ASPI’s decades: Off-the-shelf overseas or on-shore ourselves

ASPI celebrates its 20th anniversary this year. This series looks at ASPI’s work since its creation in August 2001.

Why does Australia build its own military kit? Why not just buy it off the shelf?

If Australia buys its military aircraft overseas but builds its own ships and submarines, what’s the return for jobs and the economy versus the capability created for Defence?

The F-35 joint strike fighter and the Attack-class submarines are giant case studies that show the complications that entangle simple questions. The subs are being built in Australia with an overseas partner. The F-35 is an American plane but Australia is part of the production chain.

Such giant purchases illustrate the lack of easy answers in the jungly, jangly juggle of cost, risk and capability. ASPI has produced a bookshelf or two of reports examining these problems and offering solutions.

Considering that balance of build here or buy over there, in 2009 Andrew Davies and Peter Layton looked at the strategic implications of pointing to the shelf and saying, ‘We’ll have six of them and four of those’.

The overseas answer should offer firm price, scheduled delivery and interoperability with allies, Davies and Layton said:

The clear trend in post-WWII Australia has been towards the outsourcing of our military research and development, retaining in-country only those elements of defence industry required to support equipment that is, for the most part, designed elsewhere. This is consistent with an ongoing evolution of the Australian economy as a participant in an increasingly globalised free market. These choices can have strategic consequences and have the potential to diminish Australia’s self-reliance.

The argument against off-the-shelf purchases is that Australia buys overseas kit that isn’t designed for Australian purposes. Rather, the case runs, we should do the research and the work here, buy in knowledge as needed, and use it to buy here. We should do defence as industry policy: build our own industry and build our economy, protect sovereignty and protect jobs. The capability must have Australian content. The bumper stickers would read: ‘Buy Oz, build Oz’ or ‘Think for yourself, make it yourself’.

‘Buy Oz’ has shown more domestic political heft than the off-the-shelf capability mantra of ‘Buy the absolute best for Defence and get it quick’.

The Defence version of ‘Build Oz’ became ‘sovereign industrial capability’, a concept hammered at with more than 30 references in the 2020 defence strategic update and force structure plan.

Key ASPI studies in the think-for-yourself dimension were Defence science and innovation: an affordable strategic advantage in 2015 and Defence and security R&D: a sovereign strategic advantage in 2019.

So, what economic benefit will Australia get from spending hundreds of billions of dollars on building its own kit wearing that ‘Buy Oz, build Oz’ badge?

In answering, Rob Bourke’s 2019 Defence projects and the economy was sceptical about Defence as a major source of ‘jobs and growth’, remarking on how little supporting evidence there is for the claimed economic benefits. At best, Bourke wrote, the projects appear to have a small positive impact on economic activity:

Paying high price premiums to have Defence capital equipment assembled in Australia has in the past been associated mainly with military-strategic imperatives. In future, under the banner of defence industrial sovereignty, it seems that the expectation of offsetting economic gains will play a more prominent role than before—giving sovereignty a broader remit than the term implies. However, in the absence of those gains, the cost of sovereignty has its limits. It can be argued that sovereign status shouldn’t entitle an industrial capability to unfettered levels of government assistance unencumbered by critical analysis.

Australia’s choice to build its own warships was subject to a strategic and economic analysis by Davies, Henry Ergas and Mark Thomson in 2012. High rates of assistance to domestic shipbuilding, they wrote, distorted the allocation of economic resources but also the choices Defence made about capability:

Given that the excess costs, calculated over the entirety of the future fleet program, could amount to many billions of dollars, the loss to Australian society from protecting domestic military shipbuilding could be extremely high. There is also the loss, more difficult to quantify but no less real, should the high cost of building ships in this country force us to settle for a smaller fleet or impose unwarranted opportunity costs on other parts of the defence portfolio, thus reducing Australia’s net defence capability. Unless credible offsetting benefits can be identified, and they have not been to date, the case for continuing the current preference for domestic production is very weak indeed.

In tracking the roiling, rolling story of kit creation, ASPI sought the lessons learned from the hard school of defence capability development.

When Davies looked back 13 years on from the release of the 2000 defence white paper, some of the major capabilities announced in it had still to be realised.

Future leaders could take lessons from an unhappy process. Chronic optimism permeated project timelines: the 15 delivery times given ranged from four to 15 years, with an average of seven years. The actual average was almost 13 years—schedule overruns averaged more than five years.

Projects taking more than a decade to deliver were overtaken by events, Davies wrote. The world changed and priorities changed. More than a quarter of the capability enhancements announced in the 2000 white paper were altered because of shifts in government thinking or in the strategic environment.

In the age of Covid-19, US President Donald Trump’s thought bubble about bringing all elements of production of the F-35 back to America was a brutal illustration that one person’s local manufacture is another’s loss of export markets and jobs.

Marcus Hellyer commented that Trump’s idea of stripping the seven remaining non-US partners in the JSF consortium (Australia, Canada, Denmark, Italy, the Netherlands, Norway and the United Kingdom) of their workshares likely wouldn’t happen. Finding new suppliers for literally thousands of components would delay the program even further, he wrote, and ‘it would be an act of perfidy that would be hard for America’s allies to ignore’.

The argument for sovereign industrial capability got a pandemic-sized boost. The ‘Think for yourself, make it yourself’ plan wasn’t just about building the economy and having full control over capability; it also protected Australia from the fragilities in international supply chains exposed by Covid.

In reviewing the 2021 defence budget and what had happened to the creation of defence kit during the pandemic, Hellyer said Australian manufacturers showed they could deliver:

It’s a very encouraging sign that industry can meet the challenge of ‘eating the elephant’ presented by the 2020 [defence strategic update]’s growing acquisition program. Australian defence industry did particularly well, according to Defence’s data. Defence’s local military equipment spend grew by a remarkable 35% to around $3.5 billion. Australian industry isn’t just growing in absolute terms: there are also signs that it’s growing in relative terms compared to the share of spending going overseas. If that continues, it’s evidence at the macro level that the government’s defence industry policy is delivering.