Offsets a Boon to Australian Aerospace Industry

• Increased emphasis on the development of competitive Capabilities in Australian industry.

• Incentives for technology transfer as offsets with multipliers to apply to research and development and training

• Companies with an unsatisfactory offset performance to face more stringent conditions in tendering for government business.

• Uniform administration of the civil and defence aspects of the programme and pooling of offsets arising from computer purchases

• The public issuance of guidelines for the administration of the programme and the level of performance attained by each company

The above-listed changes will greatly simplify what has often in the past been considered at best an ambiguous piece of legislation.

The history of the Australian Offset Programme, now more commonly referred to as Australian Industry Involvement (All), dates back to 1970 when the government of the day realised that a sizeable recession was about to impact the local aerospace community as a result of the termination of the Macchi and Mirage programmes. Following the lead of several overseas nations, Australia developed a somewhat loosely worded and administered offsets programme that while technically demanding that 30% of the net value of a project was spent in-country, did little to define such requirement in a legally binding contract. Indeed most early contracts, and some right into the eighties, were performed on a best endeavours basis. With the rollercoaster-like performance of the world aerospace industry, it was perhaps not surprising that many overseas manufacturers were little interested in placing work in faraway Australia at a time when their own factories, and that of their neighbours, were sorely pressed to provide work for their own workforce.

Other impediments to the practical implementation of the scheme in the early to mid-seventies was the relatively strong value of the Australian dollar and the lack of advanced equipment available to our major aerospace manufacturers.

Enter the F-18. During the late seventies, Australia realised that its emerging New Tactical Fighter project could, if properly managed, revitalise what was generally considered to be a lagging industry. CAC had run down considerably from the finalisation of the Macchi assembly and was forced for a time to resort to building buses in order to maintain continuity of employment. GAF was busy developing the Nomad programme though both Jindivik and lkara were in their dying days and Nomad itself never really reached the level of production considered internationally to be viable. Hawker de Havilland on the other hand had pioneered the concept of offsets from the start and had been quick to win the first-ever offset contract in Australia. This was with Boeing Vertol on the RAAF CH-47C Chinook programme and was the forerunner of a whole line of component manufacturing offsets from a number of the world’s leading aerospace companies. Still, Hawkers had not actually built an aircraft since the Vampire days so it is not surprising that the Bankstown-based company fought so hard for offsets, so hard in fact that at one point during the seventies, some 90% of its output was devoted to offsets.

Nowadays of course HdH is the leading Australian aerospace company largely owing to its pioneering work in the field of offsets and its 1985 acquisition of Commonwealth Aircraft Corporation in Melbourne. This year the combined CAC/HdH earnings should comfortably exceed $260m of which about two-thirds would be for offset and designated work commitments. Group Commercial Manager, Mr Peter Smith, summed up the effects of the offsets policy by stating: “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 past decade.”

And how has this transformation occurred?

Firstly the participation by Australian companies, and not just the big three, with overseas aerospace manufacturers has built up a level of expertise and technical competence not previously available to Australian industry. Australia is now on the verge of becoming a working partner on a future airliner, most probably with Boeing, which is something that would have been difficult until recently given the generally run-down condition of much of our aerospace manufacturing plant. Thanks to the multi-billion dollar F-18 programme, the industry has seen the fruits of more than $85m worth of new state-of-the-art equipment introduced to GAF, CAC/HdH, Dunlop and others in an effort to make the industry. Viable Indeed as stated in the Inglis Report, the contribution of offsets to enhancing Australia’s defence industry capabilities is difficult to assess in quantitative terms. Australia, however, needs to maintain an industrial capacity to repair and refurbish imported defence equipment which is greater than that needed in peacetime so that this additional capacity can be mobilised in time of emergency. Offsets, particularly offsets for export to overseas suppliers, provide a means of keeping this reserve capacity up to date, and utilising it, in peacetime.

Much of the offset work takes the form of repetitive manufacturing tasks, such as assembly and machining, rather than the more skill-intensive areas of design and engineering. Nevertheless, the report found, it must be remembered that the equipment, skills and quality control used to do repetitive manufacturing work in, for example, Australia’s aircraft industry, involves the advancement of Australia’s technological and skills base. It may also be the case that if Australia is to have industrial capacity in these areas, it will be necessary to build up such capacity progressively from a base comprising the less sophisticated processes.

This growth of potential is now becoming evident thanks to the surge in industrial activity these past few years via the military and civilian airliner orders that since the early eighties could reap upwards of more than a billion dollars in offsets to local industry over the coming decade. Certainly the government’s new offset regulations will close the loopholes and natural ambiguities that have unfortunately been a hallmark of the offsets programme this past decade and a half.

That the programme is beginning to work is demonstrated by some of the high-tech work that is now taking place. Indeed much of this work would have been impossible five years ago purely as a result of our factories not having sophisticated enough equipment capable of handling such tasks. Recent examples of this are the work that CAC now routinely performs in support of the F-1Bs GE F404 engine, the same company’s work on helicopter gearboxes, GAFs massive autoclave composite division and their specialised bonding plant, Hawkers work with Sikorsky on the revolutionary X-wing project and so forth. The industry nowadays has a capability not even envisaged a decade ago.

Indeed without offsets where would the industry be today? GAF would no doubt be involved in assembling F-18 fighters though not to the same extent as we presently enjoy, HdH would merely be an engine and airframe overhaul facility while CAC would barely even have the technical capability to maintain, let alone assemble and manufacture key components and spares for a modern range of advanced technology turbofans. With both Nomad and Wamira gone and the international credibility of a designed and manufactured aircraft capability gone with it, then the Australian aerospace industry, without offsets, would be merely a hollow shell reminiscent of our shipyards of the seventies.

This writer has always felt a twinge of pride when visiting international aerospace factories on seeing a shipment of Australian manufactured components on their way to the assembly area. Their large crates, with a distinctive kangaroo, stencilled on the side and emblazoned with ‘Made In Australia’ decals is a welcome reminder that we too are in our small way a part of the international aerospace community.

Presently Australia, via HdH, is sole source supplier to Boeing on all Boeing 737 composite ailerons and 757 wing inspar ribs. HdH also builds wing ribs for the new Airbus A320 in addition to various wing components for both the A300 and A310 twinjets and landing gear fairings for the smaller A320. Hawker’s largest-ever order was recently announced in the form of the entire wing leading edge section, comprising 26 individual sections for the 747, this $130m contract runs right through to 1995 and is essentially a forerunner to Hawker’s eventual joining with Boeing as a partner for their 7J7 propfan airliner. The Bankstown-based company also has extensive contracts with Sikorsky on the S-70 Seahawk in addition to Aerospatiale and McDonnell Douglas on the F-18 and as the sole world source for all MD-80 elevators. With 1986 monthly production of both the 737 and MD-80 set to exceed 20 units it is little wonder that Hawker’s are smiling when queried about their offsets achievements!

South of the border lie CAC, which is now wholly owned by Hawker de Havilland, and the Government Aircraft Factories. CAC alone has seen an influx these past four years of some $40m invested in new plant and machinery to effectively bring it into the latter portion of the twentieth century – Hawker’s 1985 acquisition of the specialist engine and component manufacturer was indeed a timely and no doubt economically viable decision given the new clout both these companies now possess in bidding for, and winning, overseas contracts. CAC itself is heavily involved in the F-18 GE F404 engine programme in addition to manufacturing components for the civil GE CF6 and CFM56 turbofans. CAC will also overhaul the F404 in RAAF service as it presently does the venerable Atar of the Mirage. CAC senior executives joyfully grimace about the ongoing work from the F404 though as it is so much more reliable than the Alar that their long-term workload from these engines will be small by comparison with the nineteen-fifties-designed Alar. CAC have reason to grimace as the F404 has a TBO (time between overhaul) of 3,500hrs as against roughly 600 for the Atar while complete assembly for the F404 takes a mere 600 manhours as against 3,500 for the French Alar, bad news for the industry but good news for the RAAF and we taxpayers!

CAC are also involved in building F-18 engine bay doors and weapons pylons and are operating as a sub-contractor to HdH on the previously mentioned 747 wing leading edge contract. Additionally CAC are building gearbox assemblies for Sikorsky and associated helicopter components for Aerospatiale, work that may on the surface not sound very exciting but ushers in a new era of expertise and engineering capability unknown during the Mirage assembly days. CAC are also building a maintenance trainer for Sikorsky in addition to various components for the Harpoon and Matramissiles. In 1980 CAC had virtually no export sales, this year they plan to see more than a third of their total output tagged as export products!

Next door to CAC is GAF, though in terms of ideology a thousand miles apart, something that we shall examine in greater detail next issue in a comprehensive review of the recent findings of the Parliamentary Report into the activities of GAF. On the positive side though GAF has also won much work from offsets though the bulk of this is aligned with their involvement as project leader on the F-18 programme. GAF are building part of the front fuselage in addition to the carbon fibre flaps and flap shrouds. GAF are also building the canopies and radome and are responsible (at Avalon) for the final assembly and flight test of the aircraft. Despite some of the obvious shortcomings of GAF they are ahead on F-18 production. GAF also act as a sub-contractor to HdH on the Boeing 757 wing inspar rib contract and are building F28 Fellowship flaps for Fokker as a sole source, a contract that hopefully will flow over to the new Fokker 100 twinjet. As a result of the NTF programme GAF has seen more than $50m invested in new plant and equipment these past few years, indeed their massive autoclaves, bonding plant and carbon fibre areas equal those found in any similar international facility. All three plants also have introduced a number of computer numerically controlled multi-axis machine plants to cut metal in the most cost-effective manner.

The future direction to the management of offsets and designated work is probably best exemplified in the coming RAAF Pilatus trainer project. By way of explanation, designated work is work that is performed in-country, usually only for the number of aircraft required locally, as a direct result of a defence requirement. Usually, a premium is paid for local production though the long-term payback is in the form of keeping money in-country, enhancing expertise and better utilising existing plant and equipment in addition to providing additional manhours for Australian industry. Offsets on the other hand are largely work that is export-orientated in addition to parts and components destined for aircraft that will be used locally. In summary, designated work is accommodated by Australia at a premium price to meet specific security goals while offsets signify the amount that an overseas manufacturer has to provide back to Australia as a form of countertrade, the figure being 30% of the net value of the purchase.

On this project, Pilatus will deal specifically with Hawkers, who in turn will sub-contract to both their partner CAC and GAF as required. This way the entire industry will get a share of the trainer cake while Hawkers maintain project leadership to their client, the RAAF. The new team of HdH and CAC will certainly be a great asset to the future of the Australian aerospace industry in the years to come.

To date, the overall performance of the offset programme has not been seen as satisfactory. In the past, too many contracts were let merely with offsets being undertaken on a vague best endeavours basis, virtually a form of gentleman’s agreement. Additionally, much of the framework of offsets, particularly in relation to civil airliner sales, was vague to say the least. The recent updating of the legislation, via the Inglis Report, simplifies and specifically clarifies the situation in a manner that will effectively prohibit any overseas supplier from reneging on their offset commitments.

Australian industry has to maintain excellent productivity though in order to ensure it does achieve these offsets. They as such are not guaranteed in that obviously Australian industry has to bid and bid competitively in terms of on-time performance, quality and cost in an effort to beat suppliers from around the world. Obviously, our vastly deflated dollar is helping at this point in time though when our dollar does eventually strengthen we must ensure that productivity can be enhanced to take up the slack. The recent merger of HdH and CAC along with the vast investment by the Government in new plants and equipment these past few years will hopefully be the catalyst to maintaining this required level of productivity. Again, the tightened offset rules now provide an opportunity for the government to review the performance of a manufacturer prior to allowing an import permit on that equipment. In other words there must be extremely strong grounds for a supplier not having met his commitment though realistically this may take up to a decade as such programmes take years in many cases to get underway.

Another grey area that has been clarified is that of civil airliner purchases. Essentially if an imported airliner is to be used on an interstate trunk route under the operational legislation of the Two Airline Policy or it is purchased with the security of government funding or a government guarantee, then that aircraft order attracts an offset commitment by the manufacturer concerned. Ansett for instance did not seek a government guarantee on their 1985 purchase of Airbus A320 twinjets, though because they will operate these aircraft over interstate TAP routes then they attract the full offset. Alternatively, the recent 737-300, MD-80 and some of the Fokker 50 purchases destined for offshore use via Ansett Worldwide Aviation Services do not attract offsets of any type. All purchases above $2. 5m by TAA and Ansett attract offsets though the Air Queensland ATR42s don’t as they are destined for intrastate routes and are not covered by government guarantee. Most or all of the Ansett Fokker 50s are in a similar situation depending upon their ultimate end use in the imminence of a more deregulated environment during the nineties.

The potential for Australia to enjoy a major boost to our aerospace industries in the decade ahead though has been firmly planted during the last eighteen months with the large number of airliner re-equipment orders that have taken place. The value of these orders, from Boeing and Airbus Industrie, come close to $3bn for firm orders alone which doesn’t take into account an additional billion dollars earmarked for aircraft presently on option or under further consideration. Future military purchases include the RAAF/RAN helicopter project, which has the long-term potential value of more than a billion dollars for up to 100 machines and the PC-9 and AEW project. On the maritime side, both the FFG Frigate and the submarine project will provide major boosts to the Australian industry which may have some aerospace ramifications as already GAF are working on FFG components on behalf of Williamstown Dockyard.

Thanks to the potential of the offset policy, particularly in its new and tougher form, Australia now has the potential to bid and work with the best in the world aerospace community. The offsets secretariat which is jointly managed by DoD and DITC, has developed a strong working relationship with its overseas customers and now even has a special office in Washington DC (the vast bulk of offsets originate from the US) to further assist Australian firms, big and small, who are interested in becoming involved in the potentially lucrative world of offsets manufacture.

More details are available from the Assistant Secretary, Industry Operations, Defence Industry Development Division, DoD, Anzac Park West, Canberra ACT 2600. Tel (062) 48 2965 or telex 62063.