French tell subs firms to shape up

The company building Australia’s $80bn Future Sub­marines says local firms may not get half of the value of the subs’ contracts.

Naval Group Australia CEO John Davis. Picture: Roy VanDerVegt

The French company building Australia’s $80bn Future Sub­marines says local firms may not get half of the value of the subs’ contracts and warns that the capability of defence suppliers is falling short of ­expectations.

Naval Group Australia chief executive John Davis also conceded that the company was still working to bridge cultural ­problems that had set back its ­relationship with Defence, ­predicting “difficult and hard ­conversations” as the project ramped up.

Amid growing angst over the project’s cost, Mr Davis said the 12 attack-class boats would be the world’s most expensive conventionally powered submarines, but they would also be the world’s most capable diesel-electric subs, and would deliver on ­Defence’s “very specific and unique requirements”.

Less than a week after the ­government launched an audit of major defence projects to ensure sufficient work went to local firms, Mr Davis was unable to say whether the boats’ Australian ­industry content would reach 50 per cent. He said the company, which is set to begin construction in 2022, was encountering “specific challenges” regarding Australian industry that were “new to Naval Group”.

“We didn’t know the Australian market before we joined the program,” he said. “Now we have a much deeper insight, and we recognise there is a lot more work to be done than we anticipated.”

Rather than maximising Australian content in the finished submarines, the first of which is scheduled for delivery in 2032, Mr Davis said the contractor was obliged to develop the capabilities of the local industry.

“I don’t have the ability to prophesise on (content),” Mr Davis said. “What I will say is we have a commitment to Australian industry capability, and we will deliver on that.”

The interview is Mr Davis’s first since an explosive Auditor-General’s report in January ­revealed the government’s Naval Shipbuilding Advisory Board was so concerned about the project it warned Defence it should consider walking away from the French-built boats.

Mr Davis said the warning, as the parties locked horns over the project’s strategic partnering agreement, was just one of a number of contractual “exit ramps” that would be available to the government to protect the taxpayer.

“If Defence is doing its job and the program is in an intolerable state, it may choose to select an exit ramp,” he said.

Given the parties have now signed the strategic partnering agreement, it would be an extraordinary move if the government terminated the deal.

Australian Strategic Policy Institute defence analyst Marcus Hellyer said he was surprised at Naval Group’s assessment of the capabilities of Australia’s defence industry suppliers. “It’s interesting they have that view because ASC has been able to achieve a very high level of ­Australian industry content in the sustainment of Collins (the current submarine class), so there is certainly Australian industry capability in the submarine ­sector,” Mr Hellyer said.

“For Australian industry, if they don’t reach 50 per cent, it will be very disappointing.”

As part of the bid process, the commonwealth paid Naval Group $8m to analyse Australia’s industry capability. The company subsequently provide an industry capability plan that spelled out at least half of the subs’ “secondary content” would be Australian-sourced.

Centre Alliance senator Rex Patrick warned Naval Group not to abandon its commitments to local industry.

“It is unconscionable for Naval Group to now walk away from the position that won them the bid,” Senator Patrick said.

The Auditor-General reported that the submarines’ design phase was running nine months late, and Defence­ had approved the fabri­cation of complex hull parts for the first boat to be undertaken in France.

Senator Patrick said: “The ­report showed the government had lost control both of the ­program’s cost and the schedule. It’s now apparent they have lost control over the level of Australian industry involvement in this critical program.”

Mr Davis denied Naval Group’s partnership with Defence had been difficult but conceded the company was still working to bridge differences between the French and Australian engineering cultures.

The British-born chief executives said the French approach placed more focus on program outcomes than processes, which “gives them great innovation in their products”.

“Conversely, (in) the Anglo-Saxon paradigm, the focus is on the route to the outcome as much as the outcome itself, and defining the route that you are going to take upfront,” Mr Davis said.

“That’s great in terms of program assurance, but one of the downsides of it is it has the potential to stifle innovation.”

Mr Davis said a key issue was the prevalence of small and ­medium-sized enterprises — the majority with fewer than 50 employees — in the Australian ­defence sector. These companies were highly innovative but ­“unable to make the necessary investments, to grow the necessary capabilities alone, or indeed to make a good business justification to come to the program,” he said.

“So the question for us is: how do we get Australian industry up to that capability level?”

Defence told the Senate last April that Australian firms had at that time won just 30 per cent of contracted work on the subs’ project. Mr Davis said the majority of the submarines’ contracts would be awarded during the building phase, leaving plenty of time to lift Australian industry capability and involvement.

Contracts for two of the sub­marines’ five critical systems — their main motors and electrical distribution systems — have been awarded to French companies Jeumont and Schneider Electric. British company Babcock has been contracted to deliver the weapons-handling system, while the diesel generators will be manufactured by Germany’s MTU.

Mr Davis said Australian company PMB Defence was “an obvious candidate” to supply the final critical system, the batteries, but declined to comment further.

Defence Industry Minister Melissa Price last week put big defence companies on notice that they needed to maximise local involvement in all major procurements and appointed a new head of Australian industry content.

Defence Minister Linda Rey­nolds said the government’s goal was not to set Australian content targets but to “maximise opportunities at all times”.