Offsets Providing Industry Opportunities

The Government describes the Offsets Programme as an integral part of its policy for the development of the Australian manufacturing industry, with the objectives of:

• Transferring technology of continuing defence or industrial Significance.

• Providing workload for industries operating below capacity,

particularly those of defence significance.

• Developing, in the case of defence equipment, Australian maintenance and spare manufacturing capabilities.

• Improving research, design and development resources.

• Creating new employment opportunities.

On defence contracts, the participation by the Australian industry now falls into two categories. The first is designated work, involving part production, assembly or adaptation of equipment in quantities limited to the Australian purchase, with cost premiums often involved because of the small production quantities, but with the benefit of establishing a greater level of Australian self-reliance in future maintenance and repair. The second is export offsets, where Australia often produces as the sole world source for the particular component and ships items back to the overseas principal for incorporation in its production line. Civil offsets fall entirely into the export category, there being no designated work because there is not the need to establish self-reliance as on defence projects.

Civil offsets and defence export offsets are not subsidised by the Australian Government, so if local industry is to win such work it is necessary to be competitive with overseas suppliers on cost, quality and schedule. This is no small task, particularly in the fiercely competitive international aerospace business, but there is now ample evidence that the Australian aircraft industry can be very competitive indeed if given the right opportunities and it has the will to win.

In quantitative terms, the success of the policy is shown by orders totalling almost $550 million over the last twelve years with the aircraft industry’s share exceeding $220 million. This is not a ‘flash in the pan’. On Boeing 727 programmes involving sole source production, both Hawker de Havilland (wing ribs and rudders) and the Government Aircraft Factories (elevators) maintained competitive pricing from 1971 to the present day, winning a dozen consecutive contracts totalling almost 1000 aircraft sets of components with a total value exceeding $100 million.

Similarly for McDonnell Douglas, HDH has been the sole world source of DC9 elevators since 1975 and has been the only source of elevators for the stretched Super 80 since it was introduced in 1976, participating in the design of the new elevator and delivering prototypes ahead of schedule.

The value of offset contracts varies enormously. At the lower end of the scale, HDH has negotiated contracts as small as $80,000, that particular contract being a ‘getting-to’-know-you’ contract with McDonnell Douglas for DC-10 pressurisation ducts, intended to allow the two organisations to establish communications, set up quality approvals, and start working together with the objective of leading on to larger contracts. The plan succeeded, leading to the DC-9 and Super 80 elevator contracts, which now total more than $30 million.

At the high end, the Boeing 757 wing rib contract won by HDH with GAF as principal subcontractor has a current value exceeding $40 million. It is a sign of increasing self-confidence in the Australian aircraft industry that a contract of that size was signed on a fixed price basis covering a programme from initial design participation through the production of 300 aircraft sets of wing ribs continuing until 1986/87.

The qualitative benefits of the policy have been far-reaching, encompassing transfer of a wide range of new technologies, significant improvements in productivity, and the acquisition of new technical and commercial expertise. It would not be an exaggeration to claim that the exposure to the international aerospace marketplace caused by the Offsets Policy has transformed the Australian aircraft industry over the last decade.

The most obvious benefits have been in the area of manufacturing technology, where a steady stream of new equipment has been installed, justified by offset contracts, considerably reducing the technology gap that concerned defence planners in the mid-seventies.

Numerically controlled (NC) machining is an area that has benefited greatly from offsets. In 1970, there were only a handful of simple NC machines in the local industry, with limited experience in their use. Today, typical Australian aircraft machine shops are smaller versions of their American or European counterparts, with machines often identical to those used overseas, programmed by Australians who have worked internationally to hone their skills, and often linked into state-of-the art CAD-CAM systems to allow integration of design and manufacturing processes.

It was a civil offset project, the manufacture of wing spar ribs for the Boeing 757 airliner, that introduced into Australia the massive 5-axis and 3-axis multi-spindle mills with work areas almost 30 metres in length, providing Hawker de Havilland and the Government Aircraft Factories with the capability essential to manufacture highly stressed airframe components. This equipment is now to be utilised in the manufacture of components for the F/A-18 Tactical Fighter, a good illustration of how the Offsets Policy has resulted in the transfer of technologies that contribute to Australia’s defence self-reliance.

The F/A-18 Tactical Fighter designated work will also result in a very significant increase in Australia NC machining capability. Commonwealth Aircraft Corporation will be funded by the Government for a wide range of NC equipment to be used on the production of General Electric F-404 engine components. GAF has already acquired an extra 5-axis NC mill for airframe items. HDH will be receiving new NC machines for the production of the landing gear. Dunlop Aviation will get new equipment for hydraulic work.

While funded as part of the F/A-18 support infrastructure, and of considerable importance because of the capability they provide for future F/A-18 spares production, the new numerically controlled machines are an important part of Australia’s total defence industry capability. Inherently flexible because of the ability to re-programme using computer-aided manufacturing techniques, the machines will be used on other aircraft manufacturing projects. For instance, the new equipment at HDH for the F/A-18 landing gear will also be used for the production of the landing gear for the RAAF’s new Basic Trainer aircraft.

Bonding of metal components and advanced composite materials is another area of technology to benefit greatly from the offsets programme. The Government Aircraft Factories, after more than a decade of experience gained as sole world source of bonded metal components for Boeing 727 rudders and elevators is currently setting up a new $25 million bonding facility, a major undertaking by international standards. This new facility will move into the field of advanced composite carbon fibre epoxy materials on the F/A-18.

Meantime, Hawker de Havilland has once again demonstrated the technology transfer benefit of civil offsets by winning a contract to build the carbon fibre composite ailerons for the best-selling Boeing 737. To handle this and other projects, HDH has invested in a new autoclave bonding facility specifically designed to handle advanced composite materials.

Providing workload for under-utilised sectors of industry was an important consideration when the Offsets Policy was first established because it was clear that the early 1970s would see a rundown in traditional defence aircraft production as the Mirage and Macchi programmes concluded. In fact, the need for offset workload became even more important as the seventies progressed as deferments and re-scheduling of new defence aircraft meant that no major new project was launched during the decade.

In HDH’s case, the presence of offset workload was crucial to the survival of the Company’s manufacturing capabilities. At times, offset activities represented more than 90% of total manufacturing activities and it is clear that efficient production could not have been maintained without offsets. Instead of closing down its manufacturing, HOH emerged at the end of the seventies with a revitalised production capability, almost entirely due to its offsets experience.

Handling offset workload demands proved more complex than the industry used toon Australian projects, not least because of the significant variations in delivery schedules, particularly on commercial airliner projects where the manufacturer is reacting to the the requirements of a variety of customers. Instead of the traditional defence programme approach of low production rates (two or three aircraft per month) with slow initial build-up, the Australian industry found schedules constantly changing on offset programmes. On the Boeing 727 contracts for instance, HOH and GAF started at 1 ½ chipsets per month, built up to 7 per month, reduced to 4 per month, rushed up to 14 per month, and then slowed to the current one or two sets per month as the project phases out.

There was no option available in such circumstances but to improve production control systems in order to accommodate such delivery variations. To a considerable extent, these improvements were achieved by reviewing the systems being used by offset principals overseas and adapting the best of these to suit Australian needs. There was a spin-off benefit to concurrent defence production activities, in that the improved production control systems introduced for offsets were also applied to defence work, giving better control and cost savings.

As the number of offset programmes grew, an increasing number of Australian specialists went overseas to work with offset principals, sometimes for training, but often as an integral member of the team starting a new project. For instance, Australian engineers worked on the design of the wing ribs for the Boeing 757 and 767 and on the design of the elevator for the Douglas Super 80. Other specialists worked at Airbus Industrie, British Aerospace, Lockheed, Northrop and Rolls Royce.

The result of this overseas experience was to expose Australians to the most advanced techniques being applied in their area of specialisation, and on their return to Australia, these new skills were applied not only to offsets but also to defence work.

The combination of improved technology, better systems and increased individual skills combined to result in significant productivity improvements. Australian industry has been competitive in the early days of the offset programme because comparatively low labour costs offset the lower productivity which was evident in comparison with US and European aircraft industries. The labour rate advantage eroded rapidly from 1973 when wage inflation in Australia moved appreciably higher than its competitors, but fortunately for those Australian firms involved in offsets, productivity improvements became apparent about the same time.

In HDH’s case, the result of successful competitive bidding in 1974 indicated that productivity had reached European levels. By 1976, productivity appeared to be equal to that of typical US contractors, and this situation appears to continue. However, the drift of Australia’s inflation rate about its main competitors re-introduces the danger that Australian industry may become uncompetitive, this time for reasons beyond the industry’s control.

One particular productivity sector showing marked gains has been the industry’s ability to continue down a learning curve over extended production runs. Up until the introduction of offsets, learning (i. e. the ability to reduce average-recurring unit costs as quantities increase) had usually ceased after about 100 units had been produced. Faced by the certainty that offset contracts would be lost unless learning could be extended past this point, Australian industry once again looked to overseas approaches to adapt these to local needs. The main change was a philosophical one; instead of planners waiting to be consulted if and when production problems arose, they were tasked with actively identifying improvements in production methods that would save costs. The result has been learning curves continuing over several hundred units, and once again the benefits have spread to all manufacturing work, not just to offsets.

Quality control is another area to have undergone considerable change as a result of offsets. While Australian quality standards have always been high, inspection procedures tended to be inflexible and the costs of quality control were high by world standards. With assistance from overseas principals, this situation has been transformed over the last decade. As a typical example, HDH’s quality organisation and systems are now approved by some fifteen overseas companies as well as Australian and overseas regulatory authorities.

Quality costs have been reduced by adopting a quality assurance approach, planning from the start to minimise the possibility of error and allowing the level of detailed inspection to be reduced. Cost savings have also been achieved by automating inspection procedures, including the introduction of numerically controlled validators to check complex components produced on high productivity numerically controlled machine tools.

If Australian industry can remain competitive, the future of Australian offsets is likely to remain secure. The Offsets Policy has been under regular review and recently has received strong endorsement both from the Government and the Offsets Advisory Committee, a consultative group consisting primarily of senior industry representatives.

New major opportunities will continue to rise. The next major military project to involve offsets will be the RAAF/RAN medium helicopter requirement which could potentially involve over 100 helicopters and a total value of $1000 million during the next decade. With a minimum requirement for 30% offsets (plus designated work), this will be a major project if it proceeds on schedule.

In the civil aircraft sector, considerable interest has been generated by the prospect that Australia may become a junior partner in one or more of the 150-seat airliner projects proposed by Airbus Industrie, Boeing and others. A 2% share in such a project would result in sales exceeding $100 million over 500 aircraft.

Participation in such a project would require Australia to assume a greater risk-sharing role than on normal offsets, but the benefits would include assured participation for the total project life. This kind of participation is a logical extension of past offset experience.

Aerospace offsets have been a success story in Australia, as can be seen by the transformation of the local industry’s capabilities and attitudes over the last thirteen years. The offset future looks equally bright.