Global Supply Chains
Australian defence firms seek global opportunities
Byline: Geoff Slocombe / Victoria
Many small Australian defence companies are run by people who have a good idea, implemented with smart technology, which proves attractive to the Department of Defence. The problem is that while large international contractors can spread their revenue and risk across a number of projects, small-to-medium enterprises (SMEs) often cannot.
Some SMEs are being cruelled by changes to Defence expenditure plans seemingly governed as much by the politics of returning the budget to surplus as by capability requirements – see ‘Budget Overview’ APDR June 2012.
Going global, to have longer production runs than those available solely for Australian requirements, can appear to be the answer. But is it?
SCENARIO A – AUSTRALIAN CONTRACTS
You are running a small, innovative company which has already won an important Australian defence contract, but that is due to be complete in three year’s time. The job has been profitable and strengthened company finances. It has also enabled you to recruit and retain some good staff. Your main product is only really applicable in the defence and security business sector and further Australian sales opportunities might be highly irregular in their timing.
The Australian Department of Defence recognises that it must nurture innovation and support a domestic defence industry which would otherwise have difficulty attaining and sustaining critical mass without organisational help. Defence helps firms understand and develop the skill sets necessary to be successful in the defence sector. It acts like a clearing house to put suppliers in contact with buyers, but has no involvement with commercial negotiations other than for its own purchases.
The first step, if not already done, is to register and list your firm at no cost on Defence’s e-Portal, where your firm’s products, capabilities, and contact details are available to any other user of the system. This is particularly important to help international prime contractors find local partners rather than bring in their own from overseas. It also gives access to Team Australia which ‘combines Australian Government and industry in promoting Australia’s innovative defence and security technologies. This partnership indicates Defence support of Australian industry to supply high quality, sustainable solutions to the capability requirements of valued overseas customers.’
Initiatives by Defence include the Australian Industry Capability (AIC) program which seeks to maximise opportunities for Australian industry to compete on its merits. The Skilling Australian Defence Industry (SADI) program and its extension, the Industry Skilling Program Enhancement (IPSE) package, exist to up-skill existing employees and broaden the Defence industry skill base. The Priority Industry Capability (PIC) Innovation program provides repayable matching grants to invest in delivering innovation within each PIC, thereby assisting companies to develop, adopt, or commercialise new products, methodologies, materials, or systems. The Defence Materials Technology Centre develops new materials and manufacturing technologies, while there is the Defence Industry Innovation Centre (DIIC), with its focus on SMEs.
Enterprise Connect is an Australian Government initiative which has a network of 12 centres located across the country that work with SMEs, particularly those that wish to trade with the Government. These centres are staffed by highly skilled business advisers who provide access to specialist expertise and the best available technical and business resources to Australian SMEs to help them transform and reach their full potential. Eligible businesses are able to request a comprehensive, confidential and independent business review at no charge.
The Australian Industry & Defence Network Incorporated (AIDN) is the peak industry association for SMEs wishing to do business in the Defence and Security sectors. AIDN is made up of State and Territory chapters with a combined membership in excess of 800 principal SME companies. In South Australia this role is taken by the Defence Teaming Centre (DTC).
SCENARIO B – GOING GLOBAL
You believe that the firm’s intellectual property and products derived from it will be attractive to the defence forces of other countries, but you do not have the funds and dedicated resources to mount a lengthy international sales campaign on your own. How are you going to grow the firm’s defence business internationally?
Defence does not provide direct financial support for SMEs seeking to export, however, the SADI program and the DMO-funded Enterprise Connect DIIC provides grants and assistance to SMEs in order to make them more competitive or capable and thus able to more likely participate in overseas activities. This has included funding a series of workshops for SMEs on export readiness and tradeshow and presentation skills training.
One key criterion for considering overseas markets is to assess whether or not your firm is ‘export ready’. Help and information for this assessment is available from the Defence Export Unit (DEU), DMO’s Industry Division and Enterprise Connect. They aim to assist Australian defence companies to access export markets and global supply chains and thus broaden their customer base, helping sustain key defence industry capabilities in Australia.
The factors which will be considered when helping to see if your firm is export ready include the ability to perform substantial work locally with Australian owned IP; test if there is a clearly defined business and export plan; establish there is a real product, technology or service – not just a concept or in development; check your understanding of the market for your product; and your appreciation of the commitment of resources (staff, time and dollars) needed to enter the export market.
The DEU promotes defence industry exports through a program of events in North America, Europe, United Kingdom, South America, Middle East, and South East Asia. This includes the organisation and conduct of trade missions, attendance at select tradeshows, the facilitation of the US Foreign Comparative Testing Program and the facilitation of inward visits by key delegations.
The DEU also provides companies with advice on the target markets including how to do business in a particular country and their offset requirements. The DEU has three two-star military specialists that help open doors to the military overseas; doors which would have otherwise remained closed to many of Australia’s SMEs.
Because of the US government International Traffic in Arms Regulations (ITAR) and other matters it is also necessary to have an export licence/permit available through the Defence Export Control Office (DECO).
DEFENCE’S GLOBAL SUPPLY CHAIN (GSC) PROGRAM
Defence’s DEU and GSC programs are two separate initiatives.
The GSC program was inaugurated in 2009 and is explained on Defence’s website as ‘The GSC Program is designed to assist entry by Australian defence industry into global supply chains of multinational primes. The GSC Program will establish agreements with multinational primes, called GSC Deeds, which will actively facilitate opportunities for Australian industry to compete in the primes’ global supply chains and that of their major suppliers. The process is driven by the multi-national primes demand (requirements) and the standards for entry by Australian companies are very high.’
‘Presently there are GSC Deeds active with The Boeing Company and implemented through the company’s Office of Australian Industry Capability (OAIC); Raytheon implemented by the Raytheon Industry Development Unit (IDU); Thales implemented by the Thales Industry Engagement Unit (IEU); Northrop Grumman implemented by the Northrop Grumman Australian Collaboration Team (ACT); Lockheed Martin implemented by the Lockheed Martin Office of Australian Industrial Participation (OAIP); and BAE Systems implemented by the BAE Systems Australia Global Access Program (GAP).’
When asked by APDR about funding, a Defence spokesperson replied: “The GSC program directly funds the international primes to establish offices within their organisation and fund activities to directly assist Australian industry access global supply chain opportunities. This takes the form of a contracted arrangement that requires the prime to seek opportunities across all business lines, introduce selected Australian industry to the company’s supplier management organisation, and, where appropriate, provide training to Australian firms to improve their international competitiveness. No funding is assigned to Australian industry, which must compete on merit against the opportunities offered. In all cases Australian industry is competing against international suppliers.”
PHM TECHNOLOGY – OPERATING GLOBALLY
PHM Technology (PHMT) is an advanced engineering technology company, based in Melbourne. They are the typical Australian defence SME. Their main product is Maintenance Aware Design environment (MADe), a suite of software tools that provides an integrated modelling, analysis and decision support solution for the design and maintenance of complex engineering systems – reducing costs and risk. MADe is an advanced model based solution that has been funded by US and Australian Departments of Defence and is currently used in the aerospace, defence, energy, mining and off-shore industries.
Responding to questions from APDR Chris Stecki, CEO of PHMT, said “Because we are selling software that optimises decisions made on projects rather than ‘widgets’ to fit a design it is no doubt a more difficult and protracted sales process. MADe has application for any project, so it is important to find the ‘right people’ that are involved in the activities that our software supports – at ‘the right time’ e.g. ideally before they commence this component of the project. However the global push towards minimising through life support costs is a key driver for companies to consider using our product.
“We have found Thales in particular to be active and I put this down to their ‘in-country’ person in the UK understanding what we do and getting some initial interest from the people that he introduced us to. We have provided a quote and understand that they are interested. “
“BAE Systems seems to be getting on their bike as a result of an opportunity we identified through an introduction to the UK from an Australian, but not from their GSC group, and a project that we got from RAN which is being conducted via BAE Systems in Australia. Since I contacted their GSC reps they have been very active in assisting us and they can provide visibility into areas that we couldn’t normally get to.
“Raytheon have been in touch with us on a regular basis.
“DEU have been fantastic. The Team Australia missions provide us with some assistance in attending the key events e.g. Farnborough and with minimal funding support for participants we can start to build continuity in these markets. We will be attending our third Farnborough Air Show this year. DEU reps have also assisted us by attending meetings every now and then which is important with other Defence organisations and companies. I have recently also had some assistance in securing introductions to MOD – that means that we have the opportunity to make our pitch to the ‘right’ people which is all we could ask for.”
BOEING DEFENCE AUSTRALIA
The Office of Australian Industry Capability (OAIC) is proving to be a highly successful partnership between Boeing and Australia, with some 240 requests for quotation released to Australian industry and more than US $230 million in contracts awarded since November 2007.
Boeing was the first company to sign-up to the GSC program. The OAIC works primarily with export-ready Australian SMEs, identifying bid opportunities both within Boeing and its international supply chain, matching local capability with global requirements.
Boeing offers a variety of training and mentoring programs to SMEs to ensure that they have the knowledge and skills to deliver in the global marketplace.
Past training has included program management, business development and communications training as well as hands on classes such as high speed titanium and aluminum machining, Geometric Dimensioning and Tolerancing (GD&T), Quality Assurance and LEAN manufacturing, which are essential to be part of this global supply chain.
Additionally, four participants a year are selected to participate in a week long executive training program at the Boeing Leadership Centre in St. Louis.
Ferra Engineering is a good example of how an SME can participate in the GSC program and gain long term work. Ferra had the distinction of being named by Boeing (USA) as their international supplier of the year (2012). That distinction was a combination of the introduction facilitated by the GSC program and the skills and business acumen of Ferra to deliver the required outcomes.
At a practical level, the OAIC has also initiated and completed export licences for most major defence programs at Boeing, which helps pave the way for eligible AS9100 approved Australian suppliers to bid on upcoming defence related opportunities.
The OAIC, in partnership with the DMO and Boeing Research & Technology Australia (BR&T-A), recently established a purpose-built facility at Swinburne University for SMEs to engage in a range of robotics training.
Like any good partnership, Australian SMEs play their part by investing the time and resources necessary to participate in the GSC program. For example, they may be asked to take part in a capability conference overseas where the OAIC brings them together with potential customers and enables them to showcase their skills in areas like machining, sheet metal, composites, simulation and modelling, and cyber security.
In addition to attending conferences, the OAIC has facilitated hundreds of meetings in the United States, Canada, Asia and Europe with Boeing and its top tier sub-contractors.
The OAIC has also brought international procurement managers and executives from Boeing and its major sub-contractors here to visit machining, sheet metal, composites, cabling, processing and tooling companies in Adelaide, Melbourne, Sydney, Perth and Brisbane. These visits have proven extremely successful and have resulted in multiple bid opportunities for local suppliers.
Another key focus of the OAIC is to match Australian-developed technology with global partners, creating sales and collaboration opportunities.
Raytheon Australia was another company keen to become involved in the Commonwealth’s GSC program.
When the IDU was established it was set the mission to identify potential opportunities for Australian firms within Raytheon Company; to mentor Australian industry on the US defence market; to work with the DMO and other Federal Government agencies to co-ordinate trade missions; and to help break down the barriers that may otherwise deter local firms from doing business in the US defence market.
Asked by APDR about the importance that Raytheon places on their IDU Michael Ward, managing director of Raytheon Australia, said “We are committed to the role of SME’s in a dynamic Australian defence industry. Part of this commitment stems from the recognition that there are genuine opportunities to involve capable SME’s in the Raytheon global supply chain. The role of the Raytheon IDU is to work with SME’s to help bring these opportunities to fruition. We are proud of what we have achieved so far and are dedicated to work with small business to create further export markets for Australian firms.
“The Raytheon IDU operates in a trusted partnership with the DMO to identify opportunities for suitably qualified Australian SME’s in the Raytheon global supply chain. The strong endorsement of Defence is evidenced by the fact that the IDU has successfully undertaken five DMO initiated program management reviews over the life of the Unit. Defence support has also been provided in the extension of the Unit’s activities through to September 2016.
“15 Australian SME’s have been organised to visit Raytheon global businesses by the IDU. In addition, the Unit has promoted a further 59 Australian SME’s with the Raytheon Company internationally. This has involved practical support for the preparation and submission of company capability briefs, technical papers and other supporting documentation to Raytheon businesses for analysis and initial assessment.”
When APDR requested details of specific events where Raytheon has involved Australian SMEs, Michael Ward said “The IDU reviews international and Australian tradeshow events to assess whether suitable opportunities exist for SME’s and the relative benefits that might result from their engagement. As part of this process, the IDU supports an SME presence at all of the major Australian tradeshows including the Pacific Maritime Exposition, MilCIS, the Avalon Airshow, the Land Warfare Conference and the Defence and Industry Conference. In addition, the Unit also works to facilitate meetings for local SME’s at relevant major overseas events such as Farnborough and Paris Airshows, Eurosatory Paris FR, Interservice Industry Training Simulation and Education Conference (I/ITSEC), Orlando FL, and the Military Communications Conference (MilComm), Boston MA.
“The IDU has also arranged for SME’s to attend and participate in internal Raytheon Company organised Technology and Engineering Conferences in the US, such as the company’s System Engineering and Architectures Conference held in Dallas TX, and the Materials and Mechanical Engineering Conference in Los Angeles CA.”
Pressed for actual results, Michael Ward responded “Through Raytheon’s Industry Development Unit, 74 Australian SME’s have been actively engaged in 85 opportunities and marketing activities across 18 major programs and 27 commodity and technology areas with Raytheon businesses globally. Through the IDU’s global supply chain activities 34 contracts have been awarded to Australian SME’s worth a combined total of A$191 million.
“These contracts have covered a wide diversity of technologies, including advanced radar electronics for F/A- 18 aircraft, precision metals manufacturing for high-end missile applications, missile warhead modelling applications, biometric security applications, high-end electronic oscillators for advanced air-defence and surveillance applications, data and cyber security applications, and advanced computer operator consoles”.
When Chris Jenkins, Thales Australia’s CEO, was asked by APDR about the importance of their support for local industry he responded: “As one of Australia’s leading defence companies, we are committed to ensuring a viable defence industry in this country. The GSC program is a valuable Defence initiative that not only contributes to providing and securing a level of sustainable business opportunities for SMEs, but also demonstrates the competitiveness of Australian industry in the global context. This is not only good for them, but also ensures that Australia has a wide variety of capable, agile and highly skilled suppliers ready to deliver vital, cost-effective capabilities to the DMO and ADF. This diversity and depth is crucial at a time of increasing global uncertainties and geopolitical challenges.”
Thales has been active in promoting Australian defence SMEs in the global market, for instance by organising SME visits to other Thales companies in France, the UK and the US. Thales supported SME presence at all recent Team Australia events to Paris, Farnborough, Middle East, DSEI, ADM conference, Manufacturing Week, Pacific 2012, and the Land Warfare conference.
A key aspect of Thales’s overseas work with Australian SMEs is to facilitate meetings with potential buyers and especially to put technical staff of the SME in touch with the technical staff of the prospective buyer, ensuring the company is in the right place at the right time. Their ideal is to help an SME acquire an initial contract which will grow over time with repeat business.
There have been a number of opportunities facilitated which are currently confidential, but many (non-vehicles) opportunities have resulted in contracts, while other opportunities are progressing. One example involves PHM Technology from Melbourne – Thales funded a trial of the MADe product in the UK, leading to the potential for contract award in Australia and Europe down the line. Discussions are ongoing.
This work with SMEs builds on previous and ongoing relationships with suppliers for projects beyond those directly linked to the GSC Program. For example, Thales is well-known for its Bushmaster protected mobility vehicle which has been credited with saving many Australian soldiers’ lives in Afghanistan. 2261 line items are required for the Bushmaster, coming from the 120+ suppliers who are involved. 80% by value of the Bushmaster is sourced from within Australia. Although orders for the Bushmaster have slowed, the company is working towards a potential purchase contract for $1.4 billion worth of Hawkei light protected vehicles, due for completion in 2015.
One important pointer to Thales’s concern for its SME suppliers is the pattern of ordering that they place for Bushmaster components. A spokeman said “Once a production cycle is running, lead times are factored into the production cycle and the order pipeline for continuous production. We continue to work with our supply partners to reduce the production and shipping lead times for these items. Our overall approach is to balance the supply chain timelines, economics of the order and shipment quantities from our suppliers with our own production schedules to get the optimum production throughput and cost model for that particular component.”
Alistair Beaton, Thales Australia Industry Engagement Unit Director, described to APDR the four main benefits to SMEs of participating in Defence’s GSC Program as “It maximises business opportunities for Australian industry to compete in the global supply chains of multinational primes and those of their major suppliers. Doors are opened by short-cutting the process of entry in the global supply chains of primes by matching relevant Australian industry capabilities with identified opportunities. Partnerships are enhanced through stronger relationships between Defence and industry through pursuing defence procurement globally. Australian Defence programs can increase competitiveness through market assistance, training and mentoring.”
He said that because Thales already does business globally, any suppliers chosen to assist Thales are deemed preferred supplier for particular aspects suited to the SME’s capability. However, SMEs need to be engaged through Thales Supplier Assessments to accurately gauge their capabilities. Once they on the IEU’s database they will be matched against global opportunities recorded by Thales and introduced to those parts of Thales which are responsible for pursuing the opportunity.
Led by Northrop Grumman’s Electronic Systems sector, and followed by Aerospace Systems sector and others, the company has been building its local presence by partnering with Australian industry. Northrop Grumman is committed to using Australian capabilities where they exist and to fostering the development of indigenous capabilities where this is needed.
One of the most notable examples of this investment is Northrop Grumman’s on-going relationship with CEA Technologies. Northrop Grumman acquired a significant shareholding of CEA in March 2006. Both companies saw strategic advantage in this decision. CEA has a well-earned reputation as a specialist in digital phased-array radar. In particular, CEA developed the CEAFAR radar for the Anzac Class frigates installed as part of the recent Anti-Ship Missile Defence Upgrade program. Northrop Grumman and CEA are jointly pursuing US and other international radar opportunities.
Northrop Grumman has also recognised the unique capabilities and technical expertise of Electro Optic Systems (EOS) Australia. Located in Canberra, EOS specializes in the development of advanced remote weapons stations and, laser and optical space tracking systems. On the space side, Northrop Grumman and EOS are working on a number of research and development opportunities.
Lockheed Martin has been active in Australia for over 50 years. They joined Defence’s GSC Program at the start of 2011 and signed a Corporate Annexe at Pacific 2012 for the creation of their Office of Australian Industrial Participation (OAIP).
The Corporate Annexe formalises the agreement between Lockheed Martin and the Defence Materiel Organisation about standing up a Lockheed Martin Office of Australian Industry Participation, with the team roughly split between Australia and the US. The people in the US work through Lockheed Martin and US program partner supply chains to identify opportunities for Australian SMEs to participate in. The people in Australia will survey local industry and broker relationships with Australian SMEs in order to identify and validate their capabilities.
In the fullness of time, both sets of individuals will fuse their collective knowledge, with the likely outcome being some announcements of GSC sourcing contract awards related to recent new ADF military capability platform contracts won by Lockheed Martin.
Pre-dating Defence’s GSC Program, Team JSF has over 30 local partners and contracted some hundreds of millions of dollars of work with local SMEs. Their capabilities are now logged in a corporate system that will identify them immediately when Lockheed Martin becomes involved in any new programs and they are invited to bid for this new work.
Lockheed Martin believe it is best for local SMEs to start with small volume contracts and as their production capability expands, to seek larger and larger contracts over the lifetime of a program. They claim it is better to supply a small range of solution components to a very long production cycle and through life sustainment than to win business solely for Australian projects.
An example of this philosophy is the announcement that Ferra Engineering has been awarded a $6 million dollar contract by Lockheed Martin to supply weapons pylons and mission kits for the RAN’s MH-60R Seahawk ‘Romeo’ naval combat helicopters.
In announcing the contract, Minister for Defence Materiel Jason Clare said “This is a great example of an Australian manufacturing company winning work in the supply chain of one of the largest defence companies in the world. Not only will Ferra Engineering produce parts for the 24 new helicopters Australia is buying, they will also manufacture parts for helicopters being built for the US Navy.”
BAE SYSTEMS AUSTRALIA
Steve Wynd, General Manager Global Access Program, commented to APDR “I have been delighted with the reaction of our Company in the UK and US to this program. In the US, we have already appointed a procurement specialist to work with the North American supply chain and a similar position will be filled in the UK later this year.
”Given that we’re just a couple of months into the program we don’t have any contracts in place but there are some very exciting prospects in the pipeline.
“While recognising that the Company is very new to the program, the GAP complements the work we have been doing in Australia over the past 50 years. Each year BAE Systems subcontracts $900 million in work to 2400 suppliers, 80% of whom are based in Australia.”
He continued “We are actively seeking opportunities particularly in the US and the UK that result in Requests for Tenders being issued to Australian companies with sufficient capability to successfully deliver the work.
“We identify suitably skilled and qualified Australian companies that have the technology, quality, commercial and business readiness to successfully compete in the BAE Systems Australian supply chain.
“We also mentor and provide training and we support Australian industry in establishing export licenses, responding to Requests for Tenders and mobilising export contracts.”
They are currently working with around 20 potential suppliers for pre-qualified opportunities in the US (these are actual opportunities within their global supply chain). Steve Wynd said to APDR “We are supporting these suppliers by delivering samples to buyers in the US, introducing them to the Engineering and Procurement decision makers, effectively fast-tracking their access to new opportunities.”
“The focus of our efforts to date has been in the area of commercial automotive, defence vehicles and electronic combat solutions. Our point of difference is that we can access global markets, we can access a broad range of products, we are actively engaged with Australian industry and we can leverage our position as Australia’s largest defence and security company.”
THE FUTURE OF DEFENCE’S GSC PROGRAM
A Defence spokesperson recently told APDR that the Government is committed to boosting Australian defence industry exports and providing opportunities for SMEs to become part of the supply chain of the global primes. The Government has promised $59m in the Global Supply Chain Program from 2009 to 2019 and $34m for the Defence Export Unit from 2007 to 2017.
The spokesperson also said “In line with the Government’s policy not to include ‘offsets’ or counter trade in Defence acquisitions, the GSC program does not set targets for the activities of the international prime contractors. Instead, in an environment of ‘best endeavours’, the program has a set of Key Performance Indicators against all activities undertaken in order to measure progress under the program. In addition, a key measure of effectiveness is the value of contracts won against the opportunities offered.”
Defence Materiel Minister Jason Clare said recently “To date more than $448 million in contracts have been awarded to Australian industry through the program. Australian SMEs are the big winners, winning about 90% of the value of these contracts.”
Since its inception in 2007, Australian firms have reported over $750m in contracts arising from involvement in DEU activities.
However, the CEO of an SME recently admitted to APDR that “The short answer is that in our case we find these people will help you – but that you still have to do most of the work yourself !”
The DEU and GSC programs will offer a lifeline to Australian defence SMEs with realistic expectations, the right intellectual property and derived products, staffing, financing and a determination that they will expand their business through exports.
Government must play its part by continuing to support these programs and by not abruptly changing their expenditure plans to fit their own perceived short-term political needs.