Regional tensions shape defence posture

Australia's regional outlook has shifted dramatically since the federal government published its most recent Defence White Paper in 2016.

At that point in time, Australia and China enjoyed a relationship so cordial that Xi Jinping addressed the nation’s parliament effusively as “dear friends” whose friendship “span[ned] over mountains and oceans”.

Australia’s largest strategic partner, the US, cloaked its competition with the world’s-fastest growing economy in careful terms, with Mr Xi and former president Barack Obama at times stating a desire to forge close economic, if not diplomatic, ties.

Owing to that stability, Australia’s defensive posture revolved almost entirely around the nation’s involvement in US-led coalitions, specifically as it pertained to air campaigns in Syria and Iraq. 

One pandemic and a change in US foreign policy later, the shape of Australia’s defence capabilities has undergone a significant realignment.

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While previous white papers reflected a relationship of collaboration, updates to the document made in June of this year make clear the federal government’s shift in priorities.

Australia will now focus its attention on the immediate region, securing its maritime border and assessing deployment capability to the Indian Ocean region and South-East Asia.

Announcing the changes at the time, Prime Minister Scott Morrison made clear the country would remain committed to joining US-led coalitions where appropriate.

As it pertained to the nation’s immediate interests, however, Mr Morrison said Australia would maintain the right and ability to defend itself against challenges in the region.

Those comments preceded the federal government’s announcement in June that it would increase spending on defensive capabilities over the next decade by $75 billion, bringing the total spend over that period to $270 billion.

Most of that money will go towards building and supporting the nation’s maritime capabilities, with $24 billion to fund stockpiling of maritime guided-weapons systems.

Substantially increased funding has also been pledged to improving Australia’s enterprise, cyber and space defence capabilities.

Those segments, which represent about $72 billion of spending commitments overall, reflect the ways in which warfare has been reshaped in recent years, as foreign-state actors embark on disinformation campaigns and economic coercion as opposed to the traditional ‘hot war’.

This reflects a wholescale rethinking of Australia’s own foreign policy.

For much of its post-WWII existence, Australia has come under the protective umbrella afforded by the regional interest of the UK or the US, with the nation’s share of defence spending falling to an all-time low of just 1.6 per cent of GDP in 2013.

At the time, China was expected to follow the philosophy of reform and opening up set in motion by Deng Xiaoping, China’s de facto leader during the 1980s.

In recent years, as China has grown more aggressive to competitors and its relationship with the US has deteriorated, Australia has been pushed to reckon with the existential threat that comes with China’s increasingly confrontational posture on the global stage.

China has shown itself willing to embrace economic warfare, placing tariffs on wine, beef and barley exports seemingly as a form of retaliation against Australia for this country’s call to investigate the COVID-19 outbreak (see page 3).

That’s a credible threat from China, which in terms of two-way trade of goods and services purchases about a quarter of Australian exports, according to data from the Department of Foreign Affairs and Trade.

Then there is China’s supposed propensity for engaging in cyber warfare.

Australia’s national security agencies reportedly suspect China was behind a sustained attack on some of the nation’s most vital digital infrastructure, which was brought to the public’s attention in June.

China also dwarfs Australia when it comes to traditional military capability. 

With more than 2 million active duty personnel, China’s military is the largest in the world.

Australia, by comparison, retains just 60,000 personnel on active duty.

In terms of annual military spending, China’s $247 billion budget is almost as much as Australia plans to spend over an entire decade.

Those numbers are not surprising, however, given the relative populations, and the fact Australia has spent much of the post-WWII era preparing to fight low-stakes conflicts against the likes of Indonesia.

Still, the capability gap is alarming.

“Now we’re worried about deterring a major power with high-end military conventional capability and a nuclear power,” Peter Dean, of the PerthUSA Centre, told Business News.

“That’s a whole different ball game.”

Precedents for this situation are imperfect, although Mr Morrison has variously likened it to the circumstances that preceded the first and second world wars.

However, Professor Dean cautioned that such analogies communicated the risk of conflict rather than the circumstances.

What’s emerging may be a new reality for Australia, he explained, where fundamental concerns about sovereignty become the animating foreign policy issue.

“If you look at other states in the world, they’ve had to get used to living with a state that’s on their border that’s not friendly and doesn’t share mutual interests,” Professor Dean said.

“If you look at the long term of what’s happened in Latvia or Lithuania, they lived under the perpetual concern of Russia for their whole existence.

“At various times, they’ve been part of the Soviet Union, incorporated or separated [from Russia], and they’ve lived under constant … coercion and threat.

“We don’t share a land border with China, but we’re getting to the point that this is the heightened state of reality.”

Industry capability

These changing geopolitical dynamics have brought into focus the need for nations to shore up their sovereign manufacturing capabilities as they pertain to defence.

Austal’s incoming chief executive, Patrick Gregg, acknowledged as much this past August when commenting on the Henderson-based shipbuilder’s net profit of $89 million for the previous financial year.

Mr Gregg conceded the success was partially attributable to the resilience of the defence-manufacturing sector amid the COVID-19 pandemic.

That in itself was a boon for Austal, given defence contracts make up about 88 per cent of its overall revenue.

What was perhaps more surprising, though, was that the company had managed to grow its year-on-year profit by about 45 per cent amid an ever-worsening economic crisis.

Those results proved the overall strength of the defence manufacturing industry in the past 12 months, he said.

Speaking to Business News, Mr Gregg said it was not surprising the company had grown despite a global economic downturn.

“Defence industries are quite often shielded from things like COVID-19,” he said.

“If we’re building government-funded contracts, there’s less commercial pressure on finances and it’s [seen as] a great way of stimulating the economy.

“Whether investing in warships or patrol boats, keeping shipyards open keeps people employed and cash flowing into bank accounts.”

Compared to many other industries that have struggled to resume operations throughout COVID-19, defence manufacturing has held reasonably well in recent months.

That can be seen in Western Australia, where Balcatta-based Orbital achieved revenue of $34 million in the past financial year, a figure that was at the top end of the company’s guidance.

Specialising in the design and construction of unmanned aerial vehicles, otherwise known as drone technology, Orbital attributed the success largely to its ongoing manufacturing with aviation and defence stalwart Boeing.

The state government has also kept investment flowing to key industry players, handing CIVMEC $13 million in June to help fund construction of its emergency submarine support facility in Henderson.

The trend towards increased defence spending has not been localised to Australia, with Austal having benefited from the US’s own drive to increase sovereign defence manufacturing.

That was evident in June, when Austal announced it would invest $50 million expanding its shipyard in Mobile, Alabama, to improve its steel shipbuilding capacity.

Seeking to bolster its own shipbuilding capabilities, the US federal government, empowered by an obscure federal act written during the Cold War that allows the federal government to commandeer defence manufacturing in the national interest, said it would match the funding and provide $50 million to Austal for those works.

That should ensure that Austal maintains ongoing works with the US Navy, which are important given the company’s US operations contributed about 80 per cent of the company’s overall revenue in the previous financial year. 

Domestically, Austal has already benefited from the federal government’s increased defence spend, having been awarded a $350 million contract to undertake construction of six offshore patrol vessels at its Henderson facility.

Mr Gregg said as that spend increased and federal governments moved to embrace sovereign manufacturing of defensive capabilities, Austal’s strategy of competing for defence contracts was sensible and profitable.

“Whether we like it or not, COVID-19 will bring uncertainty to commercial [shipbuilding] markets,” he said.

“Certainly, defence will remain a significant opportunity for the company going forward.”

The economic reality of increased defence spending is not reserved to those companies solely focused on building tanks, planes and ships.

Non-combat procurement contracts will also play a part in sovereign defence manufacturing. 

Among these is the $30 million contract awarded to Rivervale-based Sea to Summit in December to provide an array of non-combat equipment to the Australian Defence Force as part of its integrated soldier systems project.

Funding is likely to continue for decades, with the federal government having pledged $183 billion towards naval shipbuilding over the next 30 years as part of its efforts to sustain and maintain its maritime capabilities.

WA has aggressively courted some of this work in recent months, with particular attention being paid to the ongoing sustainment of Australia’s six Collins class submarines, which is currently undertaken in Osborne, South Australia.

Amid ongoing uncertainty about Australia’s trade and political standing with China, the economic reality of increased onshore manufacturing of defence inventory means the defence industry is only likely to keep receiving federal funding for years to come.

“There are real opportunities here from a business perspective,” Professor Dean said.

“Two-hundred and seventy billion dollars worth of spending is not a small amount of money; I actually worry the federal government and department of defence will have a problem spending it.

“It’s a pretty secure investment from a business point of view, because … the federal government won’t walk away from their spending on this.

“Governments may change, but this seems to have solid bipartisan support.”