Ten years of delivery by the Howard-era government of 3% (real) increases in Defence budgets, plus a promise by the new Rudd Labor government to keep the party going through to at least 2015/16, has certainly had an impact on commercial mindsets within some of the globe’s largest defence companies.
The buzz of this year’s Pacific 2008 International Maritime Exposition will be what BAE Systems’ $775m acquisition of the whole of the former Tenix Defence operation means for Australia, as well (if pre-emption rights are not exercised), acquisition of Tenix’s JV interests in RLM and Tenix Toll logistics.
Outside of Tenix Defence’s major Land (M113 upgrade) and Aerospace (‘Sea Hawk’ upgrade) contracts, the partnership with Navantia on the RAN’s new amphibious ships has elevated BAES straight into the local naval shipbuilding sector, with intriguing implications for the pending sale of ASC Pty Ltd given the former’s work on surface combatants/submarines in UK/US.
Could it be that BAE Systems might one day come to regret buying out Tenix Defence, in that, having helped its former owners into a seriously cash rich position, the Salteri’s then turn around and come back with a killer offer to acquire the submarine, and soon to be air warfare destroyer, builder?
Should that come to pass, however, the $686m directly paid for the Defence component might not be enough to secure ASC given its impressive 2006/07 financial results, which ADBR’s updated analysis of the worth of the company (see page 22) concludes requires $500m simply to buy a seat at the table upon which the rest of the game to secure ASC ownership will be played.
The attention has not all been BAES’ way, however, with UK-based Qinetiq also making its play in Australia over the New Year break and picking up the unloved (by its US parent) Ball Solutions Group, Novare Services, and in the past week AeroStructures. Prior to that it was Mediaware’s turn with its acquisition by General Dynamics, along with Aussie icon ‘Interscan’, now sold to Madrid-based IT and defence systems company, Indra.
All up, the developments of the past few months make most lists of ‘Top’ defence contractors irrelevant, given five companies now have command of over $4 billion worth of Australian defence business, while the majority of Australian-owned companies – in terms of their defence component – appear stuck in the annual revenue band between $10m and $25m per annum where, inevitably, it is not too long before a major international corporate comes along and takes the misery out of life by buying them out.
Labor’s election ‘Plan for Defence’ contained some observations on this cycle, and the nation’s apparent inability to build and sustain global firms. The solutions, however, had the familiar ring of ‘defence self-reliance’ initiatives from former years, and a Rudd Labor government undertaking to ensure that “as much of the Defence Budget as possible is spent in Australia.” The tools flagged for this to occur were also more of the same – “an emphasis being given for Australian content, and tenderers required to develop detailed strategies for involving Australian industry to the greatest extent possible.”
All this is to be wrapped up in new reporting obligations on Defence, to include in its Annual Report a specific section outlining Australian involvement in major equipment acquisition projects. Up for further fiddling are new systems to ensure better access for SMEs to information on minor capability projects, more formal processes within the DMO to entertain unsolicited capabilities, and more encouragement to expand links with the DSTO.
Against Senator Kim Carr’s (new Minister for Industry, Innovation, Science & Research) plan to kick-start a year-long mega-inquiry into the development of a ‘National Innovation System’, Labor’s defence-industry initiatives look a bit lame. Carr proposes to have fed into his innovation inquiry parallel reviews of the existing R&D Tax Concession, and the Cooperative Research Centres scheme to identify duplication with State-based assistance measures.
Carr’s problem, however, is that with all the talk about the worries of inflation, there won’t be too much money around to undertake anything substantial in terms of the funding of new initiatives until the 2009/2010 Federal Budget. By that time, there will have been one more consolidation within defence-industry (via the prospective sale of the ASC), and the cause of open competition will have taken yet one more blow to the chin on what now appears an unstoppable path towards the majority of Australian defence business being held in the hands of half a dozen overseas-based firms.
