OPINION: The Defence Industry Development Strategy (DIDS)

So, Defence has published two long-awaited (and long overdue) documents – the Defence Industry Development Strategy (DIDS) and its response to the Hilarides review of the RAN’s surface combatant fleet, Enhanced Lethality Surface Combatant Fleet.

You should read them together. Not surprisingly, the latter cites Defence’s Continuous Naval Shipbuilding program as one of the justifications for the decisions it recommends; the former names it as one of seven Sovereign Defence Industrial Priorities (SDIPs):

• Maintenance, repair, overhaul and upgrade of Australian Defence Force aircraft
• Continuous naval shipbuilding and sustainment
• Sustainment and enhancement of the combined arms land system
• Domestic manufacture of guided weapons, explosive ordnance and munitions
• Development and integration of autonomous systems
• Integration and enhancement of battlespace awareness and management systems
• Test and evaluation, certification and systems assurance

A few things stand out here. Firstly, we now have a list of Defence’s industry priorities and a proper definition of each of them – this list subsumes the previous much longer list of Strategic Industry Capability Priorities (SICPs) which weren’t all defined in any case.

Secondly, the DIDS talks of two timeframes, or ‘epochs’ for the SDIPs: Epoch 1 runs from 2023 to 2025 while Epoch 2 runs from 2026 to 2030. Defence has acknowledged it needs to differentiate between short-term and medium-term goals and will handle capability and industry development differently for those two epochs as a result.

Thirdly, although Defence doesn’t say so explicitly, the DIDS is tantamount to an acknowledgement that it hasn’t been a good customer. It does admit it hasn’t been easy to deal with. The majority of the DIDS focusses on reforms to the Defence organisation, to acquisition and to capability development.

As Mr Ewen Levick, Publisher of Australian Defence Magazine, pointed out in his opening speech to February’s ADM Congress in Canberra, “The greatest risk to industry in this country is government. And as industry ultimately deliver capability to the ADF, government has become its own greatest capability risk.”

To be fair, Defence has tended to operate on a peace time basis and its processes are designed to protect the public purse and ensure taxpayers’ money is spent wisely. But risk-aversion, at the level to which Defence and the Commonwealth take it, has simply become yet another cause of risk, delay and waste. The DIDS is meant to streamline and simplify Defence’s glacial and over-opaque processes and deliver warfighting capability much quicker, to both the Australian Defence Force (ADF) and, through an invigorated exports program, to Australia’s allies.

It remains to be seen how effective Defence’s reform program is, but this one gets off to a good start: it devotes an entire chapter to Communication, something that Defence is abysmally poor at but which a strong, resilient industry sector needs. It lists four target outcomes in communicating with the defence industry, along with methods for achieving them and the types of content required. Again, it remains to be seen how effective this part of the DIDS program will be – Defence is notoriously secretive and the culture change necessary to alter this is massive. But at least Defence and CASG have finally acknowledged Communication is an issue.

Fourthly, there’s a focus on Innovation and speed to capability, and this is reflected in the SDIPs: a platform might have a service life of 30 years, but its combat effectiveness will likely depend on regular, even frequent, technology refreshes. Refreshing the technology properly will require ongoing R&D (possibly in collaboration with a foreign ally) and the ability to commercialise the resulting Intellectual Property (IP) quickly (and again potentially collaboratively). Hence the focus on Defence being a good customer: unless it is spending money to acquire the right stuff quickly there is absolutely no incentive for the Australian defence industry to conduct research and to manufacture things.

Fifthly, the DIDS examines the characteristics of the Australian defence industrial base. It divides the industry into three Tiers: Tier 1 consists of the primes, almost all of whom are foreign-owned, though most have a significant footprint in Australia; Tier 1 companies deliver major capability at scale – the F-35, ANZAC-class frigates, Redback IFVs, and so on. Tier 2 it defines as ‘businesses delivering major equipment, systems, assemblies and services realising specific function’. It notes that Tier 2 doesn’t include many Australian companies and states that ‘Strengthening the industrial base’s resilience and capacity to innovate requires increasing [Australian] businesses in this segment.’

Most Australian defence companies are Small-Medium Enterprises (SMEs) and they operate at Tier 3, notes the DIDS. They are defined as ‘businesses providing the parts, consumables and services needed to enable the initial assembly, upgrade or ongoing operation of systems’. The DIDS aims to help Tier 3 companies grow and transition to Tier 2 and, eventually, to prime contractor status, but it will take a while and a change of Defence mindset.

Tier 3 companies are often more agile and innovative than larger companies, but barriers to growth can include cash flow, access to finance and access to skilled staff. Within the defence context specifically, they also face the challenges of increasing security requirements, lack of information about Defence’s needs and priorities and, of course, long lead times before contract signature. The DIDS is intended to overcome these barriers.

The DIDS aims to help grow Australia’s defence industry into something that can be a pillar of a stronger national economy. In 2022-23 Defence spent some $38 billion on acquisition and sustainment; 57% of acquisition expenditure and 80% of sustainment expenditure went to Australian firms. The DIDS is intended to help all of those figures to grow.

Interestingly, the DIDS also explicitly acknowledges the importance of private investment in the development of the industry. As private capital – venture capitalists, banks, institutional investors, etc – typically requires a reasonable financial return in a sensible timeframe before it will invest then, again, Defence’s capability development, acquisition and decision-making processes come under the spotlight.

An interesting feature of the fallout from the release of the DIDS has been the response from AIDN, the Australian Industry Defence Network, which is usually quick to spot and criticise inconsistencies, contradictions and deliberate obfuscation in official documents.

“This is a comprehensive document and the interrelationship between all sections and annexes needs to be read and understood in detail,” says AIDN CEO Brent Clark. “AIDN is now calling for the release of the Integrated Investment Plan (IIP). The IIP is a vital element for industry to fully plan, with confidence, and to move forward.

“The Deputy Prime Minister and Minister for Defence and Minister for Defence Industry have previously advised that the IIP will be fully funded and budgeted accordingly. Industry must have this assurance to have the confidence to move forward.”

The Defence Industry Development Statement acknowledges some simple and often hard truths: Defence isn’t always a good customer while industry itself has sometimes followed what it sees as its own best interests, even if they don’t align with Defence needs.

The DIDS is designed to modify the behaviours of both parties. It has been welcomed by most and hasn’t attracted lots of criticism – that alone makes it unusual. But until we see the IIP and the National Defence Strategy we shan’t know the full context for the DIDS.