Building a post-COVID 19 defence innovation system
Finding a balance between encouraging Australia’s domestic manufacturing to ensure supply chain security for critical sectors, and not violating free-trade agreements by introducing tariffs and subsidies for ‘strategic industries’, will be a tough task for the Australian government.
Defence faces significant risks in any disruption to supply chains. The planned capital investment budget for 2019/20 is a shade under $12 billion. Chunks of this will be spent in Australia, including building the Army’s Hawkei protected mobility vehicle and Arafura class offshore patrol vessels, but most of our supply chains reach directly back to the US. Equipment delivery and munitions are secure in the interim, but COVID-19 disruption highlights the paucity of defence equipment manufactured here.
The ‘onshoring’ of defence manufacturing isn’t realistic for Australia because there’s not much we can build without major structural re-adjustments to defence policy and the economy.
And while the political, military and intelligence relationship with the US is close, there are different rules in play for the US defence industry. The US approach has always been America first, and that’s no surprise. And Australian dollars can’t compete – USAF funding for FY20 is US$204.8bn (A$294bn), for example. While Australia spends around A$105m per day on all of Defence, the USAF alone spends eight times that amount.
The proposed US FY2021 Department of Defense (DoD) budget request is US$740.5 billion, of which US$106.6 billion is allocated to Research, Development, Test and Engineering (RDT&E) activities. The DoD is investing in emerging technologies that it refers to as Advanced Capabilities Enablers (ACEs).
The ACEs are ‘focused on the high-end fight’ according to the DoD. That means middle powers such as Australia have even less influence with US defence prime contractors to deliver small, flexible systems for the ADF’s diverse mission set, including complex and information-heavy maritime surveillance and domain awareness missions.
Programs such as the Northrop Grumman MQ-4C Triton show how little say Australia – despite being a cooperative development partner in that program – has in the production and development of high-end weapon systems, when the manufacturing base is in the US.
Australia has a stated requirement for six Tritons, and has so far ordered three airframes. On 18 June 2020, Defence Minister Senator Linda Reynolds announced Australia had ordered a third airframe. The USN and Northrop Grumman have lobbied Australia to take FY2021/22 US Triton production slots to keep the line open during a planned US Navy production freeze, although this is yet to be finalised.
Exports not the solution
Australia will rely on the US and to a lesser extent Europe for major equipment for the foreseeable future because production setup costs for building military systems in-country would be out of all proportion to the value of the contract.
Nor will the 2018 Defence Export Strategy provide much impetus for building local defence manufacturing. Dr Nan Tian from the Stockholm International Peace Research Institute (SIPRI) points out that Australian defence exports are unlikely to create intra-industry spill over effects, face competition from multiple producers including allies, don’t have an existing diversified export base, and don’t have a range of products that can be sold on the international arms market.
According to research by SIPRI, total global military expenditure rose by 3.6% in 2019. But disruption to the global economy from COVID-19 will likely reduce future military spending. Exporting our way out of supply chain insecurity is not the answer.
Instead, it would be smarter for Australia to develop design and technology solutions that maximise human performance and information advantages. Some defence technologies in robotics, artificial intelligence, and precision engineering could have dual use in industries such as agriculture, education, and health.
The success stories in Australian defence industry typify the clever application of ideas and human capital.
In 2019, then Defence Minister Christopher Pyne unveiled the Boeing Airpower Teaming System (ATS) at the Australian International Airshow. The ATS was established as a research and development activity and, out of this activity came a concept demonstrator – the Loyal Wingman Advanced Development Program (see page 26).
Dr Brendan Nelson, President of Boeing Australia, New Zealand & South Pacific told ADBR that the ATS is a testament to the Australian Government’s desire to rapidly develop and field new systems. “We collectively saw we could leverage the best of Boeing working with Australian industry to offer a global solution with innovative flexibility.” Dr Nelson, a former Liberal leader and Defence Minister says that, in 2019 alone, Boeing invested $70 million in R&D and innovation in Australia, the company’s largest investment outside of the US.
“Boeing realises the benefits Australia can offer and has established a unique research and product development model which involves the collaboration of two innovation-focused organisations, Boeing Research & Technology and Boeing’s Phantom Works,” he said. “The Boeing Research & Technology-Australia group is focused on working with academia and research organisations to further technology for long-horizon research and technology solutions, while Phantom Works International is largely responsible for advanced prototyping and development of near-term transformative technological solutions for largely military customers.”
Dr Nelson says he is positive about the Government’s approach to innovation. “The programs we are focused on are funded and globally led. They fit with defence priorities, but we aren’t just thinking of an Australian environment.
“Our innovation, R&D and investment strategy has been to work closely with university and industry through small-to-medium enterprises while leveraging the benefit of Defence’s investment in these groups and hubs. We
continue to engage with the Commonwealth of Australia to seek collaborative opportunities to leverage investments, and alongside that we continue with our investment so that both can benefit the innovation ecosystem.”
Australian defence R&D environment
Currently, investment is split between the Next Generation Technologies Fund and the Defence Innovation Hub. The Fund and the Hub are allocated $73 million and $64 million respectively per year. Both focus on small-to medium enterprises and provide limited grant allocation. For larger businesses, any R&D money comes out of profits. Cost allowances for R&D are only available after a contract is awarded, which puts all the development risk onto the contractor.
While concessions are available from the Tax Office, R&D investment is a deduction from earnings before interest, taxes, depreciation, and amortisation that only becomes available at the conclusion of a financial year, and is further delayed through the payment claims system.
More than a third of Australia’s federal R&D budget goes through tax incentives to the finance, mining, and technology sectors. Israel applies the opposite approach – the Israeli Innovation Authority actively disburses funds to develop solutions to challenges facing the ‘Israeli innovation ecosystem’, and supports industry R&D.
To avoid becoming just integration, assembly, and sustainment providers, Australian defence industry must invest in R&D.
Unfortunately, Defence mostly retains a central-planning mindset of picking winners instead of taking a collaborative approach to solving problems. This limits ‘innovation’ to developing solutions to problems already defined by Defence and avoids engaging with or incubating emerging and disruptive technologies.
There are local success stories such as the ATS, advanced phased array radars from CEA, and the ongoing development of the Nulka active missile decoy built by BAE Systems. But this hardware is all supplemented by innovative and new thinking. An innovation ecosystem needs the space for ideas to grow.
The fourth industrial revolution provides multiple avenues for disruptive technology to emerge in artificial intelligence, computer-aided decision-making, and autonomous and teamed systems. Mastering these technologies will be less resource intensive than manufacturing physical equipment and systems, but will require a similar investment in capital.
The answer to defence supply chain disruption isn’t necessarily building equipment in Australia. It certainly isn’t in rebuilding the tariff walls that were pulled down in the ’80s and ’90s. The answer must come from using our human and information advantages to empower industry and academia to maximise Australia’s security. The key to this will be effective Australian R&D.
This article appeared in the May/June 2020 issue of ADBR.