Government fails the aerospace industry

Among other benefits, partnership in the program opened opportunities for Australian industry to win work in the world’s largest defence project.

There has always been an inherent ‘tension’ in the project, however, between the requirement for partners to win work on a ‘best value’ basis to keep the cost of the aircraft down, and the desire for all partners to have a fair share of work based on their contribution to SDD and the aircraft they expected to buy. Many of the partner governments have resolved this tension by providing considerable support to their local industries to help them win work.

After 10 years it is worth examining what the partnership has meant for Australian industry and what lessons can be learned.

Australian industry currently has $300 million of F-35 work on contract, including: Early structural design work by GKN – $108 million.

Engine trailer design development and build, and composite tooling, by Marand Precision Engineering – $91 million.

Weapon adaptors, refuelling receptacles, airframe components and electronics machined parts production by Ferra – $24 million.

Titanium parts machining and corrosion sensors from BAE Systems Australia – $11 million.

Airframe component machining by Lovitt.

A wide range of other activities valued at an additional $38 million through work by Lovitt, Varley, Broens, Production Parts, Hoffman Metaltec, Goodrich Control Systems, Rosebank Engineering, TAE, Cablex, Micreo, Vipac, Partech, Quickstep and Adacel.

That work relates to the development program, test aircraft, and the first few years of production. By far the largest returns will come when production ramps up to almost one aircraft per day. In a presentation at the recent Avalon Airshow, Lockheed Martin executives said that work wonby Australian industry to date could multiply to around $5. 5 billion, and additional future opportunities could make the total even higher.

Specific additional opportunities which alone could bring the sum to around $7. 2 billion include: Production of composite components by Quickstep, estimated at approximately $700 million.

Production of F-35 flares by Chemring, perhaps up to $1 billion, subject to maturing manufacturing processes.

This work is not guaranteed, and there are some big assumptions in the estimates. First, several thousand F-35s will have to be purchased for these returns to be achieved. Second, Australian industry must continue to meet cost targets to satisfy ‘best value’ requirements.

Australian industry has faced many challenges winning JSF work. The high Australia dollar and high Australian labour costs have been a huge challenge, particularly in the context of the global financial crisis, where cutting margins to win work has been a common practice among partner countries. Delays in F-35 production have also posed significant challenges to smaller companies trying to justify their short-term investment for a long-term return.

Australian government support to industry on the F-35 program has been useful but extremely limited. Discounting the $150 million SDD contribution (which was an investment to avoid future pro-rata contribution to development costs, and is expected to save hundreds of millions of dollars in acquisition costs), the total government support to Australian industry has been in the order of $30 million.

Even if Australian industry eventually wins only a conservative 25 per cent of the prospective work identified above, there would be a total return of around $1. 8 billion. This amounts to government support of about two per cent of the long-term industry return, and about 0. 2 per cent of Australia’s estimated $16 billion acquisition cost.

Not all support needs to be direct funding.

The case of DMO providing a long-term contract to Chemring to produce non-JSF flares to allow it to mature its processes is a good example of DMO using its buying power wisely to support Australian industry. Wise investment in R&D to support activities such as Ferra’s development of direct manufacturing of titanium components and laser-assisted machining of titanium also show that small investments can open up opportunities for Australian industry more broadly.

But how much more could have been achieved if government had been prepared to provide serious support to Australian aerospace industry? The aerospace sector has been woefully neglected compared with the maritime and, to a lesser extent, the land sectors.

Compared with the $30 million support for aerospace industry on JSF, how many billions of dollars has the government spent supporting the AWD and LHD projects, and potential future maritime projects? Given the extreme challenges and the disappointing level of government support, Australian companies can be proud of their achievements in the F-35 program. The question is: How much more could have been achieved – and perhaps could still be achieved – with a vigorous, forward-looking, defence industry aerospace policy?