When policymakers discuss the AUKUS partnership, they like to focus on the flashy bits: nuclear submarines, hypersonic missiles, artificial intelligence. Politicians of all stripes can rarely resist the temptation. But beneath the surface are a host of enablers that would be even more powerful in strengthening Australia’s national security posture over the long term.
The probability of prosaic nuts and bolts receiving the attention they deserve may be low. With release of a first-of-its-kind US defence industrial strategy and an update to Australia’s seven-year-old defence industrial capability plan expected soon, the time has never been better. It’s taken many centuries since the words for want of nail a shoe was lost were penned, but military minds are finally understanding the reality that lacking a handful of mundane parts can slow the deployment of the most cutting-edge piece of technology.
Australia’s attempts to shape the industrial base as a fundamental input to military capability have focused to a large degree on the integrated investment program. Such policies would benefit from less focus on the ‘what’ and more focus on the ‘how’.
A good starting point would be better alignment with US initiatives under the AUKUS umbrella. Notably, the ‘what’ of US industrial policy does not dwell on the likes of munitions, combat vehicles and phased array radars. Rather, it identifies broad technological enablers that underlie all of these things.
The list includes kinetic capabilities, microelectronics, energy storage, critical materials, and castings and forgings. By identifying bottlenecks farther back in the supply chain, its approach is more suited to crafting specific mechanisms to enable industrial capacity.
Technology is not the primary focus. The ‘how’ makes up the bulk of the US strategy, though objectives are similar to Australian ones: resilient supply chains, flexible acquisition frameworks, a skilled workforce and deterrence of asymmetric economic threats. The full document deserves a read, but I’ll focus here on the first two.
In its goal of building resilient supply chains, the US strategy ties objectives to incentives that push for-profit businesses in the desired direction. Patriotic calls for whole-of-nation efforts don’t impact balance sheets. Balance sheets drive decisions.
A top priority is fostering the health of the subcontractor supply base. Everyone loves to tout the importance of small businesses. But policies that treat them as charity cases express profound lack of understanding for the guts of the industrial supply chain. Prime contractors rely utterly on large networks of sub-tier suppliers.
When defence departments buy highly customized systems in low volumes, perhaps even spacing out bulk buys of spare parts to stuff warehouses and achieve volume discounts, they threaten the viability of all those niche suppliers.
Fixing this problem requires willingness to pay for that professed ‘fundamental input to capability’. When procurement officials squeeze the margins of prime contractors, it sends ripples through the supply chain. Primes have to make money. If doing so requires sourcing all of their business to the lowest-cost supplier, others will eventually disappear. Defence is left with a single point of failure.
Then the logisticians move to create buffers against uncertainty by stocking up on critical parts. Production lines go cold as fleets slowly burn down inventories of spares. Defence buyers come back years later expecting to simply drop another order. But small businesses can’t afford to pay workers to sit around waiting for work. Lines shut down. Starting them up again is a long and expensive process. As obsolescence sets in, it may well become an impossible one. Broken planes, ships and vehicles sit waiting. Readiness rates plummet.
A core function of industrial strategy is addressing problems such as this. The solution requires willingness to pay for the more expensive production techniques that allow businesses to meet low-volume, intermittent demand without single points of failure. If you want surge capacity, the solutions get even more costly.
This can be accomplished in various ways. One option is to incorporate more aspects of long-run sustainment into initial procurement contracts. Rather than squeezing margins to the degree possible and relying on prime contractors to sort out the details, Defence can place more emphasis on subcontract plans. They can specify measures of supply chain resilience and calibrate prices and award criteria accordingly.
Technology can also be a solution. The most obvious example is industrial automation that reduces reliance on transient workforces. But there are a range of capabilities in which Defence can invest up front to mitigate supplier costs and strengthen their ability to adapt to unique defence-customer needs. Sustainment data analytics are being revolutionized by artificial-intelligence tools. Other examples include materials science, advanced fabrication techniques, and cybersecurity.
From the beginning, acquisition strategies must be built around long-run supply chain resilience. A critical factor complicating the ability of industry to support Defence’s unique needs is the high level of customisation that goes into military systems, creating small production runs. While this often can’t be avoided, customisation must be balanced against long-run sustainment cost.
How can Defence mitigate this cost? Open-architecture designs with plug-and-play proprietary components allow flexibility to shift work among various suppliers and foster broader competition. Relying on broadly applicable technical standards allows suppliers to more easily fill gaps in demand by tweaking production lines to serve commercial or international customers. Maximising use of interoperable and off-the-shelf subcomponents serves the same end.
Acquisition officials often avoid long-term contracts because they can reduce flexibility and shift risk to the buyer. But a strong and consistent demand signal allows contractors to better manage their network of subcontractors. No one knows when a recession might hit. No one knows what inflation will be five or ten years in the future. Contractors will demand a premium to make long-run commitments in the face of such uncertainty. If Defence truly believes resilience is a key enabler of military capability, it must be willing to share this risk.
Buyers must pay attention to intellectual property when forming lifecycle acquisition strategies. Willingness to pay for resilience means willingness to pay for data rights, production licenses, and all of the other contractual arrangements businesses use when dealing with one another. Sometimes it means directly funding R&D so the government owns core systems. Buying unique capabilities without consideration for IP ownership can set up a single point of failure from the outset.
Accomplishing these objectives becomes easier with deeper markets to draw upon. That is why US policy highlights the importance of integrating allied industries. Australia must leap at this opportunity. It must coordinate sustainment contracts on shared systems. It must expand supply chain data analytics across partner economies. It must push for security of supply agreements to avoid bottlenecks created by the US’s defence priorities & allocations system.
Considerations such as these will form the core of any viable defence industrial strategy. As the AUKUS stars align, Australia must not miss the generational opportunity.
George Henneke is a visiting senior defence economist at ASPI. Image: .