CEDA Address | BAE Systems | Australia

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CEDA Address - Glynn Phillips

Glynn Phillips - Chief Executive
Australia's defence industries boom: Are we ready?
Good afternoon everyone. Firstly I would like to thank Dr Green for his excellent speech and to say I am delighted to be invited to speak here today and in particular to recognise our partnership with the State Government of Victoria for the exciting Fisherman’s Bend Defence Precinct proposition.
 
Australia is embarking on a significant national endeavour, our largest ever peace time investment in defence capability.
 
With the Federal Government’s ambitions clear, the opportunities and challenges for Australian Defence Industry cannot be understated. It also poses some questions.
 

Fundamentally, how do Government and industry work together to grow a larger sovereign defence industry that is sustainable for the long-term?

 
How do we encourage investment, commitment and competitiveness in the industry that serves the needs of our defence force while also supporting economic growth and positioning Australia to meet the present and emerging challenges, in our region and wherever our national interests are at stake?
 
First and foremost, a long-term, binding bipartisan agreement as the basis for setting expectations and funding of our national Defence capability would go a long way to increasing the capital productivity of the money the Government invests in Defence on behalf of the Australian tax payer and will allow industry to plan long term investments to deliver technological and efficiency improvements.
 
The peak and trough cycles traditionally associated with the defence industry are challenging for industry to attract and retain workforce and plan for the future. The demand for skills in the Defence industry is to rise at a time when many organisations have been trimming their workforces. And there are some clear geographic hot spots – the implications for South Australia and Western Australia in the Maritime sector being obvious examples.
 
For an issue of such national significance, it would seem sensible if there was an agreement covering at least the period of the forward estimates that represented the bipartisan expectations of Parliament with respect to the scope and nature of Defence capability and the funding which would be made available to enable those expectations to be met.
 
Denmark provides an example of what can be achieved. In a Parliament with eight democratically-elected parties, an agreement about national security is struck every five years between the main parties.
 
The Danish Defence Agreement attempts to clarify the strategic intent for their Defence Force, their role within the chosen alliance framework, the force structure, readiness levels for different elements of capability, notional duration of sustained operations and the level of concurrency as well as the funding that will be provided.
 

We are faced with continued threats to both the security of our region and the rules-based global order.

 
We need a stronger defence capability and a world leading defence industry that can influence the strategic environment in which we are situated and operate in a way that will protect the interests of the nation.
 
There are also those unique capabilities that are so important to Australian Defence missions that they must be developed or supported by Australian industry because overseas sources do not provide the required security or assurances we as a nation need.
 
The nation will require more from industry if it is to live up to the potential that the 2016 Defence White Paper asks of it. It is up to industry to take the lead and do the hard work to ensure that Australia can not only increase its ability to service its own defence needs, but also play a bigger role in servicing the defence needs of other countries.
 
Further an increasingly changing global economy is creating challenges that is placing different pressures on how the country forms its economic strategies. Australia as we know is a prosperous nation, now in its 26th year of uninterrupted growth and set to take the record for the longest period of economic growth of any major advanced economy.
 

The challenge of securing sustained growth, greater prosperity and a fairer society has not gone away.

 
In some senses the challenge is harder. As a nation we have already picked the low hanging fruit that delivered the productivity gains of the 80s and 90s.
 
And, while further productivity gains will take more resolve, getting more output from the same or fewer inputs is never easy. Now is the time for the Defence Industry to step into its own and build a new sustainable Industrial landscape for the prosperity of Australia.
 
The federal budget is projected to continue in deficit until 2020-21, with no major changes to the bottom line. The debt will not be repaid by expenditure measures alone. To pay back the debt we will need to boost our incomes by implementing economic policies that lift productivity, drive investment, increase profits and support higher real wages.
 
While Australia is blessed with national resources the uncertainty of commodity price cycles has made clear that the development of these resources cannot be the only pillar on which the Australian economy is balanced. We can use our defence dollar to drive a high technology, advanced manufacturing future for our nation.
 
Make no mistake, a future as a global hub for advanced manufacturing is within our grasp. Australia is on the doorstep of Asia at a time of unprecedented industrialisation and urbanisation and we have many of the necessary skills and capabilities. Through productivity improvements we are able to increase our competitiveness by reducing costs. The intellectual environments available in our advanced manufacturing companies offer long and rewarding careers for Australians in a global market place.
 

We can compete globally with our manufacturing offering.

 
Unfortunately, the sector is being held back by the defeatist attitude that has prevailed since automotive manufacturing began winding down. For developed countries like Australia, competing in the high volume production markets against developing countries is difficult, if not impossible.
 
Having a high standard of living is something we enjoy, but we pay for it with our lack of price competitiveness in some areas. One way to combat this lack of price competitiveness is through leveraging our high skill base. It is therefore important that we focus on industries that demand a highly skilled workforce. That is where we get the competitive advantage.
 
The need for innovation drives a need for highly skilled personnel. Nothing drives the need for innovation like competition or survival. And since both of these characteristics underpin Defence requirements – our service men and women are protecting and defending our country with the equipment and capability we provide, it is no surprise that the Defence Industry has one of the highest skill levels.
 
To ensure a healthy Defence Industry we need to support the development of Australian technologies and products and support the continued development of our skilled workforce. To achieve this we – Government, Defence, Industry and Academia - need to work as a collective enterprise to ensure that our country receives full benefit from a healthy Defence Industry. Together we have an opportunity to utilise new technology to deliver increased capability, and to do so in a way that benefits the entire nation.
 

Thankfully, we’re not starting from scratch. Australian industry has been working with our Defence Force for 100 years.

 
We have grown our footprint, we have expanded our contribution to the economy, and we have continued to invest in and grow the skills of our workforce nationally.
 
The capability that the Defence Force will need over the coming years is intended to ensure it remains a potent high-technology force that can fulfil its obligations in our region and with our allies.
 
How do we achieve this edge? The Defence Industry Policy clearly identifies the need to have a strong local Defence Industry, characterised by identifying Defence Industry as a Fundamental Input to Capability. This signals that over time Defence will trend towards acquiring capability rather than the supply of material or equipment. In theory this results in a change to the traditional boundary between Defence and Industry as Industry take on more responsibility to deliver capability outcomes.
 

We believe everyone – large businesses, governments and the communities in which employees and business owners live – benefits when we have a viable and productive small business base.

 
Large international companies can drive diversity and extend reach into the Australian market by not only engaging with SMEs directly but by requiring our key partners and subsystem suppliers to do the same within their own supply chains. BAE Systems has committed to this on the Land400 program, the Army’s program to acquire and support the next generation of Armoured Fighting Vehicles, to secure maximum Australian Industry Content. Similarly for the SEA5000 Future Frigate program.
 
Even with help from the Commonwealth, many Australian SME’s are simply not large enough to move up the capability ladder on their own. They provide niche technologies that are vital to a competitive and advanced industry, but to deliver their potential they typically need to be integrated as an element of a larger system.
 
We need to support the transfer of IP, skills and technical information into Australia to support local manufacture and ultimately develop sovereign industry capability. In the case of Land400, we have a mature plan for Australian manufacture and onsite training for Australian teams to mitigate risk and ensure tech transfer. We see these as integral to the development, growth and sustainability of industry and a necessary part of not just Land400 but any defence acquisition program.
 
This does not mean that Australian industry should not pursue opportunities as part of supply chains. But we must recognise that this activity by itself would not necessarily result in an enduring industrial capability for defence.
 
With the pipeline of work ahead of us, it is becoming increasingly obvious that we must continue to invest in the skills and education needed to deliver on the Defence plans in front of us.
 
At BAE Systems we predict a required workforce growth totalling between 4-5,000 employees over the next five+ years – many of these will be scientists, engineers, project managers – those with the dedicated training and experience the industry needs. Many will be blue collar jobs as well – those highly skilled technicians who ultimately make up the bulk of our workforce.
 

We need to ensure our collaboration with academia is such that we are able to attract and develop talent into defence careers.

 
Just as we have seen with our Open Innovation Network, which is a collaboration with universities to align talent and research and development with Defence’s strategic needs, we need to bring industry and academia together to engage on current and future defence challenges and allow incubation of new technology, innovations and ideas.
 
As I mentioned earlier, the challenge with low-cost, high-volume manufacturing from abroad is shining a light on our manufacturing industry. The reality of our high-wage economy and geographic remoteness suggests that our success in manufacturing comes from being better.
 
We have an advantage when it comes to advanced manufacturing – the application of leading-edge technical knowledge and expertise to create products and associated services to create and sustain high growth and satisfaction.
 
If successful, our Land400 offering, the AMV35, will be manufactured and supported at Fishermans Bend here in Victoria. Alongside other defence and tertiary institutions we will form part of Australia’s new world class home for defence that will require up to 1,000 engineers and highly skilled technicians to design, develop, deliver and maintain new defence platforms and systems for the Australian Defence Force.
 
We are pleased to be working closely with the Victorian Government on this project. They, along with Victorian Federal MPs, have been strong supporters. We are excited about Land 400. Not only because the AMV35 is highly capable but also because it will be built and supported in Australia, generating the industrial and economic development I am talking about.
 

Line of sight to employment is key.

 
The rising cost of university education means students and parents are looking for alternative routes to employment. We have a fantastic opportunity to offer just that.
 
We should be banging the drum for apprenticeships in steelwork, mechanical, electrical and technical trades as they will be critical for decades to come. Let's promote the avenues this opens to work on some of the most sophisticated kit in the world, which enables those who put their lives on the line for us to have the best chance of coming home safely. Who wouldn't want to be a part of that?
 
It needs a long term strategic view of the workforce capabilities that will be required and a willingness from industry to help co-design the programs which will provide workforce ready people.
 
Academia needs investment that fosters partnerships, commercialisation of ideas and exports to a thriving, innovative and globally competitive industry, as that will attract the best and brightest and advance our technological knowhow.
 
The national shipbuilding college for example has a vital role to play in developing, supporting and sustaining the skills required to create an enduring industry, but we need to do more.
 

The $89bn investment the Navy is making will create thousands of jobs of the most advanced type in manufacturing, technology, software and construction.

 
This is a nation building activity and complex ship building requires highly skilled people and world class processes. The college will be critical to the development of these skills and will be pivotal in driving the policy reform and multilateral approach required to succeed.
 
Regardless of where the Navy’s fleet is being assembled the industrial ecosystem required to build and sustain the fleet will come from across Australia. It is expected that there will be more than double the number of workers in sustainment activities and throughout the supply-chain across Australia than those involved directly in shipbuilding.[1]
 
We, business, have a responsibility to ensure we are educating society on this point – through highly-skilled people, new technologies, virtual engineering models and new manufacturing techniques, we can transform the defence industry into a leader for Australia.
 
We have an opportunity to utilise new technology to deliver increased capability, and to do so in a way that benefits the entire nation. Well thought through advances in science and technology are a good thing and should be embraced.
 

In this climate, technology has a clear role to play in creating opportunities for economic growth as well as ensuring that we maintain a capability edge in Defence and Security.

 
Defence is a long term game. The development lifecycle for new capability and product is rarely shorter than a decade.
 
We saw the Joint Strike Fighter for the first time on Australian shores earlier this year. JSF represents state of the art in combat aircraft technology, so it’s hard to believe that the JSF program started before there was such a thing as Google or e-Bay or Smart Phones, which today are entrenched in our everyday lives.
 
Consider also the Nulka Missile Decoy, which represents state of the art naval defence technology, was started before there were personal computers and just at the dawn of digital computing.
 
Today we are starting to focus on a number of Maritime programs that will not enter into service until the next decade at the earliest.
 
The recently announced Defence Next Generation Technology Fund is focusing on advanced technologies, some of which will not likely be present in the service of our Defence Forces until the late 2020s or later.
 
There are risks associated with the de-stabilising effects of the long timescales associated with Defence Technologies over and above the risks normally associated with advanced technology or trying to do something that no-one has done before.
 
This makes it difficult for industry and research organisations to develop reasonable business cases for investment if they are forced to go it alone.
 
Having a clear route to market, having a customer who sees benefit in looking first to Australian Industry for their solutions, and having an environment where industry is engaged and kept informed of customer needs early enough to be able to plan, is what is needed to ensure a viable and strong Australian Defence Industry.
 

We can learn from history here – there has been a pattern of disruption as far back as 250 years.

 
Since the appearance of railways, and the development of modern farming – both important evolutions that changed economies and society, industrial revolutions have been characterized by radical physical transformation as well as production methods
 
For their time these disruptive technologies were unsettling for society and for individuals. It changed for many how they live and work.
 
Digitisation for example enables a significant step change across every element of a traditional ship design and build program. The digital shipyard will ensure that every aspect of the ship during the design and build and throughout its service life is live and accessible to the crew as well as all those involved in the maintenance and upgrades of the fleet.
 
People will be connected in their place of work to assured, readily understandable information and processes working in real-time.
 
Our SEA5000 digital shipyard will include an inventory of every part, including cost and acoustic signature, suppliers and their details, providing Australian industry the opportunity to improve upon all parts and systems used in the construction of the Ship.
 
Our 100 million dollar investment will ensure that everyone on the program has access to real time information that will save time and money and facilitate greater connectivity with our supply chain.
 
It will allow for the first time the ability for a ship’s systems will have the ‘intelligence’ to report on its own performance and maintenance needs and have the ability to order both the maintenance and parts required prior to even docking, much like commercial aircraft do.
 
Alongside the world class shipbuilding facility the Australian Government is developing, the digital shipyard will ensure that a sustainable naval shipbuilding industry is created that will contribute to the nation’s security and long-term prosperity.
 

My view is that technological innovation in Defence should continue to be this country’s priority.

 
If we don’t prioritise it, Australia risks becoming a nation that is lagging in capability – behind the nations, groups or individuals that pose a security threat.
 
And we will be exposed to higher costs by having to import technology.
 
In fact, if we don’t prioritise technological innovation we lose the opportunity for Australian businesses, and the economy to benefit, and for the nation to transition to one less reliant on the resources industry.
 
This is not just about inventing new technologies, it is also about innovation. It is about doing things better, in how we design, manufacture, support and upgrade assets and services to continuously ensure the ADFs platforms and services are available, reliable and cost-effective.
 
And, it is critical that we do this. Australia and the region is facing greater security complexity and uncertainty than it has for many decades, and the threats facing the nation are constantly and rapidly evolving. 
 

Both sides of government share the same concerns on our national security, on this the politics of labour and liberal are working together and should continue to do so.

 
The investment in a sovereign Australian defence industry delivers greater value for the tax payer. Through increases in productivity and technology developments the defence industry is delivering highly-skilled jobs and offering opportunities to showcase Australian ingenuity around the world.
 
Through exports we can create a larger market for Australian industry, and deliver a more sustainable, more productive industry. Export markets promote innovation, skills, technology development and employment. And they help build our relationship with allies through partner country capability and interoperability. We must seize Australia’s piece of the action.
 
If we do this, it will be a positive story for the Defence Industry and one where we are supplying a greater proportion of the world’s defence needs.
 
If we assess the importance of the Australian Defence Industry only on the benefits it provides to Defence then we are seriously under valuing the industry in terms of its contribution to the health and prosperity of the Nation.
 

So, are we ready for the defence boom?

 
Absolutely! If the Australian Defence Force are to get the capability they need, we don’t have a fail option.
 
We have a huge opportunity in front of us, of a range, scale and complexity not seen before. As a result it is going to require a collective effort from industry, academia, defence and government to work together as never before if we are to deliver the opportunity our future generations deserve thank us for.
 
[1] Source: pwc: What we know about the economic benefits of naval shipbuilding for South Australia. By the Numbers – Defence Briefing Note: October 2017.