Will we allow ourselves to remain dangerously dependent on foreign governments and multinationals?

Brent Balinski spoke to Martin Hamilton-Smith, head of the Australian Sovereign Capability Alliance, about why Australia needs to be able to look after itself.

This month more research came out highlighting Australia’s low level of manufacturing self-sufficiency.

The work by the Flinders University was commissioned by the Australian Sovereign Capability Alliance, which was launched this year in response to pandemic-related supply chain difficulties.

For manufacturing, the episode has been an overdue reminder of its criticality. 

However, ASCA argues that policy responses have been insufficient, and that the $1.5 billion Modern Manufacturing Strategy and the opposition’s $15 billion proposal are positive though piecemeal answers. 

ASCA’s founder is Martin Hamilton-Smith, a minister in both Liberal and Labor-led governments in South Australia, and who was in charge of the defence and space industry briefs before he retired from the seat of Waite in 2018.

@AuManufacturing spoke to Hamilton-Smith about sectors where Australia is exposed and must develop its industrial muscle, why his group exists, and what the federal government’s eventual decision on its new submarine fleet must consider. 

@AuManufacturing: What is behind this initiative? How and why did ASCA get started and what was the lead up to you registering the organisation earlier this year?

Martin Hamilton-Smith: A simple answer to that is the coronavirus pandemic. It was made clear that Australia had left itself dangerously exposed to foreign governments and foreign multinationals for its essential health care needs, ranging from PPE through to intensive care unit respirators and other devices, vaccines and pharmaceuticals

Industry came to me and said, ‘look, this is unacceptable. Australia must be able to manufacture its essential needs not only in health, but also in other sectors of the economy where our vital needs are not manufactured or controlled from within Australia.’ And that came from the defence sector, which was very concerned that Australian taxpayer money was being spent to create jobs and enterprise in somebody else’s country instead of our own, and urging that we should go down the path of Israel, South Korea and Sweden as middle power countries and manufacture our own defence needs as far as is possible. Then the oil industry, which said to me that they were desperately concerned about the lack of oil storage and refining, and making the point that the country was dangerously exposed to grey zone interdiction of the sea route to Singapore, which would effectively leave the national economy in ruins within weeks. Then the communications industry said to me that they were worried about the amount of cloud storage of data relied upon from overseas, and pointing out that our communications system could quickly be rendered ineffective and inoperable unless there was greater sovereign control. And then the energy industry and the space industry and others chimed in with the same message.

We are at the bottom of the OECD in terms of our reliance on locally manufactured needs, and there was a significant structural problem right across the Australian economy with us being unable to survive a crisis. And yet that’s how this started. So the pandemic really shone a light on a much bigger problem. 

@AuManufacturing: You’ve been involved in politics for some time. What are your observations on why our political class is so reluctant to develop and act on industry policy compared to other nations? 

Martin Hamilton-Smith: I think it’s a combination of factors. Our malaise in manufacturing can partly find its cause in Donald Horne’s Lucky Country when he wrote in the 1960s of a relaxed and comfortable country that was reliant upon mining for key commodities and natural resources in order to secure its wealth and perhaps not striving quite as hard as some other countries to diversify its economy. He struck a real chord. I think there’s a certain complacency that ‘she’ll be right, mate,’ with the economy structured as it is, that’s the first point. 

Picture: www.martinhamilton-smith.com.au

The second point is that I think our miners and commodity producers and the tourism and education industries have been terrifically successful, but manufacturing has not matched that success, and the consequence is that we are — if you look at our exports — overly reliant on digging things up and growing them and selling them off, and uncomfortable, unprepared and even lazy at manufacturing our essential needs at home and elaborately transforming goods. The only conclusion you can reach from that is that the future we’re sentencing our grandchildren to is employment as a fly in, fly out mine worker, a farmhand or a barista. And important though those industries are — and ASCA wants to underscore that they are vital industries for Australia — we can do more. And the research we produced points to the examples of bauxite, the price at which we export it and the price at which we buy back as refined aluminium. And similarly with our steel industry, without which we don’t have a manufacturing sector. And we need to fix those structural imbalances. So what we’re saying is that the pandemic’s the tip of the iceberg. The bulk of the iceberg are these other sectors of the economy that are vulnerable in a crisis. It could be a war, it could be a natural disaster. It could be another pandemic. 

But if Australians knew just how exposed we are to ruin, particularly with oil, communications, cyber attack and so on, they’d be shocked. And unless we sort our manufacturing sector out, we’ll continue to be dependent on foreign multinationals for our essential needs, and by implication, if you are dependent on a foreign multinational, you are dependent on the government in that country. And we saw that play out during the pandemic. Foreign governments intervened, controlled their own multinationals and said, ‘you will not export vaccines to Australia, will not export PPE to Australia, because we need it.’ And if that happened in defence, that means possibly that aircraft and submarines and ships might not be supported. If it happened in oil, the oil we have stored in America would not be available. If it happened in Singapore, simply the flow of oil would stop. So we are dangerously exposed. And that the solution, by the way, is to reform manufacturing policy, public policy around sovereign capability. 

We’re saying rethink manufacturing around filling these gaps in sovereign capability. And that probably tells us where we need to start. 

@AuManufacturing: There will always be criticism of these suggestions from free market purists. For example Saul Eslake wrote last week in response to your proposals that Australian manufacturing is not more special than other industries, has low productivity, and shouldn’t be given special treatment at the expense of sectors where we’re nationally more successful. What is your response?

Martin Hamilton-Smith: I agree with that “flat earth” economic thinking, if I can put it that way, up to a point. And that point is where Australia needs essential manufacturing of certain things in order to meet critical needs in a crisis. In other words, I accept the point that we are practical and we should buy things from overseas where it is cheaper to do so, and put our nation’s resources into those industries that can provide us with a competitive and comparative advantage compared to other nations. I accept that logic. But when the manufacture is essential in order for our economy and our people to survive a crisis, then that argument falls to the ground. And I give the example of oil. If the oil flow is turned off, the supermarket shelves might be empty within weeks and industry and the economy might grind to a halt within weeks. And if a cyber attack or some other global crisis like a war ripped down our communications system — and we are so heavily reliant on cloud infrastructure overseas — then the banking system fails the mobile communications fail, the air traffic is grounded. Health is a classic. What we’ve found is that 80 to 90 per cent of our pharmaceutical needs are coming in from the EU and China. Well, people will die if that supply of pharmaceuticals is cut off. And we don’t need to manufacture all those things here. Some solutions might involve storage and stockpiling to see us through a sustained crisis. 

I think what’s happened is that free market economics has allowed us to become not only more efficient as an economy, but it’s also opened gaping vulnerabilities, which, if they’re not closed off, may deliver the country to its knees in an emergency. And I think the pandemic gave us a real scare in that direction.

@AuManufacturing: Do you have long-term plans for ASCA or are your efforts just centred on this one campaign?

Martin Hamilton-Smith: Our raison d’être is to produce academic research and to use that to stimulate public debate and to encourage government in a non-partisan way to reform public policy.

We’ve produced this first raft of research to open the issue up. I’d like to now proceed with supply chain assessments, possibly starting with health, because it’s a matter of fact and very prescient, but wherever the funding comes from. But that will depend on industry. If Australian-owned industry and high-wealth Australians and Australians who have faith and belief in a manufacturing future for Australia are not prepared to fund the research, then we will have difficulty producing the next raft of research. So it’s really up to industry. We either believe things as they are and remain dependent on multinationals and foreign governments for our essential needs, or we invest in the research and stimulate government responses. So the ball is really in their court. We are looking to the next round, and it depends on what industry comes forward with.

@AuManufacturing: You were leading the SA government’s effort to keep the submarine industry in that state ahead of the decision on the now-doomed Attack class program. What do you want to see from whatever new submarine fleet Australia will possess?

Martin Hamilton-Smith: Australia must come out of this 18-month process and this entire nuclear submarine process with a submarine force that is truly sovereign. And which can fight a war in a high-level conflict independent of any other foreign government or its multinationals. In other words, if we haven’t got a submarine that can fight for the nation independently, without being dependent on overseas based companies and their governments, then we haven’t got a submarine force. We’ve got something that will be tied up alongside the dock, unable to fight. And by implication, the manufacturing in everything from steel manufacturing right through to combat systems and engineering involved in the high tech weapons and submarine operating systems has to be based onshore in the homeland. 

Now that means that if it’s provided by primes, they need to have all of the skills, data and everything here within Australia’s borders. We can’t be having to get on the phone and ask an overseas-based entity and the government to tick off on allowing us to operate our submarines. So my key point is, if we haven’t got a submarine that can fight independently as a sovereign Australian capability, then we don’t have a submarine. We might as well not proceed. And by implication, Australian industry must build and sustain and support that. How that looks is a challenge for the government to resolve. 

@AuManufacturing: What are some potential difficulties you would point to if we chose poorly?

Martin Hamilton-Smith: We might like the Americans and British, and we are closely allied. But there are a number of things that could go wrong. 

First of all, in a conflict, a cyber attack could simply knock out our ability to depend on them. So they can’t communicate with us. That’s point one. 

Point two is, as we saw in the pandemic, they may have a war to fight at the same time and may simply prioritise their own needs ahead of ours. And that happened in the Falklands, when we couldn’t get support for the Oberon class because the British said ‘we’re busy.’ 

And of course, there are other things that could occur. For example, Australia may conceivably want to do something that the Americans or the British don’t agree with, and to use our submarines accordingly. And they may say no. And that’s happened twice in my living memory as a serving person. Once was when the Swedes wouldn’t let us use the Carl-Gustaf anti-tank weapon in Vietnam because they disagreed with the war. And I think the French wouldn’t support the Mirage aircraft if we deployed it to Vietnam. So what happens if we’re in a conflict and the Americans or the British don’t agree with it?

There are a number of things that could come up that could stop our submarines from going to sea, and we can’t allow that. So in summary, we’ve got to have a genuine sovereign operational capability and by implication, Australian manufacturers have to be building it and sustaining it, or else we’re just dependent on a government in some other country to defend our nation.

Those who argue that it’s all about the operational capability are correct. But they often don’t then go to the next conclusion.

(This article has been lightly edited for clarity.)

Picture: ords.com.au

ASCA’s Australian Sovereign Capability and Supply Chain Resilience report can be read here.

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