7 January 2008
Boeing’s Integrated Defence Systems sector has opened an office in the U.S. to help Australian companies compete for contracts to supply components and services across the Boeing Company.
The two-man Office of Australian Industry Capability (OAIC) will be located in Kent, Wash. It will work closely with the Australian Department of Defence’s Canberra-based procurement agency, the Defence Materiel Organisation (DMO), to identify opportunities on both civil and military programs for pre-qualified Australian defence and aerospace companies.
“We expect the OAIC to develop opportunities for Australian industry as well as bring value to our global customers,” according to its head, Joel Gray, Australia/New Zealand Industrial Participation manager for Boeing Integrated Defence Systems. The OAIC is scheduled initially to run for two years, he said, “however we would hope to continue beyond that should the office prove to be successful.” The staff of the OAIC will be all American, but they will coordinate with Boeing’s subsidiaries in Australia as in-country resources.
The OAIC has three main goals: to provide Australian companies with timely notice of future opportunities in enough time for essential ITAR Technical Assistance Agreements and other procedures to be completed; to match Australian firms with the most appropriate opportunities; and to help train and mentor Australian companies, especially Small to Medium Enterprises (SMEs), in dealing with US prime contractors and negotiating the U.S. government’s complex ITAR regime.
Boeing’s assistance in negotiating the ITAR maze could be very important for Australian firms. Rumour Control understand there have already been examples of Boeing helping expedite delayed Technical Assistance Agreements (TAA) for Australian SMEs.
As well as opportunities within Boeing itself, the OAIC will help Australian firms address opportunities among Boeing’s U.S. suppliers and sub-contractors. It is an extension of Boeing IDS’s Industrial Participation Organization in St Louis, which has existed for more than 20 years. This is “chartered to develop and manage Industrial Participation programs for specific international programs. The OAIC is different in that it does not focus on a specific program and will seek opportunities for Australian industry across all Boeing’s business units,” Gray told Rumour Control.
According to Gray the OAIC is a direct response to the Australian government’s March 2007 Defence and Industry Policy Statement, which states Australia’s strategic and commercial imperatives: first, an industry base that’s able to sustain and support the Australian Defence Force; and secondly, a business environment that enables this industry base to survive and flourish on a commercially sustainable basis, so far as possible.
That means creating more and better opportunities for Australian companies to compete for work both locally and overseas, according to Dominic Zaal, director general of the DMO’s Industry Capability Branch. It also means an end to the old, inefficient industrial offsets regime which used to characterize major defence purchases in Australia.
Industrial offsets, where a prime contractor places a parcel of work in a customer’s country to offset the cost of new defence equipment, rarely delivers long-term value and doesn’t create internationally competitive industries.
Furthermore, the value of the offsets is dictated largely by the value of the original defence purchase: the amount of work placed with local companies tends to be directly proportionate to the number of items ordered, or the dollar value of the contract. Once this work is completed the skills and facilities created to carry it out frequently fall idle. The disruption to the prime contractor’s production process, and the resulting inefficiencies caused by sourcing a limited number of components or sub-assemblies from a local supplier, not to mention the cost of tooling up and training a workforce to produce them, can add significantly to the cost of the equipment being acquired.
Instead, the DMO is developing a strategic approach designed to strengthen Australia’s industry base without requiring the ADF and Australian taxpayers to pay a premium for local industry content, except in a few areas of strategic importance.
The ADF plans to spend over AUD$10 billion acquiring products and services from Boeing alone over the next few years, including Wedgetail early warning aircraft, C-17 Globemaster II airlifters and F/A-18F Super Hornet fighters. However, Australia’s project-by-project acquisition approach doesn’t always deliver local industry opportunities and benefits in a coherent, efficient and, above all, sustainable way.
Whereas Boeing’s AUD$2.9 billion contract in December 2000 to build the Wedgetail Airborne Early Warning & Control (AEW&C) aircraft for the RAAF included a AUD$1.2 billion offset commitment, future Australian defence programs will not include offset targets, according to Zaal. Instead, prime contractors will be required to develop a fully costed Australian Industry Capability (AIC) plan which spells out genuine opportunities for local companies, and any additional costs associated with carrying out certain strategically important activities in Australia.
The intent is to provide access to opportunities which, if secured, will help sustain and grow key sectors of the Australian defence industry. These opportunities need not be related directly to the equipment being acquired, but must be relevant to the skills and capabilities which defence requires of Australia’s defence industry, and could be in both Australian programs and the global supply chains of foreign companies.
“This will ensure that Defence has access to the skills and capabilities, across a broad industry base, required to support ADF operational capability,” according to the Defence Industry Policy Statement.
The DMO’s AIC Manual currently exists in draft form on the DMO web site (http://aic.defenceandindustry.gov.au/index.php) and is due for release in early-2008. When it is released it will require prime contractors (especially foreign ones) “to establish clearly defined processes and industry engagement programs to identify and manage opportunities for local industry to compete for work. If local firms are found to offer best value for money solutions, Defence would expect those firms to be engaged to supply the nominated goods or services.”
Boeing is the first foreign prime contractor in Australia to respond to this emerging policy environment, and other US and European companies may follow its lead. Dominic Zaal notes, however, that Raytheon has also been active, though in a more informal way, in trying to facilitate access to a broader market for its Australian partners, suppliers and sub-contractors. So also have companies such as Saab Systems and BAE Systems.
EADS has worked closely with another Federal government body, the Australian Trade Commission (AUSTRADE), to open a similar office in Munich; however, this pre-dates the Defence Industry Policy Statement and was set up to support the ADF’s major helicopter rationalization and acquisition project, Air 9000. The “Selling to EADS” initiative is not confined to the rotary wing sector so is in many ways analogous to Boeing’s OAIC.
Initiatives like the OAIC are expected to work very well in an environment where Australia is buying lots of equipment under US Foreign Military Sales (FMS) agreements, because it is not directly program-related: FMS regulations can restrict industrial offset proposals. It will help Australian companies identify sub-contractor and supplier opportunities across Boeing’s civil and military businesses, and not just in areas where the ADF is buying equipment.
Both the DMO’s Dominic Zaal and Boeing’s Joel Gray emphasise that Australian companies will only win contracts if they are competitive and offer value for money. “This is all about creating opportunities, and winning business on a best value basis in open and transparent business dealings,” according to Zaal. Potential opportunities accessible through the OAIC could run into tens of millions of Australian dollars, he estimates. It should be noted also that this still represents a very small percentage of the money Boeing currently spends through its US and global supply chains.
A team from Boeing IDS visited Australia in early-December 2007 to meet and interview 20 local companies. Boeing executives were impressed by the quality, capability and capacity of the Australian firms they encountered, and the company now has a database of 150 potential Australian suppliers.
That month Boeing signed a contract worth some AUD$2 million with an undisclosed SME in Melbourne. Further requests for proposal (RFP) are expected to be issued to local firms starting from January 2008.
The DMO’s approach to the OAIC is based on the successful ‘Team Australia’ strategy it developed with the Australian Department of Industry, Trade and Resources (DTIR) for the Joint Strike Fighter program. Some 12 of those first 20 companies the DMO introduced to Boeing were successful JSF veterans such as Melbourne-based Production Parts, GKN Aerospace Engineering Services and Marand Precision Engineering. These firms are already ‘export ready’ – attuned to the demands of the US and international defence market, have the necessary security clearances and experience with the ITAR regime.
Marand’s managing director, Tony Ellul, told Rumour Control in January, “They [Boeing] are generally surprised at our capabilities. We’re hoping that something very positive will come out of it.” Marand has won several contracts to provide automated manufacturing and assembly tooling for the F-35 Joint Strike Fighter, along with the F-35 Engine Removal and Installation Trailer and Adaptor.
Ellul told Rumour Control the OAIC proposal emulates Lockheed Martin’s JSF global supply chain initiative, but takes it even further: “JSF is program-specific, this [the OAIC] is right across the Boeing production plan, except for some [sensitive] defence programs, of course.”
Just as success on the JSF program has made it easier for Australian companies to impress potential new customers such as Boeing, there’s reason to hope that programs such as the JSF and OAIC will help Australian firms establish their credibility in the global aerospace and defence markets and lower existing barriers to exports.
The DMO’s Industry Division is the Australian ‘portal’ for access to the OAIC. The DMO’s new Defence Export Unit (DEU) in Canberra is also involved as this is explicitly an export-related activity; the DEU’s forward strategy will encompass the OAIC, and, it is to be hoped, similar initiatives by other companies in the future.
The joint aim of Boeing and the DMO in establishing the OAIC is a win-win, according to DMO’s Dominic Zaal: increased exports (and so growth) for Australian companies and a sound local supply base for Boeing, based on competitive suppliers offering genuine value for money.
© Rumour Control 2008