Defence purchasing need to change to grow local SMEs – Rebecca Humble

Australian defence contractor Nova Systems led a meeting of defence SMEs at the recent Indo Pacific Maritime exposition, to discuss defence industry policy. Here, Rebecca Humble argues that policy settings are not succeeding in growing small SMEs into larger ones, and larger ones to the scale where they can compete against foreign companies and bid to win major contracts in their own right.

Our defence industrial landscape has the offshoots of the large defence multinationals at one end of spectrum and a healthy base of SMEs and small businesses at the other, but a lack of Australian owned defence entities of scale occupying that middle space.

Not since the days of Tenix Defence have we had any lead representation in the Australian defence prime space.

We need Australian entities of scale that can integrate and sustain the critical capabilities we need and can partner with global OEMs and industry and provide us with the best of Australian and international technology that can be built, integrated and sustained in Australia.

As a smaller economy with a smaller Defence Force than our AUKUS partners we need to create critical mass – especially if we are going to contribute to the AUKUS alliance in a meaningful way.

Now our security circumstances are unique to us as a nation, so I’m not certainly not advocating for a cookie-cutter style approach, but we should be asking ourselves, why, as a nation, would we deprive ourselves of the opportunity to have more choice when it comes to our defence capability needs to protect and defend our nation?

We have seen other nations some much smaller than our own do it; the UK, France, Israel and South Korea, India transitioned to local capability and Saudi pursued an indiginisation strategy.

So let’s be bold in our vision and aspirations for Australia. When do you reasonably expect we should see the materialisation of our first $1 billion annual turnover Australian owned Defence prime or multiple Primes?

Remember, it’s taken Nova Systems twenty years of hard work to deliver over $300 million in revenue.

It’s been a long time since we have had an Australian defence industrial presence of the likes Tenix or ADI and we do not have 10 years to bulk up local defence industrial capabilities given the current threat environment.

What is the Australian Solution?

So what is the Australian solution and what can we do to help Australia’s existing base of defence oriented SMEs become larger and more robust organisation working alongside government and the Department.

That is the purpose of bringing us together today. We need a whole new raft of measures to help grow the thin layer of small and medium-sized businesses – the foundational capabilities within Australia’s defence industry and they need to be different.

I think we need to focus on our own national interests and prioritise those areas of defence capability that can be retained and nurtured within our borders.

Other nations are looking inward to shore up their defence capability and establish security of supply and so should we.

We know that components of Australia’s future force will be built overseas.

That’s inevitable but we need Australian owned defence companies developing and scaling priority technologies and capabilities.

As we’re seeing in the Ukraine, if you can’t provide security in your own country to keep the threat at bay you have a problem and if the last two years has shown us anything it is that reach- back to our allied partners is not full-proof.

Can we look at the fourteen Sovereign Industrial Capability Priorities (SICPs) nominated by the Commonwealth and ask ourselves what capabilities are left that offer the opportunity to create a true sovereign Australian position?

Can we narrow towards a lesser number of higher calibre capabilities as influenced by the current threat environment to accelerate the seeding, growth and sustainment of 100% owned local Australian entities?

Capabilities such as surveillance, Cyber, Space, SIGINT, Test and Evaluation and opportunities in the information domain. These are the areas where Australian businesses with the good ideas, the smarts and know-how can play so lets put a ring around them so they become the new sovereign critical priorities and develop industry plans for these.

Are we up for a different risk appetite to reduce reliance on foreign suppliers?

If our current defence industry development policies are not delivering the outcome of rapidly graduating SME’s to the point where they populate a much larger Australian presence, as envisaged by the Commonwealth, then are we up for something different?

Awarding contracts to local companies that have the capability, knowledge and experience to take on larger projects then support those entities to deliver and grow.

Can we offer different incentives to grow Australian SMEs into that middle space rather than having the incentives dry up as smaller enterprisers grow larger and get more employees?

Many companies are discouraged to take on more employees or even bid on contracts if it means hiring more staff – too big to be small but too small to be big.

As a CEO of an SME recently said to me ‘it is great being at that 50-100 number of employees. We get all the grants, we get political support to open our office and media attention. We are incentivised to stay in this ‘sweet spot’.

Can we come together to develop a joint workforce solution given it is a nation wide issue that
warrants a collective response from Government, industry and the Department?

The pandemic has only further emphasized Australian companies’ reliance on imported talent. Defence budgets are not going to get any smaller any quicker and the biggest constraints to delivering the outcomes we need is the workforce.

How can we deliver those critical elements of the SICPs like Cyber and Space without the available and skilled local workforce to support?

Let’s be open to considering and contracting to different commercial constructs to bulk-up capabilities and create critical mass.

Can we accelerate procurement timelines to reduce impact on local SMEs from the slow letting of contracts. Can we embed a different way of working across the Department and industry to deliver the outcomes we need.

Can we develop a strategy to leverage off current interest from capital markets with financing for 100% Australian owned companies to support business growth.

The robustness of our defence industry will be reflected in the seat we have at the AUKUS table and if the status quo remains, we may be beholden to our international partners, international capital markets and multi-national entities with our work on future strategic defence programmes capped at a Tier 3 position with security of supply to support our ADF at risk.

We need CoA, Department and industry to work as a collective to enable the growth of Australian defence entities and the associated capabilities, technologies and critical enablers.

There are two options as I see it:

• Do nothing and accept the status quo – the absence of real sovereign Australian defence
  industry of scale in that middle space and accept the potential further erosion of Australian
  defence capability despite the supply chain lessons learnt during COVID-19.
• Option 2 is to be bold. Develop alternative near-term, high-win strategies to grow and scale in
  those critical areas that remain. Acknowledge the need for an urgent emphasis on 2-5 year
  outcomes and a collective effort from Australian defence industry, Government and the
  Department.

A different risk appetite is required for us to fill the current void, to drive a different outcome and if we are not up for it, the change will happen around us and we need to be prepared to live with the outcome.

Let’s remember how Einstein defined insanity; doing the same thing over and over and expecting different results.

Picture: Rebecca Humble

Rebecca Humble has had a long international career in the defence sector, developing strategy working mostly for global defence contractor BAE Systems. Rebecca is chief of strategy & corporate affairs at Nova Systems.

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