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Subject: Australian Defence Industry Protectionism
Aussiegunneragain    1/7/2010 7:40:44 PM
Since we've had a few discussions lately skirting the issue of whether or not the Commonwealth should be giving the Australian Defence Industry preferential deals for equipment purchases for the ADF, I thought I'd start a thread on it. I don't think anybody here would be surprised to hear that I don't think that there is any economic case for preferential treatment of the Australian Defence Industry, as the evidence thus far suggests that the reduced competition has an overall deleterous effect on the cost and quality of the equipment eventually purchased. However, there may be a strategic case for Australia to maintain the ability to build defence equipment. What are people's views on the issues associated with using protectionist measures to maintain an independent defence manufacturing capability for Australia?
 
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hairy man       1/8/2010 7:03:51 PM
Where there is an Australian product of equal quality and price it should always be ordered.   Likewise if two overseas companies put forward their products, and one is offering it to be built or put together in Australia, it should get preference.  That is why Eurocopter has been given the Australian orders lately, as well as their product is basically superior anyway.
 
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Aussiegunneragain       1/9/2010 8:18:33 AM

Where there is an Australian product of equal quality and price it should always be ordered.   Likewise if two overseas companies put forward their products, and one is offering it to be built or put together in Australia, it should get preference.  That is why Eurocopter has been given the Australian orders lately, as well as their product is basically superior anyway.

The instance where two products are exactly equal in quality and price is so rare in procurement that it almost isn't worth considering. The question that I am asking is when, if at all, should we set aside openly competitive tender processes to give Australian products preference for strategic reasons, even if it  costs more and/or be of less quality and/or involves greater risk of delay, cost blow outs or or failure.

 
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Volkodav       1/9/2010 11:04:07 PM
The instance where two products are exactly equal in quality and price is so rare in procurement that it almost isn't worth considering. The question that I am asking is when, if at all, should we set aside openly competitive tender processes to give Australian products preference for strategic reasons, even if it  costs more and/or be of less quality and/or involves greater risk of delay, cost blow outs or or failure.
 
Never.  We should always have openly competitive tenders although we should always include through life support measures and their estimated costs.  If TLS is left out of the equation you can be left with capabilities that, while attractive on paper, are too expensive or too difficult to maintain, resulting in a net loss of capability.
 
One of the reasons so much work was brought back in country from the 80's, following the dilution of industry capability during the 60's and 70's was the sticker shock of the support costs and the associated low availability of assets when we forced to rely on overseas contractors and facilities.  Ordering most of our gear overseas out of existing production runs, in some cases saved money in upfront costs but at the price of losing local expertise that was then unavailable when deeper maintenance, that was beyond the capability of the services to do in house, was required.  Paying to get this work done overseas was soon seen to be extremely expensive and had disastrous impact on availability.
 
As for issues of quality, delays and cost blow outs and failures this is actually more prevalent overseas than in Australia, probably because we are far less tolerant in these areas than many other countries are.  We have, on many occasions over the years let Australian industry capabilities wither only to rebuild them later, when they were seen as uncompetative. Many other nations choose to subsidise under performing industries indefinitely rather than let them fail (to avoid the Australian scenario).  It is some of these under performing, subsidised companies that are competing and winning against Australian companies.  Based on this we should also factor overseas protectionism into account before ruling the local players as uncompetitive.
 
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Aussiegunneragain       1/10/2010 5:47:47 AM
Never.  We should always have openly competitive tenders although we should always include through life support measures and their estimated costs.  If TLS is left out of the equation you can be left with capabilities that, while attractive on paper, are too expensive or too difficult to maintain, resulting in a net loss of capability.

TLS would obviously be part of any cost/benefit decision and I can see how being able to do that in Australia would be beneficial from both a strategic and economic perspective. It would of course have to be offset against any increased risk of delays, cost blow outs or failure on the part of Australian manufacturers due to the difficulty in maintaining experience due to the small number of orders that the CoA makes. For example, I find it hard to believe that we are ever going to be as good at building submarines as HDW when they have a high volume continuous build program for both the German Navy and for export. As they say, practice makes perfect.
One of the reasons so much work was brought back in country from the 80's, following the dilution of industry capability during the 60's and 70's was the sticker shock of the support costs and the associated low availability of assets when we forced to rely on overseas contractors and facilities.  Ordering most of our gear overseas out of existing production runs, in some cases saved money in upfront costs but at the price of losing local expertise that was then unavailable when deeper maintenance, that was beyond the capability of the services to do in house, was required.  Paying to get this work done overseas was soon seen to be extremely expensive and had disastrous impact on availability.
 
I'm a little sceptical about the notion that you have to build the equipment in order to maintain it. As long as we have the facilities for maintenance in Australia (which was the issue previously with the Oberon submarines, we didn't have the gear) we can send personel overseas to train with the company building the gear as part of the contract. Alternatively we can stipulate that the company set up maintenance facilities in Australia and train Australians to do the work here, like we have with Boeing and the F-111's.
As for issues of quality, delays and cost blow outs and failures this is actually more prevalent overseas than in Australia, probably because we are far less tolerant in these areas than many other countries are.  We have, on many occasions over the years let Australian industry capabilities wither only to rebuild them later, when they were seen as uncompetative. Many other nations choose to subsidise under performing industries indefinitely rather than let them fail (to avoid the Australian scenario).  It is some of these under performing, subsidised companies that are competing and winning against Australian companies.  Based on this we should also factor overseas protectionism into account before ruling the local players as uncompetitive.
 
If any company, Australian or overseas,  has a history of underperformance then that should be a black mark against them getting the contract. If the Aussie industry is indeed better as you say then they should win the contracts purely on merit.
 
As for overseas subsidisation of their industries all that means in the economic sense is that the taxpayers of that country are helping the Australian taxpayer to pay for our equipment. I personally think this is very nice of them and as long as they can include an acceptable way of addressing the TLS issues that you raise, I can see no strategic reason for not letting them do so.
 
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Volkodav       1/10/2010 6:34:13 AM
If any company, Australian or overseas,  has a history of underperformance then that should be a black mark against them getting the contract.
 
The list of under performing companies would include HDW, Northrop Grumman, Boeing, General Dynamics, Lockheed Martin, BAE, THALES to name a few.

If the Aussie industry is indeed better as you say then they should win the contracts purely on merit.
 
Better than some, worse than others and unfortunately many contracts (including some won by OS tenderers) are decided on other than merit.  A big factor these days seems to be interoperability with the US sometimes at the expense of cheaper, lower risk, better intergrated, more reliabe and more capable options.  The perfect example is the RCS, not saying the US system is bad but rather the losing tender, which was prefered by DSTO, was a much better fit for the Collins and would have provided more capability, at lower cost, sooner.
 
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Aussiegunneragain       1/10/2010 7:17:33 AM

Better than some, worse than others and unfortunately many contracts (including some won by OS tenderers) are decided on other than merit.  A big factor these days seems to be interoperability with the US sometimes at the expense of cheaper, lower risk, better intergrated, more reliabe and more capable options.  The perfect example is the RCS, not saying the US system is bad but rather the losing tender, which was prefered by DSTO, was a much better fit for the Collins and would have provided more capability, at lower cost, sooner.

If inter operability will improve the warfighter's ability to do the job then why wouldn't it be considered to be endogenous to the procurement process merit decision?

 
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Volkodav       1/10/2010 7:41:57 AM
If inter operability will improve the warfighter's ability to do the job then why wouldn't it be considered to be endogenous to the procurement process merit decision?
 
The irony with submarines is due to the nature of their use interoperability is not very high on the list of priorities.  Subs are stealthy and as such its not the same as a surface combatant integrating with a combined task force.
 
The US system is good but it was designed for nuc's with their very high, virtually unlimited power supply.  Also, security concerns have prevented it being as fully integrated with other systems onboard the Collins as a non US system could have been, potentially reducing the classes potential capability.
 
End of the day the Collins are still the most capable conventional subs in the world although their edge is being eroded.  Their replacement would probably have been better in 2015 than 2025, too late now however.
 
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hairy man       1/10/2010 6:23:26 PM
Defence Industry Protectionism
We buy our defence products almost exclusively  from the USA nowadays, and nobody practises Defence Industry Protectionism more than the USA.   Even when they select Austrlian products, not only do they have to be made in the USA but the Australian company concerned must join with US companies as a Junior partner, as in Austal and Incat.
 
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Aussiegunneragain       1/11/2010 4:45:51 AM

Defence Industry Protectionism

We buy our defence products almost exclusively  from the USA nowadays, and nobody practises Defence Industry Protectionism more than the USA.   Even when they select Austrlian products, not only do they have to be made in the USA but the Australian company concerned must join with US companies as a Junior partner, as in Austal and Incat.

If the US doesn't want to purchase the best equipment at the lowest cost, even when that means buying overseas, that is the US's business. They have their reasons, some valid and some not. A valid one might be that as the power whom the buck stops with for the defence of the free world, they need to be assured that they can quickly supply their defence forces with the equipment then need from domestic sources. The invalid ones, such as as an industry protection strategy, will cost them like it costs us when we do it. However I would note that as there is a lot of competition in the US defence market even without foriegn competitors and because they frankly produce a majority of the best gear, that cost is likely to be reletively a lot less than it is for us.

 
 
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