Australian naval shipbuilding

It is up to the Federal government to drive forward the much-anticipated rationalisation of the naval construction industry, argue both State government and industry figures.
The privatisation of the Australian Submarine Corporation (ASC) will be the catalyst for the much anticipated rationalisation of the Australian naval shipbuilding industry. The ASC is central to the ongoing support of Australia's six Collins class submarines and will, potentially, help form the basis of a viable long-term Australian naval shipbuilding concern.

It has been clear for some time that there is only enough shipbuilding work to support one manufacturer. The June 1999 McIntosh/Prescott report said, " It seems inevitable that there will be a shakeout in shipbuilding capacity in Australia, to two, or more likely one, major yard specialising in Defence work. Even then it is likely to depend to a large extent on upgrades and repairs and maintenance for its viability."

What has been less clear is just who that manufacturer would be and what steps might be taken to ensure that their business, with all its expensive infrastructure and personnel, would remain viable through the peaks and troughs of demand for naval vessels.

Some analysts have questioned whether Australia should build ships at all, arguing that Australia should simply purchase warships of mature design from established overseas yards. This would, they say, save us money while at the same time ensuring that we acquired reliable vessels with fully operational systems.

Others argue that this view is simplistic and short-sighted because it ignores both the cost and necessity of maintaining and modifying the ships once they were in service. This second view emphasises that the local manufacture of naval vessels is an important strategic capability for Australia. It is also a view that the federal government and Chief of Navy agree with.

When it announced as part of the recent Defence White Paper that at least three air warfare destroyers (AWD) would progressively begin service with the Navy from 2013 the government expressed a, "strong preference to build these ships in Australia, which will provide significant work for Australia's shipbuilding industry".

The White Paper clearly defines the amount of shipbuilding and maintenance work available for local industry over the next 10 to 15 years: it refers to 29 ships that will be purchased for over that time. In fact, including new amphibious watercraft to replace both the Army's LCM8s and LCHs, the total workload is actually a bit higher.

While the total investment required for this build program will be many billions of dollars, its major ship construction element is barely enough to keep one manufacturer viable. This is why the ASC is so important - strategically for its role in maintaining and upgrading the Collins submarines, and also for the $100 million per year this represents for local industry. Industry analysts have estimated that a viable Australian shipbuilder would require revenue of between $350 to $400 million per year.

McIntosh and Prescott declined to speculate on which yards and owners might survive and strongly recommended, "that the government leave it to the market to decide". That is all very well but the nature of the business, the technology involved, and the political and strategic implications means that it will not ever be a purely market driven solution.

Last year's compulsory acquisition of Kockums' ASC shares by the federal government for $50million means that unless it pursues the most unlikely policy of simply selling to the highest bidder it will have a hands-on role in determining the industry's future shape. There is no shortage of people with a view on what the government should do.

McIntosh and Prescott said that, "if only one yard is ultimately sustainable, it is extremely important that it remain in majority Australian ownership and untied to overseas companies, except for particular projects. While it may be tempting to create the widest possible field of buyers and to encourage overseas investors, we believe that, if a monopoly or near monopoly does develop, and it ties Defence to a single overseas source, Defence will pay many times over in subsequent contracts for any increase in purchase price for the government's assets."

This is a very important point given questions over what the government really has to sell so far as the ASC is concerned. According to some commentators ASC is an asset that diminishes in value with each day that passes, primarily because it remains a single contract company with a very uncertain future. The government needs to achieve a sale price of around $100 million unless it wants to appear careless with taxpayers' money; but it is likely that only a new player, willing to pay a premium to enter the Australian market, would be willing to make such an investment. Another point to consider is that the ASC does not own the intellectual property (IP) for the Collins class boats, which resides with Kockums' new owner HDW of Germany.

Intellectual property is at the centre of more than one issue regarding the ASC and US sensitivity over its IP may have a strong influence over who is deemed suitable to own or be involved with the ASC should Australia continue to look to the US for the technology needed for the Collins submarines. In the long term it may be that the Commonwealth has to acquire the relevant IP from HDW.

Tenix Defence Systems, Australia's largest defence contractor and most active warship builder, not surprisingly, has a view on what should happen to the industry in which it is so heavily involved and this was put to government last year as part of Defence Review 2000. According to Tenix's submission, "Whilst the sale of the ASC offers an opportunity for consolidation it also introduces the significant risk of destroying the already fragile infrastructure. On the one hand," according to Tenix, "the sale offers the potential to reduce the number of players in the industry and to consolidate skills and capabilities. On the other hand, if sold to a new industry participant, there will be continued dilution of available opportunities.

"If the opportunity is not taken to consolidate the naval shipbuilding industry and the ASC is sold to a new industry participant, the result will be that in the medium to long term either or both Tenix and ASC will be forced to close their shipbuilding facilities." While there is clearly an element of self-interest in Tenix's argument, there is also sound business sense as well.

According to Tenix a consolidation that leaves only one shipbuilder does not necessarily reduce competition given the global defence market place. In an echo of McIntosh and Prescott's comments Tenix maintains that by remaining largely non-aligned with any one technology provider a consolidated Australian defence company would be free to access overseas technology and IP to fulfil Australia's requirements. Tenix also says that access to international IP is best gained through supply arrangements rather than through equity participation.

Under Tenix's plan for a rationalised ship building industry major surface warship construction would take place at Williamstown in Victoria, while Osborne in South Australia would be the site for submarine upgrades and the construction of some surface ship modules that would be barged to Williamstown for assembly. Henderson in Western Australia would be used for the construction of auxiliary warships, patrol boats and commercial and para-military ships.

ADM understands that some members of the government have reservations about what they see as Tenix's "winner take all" approach and are keen to see an Australian-controlled shipbuilding entity that involves, along with Tenix, other major domestic industry players such as ADI and BAE Systems.

Last year Tenix conducted an international survey of naval ship building concepts that included countries such as France, Germany, Italy, Japan, The Netherlands, Spain, Sweden, the United Kingdom and the United States. The principal conclusions from analysis of the overseas ship building concept survey are that:

* overseas industries are heavily protected by their respective Governments

* foreign governments structure acquisition programs to preserve industrial capability

* competition is, generally, of secondary importance

* most countries have engaged in collaborative programs that have failed because of workshare problems and delayed the delivery of capability

* foreign governments ensure that indigenous equipment is fitted to ships where a capability is resident in the country;

* the end of the cold war has changed the operational capabilities need in combatants and reduced the total number of ships needed

* new build is being increasingly used instead of modernisation to deliver needed capability.

One proposal that has been made to government by various parties advocates a continuous build program as the way ahead for Australian naval shipbuilding. Under the rolling build program new ship would be delivered every two to four years, and upgrades would no longer be carried out on older vessels. Such ships would simply be retired (or sold) once their technology became obsolete.

A Defence working paper on the subject claims that progressive build would cost no more than current practices while providing a much higher level of capability and support. An estimate included in the paper says that over a 50-year period some 36 modern and capable warships could be built for $5 billion less than the cost of building and maintaining 24 ageing warships.

Such a method could assist in assuring the viability of a rationalised ship building industry by smoothing out the workflow and avoiding many of the risks and cost associated with separate build programs.

BAE Systems Australia, General Dynamics Electric Boat, Tenix and ADI have all been involved is scoping studies on the future of the ASC, and these have been lodged with the Office of Asset Sales and Information Technology Outsourcing (OASITO). Other than the fact that the studies had been completed and lodged ADM could elicit no further comment from anyone involved.

Decisions on where to situate major manufacturing capabilities have significant political as well as strategic implications. In January this year there were newspaper headlines such as "Heave-ho for 12,000 jobs if docks slip away" in response to concerns that the Williamstown may be closed and its shipbuilding capability transferred to Osborne in South Australia as part of the industry rationalisation surrounding the ASC. Victorian Premier Steve Bracks has been lobbying Defence Minister Peter Reith in an effort to ensure that the dockyard remains open, and to this end Victorian Minister Rob Hulls was due to meet Defence Minister Peter Reith in the second half of March.

Tenix has consistently maintained that they plan to continue at Williamstown, but just as persistent has been speculation that property development would be a more profitable use of the site. A senior industry figure consulted by ADM suggested that a skilfully managed development of the site could yield up to $150 million, but he added this was dependent on a successful environmental clean up of the site. The need to maintain industrial harmony for the completion of the ANZAC build program at Williamstown will certainly limit Tenix's public comments on such speculation.

The Western Australian government also has a view on where a rationalised ship building industry should be based which is, in short, that it should be in WA. The WA Department of Commerce and Trade has run newspaper ads in support of this position and officials have made visits to Canberra to lobby for their point of view.

The WA Department of Commerce and Trade is known to be concerned over reports that the patrol boat project might be used to "pump prime" the ASC for sale to the possible detriment of up to five WA companies who are likely to bid for work.

Aside from the patrol boats WA is keen to be involved in surface warship construction and, in particular, maintenance and refitting of the Collins class submarines. On this last point the McIntosh/Prescott report is on their side saying, "There is no alternative from an efficiency perspective and from a submarine crewing perspective but to do most submarine maintenance and indeed refitting work in Western Australia where the boats are based."

The West Australians are currently putting their money where their mouth is by undertaking construction of a $200 million marine industrial complex at Jervoise Bay, 15km south of Perth, that is scheduled to be fully operational by mid 2002.

Clearly, there is plenty of interest and activity behind the scenes, but when can we expect the rationalisation process to commence in earnest? The government has signalled its intention to sell the ASC "soon". ADM sought more information on the timing of a sale from Defence Minister Peter Reith's office and were told only that he "had no comment at this stage".

Shadow defence minister Dr Stephen Martin has not yet disclosed ALP policy in regard to the ASC if they win the next election and it is still a public asset.

If a government of either political persuasion is truly serious about a commitment to direct work to local industry then another point arises. The cost of an AAW destroyer is divided roughly between 25% platform and 75% combat system. If building the platforms locally is important to industry then surely it is of at least equal importance to establish how much of the combat system can be manufactured in this country. This issue is crucial both in terms of the initial expenditure and ownership of the relevant IP.

There are plenty of state government and industry interests currently at work trying to shape the outcome of Australia's naval shipbuilding industry rationalisation. While arguing that "it should be left to the market to decide," McIntosh and Prescott also pointed out the pitfalls for Australia of a monopoly situation that tied Australia to an overseas supplier. With that in mind it is clearly in Australia's interest that the federal government withstand lobbying from interest groups where necessary and use the sale of the ASC to try and ensure that a viable Australian controlled naval shipbuilder, with full access to the necessary international IP, emerges from the rationalisation process.

By Daniel Cotterill, Canberra