Wednesday, August 16, 2017

State governments, defence exports and industry development

I was struck by a recent article in Defence Connect about the detrimental effect of State vs State competition on the prospects for Australia’s defence industry. The article cites some key industry players, including Chris Jenkins from Thales, Mark Burgess from Quickstep and Victorian defence advocate and former cabinet minister Greg Combat. They all agree that the State vs State model is ‘less than optimal’, to use Combet’s words.

The subsequent conversation on LinkedIn was driven by Grant Sanderson’s comment: “If the Federal Government is intent on building a self sustaining, export oriented defence industry then it needs to internalize two critical lessons. Firstly locally developed IP is the well spring of innovation and international competitiveness. Buying overseas designs where local capability exists is detrimental to their strategy. Secondly there needs to be a constructive approach to the development of strategic centres of excellence rather than a Darwinian free for all between states and regions.”

I couldn’t agree with Grant more, and I’m encouraged that recently appointed State government defence ambassadors and advocates such as John Harvey and Peter Scott (NSW) and Raydon Gates (WA) understand the need for a strategic, national approach.

I’d like to make a couple of points of my own, however.

Firstly, State governments will always try to look as if they’re doing something useful for their voters. That usually means chasing exports or winning something off another state – essentially, treating business and industry development as a zero-sum game.

Secondly, State governments have often stepped in where the Federal government has been conspicuously absent in supporting industry’s efforts to grow and become exporters. They’ve been trying to fill a vacuum that doesn’t exist (at least to anything like the same degree) in most other industrialised nations. However, competition between the States has sometimes confused potential export customers, especially when there hasn't been a moderating Federal government presence.

Thirdly, The Federal government has turned on a sixpence (in strategic and policy terms) by suddenly becoming a vocal (and I believe committed) champion of industry development, innovation and exports, across all sectors of manufacturing and related industry. This has happened over little more than 18 months, since December 2015; the defence focus dates back to the release of the Defence White Paper and Defence Industry Policy Statement in February 2016.

So there’s been a bit of a perfect storm: we suddenly have a defence shopping list that’s worth nearly $300 million over the next quarter-century; we have a government that’s committed to spending as much of this money as possible in Australia (alright, still a minority share, but more than we could have hoped for previously); a government acknowledging that a competitive industry needs to broaden its mental horizons and pursue innovation; and a university and research sector that’s woken up to the fact that there’s likely to be unprecedented and growing demand for its research and knowledge ‘smarts’.

Oh, and we need our new submarines, frigates, patrol boats and armoured vehicles in a bit of a rush, which goes counter to the idea of a measured, integrated whole-of-Australia approach. It should be noted that we’re only facing this rush because the Rudd and Gillard governments shamefully refused over some six years to commit any money towards the Navy’s submarine and frigate programs, resulting in the current ‘valley of death’ and the haste to get design and construction work under way.   

So my response to Grant’s comment was this: “You don’t build export-ready industry capability without addressing the local market first and we haven’t seen the REAL money flow through the looming maritime and land projects as yet. And turning around the Australian government’s previous deliberate policy of allowing market forces to shape industry – and then refusing to act as a market player – will take time. Meanwhile, the Navy needs submarines, the Army needs new armoured vehicles and the urgency of those requirements doesn’t sit comfortably with the deliberate, concurrent development of industry capability across many technology domains and industry sectors. We’re talking about trying to achieve a generational task in only a few years.  I think we need to calibrate expectations and achieve the greatest leverage possible for every bit of industry activity over the next 5-10 years.”

Export-ready means having world-class product. That takes time to develop. It also requires an understanding of the market and the customer. That doesn’t happen overnight. Today’s exporters started on their journey years ago; tomorrow’s exporters need to start now – or better still, yesterday.

So what’s the role of the State governments in all this? They don’t sign contracts with the Federal government. They don’t build ships and submarines and armoured vehicles. They don’t re-paint and service warships. They don’t train soldiers, sailors and airmen and women. At best, they can help create local business conditions that favour investment decisions by industry and the Federal government.

They can invest in education and training; they can adjust local taxes and charges to make a city or region more attractive; they can support investment in market knowledge and a physical market presence at trade shows domestically and overseas; they can be advocates for an entire industry sector – and South Australia is the standout example of this. But they can’t award defence contracts and they can’t make promises to export customers on behalf of either the Federal government or industry. 

Ultimately, their power is limited.

The Federal government is looking to become more engaged with industry, to support industry development by championing both innovation and exports. It is filling the vacuum previously exploited by the State governments.

If the current business environment persists and develops the way that industry hopes, it seems to me the States need to re-consider their roles. If the Federal government is looking, for the first time in ages, to think and act strategically, then there’ll be more work around than Australian industry can handle in its present state. Helping to increase industry capacity by growing the trained workforce, and increasing capability by enhancing innovativeness, is a critical role the State governments must play. This isn’t a zero-sum game any longer: all States can share a much bigger prize, but they must be willing to work for a common benefit.

Saturday, June 3, 2017

Moderate Islam is the heart of the solution

Once the shock of last night's horrifying terrorist attack in London and last month’s terrorist atrocity in Manchester had subsided, the media commentary that followed had me thinking. 

There’s a battle raging for the hearts and minds of the Muslim world and it’s essential that Moderate Islam wins. Because if the moderates don’t win we risk a much bigger war between Islam generally and the western, or secular, world. Moderate Muslims don’t want that and nor does the west because it could be a fight to the death, and they’re usually brutal and bloody - especially for the losers.

The perpetrator last month was an Islamist terrorist. That we know. It’s almost certain the perpetrators last night were Islamists as well. They justify both their cause and methods using Muslim scriptures. In one sense – their willingness to inflict terrible violence on those with whom they disagree – they’re little different from the murderous zealots who committed terrible atrocities in the name of Catholicism or Protestantism a few centuries ago, and those of us brought up in the Christian tradition (if not the faith itself) would do well to remember this.

However, the Islamist cause and methods are generally denounced by a majority of Muslims, just as the majority of people brought up in the Christian tradition have renounced and denounced the sectarian prejudice and violence that have disfigured their faiths from time to time.

There’s a difference, however. In modern times the liberal Christian tradition has generally promoted something approaching a benign and tolerant democracy. Liberal societies can tolerate difference and dissent – some better than others, admittedly, as any Irishman or southern European could tell you. And as a result the temper of a Liberal society as a whole, both spiritual and temporal, makes political and sectarian violence a thing of evil. The same isn’t true in many (though not all) Muslim countries.

During the years of the ‘Troubles’ in Northern Ireland, and during the terrorist campaigns of the 1970s and ‘80s in places like Italy and Germany, national and spiritual leaders repeatedly condemned violence in the strongest terms.

Moderation and tolerance had a voice that mostly drowned out the message of violence. This voice was heard in homes, at schools, at places of worship. It argued for peace, it argued that the terrorist was the grotesque ‘other’ whose taste for violence placed both him (or her) and the cause itself beyond the pale. This same tolerant, inclusive voice made welcome immigrants from a diversity of faiths and backgrounds, not least Muslims.

In most free countries this voice of reason and tolerance (helped by an open and honest media) has helped prevent the radicalisation of generations of passionate, grumpy youths. It has spoken through the law, through the media, through governments and national leaders to deny terrorists the legitimacy they crave and the support that follows. In the West, the general de-legitimisation of extremist movements, whether terrorist or not, has been a victory for the common people, for human values and for the societies that sustain them.

Are we seeing the same in the Muslim community? That’s a genuine question: notwithstanding the lonely courage of a few Imams and community leaders, is the voice of reason and tolerance being heard enough in the Muslim community?

The point is that Moderate Islam risks being painted crudely with the same brush as the Islamists if Muslim leaders won’t emerge who can champion the cause of peace and tolerance and give a voice to these values which can then be amplified in family homes, in schools and in mosques.

Moderate Islam must give voice to reason and tolerance – especially tolerance, where Muslims choose to live in or alongside a secular or non-Muslim nation - and deny radicals the sense of legitimacy that empowers them to carry out barbarous acts of murder.

It seems to me that the prevention of radicalisation and the de-radicalisation of Islamist would-be-terrorists must begin among the Muslim community at large. You see, not all Muslims are Islamists, but all Islamists are Muslims. If the voice of Moderate Islam is not heard then the atrocities committed in the name of Islam will define the faith as a whole in the minds of onlookers. The consequences for the majority of peace-loving, tolerant Muslims living in Western countries who are good citizens and decent members of society, could be serious.

That’s the battle that’s being fought for the hearts and minds of Muslims, and it’s essential that Moderate Islam wins. And Moderate Islam needs the patience and support of the wider non-Muslim community if it is to win. This must be a shared endeavour because the consequences of defeat will be catastrophic. But first we need to hear the voice of Moderate Islam, of Muslim leaders who can promote and defend peace, reason and tolerance. If Moderate Islam has no voice, or if that voice is silenced, then the faith as a whole will have been hijacked by an extremist minority that, by default, has placed Islam at war with the rest of the world. 

In the meantime, we mourn those poor innocent souls who have died violently at the hands of murderous terrorists, and try to comfort their loved ones, and thank God for the kindness, and courage, of strangers who sought to help them.

Sunday, October 23, 2016

Necessity is the Mother of Innovation

It’s rather gratifying to see so many people embrace the ethos of Innovation. Last year’s National Innovation and Science Agenda (NISA), followed by this year’s Defence Industry Policy Statement (DIPS), has prodded Australia to examine its relationship with the whole concept of innovation. As companies, research establishments and individuals start to consider the term’s implications for them, we’re starting to see a flood of magazine articles, books, on-line courses and all sorts of helpful advice on how to ‘do’ innovation.

This might be a good moment at which to examine our understanding of what Innovation is and isn’t, and how it actually happens. There are probably company leaders out there who think innovation is all about boffins in lab-coats, or bratty Gen Y-ers doing unlikely stuff with smart phone apps. They probably think bean bags are important. Some of them probably think that you can make your company innovative simply by opening an ‘Innovation Department’ and saying nice things about innovation in the annual report.

This is all symptomatic of a wider misunderstanding of how innovation works. There’s an instinctive grasp in the community at large that individuals and organisations will benefit from being more innovative, but some discomfort about the word itself, its implications for the future, and the psychological and organisational challenge that it represents. In fact, the process that we call ‘innovation’ has been around since the Stone Age and people have been innovating busily without realising (or even needing to know) that’s what they were doing. This post is intended to help simplify things a wee bit for modern folk who worry that innovation is a black art.

There are three things that individuals and organisations need to know about innovation. The first is this: innovation doesn’t happen in a vacuum. Simply telling people to go away and innovate, or to huddle together in collaborative groups and innovate, is pointless. Innovation begins with a customer, an end user, who has a problem that your innovation can help him or her address.

That customer could be internal – your production engineers might be looking for a way to produce, say, industrial chemicals quicker or cheaper, or at higher levels of purity. Or it might be an external customer: a health service provider looking for a new way of doing ultrasound scans, a laboratory looking for some kind of sensor that will enable it to measure the results of new, ground-breaking research, or an Army looking for a lighter, more accurate rifle.

If you’re not trying to address an end-user’s problems then you’re probably just doing curiosity-driven research. And that’s incredibly valuable, but it’s not innovation. Successful innovators need to be outward-looking: they need a good relationship and honest feedback from the end user. There’s nothing new in this for the majority of forward-looking businesses and research centres. That old adage, “necessity is the mother of invention” pre-dates the term innovation, but is still the fundamental truth that drives it.

Secondly, Innovation is about Change. When you innovate you make a change in what you do, or you enable somebody else to make a change in what they do. If you take enough time to understand your customer’s needs, you’ll understand where they want to go, and how your innovation process will help. Simply replacing one widget, or process, with another that achieves exactly the same thing is not innovation. Me-too-ism in the marketplace – copying or emulating somebody who has done something new or different – isn’t innovation either.

Re-fashioning your business in response to major market changes, or making a significant difference to production costs or achievable volume, or achieving strategic self-reliance in a crucial area, can be innovative. Successful innovation is aligned with design thinking: it starts with the customer and seeks to understand where the customer wants to go: what he wants to do, but can’t at present. And sometimes, the customer isn’t aware of all of the possibilities that are open to him – what can you do for him, or help him to do for himself, that he hadn’t even considered? That’s where the innovator’s expertise comes to the fore, and is the basis for the trust between innovator and customer that is so important. 

Thirdly, it is possible to organise your business to be more innovative. There is no single, universal template or set of rules for innovation, but there are some universal principles. An innovative organisation needs four key attributes. The first of these is Self-Awareness: it needs to understand what it’s doing, why and how well it’s doing it, and what it needs to change if it wants to do much more of the same, or something quite different.

It also needs Situational Awareness: it needs to understand everything happening externally that will affect what it’s doing. That could be fluctuations in exchange rates or the prices of raw materials; it could be a change in the behaviour, or the needs, of the customer; it could be the emergence of new players in the market; it could be the sudden emergence of new technologies that disrupt the market. The innovative organisation needs sensitive antennae and good external contacts so that it always has access to critical information and is open to unexpected revelations and challenges. Situational and Self-Awareness inform, and are informed by, each other.

The innovator needs what I call Professional Mastery. Any organisation, whether it be a sports team, a government department, a shop or a fighter squadron operates in a more or less specialised domain; the leader, and staff, must collectively be experts in whatever it is they’re doing. Their ability to become, and then remain, experts – and their understanding of what that means - is informed, and informs in turn, both Self-Awareness and Situational Awareness.

And then he needs what I call Business Mastery, or the ability to organise oneself so that the organisation as a whole flourishes and all of these attributes enjoy the attention and resources they need, at the time they most need them. One of the most important aspects of Business Mastery is a leader and key lieutenants who are committed to the idea of innovation and willing to embrace the internal changes that are necessary to begin the innovation process, and the others that inevitably follow as the process takes its course. The right leaders will make sure the right combinations of skills and personalities are assembled for new projects and ongoing operations, and that investments are made in the right skills and capabilities. And that the resources necessary for those investments are available. Business Mastery informs, and is informed by, each of the other three key attributes.

If that all sounds a bit simplistic, don’t dismiss it lightly: it may look simple, but achieving it is not easy. Applying these principles to your own organisation requires judgement and effort, and a proper understanding of your business and how it works; and it will probably take time to embed the cultural changes necessary to embody these principles. The open literature is full of tools to help innovators understand how to apply them to their own circumstances.

And that’s innovation in a nutshell: no bean bags, no boffins and no management-speak. You just need to be very good at what you're doing, and aware of the context in which you're doing it. Not easy, perhaps, but there’s nothing in all this that’s new to the genuine innovator. Real innovators have been following these simple, universal principles for millennia.

Friday, October 21, 2016

In defence of a free press (Je suis Bill!)

The topic of freedom of speech is back on the front page, in a big way. People are up in arms about a cartoon by the brilliant Bill Leak in The Australian. The cartoon itself has been discussed ad nauseam, and I’m proud to say “Je Suis Bill!”

But I’d like to make a more general point. After years of comment and name-calling, and inquiries in both Australia and the UK into the activities of the media, I think it's time I added my voice to those raised in defence of a free press.

A free press is a necessary condition for a healthy democracy. A truly free press is one that is not controlled by or subservient to a government or to a vested interest. That means a self-supporting press, one that survives financially because ordinary individuals are prepared to pay to read, watch or listen to whatever the media outlet in question publishes or broadcasts.

That truly free press probably doesn’t exist anywhere, but the idea that it should is important: this ideal shapes the business model that sustains the quality press which in turn comes closest (usually) to delivering the reportage and analysis (and the cartoons – let’s not forget the cartoons!) that keep our democracy healthy.

What does a free press actually do that makes it so important? It speaks truth to power. It challenges authority and convention and unfounded assertions. It deals in facts. It promotes transparency. It shines a light on people, on groups, on laws. It exposes wrongdoing. It holds leaders, and would-be leaders, to account. Sometimes, and often through the medium of an editorial cartoon, it simply holds up a mirror so that people can see themselves for what they are. And why is this so important? Because it ensures that the voters in a democracy can make an informed choice about whom to support and when, or if, to withdraw their support from a government or a group or a cause.

At its most fundamental, a free press is a force for peace. Why? Because it exposes and therefore challenges the basis upon which leaders and governments make decisions that lead to conflict. Consider the past century – can anybody think of a conflict that has broken out since the end of World War 1 between two nations that have a genuinely free press? Nor can I, offhand.

There are countless examples of conflicts between two nations distinguished by an imbalance of press freedom. In such cases it’s usually the leaders in the less-free country that are granted the freedom to create the conditions for war. Civil war can also erupt in countries where civilised discourse between communities isn’t moderated by an objective and free press. And don’t be fooled by the idea that war is a consensual activity between two (or more) nation states.

All it takes to start a war, or even a brawl, is a single aggressor without the impulse control that comes from sobriety, maturity or wise counsel. At the national level you don’t get wise counsel unless you have a wise and mature leadership that is conditioned to listen. The voices that the leaders listen to must be informed ones: that’s the role and responsibility of a free press.

So how do you support a free press? Actually, as I suggested earlier, you probably can’t. A society needs to accept a flawed business model if that is the price of an independent media. What this amounts to, in practice, is either a state-owned media, with all the potential dangers that involves, or a broadcasting or publishing house that makes its money from a combination of paid subscriptions or cover sales and paid advertising.

‘Vested Interests’, I hear you say. Yes, potentially. But the potential for interference by advertisers and proprietors is no greater or more sinister than if a press agency or media organisation is owned and funded – and controlled – directly by the state. Several national news agencies around the globe are acknowledged to be mouthpieces for the regime that funds them, and they are de facto (and sometimes de jure) propaganda organisations.

That said, public broadcasting financed by the state has a proud record of courageous, independent reporting in Australia and in countries like New Zealand, Canada and the United Kingdom. The editorial independence of state broadcasters such as the ABC and BBC is defended ferociously by supporters both within and outside these organisations and at their best they perform a vital role. During World War 2 (and for many years after) the BBC was the gold standard for accurate and impartial reporting of global events.

The overwhelming majority of media organisations, however, enjoy no state support. They are perforce commercial entities, surviving on what they can sell. They sell two things: something that certain people want to read (or watch, or listen to); and access to those readers.

News-gathering agencies such as Reuters and Associated Press make their money purely from selling news and analysis to publishing and broadcasting outlets or financial institutions. Their ‘product’ is accurate, impartial and swift reporting of critical events. They are in some cases the only source of the news on certain topics that is published or broadcast by newspapers and radio and TV stations. Their reputation is their brand and this guarantees their income.

At the other end of the scale, so to speak, are the ‘uber-tabloids’: newspapers, magazines and TV channels that deal principally with gossip. They serve a diet of salacious and sensationalist celebrity gossip and spurious revelations.

Occupying different parts of the spectrum in between are the newspapers, magazines and broadcasters that deal with national and global affairs, business and sport in a more measured and critical way.

Elsewhere, you find the specialists: publishers and broadcasters who focus on more narrowly defined interests such as aviation, cars, pets, cooking, gardening and the like. The pornographers are in there as well.

What they all have in common is an editorial ‘product’ shaped to suit a carefully defined audience, and in most cases a business model that delivers that audience to advertisers. They make their money from a combination of sales direct to the audience, and advertising. If it ain’t interesting, readers won’t buy it or watch it. So advertisers won't advertise in it. If there ain’t a quid in it publishers won’t print it. So it’s fair to say that publishers and broadcasters reflect the interests of their audience.

This in turn means that those salacious tabloid newspapers, celebrity gossip magazines and reality TV shows exist only because there’s a market for them. Think about that: if you deplore these publications and programs, then you also deplore their audience, your fellow-citizens.

Of course, the tabloids and gossip magazines have overstepped the mark frequently. (Oddly enough, the citizens who deplore them for doing so are often the same readers who avidly consume the resulting headlines – the irony appears lost on them.) Is this reason enough to shut down or control whole segments of the media? No. This is the regrettable price we as a society need to pay for the privilege of a free press.

Shutting down or controlling the tabloids (or the gossip mags, or cheap and nasty reality TV shows) would be the same as banning or controlling cheap cask wine, in the belief that only good wine should be sold and drunk, and only by people who know how to enjoy it properly. Power then resides in the hands of those who make subjective judgements on what is, or is not, good wine, or good journalism. Quis custodiet, and all that?

This also means that the so-called ‘quality’ press – which includes broadsheets like the Wall Street Journal and Financial Times, as well as quality tabloids and ‘serious’ programs produced by both state and commercial broadcasters - survive because of ongoing demand for accurate, thoughtful analysis and a modicum of activism, based upon facts and, more subjectively, values.

The ‘quality’ media faces the highest bar in terms of credibility – their ‘product’ is that very editorial quality that pursues and publishes facts and arguments unflinchingly and impartially, and it’s not cheap. Those ‘quality’ outlets that survive and thrive fill a vital role.

In a healthy democracy with a vigorous press, however, leaders, demagogues and ideas can be held to account by all parts of the media, by a tabloid newspaper as much as by a high-falutin’ broadsheet. By their very nature, editors and journalists tend to be nosy parkers with an ‘everyman’ sense of right and wrong. They’re not driven by money, on the whole, which is why publishers can afford to employ them. They fill what would otherwise be a multitude of information and ethical vacuums.

At the end of the day, even the readers of ‘Cabbage Growers’ Weekly’ want honest, accurate reporting and useful information. It’s that market discipline, and the basic integrity of most journalists, that keeps the independent media honest – if they lose readers, they lose advertisers and then they lose money.

What’s important here is that the media serving those societies that value a free press is independent. It can speak truth to power, or not, as it wishes. It may pander to its audience’s basest instincts or most abstruse interests, or it may shine a light on wrongdoing or official incompetence. It has the freedom to do all of those things, and we as a representative democracy, as a community of voters, are the better for it. To regulate the media, to control freedom of speech, is to punish society and weaken democracy.

Gregor Ferguson was a journalist and editor for over 30 years in the UK and Australia. He wrote for newspapers and magazines and edited specialist trade journals for much of his career.

Saturday, April 23, 2016

Will it REALLY cost 30% more to build submarines and surface warships in Australia?

Will it really cost 30% extra to build submarines and surface warships in Australia, compared with importing them from an overseas constructor? If the people making this claim are basing their projections on the Air Warfare Destroyer (AWD) project, then you can see their point. But you need to treat a scary claim like this with care: they’re making a general extrapolation from a very particular example.

The AWD project was hamstrung by a couple of things: first, it had been nearly a decade since the Australian shipbuilding industry had constructed a modern major warship. The technical, supervisory and management skills necessary to do so had all atrophied and needed to be re-learnt. Secondly, the shipyards needed new investment so they could handle new fabrication and assembly processes. Both of these cost money. Rebuilding industry skills and capacity, once they have been allowed to wither and die, is expensive. And that cost is being amortised over a one-off project to build three destroyers. No wonder it’s expensive, and no wonder critics point to the cost and argue that Australia can’t, and shouldn’t try to, build warships in-country.

There’s another technical issue that affected the AWD program as well, but I’ll get to that later.

Thanks to the previous Labor government’s indefensible time-wasting, we’ve almost re-created the market conditions that cruelled the AWD project. But if we’re planning to revive those skills and that infrastructure to build the RAN’s new fleet, then those conditions should apply only at the start of this new project.

Our next major purchases are not trivial: Australia plans to build 12 Offshore Patrol Vessels (OPV); 9 new Anti-Submarine Warfare (ASW) Frigates; and 12 new Submarines. We’ll also be building 21 new Pacific Patrol Boats – not demanding in technical terms, but requiring good management along with good design and construction skills. Importantly, they’ll deliver cash flow and profit to their builder, Austal, and help solidify the naval construction sector’s skills and capacity base.

Given the recent(-ish) history of Australian naval construction, and the level of scrutiny that the whole Submarine/Frigate/OPV enterprise will attract, I’m inclined to accept the publicly stated estimates of parent designers and constructors who understand how to design a new vessel and transfer technology and skills to an overseas partner. 

There are precedents for success, even here in Australia: the ANZAC Frigate program delivered 10 ships on time, on budget and with extremely high levels of Australia and New Zealand Industry Participation (ANZIP). Even allowing for Australia-specific design modifications (some of them a first for the baseline MEKO200 platform) and fluctuations in the dollar exchange rate, the out-turn cost of building these ships was not so different from what we’d have had to pay if we had simply bought them off the shelf from Blohm+Voss in Germany.

Much of the cost of the new submarines and ships will be in items that we need to buy from an overseas supplier, such as guided weapons and their launchers and handling systems, sensors, elements of the communications and combat system, and so on. The local cost will be driven by platform construction, assembly and integration. These are the areas where a smart partner can tackle risk and cost. 

If Dr John White from TKMS says that building 12 of his company’s submarines in Australia would cost no more than building them in Kiel, then I’m inclined to believe him, but I’d want to check the fine print and the terms and conditions. The same goes for the French DCNS bid.

Given our history with the AWD project, you’d need to look carefully at the history of high-technology tech-transfer programs; they’re not easy and if you’re doing it for the first time, they’re not quick.

This is what I was referring to earlier when I mentioned a technical issue that had an adverse impact on the AWD project. The Spanish ship designer, Navantia, had never undertaken such a complex technology transfer process before, so fell into many of the traps that lie in wait for young players. The process of fabricating hull and superstructure blocks to drawings that didn’t reflect then-current Spanish shipyard practise was difficult, to say the least. The difficulties were compounded by the design changes necessary to make the Navantia design suitable for RAN service, the shortage of welding and supervisory skill in the Australian yards that fabricated the blocks, and the structure of the AWD Alliance that was supposed to deliver the ships. We all know the result.

Interestingly enough, exactly the same lessons emerged from the development of the Vickers Supermarine Spitfire in England during the mid-late 1930s. There truly is nothing new under the sun in all of this. And remember how successful the Spitfire became.

So – to answer my original question: will it cost 30% extra to build the RAN’s new ships and submarines in Australia? Not if a proficient parent yard in France, or Germany, or Japan is given the freedom do to an efficient and effective job. How much more (if anything at all) might it cost, in that case? It’s hard to say, and the figures need to be calculated correctly if they’re to have any meaning. Furthermore, if the submarine design in question is good enough, and has a sufficiently robust upgrade path, then the broader question becomes: What can the bilateral relationship with that company’s parent government give us, both in the naval construction domain and in a much broader sense? A good submarine backed by the promise of the right bilateral relationship may be more compelling than an outstanding submarine that isn’t sustained by a relationship of similar warmth and intimacy.

One aspect of the indigenous build proposal that hasn’t been canvassed over much is the broader local benefit of doing the work in-country. If we pay, say, AUD$20 billion to have 12 submarines built in Germany, that’s money lost to the economy. If we’re going to spend that sort of money (and the 2016 defence White Paper says we must) then we should aim to get the maximum return on that investment: corporate and personal tax; development of skills, new jobs, new supply chains, new export markets; the creation of knowledge that we can use to maintain and upgrade those ships over their life; the development of a technology base that sustains and enhances other industry sectors.

Consider this: because we built the ANZAC frigates in Australia, with a locally developed combat system based originally on an off-the-shelf product made by Saab (formerly Celsiustech) in Sweden, we were able to design, develop and implement a world-leading upgrade to those ships that embodies major platform modifications designed by BAE Systems, the development by Saab of what is now an all-Australian combat system of considerable performance and the creation of an all-Australian family of new active phased array radars by CEA Technologies. Those radars will now be fitted to the RAN’s nine new ASW Frigates. If they aren’t paired with an advanced derivative of the Saab 9LVMk3E combat system, designed and developed in Adelaide, then I’ll be very surprised. And disappointed.

The benefits of local investment must be taken into account when assessing the cost of a major defence purchase. That’s not meant to be a defence or justification for a 30% premium; it’s a genuine strategic issue. The Government's plans to acquire no less than 33 submarines and surface warships create unprecedentedly good market conditions for industry. If, under these conditions, the shipyards reckon they can build submarines and warships in Australia without incurring such a premium, then let them prove it – and hold them to their word.

Sunday, April 26, 2015

Defence industry policy – why it matters

Why does defence industry policy matter? Why does defence industry itself matter? If it DOES matter (and successive Australian Defence White papers have stated this is the case), then it’s because of what industry can deliver to the Australian Defence Force (ADF).

However, much of Defence’s industry policy focuses on sustainment – the industry’s ability to maintain, repair and upgrade the equipment currently in service with the ADF, or about to enter service.
But there’s no explicit commitment to buying equipment from Australian suppliers, beyond niche requirements for indigenous industry capabilities – the ability to design, build and integrate equipment that can’t or shouldn’t be acquired from overseas.

I’ll deal with the industry policy shortly, but the diagram below helps explain the harsh realities facing both Australia’s defence industry and the Department of Defence.

This diagram maps in simplified form the landscape of Australia’s defence market. The vertical axis represents the number of customers there are for a particular piece of equipment; the horizontal axis represents the complexity of the equipment. The diagram includes a selection of equipment and platforms either in service with the ADF at the time this diagram was drawn, in late-2010, or likely contenders at that time for a future contract.

The Australian defence industry is generally positioned towards the bottom of the graph in the blue ‘Australian Industry’ ellipse. This contains those products developed entirely or mainly in Australia by local firms with the ADF as the launch (and possibly sole) customer. The complexity of some of this equipment along with the relatively small domestic Australian market and defence industry compounds the technical, schedule and financial risks associated with these products.

Defence is reluctant to court what it considers to be unnecessary risks associated with local development of new equipment when excellent equipment is available off the shelf from its close allies the UK and USA, and from other sources such as France, Germany and Israel. So Defence prefers to shop higher up the graph in the green ‘MOTS’ ellipse where more mature, lower-risk products are available, generally from overseas suppliers. These have all been developed initially for an overseas customer and then acquired by the ADF off the shelf, or may have been developed in a joint venture with that customer (eg Nulka, JSF and JLTV), or have been evolved from an existing, proven product (Saab’s Anzac frigate CMS, or Combat Management System). These represent relatively low technical, financial and schedule risk to the ADF.

In some cases, Australian industry is a major partner in the international team developing the equipment – for example, BAE Systems Australia leads the Australia-US Nulka decoy team: this is unashamedly an Australian product and a major operational and export success.

The highest risk for Defence lies at the bottom right of the graph, where Australia must either develop, or pay to have developed, a unique, complex and usually expensive capability not available anywhere else, such as a Wedgetail airborne early warning system, a Collins-class submarine or that submarine’s eventual replacement.

This diagram encompasses all the money that Defence will spend acquiring capital equipment for the ADF; it doesn’t include sustainment. It suggests a number of things. Firstly, if Australian industry wants more of Defence’s capital budget it needs to go where that budget is being spent.

Secondly, if Defence needs industry to develop and grow the high-end management, systems integration, repair and upgrade capabilities required simply to sustain equipment that it buys from overseas suppliers, then it needs to ensure local firms get access to the work that will create and grow those capabilities. That work is generally at the front end of a particular project: design, development, systems integration and manufacture. It’s easy from this diagram to see where such work might be in the future, and therefore where industry needs to be positioned to secure a sufficient share of it.
In my previous post I suggested that the greatest potential for change in the Australian defence industry’s circumstances would come through growing the market: by industry either exporting more or tackling defence’s risk-aversion so that it spends more of its money at home.

The latter is a long game and will require, among other things, Defence to lose its fear of becoming responsible, in some way, for industry outcomes and therefore needing to make judgements that will shape industry. The former may offer better prospects of a pay-off in the short to medium term. In order to win both the volume and quality of ‘noble’ work necessary to maintain and grow high levels of skill and capability, Australia’s industry needs to move ‘up the graph’ into the green MOTS ellipse and play a stronger part in developing and manufacturing the equipment in question.

Simple, but not easy. Defence won’t impose an offsets regime that forces overseas suppliers to give work to Australian firms. The current Australian Industry capability (AIC) program requires those overseas prime contractors to make their best efforts to do so but doesn’t mandate an outcome. The result is that nobody has a powerful incentive to help industry to flourish, and there are no real sanctions for failing to do so beyond the damage caused to companies that fail, and to their employees and the industry capabilities they embody.

However, defence industry policy needs to be based on an understanding of how certain specific and very complex skills and capabilities are developed and sustained within a relatively small manufacturing industry community. The fundamental inputs to industry capability include regular, challenging work. Defence’s current policy is based on the Team Australia construct that has worked reasonably well in the case of the F-35 Joint Strike Fighter project. It  needs to help Australian firms move up the graph – and not by simply shoving them up there and mandating work, but by encouraging the development of the industry attributes and behaviours that make choosing Australian firms the wise and rational thing to do. This approach worked fairly well in the F35 JSF project. It could and should work equally well in forthcoming projects such as Sea 1000 and 5000, Land 400 and others.

It would be nice to think the forthcoming Defence Industry Policy Statement will consider some of these factors.

Saturday, April 18, 2015

First Principles Review – implications for Australia’s defence industry

What are the implications for Australia’s defence industry of the impending re-organisation of Defence and the DMO? To frame an answer to that question you need some sense of how Defence, as a customer, currently shapes the industry itself and the market more generally. I’ve discussed some of this in previous Blog posts; the diagram below shows how I believe a number of external forces shape Australia’s defence industry and I’ll explore these forces, and the potential implications of some of the changes in the department, further down the page.

Fundamentally, the industry is shaped by four forces: Defence’s need for high technology; its culture of risk aversion; the relatively small size of Australia’s domestic defence market; and the monopsonistic and monolithic nature of the defence customer. These last two factors in combination, especially when compounded by other factors such as the Customer-Active Paradigm, make the Australian defence market unique.

Defence tries to use technology to compensate for the small size of the ADF: it explicitly seeks equipment which provides it with a capability edge and is generally not available to Australia’s regional neighbours.

Will this change with the reorganisation of Defence and the DMO? Not at all: the drivers of the ADF’s technology demand will remain exactly the same.

However, technology, and the complexity that goes with it, has a price: Defence has suffered many disappointments and much criticism in the past over equipment acquisition projects which have run late or exceeded their budgets. This has made Defence extremely risk-averse and therefore more inclined to buy low-risk products off the shelf, and therefore usually from overseas, rather than take the risk of developing new equipment in-country.

This inclination is reinforced by Australia’s strong alliances with both the USA and the UK and the resulting privileged access it receives to their intelligence, technology and equipment. To some extent also a preference for US equipment, for example, reflects a genuine need for interoperability with Australia’s major ally as well as a need to ensure the health of the alliance. Arguably, a major factor in choosing foreign-manufactured equipment in preference to locally manufactured is often the existence of a logistics supply chain and large organisation to which the ADF can turn in time of war or if it encounters technical problems with its equipment.

Arguably also, the case for an overseas purchase isn’t always tested with appropriate rigour, creating the impression of a ‘lazy default’ which favours imported, off the shelf equipment and tilts the playing field against local industry players seeking to develop new equipment in Australia, or even to play some sort of role in the industrial supply chain.

Will this change? That ‘lazy default’ is a very subjective judgment but is based often on a lack of transparency, and therefore of any contestable logic, in the Defence and government decision-making processes. As long as a Prime Minister or Minister for Defence feels he or she has the right and a reason to make a ‘Captain’s call’, sound process will be at the mercy of political forces, regardless of the capability in question. A community-wide perception that Australian industry is incapable of doing an efficient, economical job simply makes it easier to argue a case for cutting local firms out of the action.

What about a more considered capability development and acquisition process? A couple of ‘IFs’ here -  IF 1) a national debate on industry policy gets under way, embracing defence industry policy also and considering operational capability along with economic and industrial base factors, then there’s a chance that risk-aversion might be mitigated somewhat by a wider debate on the benefits of engaging Australia’s defence industry. And IF 2) the reorganization provides an opportunity for local industry and R&D capabilities to engage better with the end-user and show their worth without being filtered through a separate and disinterested DMO, then again the prospects may be good. In recent weeks it would appear that a sector-wide policy for Australia’s naval shipbuilders and repairers is under active consideration: this may address partially the two ‘IFs’ above. And if this proves to be more than a political expedient and delivers real benefits to the Navy as well as industry it would be nice to think such a policy could be applied more widely across the defence sector.

This all highlights the fact that the Defence market in any nation is a monopsony: the only customer for defence equipment and services is the Government which, through the way it spends its acquisition and research budgets, exercises complete control over the size of the market, its behaviour and the barriers to entry faced by industry players. This won’t change.

Furthermore, Defence is a monolithic customer: if a market exists in Australia for, say, 100 jet fighters capable of carrying out a particular task, aircraft manufacturers will not compete to win a 20 or 30 or 60 per cent market share – Defence will typically buy 100 identical aircraft from a single manufacturer under a single prime contract, though possibly in successive phases or ‘tranches’. Market share becomes a binary value – one hundred per cent, or zero. This has important implications for manufacturers, especially as Defence may not replace these aircraft for 30 years or more – the market is characterised by significant peaks and troughs in demand with significant technology growth between them.

Again, this won’t change. 

The relatively small size of Australia’s defence market means that demand is frequently small so local manufacturers may not achieve economies of scale when developing new products for the ADF and therefore may not be able to compete on price with foreign manufacturers whose larger domestic markets (and possibly other export sales) have helped make their equipment cheaper and have spawned a robust engineering and logistics capability to support it. 

This won’t change: Australian defence spending isn’t likely to grow unexpectedly so the accessible market for Australian defence companies can only grow if Defence spends more of its money on local acquisition, or if Australian firms make significant inroads into export markets and global supply chains – something which Defence has helped with in the past and could usefully do again.

Because of the shaping effects on it Australia’s defence industry has been only intermittently successful in developing sustainable R&D, design, systems integration and manufacturing capabilities along with the management and marketing skills that are required to innovate successfully and compete credibly in the market place. For all these reasons barely 40% of Defence’s equipment acquisition budget finds its way to Australian companies, either directly or indirectly (via overseas pries dealing with local suppliers and sub-contractors). Graeme Dunk’s excellent analyses of DMO capital equipment spending patterns on behalf of ABDIU suggest that even 40% may be hard to sustain into the future unless something changes.

A cursory sensitivity analysis suggests that the greatest beneficial change in Australian industry’s prospects would come from tackling the two things that could change: market size and the risk-aversion of the Defence customer. The former can only change if Australian firms gain better access to export markets and global supply chains, and Defence has a vital enabling role to play in this. To change the latter, industry needs to shoulder the burden of proof, and do so convincingly, in order to attract more of Defence’s attention and then, hopefully, money.