Election campaign high on cost of living relief, but cost of industry a wicked problem

By Sandy Plunkett

If Australia’s domestic manufacturing and tech sector had a dollar for every time political leaders have declared — in and out of election campaigns for decades — that innovative SMEs are the engine of the economy, we might have a small but globally significant 21st century manufacturing sector by now.

If we had a buck for every time Australian defence officials have said since 2016 that Australia faces its most threatening geopolitical environment in 70 years, and that we urgently need an accelerated sovereign capability development push, Australia might have something resembling a small but viable defence force by now.

But here we are only five weeks away from what has been touted as the “most consequential federal election” in decades and the only thing the long-ignored domestic manufacturing and tech sector can say with reasonable certainty is that we finally have a definition of what an Australian company actually is. 

An Australian business, in the context of the Commonwealth procurement framework, is a business, including any parent business, that: is 50 per cent or more Australian-owned or is principally traded on the Australian equities market. It resides in Australia for tax purposes and has Australia as its principal place of business.

Seems logical enough. But arriving at that definition, announced March 6, took four years of persistent advocacy and leadership from the SME sector and independent Senator David Pocock and, eventually, bipartisan cooperation to achieve. 

At stake is a chance for ICT and defence industry players to get a bigger share of around $100 billion in Commonwealth procurement contracts, which for decades have overwhelmingly favoured foreign defence primes and, mostly, US digital tech giants.

The definition clarification, a necessary step if Australia has any chance of building sovereign economic and defence security, is cheered. But its implementation is still uncertain. Beyond the definition, it also requires a big shift in government procurers’ mindset and in the way government contracts are structured.

“We think this is the first real opportunity to open a new conversation,” says Macquarie Technology Group’s Jamie Morse, a spokesperson for the Sovereign Australian Prime Alliance (SAPA). 

SAPA is an informal grouping of large Australian prime contractors to the federal government made up of NIOA, DroneShield, Macquarie Technology Group, Austal and Gilmour Space, and one of early and most persistent advocates for government procurement reform.

Importantly, the new definition also makes government procurers obliged to consider the broader economic benefits of the suppliers they choose. That’s a potentially good thing, but it also increases assessment complexity and is likely to make the procurement decision process even longer.

In a geopolitically tumultuous and technologically-driven 21st century, where ambition and speed of execution are as much asymmetric advantages as technical knowhow, four years of wrangling about what is an Australian company versus a foreign resident company is not just way too long. It reveals how far behind Australia is in its often-touted intent – but piecemeal execution – to build economic and defence security.

As the new Trump administration up-ends world trade and global geopolitics with tariffs and trade wars and its America First agenda, and as the threat environment for hot war on a more global scale gets more real by the day, Australia is more isolated and unprepared than most other countries.

In defence, Australia faces a “sovereign capability crisis”. The nation’s vulnerabilities and complacency were so clearly exposed a few weeks ago when without warning, a fleet of Chinese warships circumnavigated the nation and conducted live fire drills. 

Yet, Labor’s pre-election Budget contained no new money for defence and assumes that military spending will inch up to 2.3 per cent of GDP by the mid 2030s, far below the 3 per cent spend the Trump administration is demanding of allies.

In his budget reply, Coalition leader Peter Dutton has promised more spending on defence if they win government, but there are as yet no details as to what or how.

As the federal election has officially kicked off with a barrage of rhetoric about cost-of-living relief, energy affordability, about making more stuff here; building Australia’s future; getting Australia back on track, the stark reality is rather than making more things, we are making less. 

A key measure, business investment in new tools and equipment, has languished around 1990s recession levels for the past eight years, according to the McKinsey Report, Reviving the “golden goose” of Australia Inc. 

And while both major parties are running their campaigns on big spending platforms for cost-of-living relief, neither of them has a clear vision, much less a sustainable policy plan for energy affordability and security or for addressing the nation’s costs of industry and security crises.

Our domestic manufacturing base has contracted to only 5.5 per cent of GDP, making it vulnerable to supply chain disruptions and geopolitical instability; Australia is at the bottom of the OECD in competitiveness and manufacturing complexity tables; productivity has stalled at 2016 levels; and we have a broken R&D (now under review) and commercialisation system and such low business demand for R&D that it has been declared a national emergency. 

More companies have disappeared from the ASX in the last two years than at any similar period since the recession of the early 1990s. We’ve seen the end of nickel smelting and architectural glass with the recent collapse of Oceania Glass after 169 years of operating. 

And despite nearly $14 billion in production tax credits allocated to develop a green hydrogen export industry, the key underpinning of the Labor government’s $22.7 billion Future Made in Australia (FMiA) reindustrialisation and green energy superpower agenda, projects are falling over at an accelerated rate as neither the technological readiness nor the economics can be made to work.

Yet the election campaign rhetoric is on full volume.

“At a time when it’s never been more important for Australia to stand on its own two feet, only Labor is building an economy where we make more things here,” an emotional Prime Minister Albanese said when announcing a May 3 election last Friday. 

And then he said this: “We live in the greatest country on earth, and we do not need to copy from any other nation to make Australia even stronger and better. We only need to trust in our values and back our people.”

It was a bizarre statement to make. 

What we could and should learn from the speed, the ambition and technological savvy demonstrated by other countries makes a very long list. And not just from the US and China tech powerhouses, but the many smaller middle market economies who have accelerated or grown from scratch their 21st century defence and industrial bases in the last two decades.

Ukraine, Turkey, South Korea, Japan, Norway, Turkey, Finland, Vietnam, the United Arab Emirates (UAE) and Israel – even the Houthis – have shown what technological acceleration and asymmetric capability can look like. They have all pursued versions of policy and procurement that recognise and back the expertise and agility of the small and medium-sized innovation enterprises to reduce reliance on foreign suppliers.

It’s a clear acknowledgement that unlike the decades of the Cold War, innovation no longer comes mainly from the closed defence ecosystem made up of the government military buyer and a small number of large defence prime companies. Instead, innovation is now mainly coming from the digital and commercial tech sectors outside the defence sector.

Since the Russian-Ukraine war started, Ukraine has lifted its defence self-sufficiency to 30 per cent. In less than two decades, Turkey has become a defence industry powerhouse, now with 80 per cent reliance on home-grown suppliers. 

And none of those countries have developed new sovereign defence and industrial capabilities with a renewables only energy policy. 

According to official ABS price surveys, the inputs used by manufacturing have increased by 20 per cent in price over the last three years. For natural gas, the energy source which underpins much of Australian manufacturing is up by 58 per cent. 

Getting the cost of gas down quickly is a key election platform of the Coalition, with Dutton announcing the Gas Reservation Plan in his budget reply. 

“Energy is the economy,” declared Dutton.

But again, the details of how are yet to be revealed and the proposal is highly controversial and will be fiercely contested by Labor and the energy producers who are geared for export markets.

But there is no doubt that to build more stuff in Australia – and stuff that the world wants – we need reliable, affordable energy, a massive ramp-up in the adoption and diffusion of the digital and AI skills which underpin all advanced manufacturing from renewables to defence. 

And critically, domestic industry also needs growth capital and a healthy pipeline of procurement contracts to thrive. And we need to be able to do all that with speed and with confidence.

“The days of languid defence procurement must end immediately,” said Innes Willox, chief executive of the Australian Industry Group (Ai Group)

“If we don’t act with urgency to respond to our deteriorating strategic environment, aspirations for any sort of reasonable security will be just a pipe dream.”

The same is true of non-defence procurement. ICT projects account for around 15 per cent of Commonwealth procurement. 

But Australian federal and state governments’ record in ICT and digital transformation projects, all historically dominated by the big four consulting firms and the US tech giants, has been littered with failures, at a cost of billions of dollars.

The reasons for these failures are many, but at the core it reveals a low-tech savvy and a lack of strategic cost benefit rigour.

So whomever wins government on or after May 3, Australia’s challenges along its long tortured journey toward economic and national security are multi-faceted and highly complex. 

But at least we now know what defines “Australian”. It’s a start.