in the private sector.

“If a contract is highly detailed, it’s to ensure that the particular piece of equipment does its job properly in the field, and to provide the contractor with sufficient guidance.

“A recent internal review showed that 99% of the 47,000 contracts we sign annually are three pages or less. That is, I think, a pretty impressive figure.”

King suggests that, for most companies, there is not much difference between bidding for defence work and bidding for a contract from a large private sector firm. A successful bid, he believes, requires research and planning, and a sound understanding of consumer needs.

A great deal of information about current tenders and forthcoming projects is available through the DMO website. The DMO also provides material to industry associations, and seeks to communicate with the private sector through events such as the recent Pacific 2008 conference. A key document (available from the DMO website) is the public version of the Defence Capability Plan 2006-16, which sets up the country’s overall defence plan and needs.

“And,” says King, “our door is open. In the past year, for instance, I’ve spoken with some very large companies who specialise in defence work and some very small ones that are looking at the area for the first time. Part of the job — an important part.”

Prime relationships

Working directly with the DMO is one avenue for defence suppliers, but there are huge opportunities in working as a subcontractor with one or more of the ‘primes’, such as Tenix, Thales, or Raytheon.

One case is Bishop Manufacturing Technology, a Sydney-based supplier of high-precision parts and equipment. Bishop works with Raytheon to supply components to support electronics for Australia’s Collins-class submarines.

“Defence work accounts for about 10% of our business at present, and we see it as a growth area,” Lee Edgecombe, Bishop’s Operations Manager said.

“The nature of modern weapons systems is geared towards precision technology, and we see a lot of potential for us. We are looking at involvement in the Air Warfare Destroyer project, for example, and at several other projects coming on stream.

“We were fortunate that Raytheon approached us, because we had a proven reputation in the high-precision field. That is what anyone looking at getting into the defence field needs, I think: proven capability.

“You need to be able to show that you have an appropriate company structure, the right people with the right skills, and access to the necessary technology. Given the size of some defence projects, you also have to show that you can plan a complex task, and carry it through.”

Edgecombe explained that Bishop recently received accreditation as a Defence Recognised Supplier, which he believes will be valuable in gaining future work, both in Australia and, if the company begins to look at exports, overseas.

“In itself, a badge of accreditation is not enough to win a big contract, either in the defence sector or elsewhere,” Edgecombe said.

“My view is that it helps to get you to the table. But once you’re at the table, you’d better have all your ducks in a row, or you might as well not bother turning up.”

Mark Scherrer, CEO of Ferra Engineering, another company involved in defence sub-contracting, agrees that a proven track record is a key asset in winning defence work. Ferra Engineering is a leading manufacturer of light metal, titanium and heat resistant components; it has been a key player in the Joint Strike Fighter project.

But Scheerer sees some important differences between defence contracts and private sector work.

“Defence contracts can be very rigid,” he says. “You can see why they emphasise proven technologies and established expertise, but the other side of that coin is that it can be very hard to get the primes interested in anything new or innovative.

“There can also be restrictions in the sources used for raw materials, for national security reasons. Those restrictions are often written into the contract, especially in the US. You have to look closely at those issues, and how they might affect your costs.”

Scherrer notes that defence-related work accounts for about half of Ferra Engineering’s output, and that exports are a growth area. The company exports defence-related products to the US and Europe, and he believes that Australian companies are well-regarded in those markets.

Like Edgecombe, Scherrer believes that there is sufficient information in circulation about defence work and contracts, although a company seeking to move into the area has to be willing to actively seek it out.

He points to industry associations as a good place to start, and suggests that conferences can be a useful way to build a network of personal contacts.

An important conduit between SMEs seeking defence work and primes is the government-funded Industry Capability Network (ICN).

The ICN maintains an online database called Supplier Showcase, which lists the expertise of companies and has proved extremely valuable.

“Even companies that might not think of themselves as being suitable for defence work can benefit from registering with us,” says the ICN’s Derek Lark.

“For instance, we had one case where a prime needed a fibreglass antenna tower. There were no companies that made them, but we found one that made fibreglass fishing rods, and the expertise was suitable for adaptation and development — so everyone won.”

Lark does not see much difference between defence and private sector contracts, but he underlines the point that all contracts should be read very carefully, especially where there are penalties for failing to deliver on time and to specification.

“A large defence project is like a tapestry, and every part of it has to come together for the whole to work. Many contracts related to large projects have significant penalty clauses, so the risks have to be understood. Don’t enter into it if you’re not sure you can deliver.

“But the challenges of defence work should be kept in context, weighed against the benefits. As the sector grows over the next decade, the opportunities will expand. It’s a question of how to be a part of it,” Lark told Manufacturers Monthly.

Key organisations and websites:

Defence Materials Organisation www.defence.gov.au/dmo.

Australian Industry & Defence Network www.aidn.org.au.

Association of Australian Aerospace Industries www.aaai.asn.au

Australian Business Limiteds Defence Industry Unit www.australianbusiness.com.au/defence.

Industry Capability Network www.icn.com.au; opportunities to investigate buyer requirements and register for projects online are at Project Gateway, www.projectgateway.com.au.

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