ADI, past, present and future

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ADI has been Australia's biggest defence contractor for a number of years; its journey to the top of the ADM Top 40 hasn't always been easy, and staying there will be a tough challenge.
ADI Ltd has come a long way since the days of the Office of Defence Production, which was a bureaucratic entity formed in 1984 from the leftovers of Australia's mammoth WWII industrial effort. ADI dates from May 4, 1989 when its takeover of the ODP was formalised. Then Defence Minister Kim Beazley described it as, "one of the most ambitious corporatisation exercises ever undertaken in Australia".

The new company was made up of a diverse range of factories and facilities that had essentially been stand-alone government owned operations until that time. The business settled on four divisions that covered Naval Engineering, Ammunition and Missiles, Weapons and Engineering and Military Clothing, and moved quickly to establish a corporate identity.

During the 1990s ADI progressed through a mixture of acquisition and organic growth. Universal Defence Systems was purchased in 1991 and Stanilite in 1996. That year also saw the opening of the company's new ammunition factory at Benalla in Victoria, a move that replaced facilities at Footscray that had been in operation since the days of the Colonial Ammunition Company formed in the 1880s.

After a protracted process ADI Ltd was privatised in 1999 passing from government ownership into the hands 50:50 partners Transfield of Australia and French defence company Thompson-CSF, later to become Thales. Long-term managing director Ken Harris handed the reins to Frenchman Jean Georges Malcor, a hard businessman with an inimitable style, who oversaw the company's first steps under private ownership.

These were difficult days with cost cutting across the company and many of the high profile contracts that had marked ADI's final months in government hands, notably the Bushranger and FFG upgrade contracts, running in to trouble and the Bushranger deal in particular threatening to unravel.

While the company has had its ups and downs it is now a firmly established private enterprise. Jean Georges Malcor had every reason to be proud of his work when he moved on to new challenges in the Thales Group and in September 2002 a new managing director, Lucio Di Bartolomeo was appointed.

ADI employs 2530 people at 10 main sites across Australia. Their turnover for 2002 was $725 million comprising $70 million in civil business and $655 million in defence; making them the largest Australian based defence company.

ADM recently caught up with Mr Di Bartolomeo at his Sydney office and as part of a wide-ranging discussion on both the company and defence industry in Australia sought his initial impressions of ADI when he first joined the company.

"I was impressed with Jean Georges and the management team here who had really established some good discipline, protocols and reporting structures for managing the business, and I was impressed at the level of control that actually existed within the company, particularly on a financial basis.

"The other area was the diversity of the work that ADI was involved in. I mean, it was all defence but defence has many requirements - a very diverse set of requirements - and ADI, while it might not cover the whole field, covers a substantial proportion. Subsequently, I've come to the conclusion that ADI covers the field far more broadly than any other Defence contractor here in Australia."

ADI was recently restructured in a move that sees business groups responsible for the Naval, Land - Ordnance, Land - Engineering and Vehicles, Electronics and Aerospace, and Services and Security business sectors. The rationale behind the reshuffle was to get as close an alignment as possible with the company's customer base. According to Mr Di Bartolomeo the interface point with the customer is clearer, narrower and more focussed.

The restructure was also part of a broader initiative under the banner of a customer commitment program to improve customer focus, and according to Mr Di Bartolomeo the company is seeking to go beyond the DMO scorecard in measuring customer satisfaction. "Once we have understood where we succeed and where we have failed we will then be able to develop the sort of programs that allow us to narrow that gap and hopefully eliminate the failures in customer satisfaction," he said.

Prior to taking up his appointment with ADI Mr Di Bartolomeo had not worked in defence industry, and as a relative newcomer in a senior defence industry position ADM was keen to find out what view he had formed of this market sector.

"The one thing that first of all stands out clear in my mind," he said, "is the long cycle time in projects being identified, from the initial capability perspective through to refinement of budgets and timeframe to actually going RFT and then the selection process, the negotiation process and the final contract signature.

"I don't think it is necessary to take the length of time that they have been taking and I think that's a view generally shared by everyone, including...various elements of the customer base. I think that the challenge lies not only with Defence and DMO and the restructure of DMO but also within the defence industry. I think we're as much a party to that process as anybody else and I think we have something to offer to assist and I think we need to do that."

So far as other improvements that could be made in the conduct of defence business in this country Mr Di Bartolomeo nominated the earlier involvement of industry in the capability development process to help get a better definition of what's available, when it can be delivered and for how much.

The outcome of this approach would be fewer surprises for all concerned. Mr Di Bartolomeo was very keen to point out that industry does not like to be involved in projects that are delayed and go over budget. He said that blown out projects did not equate to extra profits or financial rewards and suggested strongly that such a circumstance inevitably has the reverse impact on the bottom line.

When ADI was privatised much was made of the advantages that would come the company's way from its new owners, and while both are active shareholders in setting direction and strategy the most tangible benefit comes from ADI's capacity to access technology from Thales.

According to Mr Di Bartolomeo a successful prime defence industry player in Australia needs to have financial strength, good skills, ability to spend money on R&D, and must have the ability to gain access to technology. He says that Thales offers ADI financial strength, in particular the ability to take a longer-term view in the support of R&D growth, and access to technology. "Effectively, any of Thales' technology that we believe is of value to the programs coming forward, we have available to ADI free of charge," he said.

While access to leading edge technology is undoubtedly crucial to future growth opportunities, some of ADI's more traditional activities also remain very important to the company. The Strategic Agreement for Munitions Supply is a financial engine for ADI and it forms a core business. According to Mr Di Bartolomeo ADI is one of the more fortunate defence industry companies because of this significant long term contract. However, the company's Benalla ammunition factory is dependent on a good, steady supply of propellants and explosives from Mulwala and that facility is coming to the end of its useful life.

Mr Di Bartolomeo describes the refurbishment of Mulwala as "absolutely essential," and is pleased that a deed of agreement covering the modernisation of that facility was recently signed with the Commonwealth. As this issue of ADM went to press a final RFT for that project was on the verge of being finalised and released.

Another traditional market segment of great importance to ADI is naval shipbuilding and repair, and there is more optimism on this front since the recent Defence Capability Review. Mr Di Bartolomeo describes the naval program announced in the DCR as "fairly bullish" and expressed a view that there is enough Naval work in there to keep most of the current naval players going for some years yet.

"Naval represents 50% of our turnover - historically - and we see no reason why we should shy away from that work," he said. "We certainly have an interest in the AWD. We also recognise there are some aspects of the AWD that we may not have ready access to, but there's a lot of other work that I think we can certainly be involved with.

"We have capabilities that in some cases are unique. Here at Garden Island I think we have certain unique capabilities such as the dry dock, but also a high level of skills that sometimes aren't recognised in terms of the level that we've got because we've been able to maintain a continuity of need for those skills and we maintain it through the, not only the big programs whether it be off the back of Mine Hunter and FFG, but the very significant level of repair and maintenance work that we've had. Our clear objective will be to continue to play the sort of significant role we've had in Naval of the past into the future."

Discussion of ADI's future led quickly to the to
A large military commercial support contract is being contested in the United Arab Emirates, similar to the Defence Integrated Distribution System contract which the company missed out on in this country recently. ADI has been short listed for the deal which could be worth up to $1.5 billion and a decision is expected sometime in 2004.

Another major opportunity is the export of the company's unique High Mobility Engineering Vehicles to the United States. Some 40 HMEVs have already been sold into that market but the competition to fill a requirement of up to 1500 vehicles is still running. Two prototype variants of the HMEV are currently under construction and once completed will be tested as part of the selection process for a deal worth in the vicinity of $500 million. A decision on that one is expected early in 2005.

Another growth strategy for ADI is the pursuit of non-defence work which is currently approaching 10% of the company's total turnover. This aspect of the business is one that Mr Di Bartolomeo is keen to see grow to 30% of turnover in the next five years.

"There are two or there areas that we're looking at now," he said, "and in fact part of the rationale for our restructure was to create a division that would focus on that non-defence work, and that's the services and security business. We are fortunate to have direct access to a lot of technology from the Thales group in that domain. Security, information security and information technology services, again leveraging off not only in-house capability here at ADI but also technology from Thales.

"Our core business will always be the Australian Defence Force business, but I don't want ADI to be a business that simply is going to go with the ups and downs and the fortunes of the ADF alone."

ADI has been transformed since its inception in 1989, and the process has been particularly intense since privatisation 10 years later. The company may have come a long way, but it is clear that its managing director is intent on taking it much further.

Sources: Coulthard-Clark C (1999) Breaking Free; Melbourne, Australian Scholarly Publishing.

By Daniel Cotterill, Canberra
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