Rethinking the future of Australian defence industry policy

A report from The Australian Industry Group and Strategic and Defence Studies Centre, The Australian National University

As our geostrategic environment deteriorates, the Australian Government has adopted the concept of National Defence – the defence against potential threats arising from major power competition – as a new approach to defence planning and strategy.

While many reforms will be required to implement the National Defence concept, building Australia’s defence industry capability is one of the most important. The Defence Strategic Review has argued for the need to build enhanced sovereign defence capabilities in key areas.

However, the current paradigm of defence industry policy was established in a very different context to that of today. Risks of major power conflict were low, policy assumed a 10-year warning time, and industry capability was viewed largely in terms of supporting individual ADF programs.

This report examines the role of defence industry in the context of Australia’s National Defence strategy. It argues that a change is required to recognise defence industry not as an input to capability but as national capability in its own right. The possession of a sovereign but internationally linked defence industry is itself an asset during a period where the risk of major conflict is rising.

To inform the national debate in Australia, this report examines defence industry policy in five countries: Sweden, France, the UK, Israel and Canada. These case studies offer pertinent lessons for how defence industry policy can be implemented in different strategic contexts.

The report identifies several factors that shape effective policy: fostering defence-civilian industry embeddedness; utilising a broad range of industry policy tools; ensuring formal and informal coordination between government and business; balancing competition and strategic relationships; and leveraging international markets for scale.

The report then connects these lessons to Australia, considering how our defence industry policy could be reformed to deliver on the needs of a National Defence Strategy. It offers five recommendations for the future of defence industry policy in Australia.

Policy Recommendations

1. The Australian defence industry should be considered a capability in its own right: A capability that supports the ADF force-in-being, but whose strategic value lies in those situations where that force is fully committed, needs to be rapidly reconstituted, and may need to expand. Domestic industrial capability should be developed to meet the demands of our defence planning scenarios, with foundation capabilities in place and capacity to scale with operational needs during conflict.
2. Defence industry should be embedded within and managed as part of Australia’s broader national industry structure and policy. Defence industry draws on resources such as capital, technology, infrastructure and skills from the civilian economy, and can achieve better scale and efficiencies when connected to their civilian peers. Industrial policy support for defence industry is integrated with, and not simply alongside that, support offered to its civilian counterparts.
3. Defence industries should be strategically prioritised, then supported to achieve scale and surge capabilities. Prioritisation will be required to identify where Australia has relevant capabilities, or might be able to efficiently develop them, that can contribute to our own and allies supply chains. These capabilities should also be aligned to existing areas of strength in Australia’s civilian industries and leverage new industrial policy programs. Scale in these prioritised areas should then be achieved by coordination across programs, the development of export markets, and/or the building of international technology partnerships.
4. Government should utilise the full range of policy levers at its disposal to shape defence industry outcomes. This including both formal and informal mechanisms for coordination between government and business, to ensure greater understanding, cooperative relationships, and two-way flow of information. Given the size of Australia’s defence effort, the selective use of single supplier (strategic partnering) arrangements will be crucial in some areas to achieve and sustain required industry outcomes.
5. Government should establish a Defence Industry Capability Manager. The Capability Manager would be responsible for defining the capability and capacity that government needs to develop, as well as for development of industry to meet the level of preparedness determined by the Government. Whilst close liaison within the Department of Defence and specific Capability Managers would be required, the Industry Capability Manager would have a wider ‘whole of government’ role to bring Defence, wider government and industry together for the achievement of strategic industrial outcomes.