For many decades, parliamentarians, Defence personnel, representatives
from Defence industries, peak professional bodies, such as engineers and naval
architects, and subject matter experts, have been calling for a continuous naval
shipbuilding program. Yet once again, the naval shipbuilding industry in
Australia is experiencing a serious decline. In its first report, the committee
raised concerns about an impending hiatus in ship production and, although the
so-called 'valley of death' appeared imminent, the committee was not convinced
that it was inevitable. Even at this parlous stage for the industry, there were
But on 31 March 2015, the Minister for Defence noted the gap between the completion of
the AWD project and the start of the future frigate project. He announced that
the 'valley of death', now could not be avoided and further that no decision
the government could make at this stage 'could stop it'.
chapter, the committee examines the impending gap in ship production, whether
it is inescapable and/or the extent to which it could be mitigated or overcome.
The committee considers the consequences of the downturn in production for
Australia's naval shipbuilding workforce and for the future of naval
shipbuilding in Australia.
In its first report, the committee took evidence showing that
Australia's naval shipbuilding industry was entering a period of slowdown in
production after reaching a peak involving work on the LHDs and the ramp-up in
production for the AWDs. Witnesses spoke of work finishing in three shipyards
in 2015: BAE in Melbourne, Forgacs in Newcastle and Austal in Perth. Mr
Thompson, AMWU, told the committee in July 2014 that work on the AWD would come
to an end in Newcastle and in Melbourne in 2015 and finish in 2016 with the
capacity of a number of shipbuilding yards already in decline.
We have just recently had 110 skilled jobs come out of the
Newcastle Tomago yard. Work on the destroyer will end in Adelaide in around
2019–2020 but will taper off dramatically in the years before. Work on the
amphibious ship comes to an end in Melbourne in 2016 and production work on the
future submarines will not seriously start until the mid-2020s. But we do not
have any details yet about that scheduling. Also we have not seen the new
scheduling in relation to the ANZAC frigate replacement. We obviously welcome
comments from Mr King [former CEO of DMO] in relation to the need for a rolling
build on that project. If this were to be brought forward, it would not
seriously start production until the 2020s.
All of that leaves a gap for several years, especially for
the production workers who operate in this industry. The gap in Melbourne and
Newcastle is from 2016 to 2022 and possibly longer. In Adelaide it will be from
2018 to 2022.
Since taking evidence on the pessimistic outlook for Australia's naval
shipbuilding in 2014, the committee considers recent developments and their
implications for the future of the industry.
In September 2014, the Department of Defence engaged RAND to undertake a
series of materiel studies and analysis of Australia's naval shipbuilding
industry. The purpose of this detailed review was to inform the development of
an enterprise-level plan for naval shipbuilding for the government's
The government announced the release of this report on 16 April 2015.
RAND's analysis of the future of Australia's naval shipbuilding industry
indicated that a gap would occur between the end of the AWD production and the
start of the future frigate program followed by another interlude around 2035,
when production of the future frigate was expected to end.
It found that:
Without some way to lessen the gap between the end of the AWD
program and the start of building the Future Frigate, the industrial base will
have to ramp up its workforce from an almost negligible level to 2,700 skilled
personnel in approximately eight years.
Downturn in production
The downturn in production in the shipyards and the shedding of workers
that had started in 2014 continued into 2015. Mr Saltzer, BAE, referred to
statements about the looming valley of death. In his view, the laying off of a
number of people in the Williamstown shipyard heralded the potential demise of
In April 2015, he informed the committee:
We have a workforce that consists of subcontractors, fixed
term employees, permanent employees and so on. Our objective is to roll off
subcontractors first, and we have probably rolled off about 150 over the last
few months. We have also rolled off 12–13 permanent employees that we simply
had no more work...LHD will be finished later this year and the AWD blocks that
we have will be finished in early 2016...Right now I have got over 800 people
working on LHD and I have got about 150 people building AWD blocks.
Mr Saltzer noted that there was nothing on the order books after 2016
for naval shipbuilding and while BAE was still working in sustainment, there
was no way it could absorb that type of a roll-off into its existing
sustainment activity. According to Mr Saltzer, BAE had reached a point 'where
we are making a very serious analysis of the viability of that shipyard'.
The committee has noted the predicted and actual job losses from some of
the primes. But, when considering the consequences of the anticipated downturn
in naval shipbuilding activity, it is important not to forget the adverse
effects on the critically important supply chain.
Australia has a robust supply chain currently servicing Australia's
major naval shipbuilding projects. Mr Tony Quick, Chairman, Defence Materials
Technology Centre (DMTC), underscored the importance of the SMEs that comprise
this supply network noting, in particular, that with shipbuilding 'a lot of the
productivity is actually in the supply chain'.
Similarly, Mr Edwards highlighted the importance of having a mature
supply chain that supports industry in maintaining its progress and level of
productivity. In his view, this network of large and small suppliers was
'pivotal to a complex program such as the AWD'.
Likewise, Mr Saltzer highlighted the critical role of the supply chain as a
vital component of Defence industry.
Importantly, this supply network extends beyond the local region to other
states and overseas. A slowdown or cessation in production would have a
significant effect on the supply chain.
According to the AMWU:
...if the valley of death came in there would be a significant
impact on the supply chain...It would be our view that if there were a decision
to wind down the industry there would be a direct correlation in the supply
chain of companies that rely on Defence.
But already, with naval shipbuilding activity tapering off, workers in
the supply network are being shed. According to Shadbolt Engineering, its
workforce has virtually gone from up to 100 people on the site at Williamstown
with BAE to now six people.
Mr Scott McClymont, Alton Personnel Pty Ltd, had a similar story.
He informed the committee that at Williamstown his business had employed a
maximum of 180 electricians, which has dropped down to 75.
Dr Mark Hodge, DMTC, referred to the lumpy nature of Australian
shipbuilding in Australia and was concerned about the 'drop-off' because of the
loss of ability to have the cash flow that 'industry needs to keep its
Training and skilling the workforce
Many witnesses impressed on the committee the time, energy and expense
involved in training workers in the naval shipbuilding industry. They referred
to the effort required by workers to acquire the knowledge, understanding and
skills needed to effectively start-up production and to improve productivity
for subsequent builds. Mr Wardell, Manager of Shadbolt Engineering, described
the lengthy recruitment process:
From the time you apply to BAE to the time you actually get a
job is about 10 weeks. That is just the process they go through. Being an SME,
we take a shorter time than that. You have to filter through an awful lot of
people. We found this when we first started doing pipe welding on the site. To
get nine copper nickel pipe welders, we would have conducted interviews and
done welding trials in our factory for about 120 people. That gives you an idea
of the sort of filtering you have to go through to get competent people.
Obviously in the lower trades—the TAs and things like that—it is different.
Once you have got someone then you have to train them to be useful on a
shipbuilding site. They have to understand all the safety issues. For them to
work on a block construction or on a ship, there are all sorts of rules and
regulations and training which have to become second nature to them—things such
as fire burning electrical cables with welding leads; those sorts of things.
There are myriad things that people have to go through just to become efficient
on the vessel.
Mr Wardell informed the committee that for a company like Shadbolt
Engineering, it costs about $10,000 to have an employee up and running on the
job. He noted that just to get the worker 'through the gate costs about
$7,000—just to have standing in overalls, ready to work'. According to Mr
...by the time you do inductions, training and all that sort of
thing. By the time you put them through a few EWP [elevated work platform] and other
training exercises and a month or two of poor productivity because they are
learning, and you get to a point where they are made redundant and walking out
of the gate, you are seeing an investment of at least $10,000 a person. 
Also highlighting the care, effort and time that SMEs take to engage and
train workers for a shipbuilding project, Mr McClymont observed:
It probably took us five to six months to interview 180
people and get 180 people for BAE. The electrical project on a ship is
different from any other project. Even after getting a competent electrician
and putting him on a ship, their productivity probably does not get up to 100
per cent for five to six months. It is a long process, and that is evident from
LHD1 to LHD2. The LHD1 build program was a lot longer than the LHD2. Electrical
installation on LHD2 probably went 50 per cent under budget compared to LHD1.
Mr McClymont explained further the specialist training involved for
people working on naval ships:
For the specialist area that we are in, before anyone is
ready to be let loose into a shipyard they really need to be protected in a
workshop and looked after for the first 12 months. A shipyard can be a bit
daunting for a young guy to be let loose in.
Those engaged in the industry spoke not only of the time and effort
taken to recruit and train workers, but the potential waste of these newly
acquired skills. Referring to the estimated $10,000 to have a worker job ready,
Mr Wardell noted the effect on the industry and its workers if naval
If this industry is allowed to pass and shut down again, this
is going to have a dramatic effect on the ability to do it again. It is costing
millions—10, 20 and hundreds of millions in lost skill sets and training and
opportunities for communities...When you are looking at 45 or 50 people, you are
talking about an enormous amount of money. That is what the subcontractors, the
supporters, of the likes of BAE are going through. I would hate to think what
BAE are going through and what it is costing them.
According to Mr Wardell, the Australian shipbuilding industry was 'finally
getting the talent and the capacity to do world-class ships', but he was seeing
it decay very quickly and fall away.
He noted the difficulty re-engaging highly skilled workers who leave the
Most of those people will not come back into the industry
unless there is some guarantee of continuity in the business. The good people
will go and get other jobs. They will not walk away from secure, long-term jobs
on the chance that there might be a year or two's work in a shipyard, no matter
how much they love the job. This is going to devastate the industry and the
capacity to rebuild.
Mr McClymont captured the frustration and disappointment of those in the
supply chain witnessing workers leave the industry, especially after so much
effort to train employees:
Ever since October last year, we have been facing the problem
that we have trained all of these people up and now they are starting to wander
onto other secure jobs. For a company like mine, we are faced with turnover at
the end of a project. If I was able to say to these guys 'There's another
project coming along,' I would be able to retain them. I cannot retain on a
short build program like the one that we have at the moment.
While noting the detrimental effect on his company if Australian
shipbuilding went overseas, Mr Phillip Taylor, Taylor Bros Marine Pty Ltd,
referred to the consequences for the wider community.
This work filters down into areas of industry that are not
available to us normally, and so it is really important. For places like
Tasmania, which suffer from a lack of investment in all areas of industry, this
is really important to us. We are in the ASC; we are about the third biggest
contractor to the ASC. So we can see real benefits in continuing that hull
build in that shipyard.
Clearly, companies invest heavily in recruiting and training their
workers. While some SMEs are not required to invest in capital equipment and
related expenses to participate in a naval shipbuilding project, some do. For
example, Mr Wardell explained that:
We have had to invest in equipment, machinery and, I have put
in, training of people specific to the task. Just for the Williamstown site we
probably purchased somewhere between $200,000 and $380,000 worth of stuff to
enable us to do the tasks we have done. We have amortised that over the period
of the project. That is fine. But as an investment, and what was spent on other
suppliers in the Victorian economy, even small Shadbolt Engineering spent
probably closer to half a million dollars just on being job ready.
The committee recognises the contribution of SMEs and the vital role
they have in Australia's naval shipbuilding industry. In the committee's view,
their commitment to the industry should not be underestimated nor undervalued.
Ramping up after a lull in
production—the cold start
The industry was equally concerned about the challenges presented when
the time came to ramp-up construction after a drop-off.
Mr Edwards explained:
If we do not have a mature supply chain, then elements of
that will restart as part of the program, similar to what we have had to do
with AWD and our block subcontractors and fabrications. We have had to restart
those areas and bring their performance up to a level to support the program.
That is something we have got to get the right balance on going forward. What
we have seen from overseas and other industries is that they try to have a
build cycle that will support industry and give it enough work to feed the
ongoing build program.
Mr Saltzer made a similar observation:
If the supply chain is not there to support the effort, then
not only will you go through a need to reactivate the shipbuilder but you will
need to reactivate the supply chain. And that will cost you even more money.
But the cost is not only in recruiting and training workers but the lost
productivity due to the industry entering a steep learning curve from a low
base—management and workers starting from scratch without any momentum and with
limited experience and corporate knowledge. For example, the Future
Submarine Industry Skills Plan referred to international examples of where
the erosion of skills between projects resulted in 'some very significant cost
overruns on subsequent naval projects'. It then cited the recent Australian
experience with the AWD and LHD programs and the detriment to the AWD project
from having a 'cold start'.
The problems seen with the current shipbuilding projects in
the last few years are the most direct result of having to rebuild Australian
shipbuilding given its decline after the ANZAC and Collins
projects...shipbuilding projects that start up after any such decline cost more:
facilities have to be built or upgraded, and workers have to be recruited and
trained. This also leads to schedule delays, cost over-runs, low productivity
and issues with production that would have been avoided by an experienced
The previous chapter detailed experiences with the AWDs as a most recent
example of a naval shipbuilding project commencing from a cold start and the
problems that can flow from that.
Need for continuity
Clearly, from industry's perspective, a continuous build program would
address the problems created by the stop-start pattern that has characterised
Australia's shipbuilding industry. Indeed, the repeated cycles of feast and
famine production have dogged naval shipbuilding in Australia for years.
In this regard, Austal, a global defence prime contractor and designer, argued
that the government has a responsibility to create the environment that would
'provide Industry with the best opportunity to be as competitive as possible
In its view:
A continuous build program would seem to be the simplest and
most effective method to ensure efficiencies are achieved across the various
build programmes. Not only does it offer productivity advantages, it also
provides certainty for industry and hence the market and investors in the case
of Australia's only ASX listed ship building company, Austal. Productivity
efficiencies can also drive a more competitive Australian offer on a Government
Likewise, Engineers Australia maintained that continuity of work was
'essential for naval shipbuilding and sustainment costs to become
internationally competitive'. In its view:
The importance of specialisation in this work has been
seriously under-estimated and there is a direct parallel between economies of
scale for multiple asset builds and improving the productivity of a skilled
work force through continuous work.
Mr Wardell stressed that continuity was the key to the success of the industry.
Acknowledging that other companies would respond positively to the incentives
offered by having a constant and certain build program, he referred
specifically to Shadbolt Engineering:
...in our case we would continue investment. We would be
employing people even on the chance within our existing business for other
scoped work so that we could take them into that business. We would build our
business in such a way that it would be flexible to be able to go in and out of
that industry, knowing we might be successful on various contracts within it.
One of the things that I think is missing is sufficient work
in that industry, particularly on a continuous basis, to foster good
competitive processes. There are not enough Shadbolts, Altons and Taylor Bros
out there. Over a 20- to 40-year build program, if you look at the amount of
vessels that the government should be buying in the next 40 years, you need
another five Shadbolts, two or three Altons and a couple more Taylor Bros to
keep the pressure on and to keep standards, quality and performance up. If you
do not have that, you are not going to get that competition, and we are not
going to invest. Competition breeds innovation and constant improvement. You
need to have those market forces driving it. Once off builds do not get it.
In his view, 'if we want to save money in shipbuilding, we have to work
Moreover, witnesses were of the view that measures could be taken to
address the current short-term downturn in naval shipbuilding activity. Mr
Thompson, AMWU, stated bluntly that without a continuous build, the Australian
shipbuilding industry was 'always playing catch-up' because the progress made 'is
lost between projects'.
Mr Thompson referred to the minister's speech on 31 March 2015 and his
reference to the inevitability of the 'valley of death'. He informed the
committee that the AMWU had been urging the government to fill this void with a
fourth AWD, as outlined in the 2013 White Paper, by accelerating the Pacific
patrol boat tender process; reopening the tender for the Antarctic icebreaker
and bringing forward the future frigate build.
He cited the list of naval ships to be acquired—the Pacific boats, the supply
ships, future frigates and possibly the hydrographic vessels.
Mr Taylor looked to the future frigates as a solution. He suggested:
If three air warfare destroyers were to get more advanced and
become a rapid build program and turn into another eight frigates, that, for
Australian industry, would be amazing. Certainly for us it would be beneficial
if those 30 people that we employ specifically on that program continued for
another eight years beyond the AWD program. That does not seem much. It is only
a drop in the ocean of what the whole program is, but for a little company down
in Hobart it is quite substantial income, and there are a lot of people that
feed off that...
Raytheon Australia considered that should the government choose not to
advance the frigate program, alternative proposals would be required to prevent
the demise of naval shipbuilding and the loss of systems integration skills.
It also referred to the acquisition of one or more additional AWDs noting:
...the option of a fourth AWD is not new and has existed since
the Second Pass of the AWD program was achieved in 2007. In the absence of
advancing the Future Frigate program there could be strong reasons to proceed
with an incremental evolution of the AWD design.
Putting aside any workforce considerations, as is
appropriate, additional AWD's would ensure that Australia could, with a higher
degree of confidence, provide its lightly armed LHD's and other Afloat Support
assets with the protection they require in contested environments. Such an
evolved AWD design could also undertake an appropriate role in ballistic missile
defence should the Australian Government choose to adopt such a requirement in
its forthcoming Defence White Paper.
The South Australian Minister for Defence Industries, the Hon Martin Hamilton-Smith,
was of the view that Australia needed both submarine and frigate work to
establish 'productive working relationships in a world-competitive shipyard to
produce a continuous build of ships over the next 30 years'. He stated:
We need both submarine and frigate work to do that. I think
any suggestion that you can, if you like, build frigates alone and have a
sustainable shipbuilding industry but feed off the 12 submarines overseas is
With regard to the proposed future frigates, the committee noted in its
first report Mr Warren King's strong argument in support of an Australian
build. Mr King suggested that if Australia structured the program well, 'we
would actually be building them in this country at the same price that we could
buy them anywhere else'. In his view, it would be a legitimate business, with a
real strategic value that needs no additional budget investment to do it: no
subsidies or similar assistance. According to Mr King, for the first time since
Federation, Australia has 'an opportunity for a truly strategic shipbuilding
capability'. He referred to the past 50 years of off and on
constructions—Australia built the ANZACS but stopped; built Success but
stopped; built two FFGs.
He stated further that should the government decide to build the future
frigates based on the AWD hull, incorporating an Australian-made radar, then
potentially the program could start at the point of learning efficiency
achieved by the AWDs.
In other words, production would start much higher up the learning curve and
the work and management practices, improved and refined on the AWD, would flow
into the construction of the frigates. For example, as described in chapter 4,
ensuring that materials and equipment are in place when a particular phase is ready
to start, having a mature supply chain and workers and, importantly, management,
Mr King explained this process of transitioning from the AWD to the
future frigate. He noted that the AWD did not deliver when expected, so the
last AWD construction was estimated to be sitting in the area of 2019–20. He
explained that therefore, it was possible, depending on present and future
governments, that the future frigate, if authorised and based on the AWD hull,
could pick up and be 'the basis of a proper strategic shipbuilding industry'.
In his view, if the future frigate is based on the same hull as the AWD, 'we should
be able to get to world's best practice around about ship 3, and with
Australian radars and Australian technology in it'. He informed the committee
that he had never seen a better opportunity to have 'a real strategic
capability that is cost efficient, that no-one has to apologise for' and is of value
to the taxpayer.
In highlighting the importance of continuity in shipbuilding, he again
stressed his view that the government's initial decision to look at the
feasibility of reusing the AWD's hull with Australian radars and other
equipment represented the 'best opportunity to deal with continuity'. He
If decisions are made as it is proposed they will be, we
could very much be in that place where we keep the continuity of work and keep
The AMWU welcomed DMO's indications that it was looking at the
feasibility of using the AWD platform for the replacement frigates. Mr Thompson
added, however, that the union would want government to reiterate its position
on this. Even so, according to Mr Thompson, the AMWU had concerns about being
able to maintain the workforce built up over the life of the AWD project—some
3,800 skilled workers—until such time as a frigate project comes online.
Mr Graeme Dunk, Australian Business Defence Industry, also noted that
conceptually the frigate proposal was 'a good idea':
It is something we needed to have done years ago—actually commit
to a long-term, ongoing rolling build of naval vessels of a similar type so
that we can get good at it and do it at a globally competitive price.
In July 2014, Mr Dunk observed, however, that at this stage, there was
'only a commitment to study the early stages of the frigate design'.
Mr Burns likewise thought that the future frigate proposal was a 'great
solution' at this time and strongly supported it.
But he made the point that shipbuilders 'cannot go to the bank with a
prospect', noting also that industry had only heard about 'the prospect of a
future frigate build'.
He indicated that work was already being lost and in the meantime:
There was no indication of when that future frigate program
might commence and when we might see the cutting of steel. The problem for
industry is that it has been very hard to go to the bank for the last six
years, and time is running out for a lot of the SMEs out there.
It is worth noting that in July 2014, the Minister for Defence informed defence
and industry representatives that he wanted a continuous build but needed their
help to fix the AWD and also design a future frigate program that follows on
from the AWD with minimal industry disruption.
The minister indicated that further decisions on the future frigate would be
taken in the context of the 2015 Defence White Paper.
It is now June 2015 and the White Paper is yet to be published. Meanwhile,
naval shipbuilding companies in Australia and those in the supply chain witness
the industry haemorrhage.
Importantly, as noted earlier, the time lapse between tendering for a
project and arriving at construction can be significant. In the committee's
view, if the future frigate project is to contain the impeding slowdown in
naval shipbuilding then decisive action must be taken now to start the project
in earnest. The same applies to the Pacific patrol boat project.
BAE Systems agreed that the industry must be competitive and accountable
for achieving competitive levels of productivity on existing and new shipbuilding
Mr Saltzer made the point, however, that industry can only produce when the
...the industry cannot be competitive if it has no work, just
as an athlete cannot be competitive if they do not practise and play their
sport. With continuing work, productivity can continue to improve, and evidence
of this abounds.
Indeed, the committee has an abundance of evidence supporting the
contention that Australia's shipbuilding industry needs a constant flow of work
that is able to sustain a viable naval domestic shipbuilding industry if it is
to be competitive and productive. BAE Systems noted that a continuous and
efficient production of naval vessels would benefit all parties, especially the
Australian taxpayer. In Mr Saltzer's view, the navy would need many new ships
and submarines over the coming years.
A number of them should have been ordered already to replace
vessels that are too old and are costing too much to maintain, but the fact
that they have not should not be a reason to delay further. It should be a call
to action now.
Mr Quick, Chairman of DMTC, told the committee the issue was not whether
Australia could build naval ships but how it could build ships productively.
Again, the need for continuity was central to the solution. Mr Quick referred
to the increase in productivity and diminishing costs as the construction of
ship 2 and 3 proceed. From his perspective, the real challenge was how to start
at a higher level of productivity.
What can you actually do with those critical skills that you
could start to build up early enough so that those people are already down the
learning curve. That practice is well established across a whole lot of
industries, but we have not been doing that here. What we have done is we have
waited until we have got to the end of the procurement process and then
recruited the people, and they are starting at point zero. If we look at the
skills that are critical to productivity and start driving those individuals,
the supervisory staff, down the productivity learning curve, then we can
actually be more productive.
Noting that Australian shipbuilding was significantly more expensive
with slightly longer schedules, the RAND report was of the view that Australian
shipbuilding could perform better. Pointedly, it referred to the role of
continuous building. For example, it found the production of naval warships in
Australia involves a 30 to 40 per cent price premium over the cost of
comparable production at shipyards overseas, but this cost could drop over time
with 'steady production drumbeats and mature designs'.
Indeed, the RAND report suggested that with a constant production program that
'leads to a productive workforce', the premium could be cut by approximately
The RAND report noted that a sustained build program would help to
develop and retain skilled workers, which would improve productivity. In its
assessment, a continuous build philosophy avoids the all-too familiar boom-bust
cycle for industry, allowing industry to maintain and train a skilled
workforce. It reasoned that a continuity of work would also allow 'the
shipbuilders to justify investments to achieve better productivity because
there is a dependable, long-term cash flow'.
According to the RAND report, once productivity improves, schedules are likely
to be more competitive as well. It suggested, however, that the needed
improvements go beyond just more proficient workers and that many acquisition
practices also have to improve. It suggested:
One necessary change is a much more rigorous approach to
program execution to avoid the issues seen on the AWD program. These improvements
include better integration between designers, builders, and suppliers; a mature
design at the start of the build; and control of requirements and design
changes once building begins.
Although, the importance of moderating the peaks and troughs in
shipbuilding activity was one of the most significant findings, the problems
created by fluctuations in demand are well recognised. According to Mr Saltzer
the boom-bust cycle was not a phenomenon unique to Australia. He argued,
however, that it was unfortunate that:
...Australia has not learned from the lessons that have
occurred in other countries. The US went through this, and over the last 30
years they have been doing continuous production—and that industry is
rationalised. The UK went through the same problem. They have done the same
thing. They have rationalised down to a level of capability that they have
determined is important for their own strategic reasons, and that is where the
industry sits—and, when work needs to be put into it, the government puts work
But, despite the unanimous recognition of the critical importance of maintaining
a steady and reliable flow of naval shipbuilding work and the persistent call
for a continuous build program, no concrete proposals or commitments have been
made that would realise this objective. According to Mr Saltzer, BAE:
At present there are only two active requests for tender for
shipbuilding projects, both of which were issued quite recently by DMO. One is
for the SEA 1654 phase 3 replenishment ships, which is restricted to
competition between one company in Spain and one company in South Korea. The other
is for the Pacific patrol boats, which are to be built in Australia, but with a
projected contract award date of the first quarter of 2017, meaning a
production start in late 2017 or even 2018.
Referring back to the acquisition of the two supply ships, Mr Saltzer
stated that there was no reason for not having Australian content in that
project: that they were large oilers with a basic combat system and a set of
communications. He reminded the committee that BAE was one of the prime
naval shipbuilders that made an unsolicited proposal to Defence to do a hybrid
In its first report, the committee noted the argument in favour of a
hybrid build in Australia for the new replenishment ships in order to bridge
the potential trough in shipbuilding activity. Although Defence was of the view
that these ships were to be based on existing designs with minimal
modifications to meet Navy's requirements, some witnesses saw opportunities for
Australian industry to add value. As noted earlier, BAE had 'very brief discussions'
with DMO executives in 2012 about its hybrid proposal which DMO 'never
Mr Saltzer observed:
Now we are all the way in 2015 and those ships have not been
bought yet. There is no contract for those ships yet. They have just issued the
tender for it. They spent some time working with a Spanish company and a Korean
company on risk reduction studies and they have just issued the tender for it.
The only requirement for Australian content that I am aware of in those tenders
is for the in-service support after the ships have been delivered.
In his view, the opportunity was still there to ensure Australian
content. He explained:
If the companies that are bidding for that project were given
direction in the tender to include Australian content, I believe we could
achieve that in some very cost-effective ways. In fact, I have pursued that
idea together with Navantia and with a Korean company. We have had meetings
with them offering the services we could perform in Australia—things like installation,
integration, testing and trials of the combat and communication systems on
those ships, which should be done in Australia anyway in my opinion.
Mr Saltzer accepted that there were projects in the pipeline and talk
about bringing forward projects—the supply ships, the patrol boats, the
remaining work on the AWDs and the future frigates. While he appreciated comments
on the government's intention to bring forward work and the studies going on in
Defence on the projects, he observed that, as a leading player in the industry
in Australia, BAE did not see any activity that 'benefits our operation at this
One of the most important observations presented to the committee is
that industry can only produce when the government purchases—that the industry
'cannot be competitive if it has no work'.
The committee understands that Australia's defence industry cannot survive a
'stop-start' order book: that it needs a consistent and reasonably predictable
local workload to be sustainable and competitive. In the committee's view, it
is unacceptable for the government, as sole customer, to criticise the industry
for poor performance when many of the problems originate from a lack of
government foresight, and the 'feast and famine' cycles inflicted on industry.
While the predicted gap in shipbuilding activity, sometimes referred to
as the 'Valley of Death', is now closer than it was at the time the committee
tabled its first report, the committee remains of the view that the government
could and should be doing more to maintain a viable shipbuilding industry in
Australia. Witnesses have suggested maximising Australian content in the
construction of the new replenishment ships, as well as bringing forward the
construction of the Pacific patrol boats and the future frigates.
The committee understands that the 2015 Defence White Paper will state
the government's priorities for major naval acquisitions. The committee,
however, believes that important decisions have already been delayed for too
long and the government should give clear and certain indications of its
intentions to acquire the future frigates, and of maximising Australian content
in the new supply ships.
The committee recommends that the Australian Government take measures
immediately to reverse the perilous downturn in Australia's naval shipbuilding
industry, reduce the impact of the 'Valley of Death' and enable a program of
continuous build by:
mandating a hybrid build for the first Auxiliary Oil
Replenishment Ship and an onshore build for the second;
mandating that all 12 of the future submarines be built in
fast tracking the build of the Pacific patrol boats and the
replacement of the Armidale Class patrol boats; and
bringing forward the construction of the future frigates.
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