Defence’s acquisition plan risks leaving ADF with stranded assets
6 May 2021|

In my previous article, I looked at the transition that’s underway in Australia’s electricity sector, driven by technological innovation. The electrical grid is moving from one based on a small number of large, inflexible generators to one consisting of a large number of small (and, in the case of rooftop solar, very small), responsive, disaggregated generators.

It’s a textbook case of disruptive innovation. The incumbents didn’t see it coming. Now they’ve been left with stranded assets and are scrambling to adjust. They can’t sell them because nobody wants to put their own money into a losing economic proposition. If it made economic sense to sink a lot of money into new power stations fired by fossil fuels such as gas, the private sector would be lining up to do it.

The traditional generators are taking a range of measure to save themselves. They are writing assets down, essentially accepting that they’re uneconomic. They are bringing closures of coal-fired power plants forward; AGL, for example, recently announced that it was moving the closure of the Yallourn brown coal plant in Victoria forward from 2032 to 2028. It’s a measure of how far the transition has come that nobody other than federal government ministers and some news commentators expressed any concern that this would lead to shortages and price increases. Industry and investors were uniformly confident that renewables would easily fill the gap.

Traditional generators are also entering the renewables market, either buying up renewable generators, building their own renewable arrays on greenfield sites, or seeking to re-role existing locations, for example into sites for big batteries. And they are quarantining these new ventures from their unviable traditional assets; AGL has split its business into old and new generation, presumably to prevent the former from dragging everything down with it.

Whether these measures will be successful remains to be seen. History is replete with incumbents overtaken by disruptive innovation (Kodak, for instance), but there are also examples of companies that have successfully reinvented themselves (Netflix is a recent one).

So, what does this mean for the Department of Defence? Will it too be left with expensive stranded assets? It certainly is facing disruptive innovations. These include the robotic and autonomous systems I mentioned in my last post, but there are many more, such as the proliferation of cheap guided weapons that challenge a business model based on expensive, crewed platforms such as surface ships and armoured vehicles. There’s also the question of what happens when the world moves away from fossil-fuel-driven transport and the global infrastructure to produce and distribute liquid fuels dries up. That’s not so far away, with many countries having already agreed to end the sale of new petrol and diesel cars by 2030.

There are, then, many technological innovations that could leave Defence with stranded assets. In the defence context, stranded can mean uneconomical, but it also means technologically obsolete, to the point that it’s just too risky to deploy the outmoded capability. As I noted in my previous post, day one of the next war is the worst time to have this realisation.

One way to avoid stranded assets is to not invest in them in the first place—that’s the tipping point the electricity sector has reached. But Defence is a long way from there. It continues to invest in traditional platforms that face the disruptive threats identified above, even ones that won’t enter service for a decade. Defence’s domestic shipbuilding program is spending around $1.7 billion in 2020-21; that’s likely to grow to $4 billion per year. The frigate and submarine programs between them are likely to spend around $20 billion before the first of each class enters service in 2031 and 2034, respectively.

In times of uncertainty, it’s wise not to be overly invested in one potential future. That means hedging by spreading risk. One way to do this is to invest in other futures, especially when there’s a high likelihood they will occur. In Defence’s case, that would mean investing in research and development on the kinds of disruptive technologies mentioned above. But it’s hard to argue that Defence is taking a balanced approach. Its two innovation funds, the Next Generation Technologies Fund and the Innovation Hub, are each budgeted at around $100 million per year over the next decade. Out of a total defence budget of more than $40 billion per year, that’s less than 0.5%, far short of what technologically innovative organisations invest in R&D.

There are likely to be other lines of R&D spending in Defence than just its two innovation funds, but it’s difficult to identify them from the outside. In response to ASPI’s inquiry on total R&D spending, Defence stated, ‘The Australian government has committed around $3 billion of capability investment in Defence innovation, science and technology over the next decade.’ That’s still well short of 1%.

Defence does have substantial investment in robotic and autonomous systems programmed into its future investment plan—but those large sums are still some time away and by then Defence will be deep into the acquisition of the next generation of large, expensive crewed systems with the sunk costs rapidly mounting.

So when we reach the tipping point of whatever disruptive technological innovation is coming down the track, it’s highly likely that Defence will have a long list of potentially stranded assets on its books. Because of the huge economic and cultural outlays on them, Defence will be unwilling to simply write them off. It’s likely that Defence will attempt to adapt them to reap some return on its investment. After all, one of the main selling points of crewed, multirole platforms is their versatility and adaptability.

We can already see that approach emerging with the development of concepts such as human–machine teaming in which those large, crewed platforms continue to play a key role as motherships or command-and-control nodes in distributed webs consisting of large numbers of small uncrewed systems. I’ll look at whether this is a viable way to ‘unstrand’ those traditional assets in my next post.