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Chapter 9 - The comparative economic productivity of the Australian shipbuilding industrial base and associated activity with other shipbuilding nations
9.1
While Australia may have the shipbuilders, the supply chain, the
infrastructure and the skills base capable of sustaining a naval shipbuilding
industry, it is quite another matter whether this industry can match or better
the productivity of overseas competitors. This chapter considers the data available
that would enable a comparative analysis of Australian shipbuilders and their
overseas counterparts. It then endeavours to compare the economic productivity
of the Australian shipbuilding industrial base and associated activity with
other shipbuilding nations.
Difficulties in comparing the productivity of shipyards in Australia and
overseas
9.2
The difficulty in undertaking a comparative analysis of the productivity
of shipyards is underscored by the findings of a recent work, First Marine
International findings for the global shipbuilding industrial base benchmarking
study, Part 1: Major shipyards. The study was to provide a direct
international comparison and a comparison of the performance of U.S. naval and
commercial builders. It compared the practices and technology employed in six
major U.S. shipyards with those of seven selected leading international
commercial and naval shipbuilders in Europe and Asia.
9.3
A key component of the study was to establish the productivity of U.S.
shipbuilders in order to make comparisons with the international yards and to
determine how effectively the U.S. yards use the technology applied.[1]
The analysis was hampered, however, by a lack of information. The study acknowledged
this weakness:
As the majority of the U.S. shipyards benchmarked were unable to
supply the information required to calculate shipyard performance, productivity
has been estimated from information available in the public domain...the
resulting estimates are considered to be indicative only and would need to be
validated by calculations supported by the shipyards before any robust
conclusions could be drawn. Even so, the estimate of overall industry
productivity is in-line with the expectations resulting from the technology
survey carried out in the shipyards.[2]
9.4
In order to provide a direct international comparison, the study used
man-hours per Compensated Gross Tonnage (CGT)[3]
and $US per CGT as overall measures for productivity and cost performance
respectively.[4]
Again the study warned:
This method has produced very rough estimates, based on very
limited information, and extreme caution is advised regarding its use. Shipyard
cooperation is required to produce a more definitive estimate.[5]
9.5
The study produced very helpful advice to the U.S. shipyards on how they
could raise their productivity. This advice also has direct application to all
shipbuilders including those in Australia. It provides a best practice guide for
governments who are major purchasers of naval vessels on how to manage better their
practices in order to assist their shipyards become more efficient and cost
effective. The study, however, did not help the committee in its task of
comparing economic productivity. It should be noted that Defence considered the
study to be 'the only public comparator of productivity factors across
US/Europe/Australia'.[6]
Quality of available data
9.6
According to witnesses and the committee's research, there is a lack of clear
and solid comparative economic and productivity data on the naval shipbuilding
industry.[7]
Engineers Australia believed that the type of detailed benchmarking and
analysis required to compare Australian shipyards with shipyards overseas has
never been done. Certain that no results have been published, it concluded:
In the absence of such analytical data, any assessment of
comparative economic productivity of the Australian shipbuilding industrial
base and associated activity with other shipbuilding nations is subjective in
nature.[8]
9.7
The South Australian government also found that there was 'little
definitive information available to assess the economic productivity of
constructing naval vessels in Australia compared with overseas'.[9]
The Department of Industry, Tourism and Resources (DITR) agreed with the view.
It said:
The sort of information that is available can be the market
outcomes of who is actually producing these things which have been sold in
world markets. That tends not to apply to naval shipbuilding, so you cannot
find analysis from market outcomes. In terms of industry level statistics, we
provided some statistics for various countries on the relative productivity of Australia
versus other countries. We also point out the difficulty as to those numbers.
They are imperfect numbers in various ways. The output measures are problematic
and the input measures are problematic.
In terms of specific firm or company level data, we have not
been able to find publicly available data that enables us to compare Australia
with other countries. People have made reference to the First Marine
International study which was done for the US Department of Defense, and I understand
they visited some of the Australian companies. But that material on Australian
companies has not yet been published.
It is really the nature of the beast of government procurement,
defence procurement and commercial in confidence that that sort of data at a
company level is not going to be available.[10]
9.8
Aside from this lack of data, the degree of regulation and government
control or intervention in the naval shipbuilding industry is another factor
when considering the productivity of shipyards.
A protected industry and distorted
data
9.9
A number of submitters cited the protected nature of the naval
shipbuilding industry as a major complication when comparing productivity
between different countries.[11]
Indeed, as noted in chapter 2, a number of shipyards are government owned or
controlled enterprises. Furthermore, the range of direct or indirect government
assistance given by overseas governments to their local shipbuilders takes on
many and various forms—money grants, soft loans, debt guarantees, tax shelters,
tariffs and provision of equity capital (see also paragraphs 2.15–2.18).
9.10
The Government of Western Australia was one of many participants in the
inquiry who urged the committee to bear in mind the distortions in the naval
shipbuilding market that stem from government interventions, particularly since
the end of the Cold War. In its view, this interference makes 'any attempt to
estimate such premiums and make robust international comparisons of the costs
of naval shipbuilding in different countries notoriously difficult'.[12]
9.11
The Australian Manufacturing Workers Union (AMWU) also argued that the
differing levels of protection by other shipbuilding nations creates
difficulties in comparing productivity.[13]
Tenix voiced its concerns about making direct comparisons between the costs of
building in Australia and some overseas countries who receive government
benefits in the form of subsidies and protective legislation to support the
local industry.[14]
To the same effect, the Australian Shipbuilders Association noted that 'Some
countries still maintain industry protection in the form of hidden tariffs and
subsidies that provide a false perspective on their efficiency'. [15]
9.12
Rear Admiral Doolan and the RSL similarly spoke of the difficulties in
establishing the cost effectiveness of overseas naval shipbuilders because of
government assistance to that sector which provides 'a false perspective on
their efficiency'.[16]
The RSL argued that 'With so many variables and questionable data it would be
imprudent to make any firm judgment about this issue'.[17]
9.13
The committee sought advice from Defence about the difficulties
conducting comparative analysis on the productivity and cost effectiveness of
Australian shipyards against overseas yards. Defence's assessment confirmed the
view that there are significant difficulties in comparing this type of economic
performance. It also cited the use of subsidies by previous and current
governments in Australia and overseas which hampers the production of
'meaningful comparative data'. It explained further that the difficulty is
exacerbated by the range of national funding arrangements for military ships in
areas covering:
- design development and R&D costs of ships and equipment
relevant to a particular acquisition;
- other cost attributions (or cost recovery) available from other
related defence programs (eg staff allocations/skilling, etc); and
- broader infrastructure investment and other operating costs that
may be hidden or charged differently to a specific ship program to suit
commercial interests.[18]
9.14
The lack of reliable data coupled with the difficulties in ascertaining
the extent to which the shipbuilding industry benefits from direct and indirect
government assistance prevents the committee from making any definitive finding
about productivity in Australian or overseas shipyards. There is evidence,
however, that provides some indication of the economic productivity of the
Australian industrial base.
Data on Australian productivity
Australian shipyards, the
construction of commercial steel ships and niche capabilities
9.15
Despite the lack of sound data, most studies and commentators generally
accept that countries such as South Korea, China and Japan dominate, and are
highly competitive in, the construction of commercial ships, notably large
tankers and carriers. Chapter 2 provided detail on the shipbuilding industry in
these countries (see paragraphs 2.48–2.54). Australia is simply not in their
league. Indeed, DITR informed the committee that, 'In large commercial steel
ships the evidence is equally clear that Australia is not as productive as
other countries. We have not produced large commercial steel ships for around
thirty years'.[19]
Austal asserted that:
Australian industry is not able to compete with the
well-established, highly productive steel shipyards in Asia whose main threat
comes from the rapidly expanding Chinese industry which has access to a large,
low cost workforce and inexpensive land for the development of the necessary
infrastructure.[20]
9.16
On performance, however, some Australian companies, notably Austal and
Incat, have clearly demonstrated that they have a competitive edge in niche
markets of the commercial and naval shipbuilding industry.[21]
The Australian Shipbuilders Association also referred to the demonstrated world
class competitiveness of Australian shipbuilders as the leading manufacturer
and exporter of large fast ferries as an indicator of the potential in Australia.
It suggested that 'export success by the sector generally would re-enforce the
comparative economic productivity of the Australian shipbuilding industry'.[22]
9.17
The committee's delegation witnessed the success of Austal's overseas
enterprise when it visited the company's facility in Alabama which was opened
in 2001. Since then Austal USA has built and delivered eight ships in the yard,
including a 192 foot high-speed vehicle-passenger ferry, two 150 foot fast
crew/supply monohulls, an 86 foot high-speed passenger catamaran, a 111 foot
dinner cruise catamaran, a 135 foot dinner cruise monohull, a 143 foot
high-speed passenger/excursion catamaran and a 102 foot surface-effect ship.
Austal is currently constructing the largest aluminium catamaran in the U.S., a
107 metre high-speed cargo/passenger ferry for Hawaii Superferry. In terms of
naval vessels, as the designer and builder of the Littoral Combat Ship (LCS)
platform, Austal is part of the General Dynamics team offering a unique
trimaran solution for the US Navy.
9.18
Delegation members discussed with Austal representatives the Littoral
Combat Ship (LCS) program. The LCS is intended to operate in coastal areas
globally, be highly manoeuvrable and configurable to support mine-warfare,
anti-submarine and surface ship warfare. Austal's LCS is based on its trimaran
underwater hull design, which offers superior seakeeping and speed, along with
the capacity to configure a range of weapons packages. It is a 127 metre long
craft, with maximum hull draft of 4.5 metres and speed over 40 knots. The
mission bay comprises 1000 m3
and the ship has
aviation capacity for one H-53 or two H-60 helicopters. Mission specific system modules, such as
submarine seeking or minehunting modules, can be added to the generic vessel
(the 'sea frame') to tailor the ship's specific capabilities. Open architecture
systems are therefore critical.
9.19
The LCS is being built using the principle of 'cost as an independent
variable'. Austal offers capability options within its capped price of $220
million. Where further specification changes are required the resulting cost
and capability outcomes are assessed.
9.20
The committee also visited the Incat shipyard in Hobart where it
inspected one of the high-speed craft on lease to the U.S. Army (see chapter 4).
In April 2006, Mr Craig Clifford, Managing Director of Incat Australia,
informed the committee that currently the company had leased three vessels to
the U.S. military—Joint Venture, a 96-metre vessel charted on a long
term basis (nearly 5-years), Spearhead and Swift both 98-metre
catamarans. He explained the nature of the company's relationship with the U.S.
military which has been developing since 2000 'when HMAS Jervis Bay
in the north of Australia opened the eyes of the military world as to what an
aluminium, catamaran, high-speed craft could achieve'. He stated:
A dialogue was opened up with various arms of US military which led
to the charter of our hull No. 50, which up until that point in time had been
in a commercial operation between the North and South Island of New Zealand. A
combination of Navy, Army and other arms within US military chartered the
vessel. It was appropriately called Joint Venture because it was a joint
venture between a numbers of arms. They have chartered that vessel on what has
turned out to be a long-term basis to operate in various field sectors that
they are interested in.[23]
9.21
Mr Clifford noted the political obstacles in the U.S. that prevent the U.S.
purchasers from buying a foreign asset of the size and cost of the types of
vessels on lease to the U.S. Defence. He maintained that the leasing
arrangement was operating successfully and that the company had explored the
option of building vessels in America. Looking to the future, he advised the
committee that the company's next stage is a 112 metre vessel made entirely of
aluminium:
Today we are building 98-metre vessels for the commercial market
and 112-metre vessels for the commercial market and are pursuing additional
military opportunities as they present themselves.[24]
He suggested that the vessels are popular with the
commercial world because of their speed, their carrying capacity and their
competitive costs.[25]
Australia's record in the
construction of naval ships
9.22
Returning to steel-hulled naval vessels, however, the absence of
reliable data on these ships makes any assessment of Australia's
competitiveness in naval ship construction difficult. To gain some appreciation
of the productivity of Australian shipbuilders, many witnesses, as a starting
point, drew on the industry's proven capability over recent decades to construct modern naval vessels on a sustainable basis.[26]
For example, the RSL noted the way in which the naval shipbuilding sector has
adapted to changing circumstances with teaming arrangements and by other
collaborative means to meet varying government needs. It stated:
With this track record there is no reason to believe it cannot
continue to adapt. Given the high probability of the ongoing need to continue
to replace all major Australian warships over the next half century, there is a
clear opportunity to continue to grow a national industrial capacity to meet
the need. A consistent government policy of building all Australian warships in
Australian shipyards would strengthen the industrial basis of the industry and
give it the best chance of evolving efficiently and effectively.[27]
9.23
Taking the same approach, Rear Admiral (Ret'd) W. J. Rourke submitted
that the productivity of local shipbuilders is practicable and appropriate. He
argued that local construction can usually compete well with U.S. construction
costs and those of Europe.[28]
Thiess provided an example of where it believes Australian shipbuilders are
competitive:
If we compare raw productivity figures in terms of welding for
offshore purposes, Australia competes very successfully against US standards
achieved on the Gulf of Mexico coast, where most of the efficiency standards in
that industry are set.
Therefore in global terms, the Australian shipbuilding industry
is capable of competing successfully against world standards.[29]
9.24
Tenix commissioned a benchmarking study of its performance as a
shipbuilder against companies through Asia, Europe and the U.S. According to
Tenix, the study indicated that Tenix is 'above the midpoint of where many of
the best yards in the worlds are in'. Although the study showed the company's
strength in planning systems and organising work, it had specific suggestions
to improve its modular assembly.[30]
9.25
Raytheon Australia noted that it had conducted a benchmarking test
against its parent company in the U.S. The study showed that Raytheon Australia
'could conduct many of the functions associated with systems engineering and
systems integration at less than two-thirds of the cost of doing them in the U.S.'[31]
9.26
Many submitters cited the construction of the ANZAC frigates and the
Minesweepers as evidence of Australia's capability to build naval vessels on
time and on budget and with economic benefits to the nation (see chapter 4).[32]
The AMWU observed that:
The ANZAC frigate project, based at Williamstown, Victoria, was
extremely efficient. The project for 10 frigates, costing $5.6 billion (in 1999
dollars) over 10 years, was, until the new Air Warfare Destroyer project, the
largest single defence contract ever entered into by Defence. All of the
frigates have been delivered on time and on budget.
In 1994, Defence awarded ADI Limited a contract to build 6
Italian-designed minehunter vessels at a contract value of $917 million. ADI
delivered the first minehunter, HMAS Huon, on time and on budget in March 1999.[33]
9.27
Two significant studies inform most commentary on the productivity of Australia's
naval shipbuilding industry—A case study of the ANZAC Ship Project, and Impact
of Major Defence Projects: A case study of the Minehunter coastal project.[34]
Although they were not comparative studies, they did demonstrate clear savings.
9.28
The Australian Industry Group (AiG) represented the views of many
witnesses in submitting that Australia's naval construction industry has proven
its capacity to deliver major defence capabilities within the time schedule and
budget. It also cited ADI and Tenix's involvement in the recent 'highly
successful' naval construction projects—the Minehunters and ANZAC frigates.[35]
It stated:
The ANZAC frigate project, based at Williamstown, Victoria,
provides a first-class template of success. The project for 10 frigates,
costing $5.6 billion (in 1999 dollars) over 10 years, was, until the new Air
Warfare Destroyer project, the largest single defence contract ever entered
into by Defence. All of the frigates have been delivered on time and on budget.[36]
9.29
The Australian Shipbuilders Association contended that the costs of building
most categories of naval vessel in Australia can be comparable with, if not
better than, those achieved in foreign countries. It also cited data gathered
from the ANZAC and Minehunter studies to strengthen its argument, asserting the
'after the initial learning curve, production in each program was efficient and
globally competitive'. [37]
9.30
The Submarine Institute of Australia Inc was of the view that 'The
Collins Class submarine program demonstrated that the Australian naval shipbuilding
industry competitiveness is on a par with overseas countries (for example, Europe
and the U.S.). According to the Institute the submarine program demonstrated
that the key to controlling and minimising costs is the use of advanced
manufacturing techniques and processes (such as modular construction),
maximising competition throughout the materiel/equipment supply chain and an
ongoing workload.[38]
Overall it argued that:
The Collins and ANZAC programmes demonstrated that Australian Industry
is competitive with international shipbuilders for cost and quality...The Collins
Class program demonstrated that the cost of Australian construction equated
closely to the cost of overseas construction.[39]
9.31
Defence, however, was reserved in its assessment of the productivity of Australia's
shipbuilding industry. It observed that apart from Tenix's obtaining orders for
small and or less complex warships and Austal's success with the Littoral
Combat Ships for the USN, Australian industry has been unable to secure orders
for major warships construction from overseas. It added:
Industry might be best placed to comment on why they have not
been able to secure orders but Defence would observe that the market is very
competitive and the Australian industry is unlikely to have a cost advantage in
steel monohull ships or product advantage such as a unique design except in the
high speed multi-hull sector.[40]
Factors influencing productivity in Australia's shipbuilding and repair
industry
9.32
Defence's assessment points to a significant hurdle for Australian shipbuilders
in endeavouring to be internationally competitive; namely, economies of scale.
Costs and economies of scale
9.33
Some submitters drew attention to the diminishing costs associated with
the number of vessels built.[41]
According to Defence, when shipbuilders build the first of class, they 'always
find that it is a significantly more expensive vessel than the second, third
and fourth'. Mr Gregory Copley of Future Directions International Pty Ltd, advised
the committee that economies of scale in terms of the shipbuilding process for
warships are achieved after the second vessel—three or more vessels onwards.[42]
9.34
Supporting this view, ASC stated that one of the most serious problems
preventing Australian shipbuilders from meeting high building efficiency on a routine
basis are those relating to the management of vessel demand. It cited in
particular 'the small scale of the demand for particular classes of ship, and
hence production is frequently confined to the steep end of the learning curve'.[43]
It found:
Plotting, in a general conceptual sense, the learning curves of
the Australian destroyer/frigate, submarine, minehunter, and other naval ship
programs of recent decades, highlights the fact that Australian shipbuilding
programs have rarely been of a size to permit the full benefits of economies of
scale to be reaped...it was only in the case of the ANZAC frigates and, to a
lesser extent, the Collins Class submarines and the Huon minehunters, that
production was of a sufficient scale to permit the flatter parts of the
learning curve to be reached. Even when relatively high efficiencies were
achieved, this was generally from ship 4 or 5 onwards and so the real cost per
vessel across the entire program was still relatively high.[44]
9.35
The Victorian government agreed with the general principle of economies
of scale and learning curve. It noted that while not always the case,
construction of major vessels in Australia is:
...generally more expensive than construction overseas, because
international shipyards benefit from greater economies of scale in activity as
well as productivity improvements generated by experiential learning on larger
production runs of a particular ship type.[45]
9.36
DITR argued that 'a driving factor determining whether Australia can
produce on a long term and sustainable basis is whether Australia can achieve
the required economies of scale to be competitive'.[46]
Indeed, Defence attributed the success of the ANZAC, in some measure, to the
relatively large number of ships (10) that 'generated substantial learning/improvement'.[47]
The data from Anzac...is that when the tenderer put in their
submission on Anzac, their statement was that they would be equivalent to any foreign
or European builder. What happened was that it took until the sixth vessel for
the Australian industry to be equivalent to the Europeans, and with vessels
seven, eight, nine and 10 we actually bettered the Europeans in some of our
productivity factors. What it really came down to is that it took a learning
curve to get there.[48]
9.37
Defence informed the committee, however, that:
With a small Navy it is unlikely Australia will have a need for
a build of more than 2–4 ships in each class until the capability provided by
the submarines and ANZAC ships has to be replaced. The numbers and types of
ships required for Navy will be decided by this capability analysis. Defence
will take into account of the economies of scale benefits when modelling
capability acquisition options.[49]
9.38
It should be noted that even with the ships constructed in Australia that
benefited from a larger production run, such as the ANZACs, there was a local
build premium.
9.39
A 2005 report by the Allen Consulting Group, Future of Naval
Shipbuilding in Australia: Choices and Strategies, pointed to the often
cited cost premium of 3 to 3.5 percent for the ANZAC Project. It accepted that
this was a relatively low cost but equates to over $200 million on a $7 billion
acquisition.[50]
It also referred to the cost premium for the Collins class but stated that it
was impossible to estimate because of the uniqueness of the submarine. The
report stressed, however, that:
...the cost premium for each of these classes was low for
particular reasons that may not apply to the acquisitions currently in the
pipeline. This is because a significant number of both the Collins and Anzac
classes were produced in Australia even by world standards.
...
In the case of the Collins and ANZAC classes, therefore, there
was a beneficent coincidence of minimum local production costs, because of the
availability of scale and learning economies, and maximum benefits in terms of
self-reliance, because of the use of domestically engineered and integrated
systems. The pay-off to Defence from the investment in local capability was
almost certainly positive.[51]
9.40
The report noted that the AWDs and LHDs are to be built in production
runs of three and two respectively and suggested the outlook for the future
acquisitions was 'less rosy'. It suggested that the cost premium of a local
build of the AWDs could be high because of the inability to benefit significantly
from scale or experience economies.[52]
The report was also of the view that the relative costs of local procurement
for the two LHDs was likely to be higher because of the smaller number of ships
being purchased.[53]
It noted that the scale and learning benefits may be 'commensurately reduced'.[54]
9.41
Defence concurred with this view on both the AWD and LHD projects. It
observed that the limited build run on naval ships in Australia limited the
scope for productivity gains and cited the LHDs. Mr Kim Gillis, Deputy CEO of
the DMO advised that on a two-ship class it would be 'very hard for us to get
to that learning curve where we can compete with a European builder who is
building modules in a process, in a production line'.[55]
In his opinion it would take four or five LHDs to reach the stage approaching
the productivity of the Europeans.[56]
9.42
Without doubt, the lower demand for naval vessels in Australia and the
concomitant smaller economies of scale limit opportunities for Australian naval
shipbuilders to gain efficiencies in their production runs.
9.43
Mr Gillis also noted that the difference in productivity between
Australian shipbuilders and their European counterparts is due not only to a
combination of infrastructure and learning curve but also the association between
designer and builder. He said that there is an advantage 'if you are the
designer of a product and you are building your own design as distinct from being
a designer who is handing it over to a different builder'. He noted:
Whenever we took a design that was not worked on and developed
in house, there was a significant loss in our productivity factors. The
difference between being the designer and being the builder is significant.[57]
9.44
When purchasing vessels designed overseas, however, Defence must take account
of the specific needs of its naval fleet. So, an important consideration in
assessing productivity is the work and costs involved in customising a ship for
Australian conditions. The following section considers Australia's unique
operational requirements and the costs involved in customising a ship for
Australian conditions. A closely related matter—Australia's national security
interests—is discussed fully in chapter 12.
Costs in meeting Australia's unique
requirements
9.45
Australia confronts a range of challenges protecting its shores and
surrounding maritime approaches from external threats. The 2000 Defence White Paper
stated:
The Government's primary goal for our maritime forces is to
maintain an assured capability to detect and attack any major surface ships,
and to impose substantial constraints on hostile submarine operations, in our
extended maritime approaches. We also intend to maintain the ability to support
Australian forces deployed offshore, to contribute to maritime security in our
wider region, to protect Australian ports from sea mines, and to support civil
law enforcement and coastal-surveillance operations.[58]
9.46
It stated further:
Australia's forces for maritime operations give us the ability
to deny an opponent the use of our maritime approaches, and allow us the freedom
to operate at sea ourselves...Capable maritime forces also provide important
options for contributing to regional coalitions in support of our wider
strategic interests and objectives.[59]
9.47
Australia pursues these objectives in a unique environment that places
particular demands on its naval ships. Mr Derek Woolner pointed out:
Traditionally, the Europeans have designed equipment to look at something
like a campaign from London to Moscow as being horrendously large. We have to contemplate
distances greater than that in simply moving our equipment around in our areas
of strategic interest and getting them to apply the various military
capabilities in ways that suit the national interest. That for a start demands
different sets of design parameters.
It is a question not only of putting enough fuel in to get them
there, but also of how you sustain the crew. You have to keep them efficient,
keep them operating. You have to put them in an area with a big enough load of
weapons and ordnance and so on to make them effective. You have to develop
communication systems that enable you to transmit intelligence or whatever other
information you are gathering back to headquarters, and enable you to operate
them with allies that want to operate further afield than you would normally
plan, with the same sort ability for your deployed units to operate under
Australian command.[60]
9.48
The Navy has underlined the fact that not only are great distances
involved in its line of duty but Australian naval ships are expected to endure
extremes of climate from the calmer warm tropics to the icy conditions in the
Southern Ocean:
The area of direct interest to Australia's security encompasses
a substantial percentage of the Earth's surface. Australia adjoins the Pacific
Ocean in the east, the Indian Ocean in the west, the South East Asian
archipelago in the north—and sometimes forgotten—the Southern Ocean. Our
maritime jurisdictional areas alone comprise more than eight million square
nautical miles (or almost 16 million square kilometres). Our security
requirements are such that maritime forces can find themselves rapidly moving
from one extreme of climate and local sea environment to another within a few
weeks, major units may transit from the tropical calm and heat of the dry
season in the South East Asian archipelago to the huge seas and swells of the
Southern Ocean.[61]
9.49
Naval vessels may also be called upon to participate in a range of
non-combat operations such disaster relief. On such occasions they may be
required to provide short term or long term assistance not only for coastal
locations, but inland as well:
While shipborne helicopters can be particularly useful and ships
may act as logistic support bases, hospitals and command posts for long
periods, the specialist skills available in ships also mean that their
personnel can be invaluable sources of trained manpower for rehabilitation and
repair work. Naval forces are self-supporting and do not create logistic
burdens in situations where infrastructure has been destroyed or severely
damaged.[62]
9.50
Participants in the inquiry readily recognised Australia's special
operational requirements and the need to modify off-the-shelf purchases. Mr Ron
Fisher, Managing Director of Raytheon Australia, asserted that 'no one
off-the-shelf platform can address the unique strategic circumstances in Australia'.[63]
Mr Peter Hatcher, Chief Executive Officer of ThyssenKrupp Marine Systems
Australia Pty Ltd, cited in particular the need to take account of distance and
endurance. He understood that Australia developed with Kockums its own design
for the Collins-class submarine because the capability that was required was
'very much an Australian capability requirement'.[64]
Mr Woolner supported this view:
The Navy wanted to use those vessels in a particular way that
exploited the ability of submarines to disrupt an opponent’s preparations for
naval warfare by being able to attack them near their bases. Given Australia’s geographical
position, and particularly the position of its naval ports, that meant a
submarine with long range, high endurance and very great weapons carrying and
systems capacity.[65]
9.51
In turning to the AWDs, he noted:
It is seen as being able to operate in conjunction with US task force
groups. With the Aegis system, the US navy insists that those operating with it
have the system certified. That will mean that this particular ship will be
more like an aircraft than a ship in terms of the way it is handled. Instead of
going through major midlife refits that generate workload in a period of
10-to-12-year cycles, the software for those vessels will have to be continually
updated so that they remain in sync with US naval standards, so that those
vessels can be certified by the US navy as capable of operating in what they
call a ‘network warfare mode’—without the Americans worrying about any
technological data system glitches.
At the same time, there is a component in the concept of
operations that calls for those vessels to operate as what they call private
ships. In other words, it accepts the fact that the Australian Navy, unlike the
US navy, is not often going to operate in large task force groups and that we
will be looking at those vessels to operate not always in US naval groups but
independently for Australian national interests. That requires a somewhat more
capable fit than those vessels and that there be a more thorough investigation
of what they are under. That might cause conflicts between some of the
equipment that is mounted on US vessels, which is supplied by some of the people
who are currently major members in the alliance contract organisation, and
choosing other equipment, some of which is made by local companies.[66]
9.52
Indeed, DITR noted that the FFG, ANZAC, Collins and prospectively, the AWDs
and the LHDs, are 'typically modifications of overseas designs'.[67]
The 2004 ACIL Tasman report on the Australian Defence Industry similarly noted
that 'the surface combatants, submarines, mine warfare and oceanographic ships
were all built to overseas designs but adapted in Australia to suit Australian
circumstances'. It stressed that such modifications can 'entail substantial
innovation'.[68]
The costs of customising a ship for
Australian conditions
9.53
Defence acknowledged that modifying a standard military off-the-shelf
design 'will always involve a cost increase, wherever construction occurs'.[69]
Other witnesses were convinced that modifications to an off-the-shelf model
should be conducted in Australia. Mr Tunny of ASC, explained that it is 'not
nearly so easy' to modify a ship for particular needs at a distance. He
suggested that such an undertaking was possible but questioned whether it would
be efficient or cost effective. He explained:
I think there is a close interaction between the customer
iteratively defining its requirements and the alliance iteratively refining
potential solutions. Attempts to do that sort of work at great distance lead to
mistakes, misunderstanding and inefficiencies.[70]
9.54
Saab Systems Pty Ltd was of the view that:
The best outcome for the customer will be achieved when the systems
selection, integration, test and delivery is performed by companies who are
Australian based, understand the customer and the operational environment and
who themselves have an ongoing stake in the outcome.[71]
9.55
Raytheon Australia noted further that even with a relatively less
complex ship such as the LHD, the platforms may have to be modified to meet
Defence's needs which 'are unique compared to the Spanish and French model'.
9.56
Ms Denise Ironfield, the author of the studies on the Minehunters and
the ANZACs, noted that there are problems with international benchmarking of
naval shipyards because governments choose to 'purpose-build their ships'. Put
simply, 'we are not looking at like with like and that makes it very
difficult'. The requirement to modify off-the-shelf vessels, which according to
the evidence is best conducted in country, further highlights the difficulty in
making comparisons between Australian built ships and those built overseas.
9.57
The flow of work, as distinct from the economies scale, also affect a
shipyard's productivity. The government has set out a long-term acquisition and
naval ship repair and upgrade program. The committee now considers the effect
that the Navy's acquisition program has on industries efficiencies and hence
its ability to minimise costs.
Fluctuations in work flow
9.58
The Australian Academy of Technological Sciences and Engineering argued
that a viable industry requires a consistent long-term base workload. In its
view, no industry can survive on a stop/start order book—that a viable industry
is possible if steps are taken to manage a consistent flow of work to avoid
costly stops and starts during which time skills and other capacity is lost'.[72]
While it accepted that exports could fill in gaps, it noted 'a base load of reasonably
predictable local demand can provide the platform on which a competitive export
industry can be developed'.[73]
The Academy submitted:
Costs cannot be divorced from the demand question and a steady
flow of orders to naval shipbuilding yards will spread the establishment
overheads, avoid recurring design or manufacturing errors, provide greater
negotiation leverage over suppliers, amortise the training costs and reduce
labour mobility. It would be particularly helpful if ship-procurement programs
could be adjusted to ensure the timing of the order for the first in any class
of ships allowed a sufficient interval before the rest were required, to allow
full validation of design, construction and operating features, so avoiding
costly later modifications.[74]
9.59
Indeed, it suggested that should a steady stream of work be available
the Academy has every reason to believe Australian costs and productivity would
match the European, American and Japanese yards who would be the alternative
suppliers.[75]
9.60
The Australian Industry Defence Network Inc pointed out that
shipbuilding tends to be work of varying intensity with the associated costs of
start up and wind down. It noted that the peaks and troughs can be moderated by
the benefit of in-service support contracts but they do not alter 'the risk and
cash relationships of the initial task themselves—nor do they absorb the full
compliment of the initial workforce.[76]
The Submarine Institute of Australia Inc also referred to the peaks and troughs
in demand for naval vessels. It submitted:
The continuing competitiveness of Australian naval shipbuilding
relies on maximising opportunities for local construction thereby smoothing as
far as practicable the ‘peaks and troughs’ of supply and demand. The
construction in Australia of large naval vessels is therefore critical to both
maintaining an ongoing capability and further improving its efficiency and
productivity. By this approach, the industry will realise its goals of
continuing to be price competitive, technically innovative, consistent in
quality, reliable in supply and profitable. It cannot exploit and develop
intellectual property, new technology, new ideas and new methods of construction
and support if it is not profitable.[77]
9.61
Mr Geoff Evans OBE VRD also referred to this problem of fluctuations in
demand. He stated 'Australia's main problem as a naval shipbuilder is, and
always has been, lack of continuity in orders for ships, making it difficult if
not impossible for shipbuilders to hold a highly trained workforce together.[78]
The South Australian government noted that even with state and federal
investment in the defence industry, 'when the bow wave of Air Warfare Destroyer
(AWD) and Amphibious ship construction work is complete, remaining long-term
demand will not be sufficient to support the existing ship builders'.[79]
9.62
The committee accepts that fluctuations in demand create difficulties
for the shipbuilding industry which can affect their overall productivity. It
should be noted that overseas countries face this same problem. To a degree,
industry must accept and adjust to this problem. Defence, as the sole
purchaser, also has a responsibility to ensure that it plans naval acquisitions
with a view to assisting industry manage the demand cycle. Indeed, as noted in
chapter 2, recent overseas studies have pointed to the dominant position that
governments have determining demands on the naval shipbuilding sector.[80]
This matter of planning and scheduling is discussed in detail in Part IV.
9.63
Increasing demand through exports is one way of achieving efficiencies
through economies of scale and by moderating fluctuating demands.
Impediments to export trade
9.64
The 2005 Allen Consulting report looked at the substantial barriers to
trade in the international arena. It stated:
Government purchasing policy and subsidies have distorted the
global market for warships to an extremely high degree and no matter how
internationally competitive a particular shipyard may be, the lack of anything
resembling a level playing field means it is very difficult for it to succeed
internationally.[81]
9.65
The Australian Manufacturing Workers' Union (AMWU) suggested that 'the
need to pay royalties and to negotiate marketing rights erodes the
international competitiveness of Australian builders'.[82]
Chapter 2 described the obstacles to trade in naval ships including direct and
indirect government subsidies and legislation designed to protect local
producers (paragraphs 2.37–2.40). The range of measures used by governments to
protect their domestic shipbuilding industries means that Australian producers
looking to export their products are effectively locked out of these highly
protected markets. Also, when it comes to selling to a country that is not a
naval ship producer, Australian industry must compete against shipbuilders who
enjoy some form of subsidisation.
9.66
In addition to a relatively small domestic market, limited export
opportunities further impact on industry's ability to achieve economies of scale
and resulting efficiencies. With the exception of niche markets, Australia is
limited in its export of naval ships and equipment.
Comparative labour productivity
9.67
Comparison of the costs and efficiencies of Australia's naval
shipbuilding labour base with overseas industries is also hampered by a lack of
data. Both ACIL Tasman and DITR have used a measure of 'value-added per
employee' to approximate labour productivity. The ACIL Tasman analysis
suggested that 'Australia's labour productivity might be comparable to that of
Western shipbuilders, but behind that of Asian shipbuilders, notably Japan'.[83]
DITR's assessment suggested that Australia is comparable with Norway and Denmark,
somewhat ahead of the UK, France and Spain and well behind Japan and to a
lesser extent the USA. However, there are major shortcomings in the measure
used. DITR noted that the measure is not adjusted for hours worked per employee
and is biased upwards for countries that protect their shipbuilding industries.
Importantly, the data are not specific to naval shipbuilding.[84]
It is therefore difficult to make an informed assessment of the comparative
productivity of the Australian shipbuilding workforce using quantitative
measures.
9.68
Qualitative assessments were put forward by a number of submitters.
Observations included that in the area of hull construction Australia needs to
compete with the lower labour costs of countries such as South Korea and China.
However, some submitters suggested that design and efficient work practices,
including the use of automation, are the principal drivers of construction
costs rather than wage rates. Several submitters observed that other high
labour cost countries such as Sweden, Israel and Japan maintain viable naval
shipbuilding industries.
9.69
A number of submitters acknowledged the world class skills of Australia's
welders, engineers, technicians and systems integrators. Several companies
submitted that Australian labour costs for higher end skill sets are comparable
or less costly than in Northern Europe and the United States.
Summary
9.70
The lack of suitable data prevents any sensible or accurate comparative
analysis of the productivity of Australian shipyards against overseas yards.
The committee therefore finds difficulty in making a definite determination
about the comparative economic productivity of the Australian shipbuilding
industrial base with other shipbuilding nations. Evidence, however, suggesting
that Australia may not be as productive as overseas producers included:
- Australia cannot compete with countries such as Japan, China and
South Korea in the production of larger and less complex steel ships such as
tankers and carriers;
- Australia is a relatively small market and the demand for naval
vessels is not as large as for some overseas producers—Australia does not have
the economies of scale enjoyed by some of its potential competitors;
- the assistance or protection given by the governments of shipbuilding
countries to their domestic naval shipbuilding industry limits Australia's export
opportunities; and
- even with larger production runs, some projects in Australia such
as the ANZACs are believed to have attracted a local build premium.
9.71
Evidence suggesting that Australia may be as productive as overseas
producers in constructing naval vessels include:
- the naval shipbuilding industry in overseas countries is
subsidised or protected in someway by government; (removing or discounting such
barriers may show that Australian producers can match the productivity of
overseas producers);
- the success of Incat and Austal in producing very fast vessels;
- the bench-marking studies carried out for Tenix and Raytheon Australia;
- greater efficiencies when it comes to modifying or customising a
ship in Australia for Australian conditions; and
- the acknowledged world class standing of Australian welders,
engineers and technicians.
Conclusion
9.72
Given that overseas countries are unlikely to remove the various forms
of assistance and protection given to their local naval shipbuilding industry, Australia's
builders of large naval ships must compete on an 'unlevel playing field' to
some extent. The committee however, believes that whenever non commercial
considerations are made, such as the need to be self reliant in defence support
industries, where there are direct or hidden subsidies, or where broader
economic benefits not considered in commercial cost benefit analysis are
included, there will be added costs which need to be quantified. Such costs
must be known for otherwise there will never be a true measure of actual
competitive design and construction costs, nor of those costs properly
attributed to non economic or political motives. The committee believes that if
this work has not already been done it must be done as a priority for all
future projects. If it has been done, but not provided to the committee, it
should continue to be as part of a whole of project costing through life for
future benchmarking purposes.
9.73
Therefore, given the absence of any credible quantitative data to the
contrary, the committee would like to believe that a revitalised Australian
ship building industry may well hold its own when compared with overseas naval
shipbuilders, particularly if the value of ships' through-life support, is
considered. No categorical assertion however, could be made on the basis of
current evidence available.
9.74
To this stage, the committee has not taken account of other important
considerations including the through-life support of the ship nor the wider
advantages or benefits that accrue to the country when a major ship project is
undertaken in Australia. These matters are taken up in the following chapters.
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