- Sovereign Defence Industrial Priorities
Overview
3.1Defence industry is a critical partner in achieving the vision of the Defence Strategic Review 2023, that of transitioning Defence from a balanced, joint force to an integrated, focused force. Australia’s changing strategic environment and the loss of the traditional 10-year warning time demand careful prioritisation within our sovereign defence industrial base.
3.2In 2024, the Defence Industry Development Strategy (DIDS) was released which provided industry this prioritisation through seven Sovereign Defence Industrial Priorities (SDIPs). In the Defence Annual Report 2023–24, Secretary of the Department of Defence, Mr Greg Moriarty AO, stated:
The Defence Industry Development Strategy forms the foundation of the stronger partnership with industry that is necessary for Defence to develop the higher levels of military preparedness required by the National Defence Strategy.
3.3This chapter will open by outlining the Sovereign Defence Industrial Priorities. It will critically examine Defence’s progress toward achieving continuous naval shipbuilding and sustainment, enhanced self-reliance and resilience of guided weapons and explosive ordnance and finally innovation, research and advanced capability acceleration.
3.4It will then review the Sovereign Defence Industrial Priorities from the perspective of small and medium enterprises (SMEs), examining the Defence industrial base and the challenges experienced by SMEs in contributing to Australia’s sovereign defence industry.
The Sovereign Defence Industrial Priorities
3.5The Defence Industrial Development Strategy identified seven priorities that were required to meet the capability priorities of the Defence Strategic Review 2023 – priorities which were later formalised by the 2024 National Defence Review. The priorities are:
- Maintenance, repair, overhaul and upgrade of Australian Defence Force (ADF) aircraft
- Continuous naval shipbuilding and sustainment
- Sustainment and enhancement of the combined-arms land system
- Domestic manufacture of guided weapons, explosive ordnance and munitions
- Development and integration of autonomous systems
- Integration and enhancement of battlespace awareness and management systems
- Test and evaluation, certification and systems assurance.
- Building on the strategic direction provided through SDIPs, Defence has further developed Detailed Sovereign Defence Industrial Priorities (Detailed SDIPs) which provide the increased detail needed at all levels of the supply chain to build, supply and enhance Defence capability.
- In its submission, the Australian Industry Group (Ai Group), the peak national representative body for the Australian defence industry, welcomed the Australian Government’s intent to shape priorities through the development of the SDIPs. However, Ai Group observed the SDIPs are high-level, with further detail required to guide industry investment.
- As articulated in the Industrial Development Strategy, it is intended that the Detailed SDIPs will be refined, in consultation with industry, as projects and programs progress and the industrial base develops. This will ensure continued alignment with the biennial National Defence Strategy.
Progress of the Sovereign Defence Industrial Priorities
3.9This section will examine Defence’s progress toward continuous naval shipbuilding and sustainment, enhanced self-reliance of guided weapons and explosive ordnance, and innovation, research and advanced capability acceleration.
Continuous naval shipbuilding and sustainment
3.10As a maritime nation, continuous naval shipbuilding and sustainment is a critical sovereign industrial capability. As stated in the Strategy:
Australia must have the industrial capability and capacity to maintain, sustain and upgrade our naval vessels and capabilities, including nuclear-powered submarines. Creating and sustaining this industrial capability, including the underpinning workforce, is a critical component of self-reliance in National Defence.
3.11Mr John Chandler, First Assistant Secretary Submarines, Department of Defence, provided an explanation of the continuous naval shipbuilding and sustainment concept based on a RAND Australia (RAND) study of 2015. The study noted that Australia had a habit of recapitalising its fleet on a project-by-project basis, which essentially focused the industrial base on construction at the expense of sustainment. Once the fleet was recapitalised, the industry base would then swing back to sustainment, which was inefficient. RAND’s contention was that moving away from this boom-and-bust, project-centric recapitalisation methodology would maximise efficiency across both the construction and the sustainment of vessels.
3.12Defence has announced an ambitious program of naval shipbuilding over the next two decades, with construction of the Hunter class frigate, AUKUS nuclear submarine, Landing Craft Medium and Landing Craft Heavy, and the recently announced Mogami General Purpose Frigate. This is in addition to sustainment activity for current naval platforms, including the Hobart class destroyer, ANZAC class frigate, Collins class submarine, Arafura class offshore patrol vessel and Cape class patrol boats.
3.13The 2024 Naval Shipbuilding and Sustainment Plan sets out a program of activities to deliver this maritime capability, including in relation to the uplift of Australia’s maritime industrial base. Key uplift activities include investments into South Australia’s Osborne Naval Shipyard and Western Australia’s Henderson Shipyard.
3.14In October 2024, the Australian Government announced that it would commit an initial investment of $127 million over three years to progress planning on a consolidated Commonwealth-owned Defence Precinct at the Common User Facility at Western Australia’s Henderson Shipyard. In September 2025, a further $12 billion was committed which would underpin the delivery of Army’s landing craft and, pending successful consolidation, the domestic construction of the future general purpose frigate; and have facilities to sustain surface combatant vessels, contingency docking for future nuclear-powered submarines and depot level maintenance.
3.15The availability of skilled workforce is one of the key issues that requires careful management for success of the nation’s continuous naval shipbuilding and sustainment endeavour. Competition with other industry sectors, such as resources, have presented challenges in attracting workforce to shipbuilding. However, the increasing certainty of potential 20-to-30-year career pathways in the naval shipbuilding and sustainment industry may be changing this paradigm.
3.16The Subcommittee heard from Mr Gavin Stewart, Executive General Manager, Strategic Shipbuilding, Austal Defence Australia (Austal):
The industry has continued to struggle with capability due to other industries. It's very difficult in defence to compete with the resource sector, as an example. What we're seeing now is that there are a lot of people that maybe left defence and have tried the resource sector and now recognise, 'You know what—we actually can come back to defence, go home to our families every night and have good-quality time with the families as well as a really good career opportunity and longevity within defence now.' That's never been there for defence employees before. It's always been, 'Let's see what the next one or two years is going to look like.' Now we've got the ability to say, 'We've got an order book of 12 years, plus we've got another order book for another 20 or 30 years as we negotiate and work with the Commonwealth to onshore the Mogami class frigates as well.
3.17Mr Stewart stated that ‘it’s our responsibility as a business to make sure that we have the workforce ready and the capability required as well as working with local industry to help them grow their capability to support this program as well.’ Notwithstanding, the Commonwealth recognises that a long-term demand signal for work is an important requirement. Mr Chandler expanded as follows:
We've got a lot of work to do, and we need the workforce to do that… for industry partners like Austal, the onus for getting their workforce is on them. But we absolutely recognise that firstly, as the Commonwealth customer, we need to set the work demand in order for them to know what work is to be done, and we're absolutely doing that, initially with things like the Naval Shipbuilding and Sustainment Plan. We're really trying to declare that long term demand and convert that demand into more practical implements with things like the Strategic Shipbuilding Agreement with Austal.
3.18Whilst attracting workforce into shipbuilding from other sectors will be necessary in the short-term, energising the entry-level educational environment is also critical for long-term growth. The Skills and Training Academy in one such initiative. Being constructed at Osborne in South Australia, this academy will deliver the high-tech education and training needed for continuous shipbuilding and AUKUS. Mr Chandler also highlighted the Defence Industry Pathways Program being coordinated through TAFEs, which he stated is ‘really allowing us to access and get into the industry people who would not otherwise have an opportunity to get into the industry’.
3.19Rear Admiral David Mann, Head Virginia Workforce and Commercial, Australian Submarine Agency, further emphasised:
The Commonwealth has worked very closely with the state governments, particularly in South Australia and Western Australia, to very good effect, to deliver a number of those initiatives. There's the Defence Industry Pathways Program… and the Shipbuilding Employment Pathways program. Both of those are running concurrently at the moment in South Australia, in a group training organisation called PEER.
3.20The Subcommittee asked Austal for perspectives on what more needs to be done to encourage people to the shipbuilding industry. Mr Stewart offered:
One is that we need to make sure that we can get out to the TAFEs and universities and the schools and colleges to show them, to demonstrate, that ship building is actually quite exciting.
3.21The Subcommittee heard evidence related to the challenges experienced in relocating highly skilled and experienced workers from overseas to Australia to support the shipbuilding program. This will be further addressed in Chapter 4 – AUKUS.
Domestic manufacture of Guided Weapons, Explosive Ordnance and munitions
3.22The 2024 National Defence Strategy stated that ‘Government is pursuing a comprehensive approach to build Defence’s Guided Weapons, Explosive Ordnance (GWEO) stocks, strengthening supply chains and supporting a domestic manufacturing capability.’ The domestic manufacture of GWEO and munitions was subsequently listed as one of seven Sovereign Defence Industrial Priorities in the DIDS.
3.23In October 2024, the Australian Government released the 2024 Australian Guided Weapons and Explosive Ordnance Plan. The plan provides a blueprint to uplift Australian Defence industries capabilities with the aim to build Australia’s GWEO stockpile, to strengthen supply chains and to enhance domestic manufacturing capability.
3.24Under the GWEO plan, the Australian Government prioritised four initial manufacturing projects linked to building domestic industrial capacity; Naval Strike Missile and Joint Strike Missile production; Guided weapons production capability–Guided Multiple Launch Rocket System (GMLRS); Large calibre (155mm) munitions manufacturing; and Solid rocket motor manufacturing.
3.25The Defence Annual Report 2023–24 lists the following developments for GWEO procurement and local manufacture:
- Purchase of significant new long-range strike capabilities over the reporting period, including up to 200 Tomahawk cruise missiles, more than 60 advanced anti-radiation guided missiles and new Spike Long-Range 2 anti-tank guided missiles
- Progressed acquisition of long-range anti-ship missiles and the joint air-to-surface standoff missiles — extended range
- Significant progress has been made on the domestic manufacture of guided weapons and explosive ordnance. Defence have invested in munitions production at factories in Mulwala and Benalla in New South Wales, boosting their industrial capacity to support future production demands such as 155mm artillery ammunition and BLU-111 aerial bombs
- Signing a contract with Lockheed Martin to begin manufacturing Guided Multiple Launch Rocket System missiles in 2025
- Announcing plans with Kongsberg Defence and Aerospace to build Naval Strike Missile and Joint Strike Missile in Australia in 2028.
- The November 2025 Defence submission to the inquiry noted further developments since the release of the Defence Annual Report 2023–24:
- Construction has started with Kongsberg Defence Australia for a purpose-built factory in Newcastle, New South Wales for the production and maintenance of the Naval Strike Missile and Joint Strike Missile. Production will commence in 2027, reaching full rate production in 2028
- The Commonwealth and Lockheed Martin Australia are in contract for the GMLRS Risk Reduction Activity, with manufacture of the first batch of GMLRS missiles having commenced in Defence facilities at the end of 2025. Defence also noted that a larger Australian Weapons Manufacturing Complex will be operational by 2029, with the permanent infrastructure capable of producing up to 4,000 GMLRS missiles per annum
- A Request for Tender to forge 155mm M795 artillery shells has been released and is expected to be finalised in Quarter 1 2026
- In December 2024, the Request for Information on the manufacture of rocket motors closed, with responses used to inform a strategy to establish a domestic Rocket Motor Manufacturing capability.[20]
- Submitters were supportive of Defence’s intention to establish domestic GWEO production capacity. The Australian Strategic Policy Institute (ASPI) submission offered the following observation regarding the 2024 GWEO plan:
The release of the 2024 GWEO plan is a milestone in terms of SDIP advancement. The GWEO plan promises to integrate more Australian defence industry players into global supply chains by 2029 and commits $60 million in research and development investments to the growing domestic industrial base over the next five years. This investment is intended to enable Australian companies to manufacture 5 out of 10 GWEO components by the end of the decade; the current industrial base is only capable of manufacturing structures and actuators independently and warheads and rocket motors with support.
3.28Alternative perspectives relating to sovereign manufacturing of guided weapons were provided. In its submission, RAND noted Australia’s traditional reliance on importing munitions from partners outside of the immediate region, which creates supply chain vulnerabilities in the event of conflict. RAND stated that Australia should carefully consider where domestic production would achieve comparative advantage. Efforts to fully onshore production should be munitions of either low-complexity, high-rate of use or niche capabilities for future joint operations, such as the Naval Strike Missile. It may be more efficient to invest in stronger co-development and co-production pipelines with closely aligned regional actors.
3.29In its submission, C2 Robotics critiqued the slow delivery of guided weapons, whether manufactured overseas or in Australia under licence, demonstrates Australia is totally dependent on the priorities of overseas suppliers. Whilst the Australian Government has been announcing acquisitions of guided missiles such as LRASM, SM6 and JASSM-ER since 2020, those weapons have still not been delivered.
3.30Further, a concern was raised that Australia’s munitions production capability is fragile, and overly dependent on imported materials through logistics chains that are increasingly vulnerable to disruption.
3.31Mr Coan Harvey, Assistant Secretary, Strategy and Plans, Guided Weapons and Explosive Ordnance Group, Department of Defence, highlighted that it will take some time to establish a sovereign GWEO capability. He described Defence’s approach as ‘crawl-walk-run’, expanding as follows:
We’re in the crawl stage right now. We estimate that, under the plan, it will take about two years. Then we’ll progress over time. The crawl stage includes setting factories up, starting to assemble kits, getting industry on board through investment, and then, over time, starting to expand the amount of Australian industry capability and components that are manufactured as part of that. For example, there are items that, due to information technology exclusions, are difficult for us to manufacture here, such as seekers, or items that are just difficult to transport or bulky, such as rocket motors and other explosive material. So, over time, we will be building our capability in that walk and run approach, and then, within the decade, we estimate we'll be in the running stage, where we'll be having a lot more Australian industry components involved in advanced manufacturing. You'll see that through a number of milestones we have anticipated.
Innovation, research and advanced capability acceleration
3.32The 2024 National Defence Strategy states that ‘investing in innovation, science and technology is fundamental to properly equipping and preparing a modern fighting force in a technology-dominated world’. The Strategy emphasises the importance of developing asymmetric advantage, which refers to:
Military capabilities that pit strength against weakness, at times in a non-traditional or unconventional manner, and that disrupt a potential adversary’s decision calculus. Countering, eliminating or enduring asymmetric advantage imposes disproportionate costs, and in some cases there may be no effective response. Defence’s innovation, science and technology plans and resources are aligned with this intent.
3.33In response to the direction set by the 2024 National Defence Strategy, Defence developed a Defence Innovation, Science and Technology Strategy. This strategy details Defence’s approach to innovation, science and technology capability development as well as the collaboration between Defence, industry, universities, research organisations and international partners required to deliver asymmetric capabilities to the ADF.
3.34The Advanced Strategic Capabilities Accelerator (ASCA) was established to ‘rapidly translate disruptive new technologies into defence capability in close partnership with Australian industry and research organisations’. ASCA would also support through co-development the capability priorities of AUKUS Pillar II – Advanced Capabilities, which will be further addressed in Chapter 4 – AUKUS.
3.35The Defence Annual Report 2023–24 detailed key outcomes that achieved in the innovation and research environment through collaboration with partners, industry and academia. These included:
- PHOEBE, a prototype digital twin of the integrated C2 network for multi-domain planning and command, has been developed and delivered to Headquarters Joint Operations Command
- AUKUS Pillar II continued to advance resilient autonomy and artificial intelligence technologies through the Trusted Operation of Robotic Vehicles in a Contested Environment trial held in South Australia in late 2023
- Defence Science and Technology Group and its associated Australia–United States (US) industry consortium, led by Thales Australia, demonstrated the largest advanced, military-relevant solid rocket motor designed and manufactured in-country to date
- with Special Operations Command units and Perth-based company Innovaero, demonstrated the first dynamic flight trials of an armed loitering munition
- with Joint Operations Command, worked to deliver advanced theatre decision capabilities for the ADF during major exercises
- Defence scientists have joined partners in the United States for a long-range fires demonstration.
- In February 2025, Defence’s submission to the inquiry highlighted the key outcomes for ASCA over the 2023–24 period. These included establishing the three programs; Missions, Innovation Incubation and Emerging and Disruptive Technologies; commencing the Ghost Shark Program as ASCA’s pilot mission (Mission Zero); and commencing the inaugural AUKUS Pillar II Innovation Challenge in electronic warfare.
- A further Defence submission from November 2025 detailed continued ASCA progress as follows:
- Missions - ASCA is now executing five missions, three of which were in contract with vendors and the remaining two anticipated to reach contract in 2025.
- Innovation Incubation - ASCA is addressing capability priorities by rapidly adapting, testing and acquiring technologies through short-term, lower cost projects. ASCA has hosted two Pitch Days, which provide an opportunity for industry and academia to showcase innovative technologies. In addition, ASCA facilitated the Sovereign Uncrewed Aerial System Challenge and initiated the AUKUS Maritime Innovation Challenge in March 2025.
- Emerging and Disruptive Technologies - During 2024 and 2025, ASCA announced over $65 million in quantum and information warfare contracts across 24 industry and academic partners.
- Defence further advised that since its establishment on 1 July 2023, the ASCA has executed 103 contracts valued at $264.6 million, including:
- Missions Program - 18 contracts ($119.6 million)
- Innovation Incubation Program - 22 contracts ($16.4 million)
- Emerging and Disruptive Technologies Program - 47 contracts ($94.9 million)
- Legacy Program - 16 contracts ($33.7 million).
- Evidence received from Dr Clare Murphy, Assistant Secretary, Advanced Strategic Capabilities Accelerator, Department of Defence, indicated that ASCA intends to invest up to $3.8 billion over the next decade to deliver capabilities that will meet Defence’s most pressing needs. Dr Murphy provided an example demonstrating ASCA’s critical role in fast-tracking delivery of innovative systems. Mission Talon Strike, which is developing a low-cost, sovereign, uncrewed aerial precision loitering munition, took four and a half months from approaching the market to signing a contract and getting Australian company Innovaero working on the mission.[35]
- In its submission, Ai Group stated that members have raised concerns about the future of ASCA, and that increased transparency of ASCA’s long term funding and priorities would provide industry with confidence in the Australian Government’s commitment to innovation.
- Dr Murphy highlighted several mechanisms through which industry could gain further understanding of priorities and opportunities, including through the Office of Defence Industry Support, classified briefings delivered by ASCA, and information on priorities available in the 2024 National Defence Strategy and Defence Industry Development Strategy.
Defence contribution to the Australian economy
3.42As detailed in the Defence Annual Report 2023–24, Defence’s spending going to entities with an Australian Business Number (ABN) was $29.41 billion, an increase of 7.1 per cent over the previous annual reporting period. Substantial increases on capability-related spending to entities with an ABN were recorded, with notable examples including Capability Acquisition and Sustainment Group up 10.3 per cent on 2022–23, Guided Weapons and Explosive Ordnance Group up 14 per cent, and Naval Shipbuilding and Sustainment Group increasing by 13.2 per cent.
3.43Despite the growth in Defence’s contribution to Australia’s economy, a common theme in submissions to the inquiry was that insufficient contracts are flowing to the SME sector under the current industry settings. Orders had been slowed or cancelled entirely as the Defence Strategic Review and the time taken to develop supporting strategy documents delaying procurement decision making. Ai Group reported significant funding strain on existing programs that had resulted in de-scoping, challenging Defence and industry’s ability to deliver desired outcomes.
3.44The disorientation of industry with the rapid environmental changes was noted by the Subcommittee. Major General Matthew Pearse, Acting Head of Force Design, Department of Defence, addressed the magnitude of change:
Really the challenge for us is to continuously communicate to help our partners understand what our requirement is going forward, and quite often it's actually changed from what it was previously. To give a scale of that, when we did the National Defence Strategy there was an impact to 80 per cent of our integrated investment program. Only 20 per cent of planned investment stayed on the same pathway as what it was before the National Defence Strategy.
3.45Mr Chris Deeble, Deputy Secretary, Capability Acquisition and Sustainment Group, Department of Defence, acknowledged the challenges facing SMEs, offering that it was a function of the project lifecycle, project approvals and new work. Nonetheless, Mr Deeble also referred to the significant amount of extant work, with $9 billion going to the sovereign industrial base in Australia which represents 54 per cent of all acquisitions. A further $13 billion was spent on sustainment, equating to approximately 79 per cent of all sustainment expenditure. According to data compiled by the Australian Bureau of Statistics, Defence awarded approximately $8.1 billion of its overall contract value to SMEs.
The Defence industrial base
3.46Noting the disparity between Defence’s spending growth and the challenges experienced by SMEs, the Subcommittee sought to understand how this funding was allocated across the defence industrial base.
3.47Australia’s Defence industrial base can be divided into three tiers:
- Tier 1 - Prime system integrators enabling the integration of multiple systems and services realising an enduring platform, system or product.
- Tier 2 - Businesses delivering major equipment, systems, assemblies and services realising specific functions.
- Tier 3 - Businesses providing the parts, consumables and services needed to enable the initial assembly, upgrade or ongoing operation of systems.
- At the time inquiry evidence was taken, Australia’s Defence industrial base did not necessarily translate to Australian ownership. As detailed in the DIDS:
Australian defence industry is comprised of businesses with an Australian-based industrial capability and an ABN, providing products or services used in, or which can be adapted to be used in, the Australian Department of Defence supply chain and/or an international defence force supply chain. This is Australia’s sovereign defence industrial base. Only in limited circumstances is Australian ownership critical to sovereignty.[44]
3.49It is noteworthy that the Commonwealth Procurement Rules have since been amended, and from 17 November 2025, include the following definitions for Australian businesses:
- is a business, including any parent business, that:
- has 50 per cent or more Australian ownership, or is principally traded on an Australian equities market
- is an Australian resident for tax purposes
- is a business that has its principal place of business in Australia.
- Defence indicated that approximately 70 per cent of the work for SMEs is through the Tier 1 Prime System Integrators, otherwise known as ‘primes’. Mr Deeble indicated that whilst difficult to categorise, Tier 1 would represent companies capable of systems integration with reach back to broader technology in a global context. Currently, there are no Australian primes capable of doing that, with Tier 1 instead comprising landed identities in Australia from the US, UK, Europe and more recently Korea. As stated in the DIDS, most Australian SMEs operate at Tier 3.
- The Subcommittee heard from Dr Andrew Dowse, Director at RAND, who stated it has been long-established practice for SMEs to work through primes, rather than engage directly with Defence. He noted there are pros and cons to this arrangement:
Defence primes can provide supply chain opportunities not just within Australia; they can broaden out to global supply chains and allow Australian SMEs to engage with these more global systems that they, otherwise, wouldn’t get directly through Defence.
Promoting Australian SMEs
3.52Australian SMEs are known for their capacity to innovate. Whilst in Darwin, the Subcommittee heard evidence from Mr Steven Camilleri, Co-founder and Chief Technical Officer of Spee3D. A local company who has developed a novel metal 3D printing technology, Spee3D are able to manufacture a new engine block overnight, largely automatically. Spee3D have trialled their technology in the field with the Department of Defence in 2020 and 2021 and have since sold their technology internationally to the governments of the US, United Kingdom, Japan, the United Arab Emirates and Nigeria.
3.53Mr Camilleri said:
What we have seen is foreign governments being extremely supportive champions of our technology and what it can do and engaging with it wholeheartedly. Unfortunately, we haven’t quite seen that same level here.
3.54Despite the appetite of Australian SMEs to support defence industry, the majority of Defence work for SMEs is delivered through the major primes. There are however a number of initiatives to promote the use of Australia’s SMEs in capability delivery.
3.55According to the DIDS, the Australian Global Supply Chain (GSC) Program is:
A Defence industrial participation program that contracts major global primes to integrate Australian businesses to their global supply chains, across both Defence and civil sectors. The aim is to diversify Australian businesses’ revenue sources, drive economies of scale and build capacity and resilience through exports. This also assists in mitigating the peaks and troughs of domestic acquisition.
3.56Mr Deeble indicated that participation in this program has recently been expanded from seven to 13 primes, with work ongoing to potentially incorporate the Australian Submarine Agency.
3.57As a prime systems integrator, BAE Systems Australia (BAE) generates export opportunities for Australian SMEs through its Global Access Program (GAP), which has operated under Capability Acquisition and Sustainment Group’s (CASG) Global Supply Chain program since 2012. BAE stated that since 2012 it has generated more than $220 million in export sales for Australian SMEs, with 615 contracts signed. In 2025, BAE and partners supported over 50 contracts within excess of $75 million in exports. The GAP also provides funding for BAE to support industry uplift activities.
3.58The Australian Industry and Defence Network (AIDN) acknowledged that the Global Supply Chain Program has secured $1.9 billion of work for 250 suppliers over many years. However, it did highlight that this program is not generally effective in attaining workshare for Australian suppliers of IP-rich technology and highly advanced manufacturing. Other mechanisms are required for these export markets.
3.59The Australian Industry Capability (AIC) Program aims to ensure consideration and inclusion of Australian industry capability in Defence contracting. Defence is working to refine and align both the AIC and GSC programs more closely, especially in SDIP related areas.
3.60In its submission related to AIC, AIDN indicated that:
Many countervailing factors undermine program effectiveness. AIDN understands that the Government in concert with Defence has embarked on a program to reform AIC plans to ensure Primes are held more accountable. However, this is a work in progress. AIDN recommends the current approach to AIC be amended from a ‘best endeavours’ model to contractually binding levels of Australian content.[55]
3.61BAE stated that the AIC Program has improved from previous iterations, however limitations still existed relating to the inconsistent application across different programs, lack of understanding of the intent from CASG staff and lack of consistent funding to support the delivery of AIC outcomes.
3.62The Subcommittee heard evidence from a number of primes related to the extent of their engagement with Australian SMEs. BAE described an extensive level of support for Australian SMEs:
BAE Systems Australia is proud to work with 1400 Australian suppliers, with $837 million being spent with our supply chain in 2024. This includes $211 million spent with 776 SMEs. $1.9 billion has been spent Australian suppliers over the past 3 years.
3.63In the Hunter class frigate program, BAE has contracts with over 70 Australian suppliers, with the value of contracts exceeding $1.5 billion. Over 30 Australian industry activities have been established across platform and combat systems equipment, including significant technology transfer activities between Original Equipment Manufacturers to develop local industry.
3.64Mr David Goodrich OAM, Executive Chairman and Chief Executive Officer, Anduril Australia (Anduril), explained that the supply chain for the Ghost Shark program involved over 42 Australian SMEs from every state and territory. A five-year commitment from Anduril provided these SMEs enough certainty to invest deeply in their own businesses.
3.65Mr Stewart said that a lot of Austal’s work had previously been in-house. However, the future build of the Landing Craft Medium will require local business to ‘come on the journey’ with Austal and be part of the continuous naval shipbuilding program. Mr Robert Jackson, Head of Strategic Shipbuilding Capability and Business Services, Austal, explained that since major systems such as engines may are uneconomical to build in Australia, Austal has sought to maximise local contributions of components.
3.66Whilst acknowledging their high regard for the expertise of primes and the support they provide, the Subcommittee inquired how Defence mitigated the potential conflict of interest of private companies providing expert advice.
3.67Mr Deeble offered a number of solutions to this issue that would independently provide Defence contemporary market information, including setting up an industrial intelligence capability. In particular, a database titled Joint Supply Chain Accreditation Register, used by a number of locally-based primes that will enable Defence to ‘better interrogate what the marketplace looks like, what the opportunities are and what technology readiness levels might exist’. Furthermore, Mr Deeble highlighted agreements to work closely with peak industry bodies including Ai Group and AIDN, potentially developing dashboards for shared use to guide how Defence works with industry.
Development of Tier 2 businesses
3.68Australia currently has no Tier 1 Defence businesses, with most SMEs classified as Tier 3. The importance of developing Tier 2 businesses in Australia in clearly articulated in the DIDS:
More businesses operating at Tier 2 will increase the resilience, capability and capacity of Australian defence industry, especially its ability to innovate, develop, and deliver technology to maintain a capability edge. This will be done by simplifying procurement processes, supporting the development and retention of a skilled workforce, growing an internationally competitive industrial base through exports, increasing the security posture of our industrial base, and where appropriate, mandating the use of critical Australian businesses in Defence projects.[64]
3.69Mr Deeble acknowledged the challenges in upskilling SMEs to Tier 2 businesses:
We want to grow that Tier 2 layer. We want to get that more sustainable and more resilient into the future, and we want that tiering layer to work with small-to medium-enterprise Tier 2 right up to the primes in a much more integrated way. We're not there yet, and we need to continue to develop that.[65]
3.70Mr Deeble highlighted the Defence Industry Development Grant Program (DIDG Program) and the ASCA Program as supporting Tier 2 development. Mr Deeble explained that the DIDG Program, valued at approximately $170 million out to 2027, comprises four key elements: building capability and capacity, supporting export, a skilling component and a security component.
3.71As detailed in the DIDS, the DIDG Program aims to:
Deliver targeted support to Australian defence industry to develop SDIPs by tailoring its grants to grow industrial capabilities in areas of strategic priority. This will give Australian defence industry a single access point for grant opportunities. Funding will be allocated in accordance with identified areas of priority and move between streams as demand and priorities evolve.
3.72The DIDS specifies that the grant includes four separate streams to support:
- Growth of industry capability and capacity in Sovereign Defence Industrial Priorities.
- Export opportunities for Australian defence industry.
- Upskilling and training of defence industry in priority trade, technical and professional skill sets.
- Establishing and maintaining security accreditation, in line with the Defence Industry Security Program.
- Defence describes the Defence Industry Security Program (DISP) as a membership-based program that ‘sets baseline security requirements that industry entities must achieve and maintain to work with Defence’. The intention of DISP is to support Defence industry in understanding and meeting Defence’s security requirements before tendering for Defence contracts. One member of DISP, the University of New South Wales, said that the program was the primary channel through which the higher education sector engages with Defence in relation to security controls and provisions and was supportive of Defence’s ‘efforts to build a shared understanding of our respective operating environments’.
- In a response to a Question on Notice, Defence advised it awarded 98 grants with a combined value of $33.8 million in 2024–25 through the DIDG Program. The 2024–25 award value was equal to the combined total of the amount awarded in the two previous years.
- In its submission, AIDN offered a number of approaches to support SMEs emerging as genuine Tier 2 businesses:
Defence needs to identify growth opportunities for SMEs in upcoming major programs. Procurement strategies should be aligned to promote the likelihood of the identified SME gaining work on the program. Set the minimum viable capability (MVC) level for the program low enough to allow the SME to bid directly to Defence. Where a larger MVC level is unavoidable and Prime integrator is required than Defence must either mandate the relevant SME supplier or impose fully transparent and separate supplier evaluations on to the Prime to enable the SME to bid fairly for the opportunity.
Metrics related to sovereign industry progress and industry tiers funding
3.76Multiple submissions highlighted deficiencies in the Defence Annual Report 2023–24 relating to progress in developing sovereign defence industries and the allocation of funding to the various tiers of the industrial base.
3.77Ai Group stated in its submission that members had expressed concerns around the lack of transparency in achieving sovereign priorities, such as continuous naval shipbuilding. The resulting uncertainty risked undermining confidence in Australia’s commitment to developing a sovereign defence industry.
3.78In its submission, ASPI noted that Defence has made positive progress in the integration of more Australian businesses into national and international supply chains. However, to better reflect Australia’s current and future ecosystem of businesses, Defence annual reports would benefit from breaking down the aggregate figures according to each tier of a defence industrial base.
3.79The Defence Annual Report 2023–24 described Defence’s contribution to strengthening sovereign defence industry. It provided comparative figures between 2022–23 and 2023–24 as a measure of performance. However, the report provided no fidelity of where in the industrial ecosystem the funding was allocated below CASG, GWEO and Naval Shipbuilding and Sustainment Group.
3.80The Subcommittee was informed by Mr Deeble that approximately $22 billion in work was provided to Australian businesses, which include international primes with an office in Australia. The Subcommittee sought to understand how much of this funding is spent on Australian businesses, excluding international primes.
3.81Mr Deeble responded that:
I don't have that data. That goes back to the point that the Chair raised about getting that data to be much more definitive… We need that for the next outcome of the DIDS. As I said before, about 70 per cent of the work that's undertaken by small-to-medium enterprise comes through that pathway. We're doing the work to better understand exactly that supply chain and what the revenues are in that context.
3.82Whilst the metrics to support a clearer understanding of the funding allocation to various Tiers of Australian SMEs are unavailable, Mr Deeble did highlight mechanisms used to track sovereign defence industry outcomes. These include AusTender and ABS data, although it is challenging to extract the Defence dimension from the latter. AIC is tracked closely on a project-by-project basis, and Defence is reviewing this policy to enhance this as a measure of performance. In the view of the Committee, this has been inadequate.
3.83In a similar argument to that of ASPI, RAND’s submission stated that the Defence Annual Report 2023–24 noted an increase in expenditure with Australian entities, however this did not necessarily indicate that such expenditure was associated with industry priorities. RAND recommended that it would be advantageous for future annual reports to specifically address outcomes and progress against implementation actions as detailed in the DIDS annexes related to each sovereign priority.
3.84When questioned by the Subcommittee about how Defence would implement better measures of sovereign investment capability outcomes against priorities, Dr Andrew Dowse, Director, RAND Australia, offered the following:
The sovereign defence industrial priorities have measures associated with the outcomes that they seek… We do encourage those measurements about the specific outcomes that are listed within the seven appendices of the strategy. They could quite easily transition to being measures, and we would encourage that those measures be included in future Defence annual reports, whether they be around financial measures or whether they be, probably more importantly, around capability outcomes. I think the structure is already there in the framework.
3.85On 1 December 2025, Deputy Prime Minister and Minister for Defence, the Hon Richard Marles MP, and Minister for Defence Industry, the Hon Pat Conroy MP, announced the establishment of the Defence Delivery Agency (DDA). The DDA will integrate three existing Defence capability delivery groups, reporting directly to Ministers and having control over its budget. This will enable coordinated delivery of defence capability and growing of our sovereign defence industrial base.
Committee comment
3.86The DIDS has been an important step in developing a stronger partnership between Defence and industry as the nation strives toward a sovereign defence industry capability. With the aim of being refined and updated at each biennial release of the NDS, the seven SDIPs provide Defence industry the detail needed at all levels of the supply chain to progressively build, supply and enhance Defence capability across epochs.
3.87Uplifting Australia’s maritime industrial base will be critical to delivering continuous naval shipbuilding and sustainment. The availability of skilled workforce to achieve the ambitious shipbuilding program was of considerable interest to the Committee, who note that naval shipbuilding is only one component of defence industry that will be drawing on the same workforce pool. Despite predominately being the responsibility of industry, the Committee was encouraged by the activities of the Australian Government, industry and Defence to work cooperatively in energising the entry-level educational environment.
3.88The Committee still holds reservations that this may be insufficient due to the breadth of activities to support Australia’s sovereign defence industry and other sectors that require skilled and intelligent young Australians. Relying on attracting workers from other sectors of the economy cannot be a long-term solution and may have consequences for other sectors in the medium term. However, the increased certainty of shipbuilding now providing career opportunities for life should be an attractive incentive to be communicated. The Committee would like to see the establishment of a ‘Pathways to Shipbuilding’ national campaign to raise awareness of these excellent career opportunities in shipbuilding. Whilst there is a long road ahead, Defence and industry are establishing the fundamental conditions for accelerated progress into the future.
3.89Defence has made considerable progress toward delivering the priorities necessary to increase resilience in guided weapons and explosive ordnance. Multiple submissions to the inquiry highlighted that Australia is dependent on overseas supply chains and priorities, but the Committee notes that the crawl-walk-run approach to establishing Australia’s sovereign capacity will progressively reduce this dependency. Whilst the Defence Annual Report 2023–24 highlighted a number of advanced guided weapons have been purchased through overseas suppliers, it is beyond the scope of this inquiry to understand quantities and delivery timeframes which would be necessary to inform further discussion regarding resilience.
3.90The challenges being experienced by Australia’s SMEs in navigating business opportunities within Australia’s sovereign defence industrial base was frequently addressed in submissions. The release of the 2024 NDS and requirement to rebuild the 2024 Integrated Investment Program (IIP) to reflect the shift to integrated, focused force priorities resulted in many projects being amended or cancelled. Evidence from Defence highlighted the scale of the change, with only approximately 20 per cent of the IIP remaining on the same pathway as before the NDS was released. The Committee notes that a business-as-usual approach would no longer be sufficient to meet the challenges of the geostrategic environment, necessitating significant adaptation by all stakeholders.
3.91It was reported that over the period covered by the Defence Annual Report 2023–24, funding was simply not flowing through to SMEs. The Subcommittee heard evidence from Defence that funding to industry has actually increased over this reporting period. Noting the previous comment about SMEs, the Committee observes that the lack of visibility regarding where this funding is specifically being directed is an opportunity for improvement. The Subcommittee heard that Defence has a preference to contract to Tier 1 Prime Systems Integrators, all of which are foreign owned, who then work with Australian SMEs. Accordingly, it is difficult to understand the full extent to which Australian SMEs are being supported by Defence as the nation strives to develop a sovereign industrial base.
3.92In the context of Australia’s sovereign Defence industrial base, the definition of what constitutes Australian defence industry was a contentious issue raised in submissions. The Committee was pleased to note that the definition of an Australian business has recently been refined beyond having an Australian-based industrial capacity with an ABN.
3.93Tier 2 businesses are identified as a priority area for developing a sovereign industrial base and may present the best opportunity to progress to an Australian owned Tier 1 Prime Systems Integrator. Whilst it is acknowledged that Defence continues to improve in fostering growth through the DIDG Program, AIC requirements and ASCA, the Committee encourages further work to build capability in Australia’s domestic market.
3.94The Committee is encouraged by the Australian Government’s intention to establish the Defence Delivery Agency. This initiative may create more opportunities for Australian businesses and increase the resilience of our sovereign defence industrial base.
3.95The Committee recommends that the Department of Defence provides, where possible, more granular data in future Defence Annual Reports to include a breakdown of:
- aggregate figures according to each tier of a defence industrial base
- expenditure on Australian small and medium enterprise as a proportion of acquisition and sustainment costs.
3.96The Committee recommends that the Department of Defence include in future Annual Reports the outcomes and progress of actions related to each sovereign priority, as detailed in the Defence Industry Development Strategy annexes.
3.97The Committee recommends that the Australian Government continue to work with industry to identify and promote opportunities, and overcome barriers for Australian small and medium enterprises in the defence sector, within Australia and with international trusted partners.
3.98The Committee recommends that as part of the design work for the Defence Delivery Agency consideration is given to the establishment of a Defence Coordinator, a role which could provide a project management-type of oversight to keep abreast of all capability related projects, deliver quarterly updates and advice on the status of projects, provide quality control oversight, and be a liaison between industry, the Department of Defence and Ministers. These functions could be performed by the recently announced National Armaments Director.
3.99The Committee recommends that the Department of Defence consider establishing a ‘Pathways to Shipbuilding’ national campaign that raises awareness of career opportunities in shipbuilding.
3.100The Committee recommends that the Department of Defence and relevant Australian Government departments consider measures to increase transparency of Prime System Integrator utilisation of Australian small and medium enterprises in the delivery of Defence outcomes.
3.101The Committee recommends that the Department of Defence continue to implement its Defence Innovation, Science and Technology Strategy, providing a coordinated approach to investment thus supporting innovation and successful risk-taking by industry, and to generate data to verify such implementation.
3.102The Committee recommends that the Department of Defence continues to improve and align its procurement practices, documentation, and procedures to efficiently deliver for the new strategic environment and the changed needs of an integrated, focused force.
3.103The Committee encourages the Department of Defence to scope and schedule projects elements at a level appropriate for Australian small and medium enterprise to bid directly where appropriate.