Australian governments have been discussing innovation, advanced manufacturing, and the vision of making more (and more high-tech things) in Australia… for decades.
Yet here we are in 2024, ranked 93rd out of 133 countries in the Economic Complexity Index, the lowest among all OECD nations in terms of our ability to manufacture and export diverse and complex products and services.
It means that Australia is still buying the bulk of its high-tech products and services from overseas. This is clearly demonstrated by our Department of Defence, which spends most of its technology development budget on foreign companies operating in Australia.
Why is this a problem? The longer our government, and Defence in particular, relegates Australian-owned companies to small projects at the back of the line, the more we will rely on foreign companies for our critical technology and infrastructure, and the more control and autonomy we will cede – either militarily, politically, or commercially – to foreign companies and influences.
So, what can we do to reverse the slide and truly support Australian-owned technology development and manufacturing?
Despite decades of underwhelming ambition and action by the government, right now there is a strong backbone of innovation growth in Australia.
In this paper, I highlight a few existing programs, consider some ways we could take it to the next level, and present three big problems we will need to solve as a nation.
What are we doing right now, and how can we do it better?
Venture capital limited partnerships (VCLP) tax concession
What’s working: The VCLP tax concession has played a key role in raising and deploying billions of dollars into Australian companies in the last decade, some of which are now unicorns (private companies worth one billion dollars or more). Canva, Go1, SafetyCulture, Airwallex, and Employment Hero are a few of them.
Australian VCs have also played a role in growing Australia’s new space industry in recent years. Companies like Fleet Space, Gilmour Space, Skycraft and Myriota, for example, have collectively raised over $400 million in VC funding and now employ more than 500 high-tech workers in Australia.
How we can do better: However, funding higher technology readiness level (TRL) innovation and technology development in Australia should not be left to the VC market alone. Other countries with high innovation and complexity, such as the US, Germany, Japan, and South Korea, demonstrate the importance of a more balanced partnership between the public and private sectors.
It is possible that the national reconstruction fund (NRF), which is starting to roll out, could bridge that gap, although details are pending. However, there remains a huge funding and strategy gap in Defence, whose continued preference for buying “proven”, off-the-shelf (usually foreign owned) technologies greatly reduces the survivability of Australia’s sovereign defence industry and runs counter to developing sovereign tech capability. (More on this below.)
Research and Development tax rebate
What’s working: On its website, the Australian Taxation Office (ATO) describes the R&D program as “the Australian government’s most significant lever for funding innovation and R&D”, playing a “pivotal role in shaping the nation’s economic future and bolstering Australia’s global competitiveness.” We would agree. Indeed, without it, there wouldn’t now be an Australian orbital rocket and test satellite sitting on an Australian launch site.
The R&D tax rebate gives 43.5 cents back in cash for every dollar spent on eligible research and development activities. It effectively leverages VC money by about 30 per cent (though not the full headline 43.5 per cent, as not everything you spend is eligible). The removal of its four million dollar cap four years ago has also encouraged more R&D in Australia.
How we can do better: However, the $20 million revenue cap remains a major hurdle. If you’re starting a deep tech company developing complex products – think rockets, large drones, small submarines, electric cars, many defence products, new drugs – expect to spend at least $50-100 million to develop the technology. You will need $100 million in revenues to break even.
Deep tech involves a lot of R&D, high wages, significant capital expenditure, and a much longer time to market. With the $20 million limit, you would be losing the R&D cash rebate just as you start climbing out the valley of death, regardless of your ongoing R&D expenses or overall losses. This also leads more entrepreneurs to aim for lower-value, lower-impact products.
Government grants by the Department of Defence and Department of Industry, Science & Resources (DISR)
What’s working: Grants are good for helping companies start up in new or focus industries, progress in their development, and engage in R&D projects otherwise outside their budget or scope. For instance, Gilmour Space’s composite pressure vessel tank technology was made possible in our early years because of a DISR grant.
For space manufacturing and defence companies like us, the DISR (which includes the Australian Space Agency) provides grants of up to two million dollars. The old Defence Innovation Hub grant had a cap at eight million dollars. So far, the Defence Department’s catch-all Advanced Strategic Capability Accelerator (ASCA) has given out less than one million dollars (not counting the roughly $70 million it gave to an overseas defence company).
How can we do better: Some challenges: These grants generally pay only between 30 per cent to 50 per cent of the project, with the company funding the rest. The small notional amounts tend to focus Australian companies on small projects. And they take too long to process and disburse funds. For two of our grants, it took more than 18 months to receive the first payment from when we submitted the documents. That’s way too long for a fast-moving tech company.
To help SMEs manage their business and cashflow risks, the government should have a benchmark time for granting its decision and deploying the funds. Some grants like the previous Sovereign Industrial Capability Priority (SICP) grant took no more than six months between grant submission and first payment.
What’s missing
Beyond these programs, we need to solve these three big problems if we want to see a significant increase in our economic complexity, advanced manufacturing capability, and economic resilience.
Problem #1: The Australian government is missing in action as an early customer.
First or early contracts are vitally important for Australian companies that are developing sovereign tech, especially given Australia’s funding scarce environment.
The US government does this well. Recognising the importance of launch capability for the nation, for example, they give multiple launch contracts to rocket companies before even their first launch attempt.
The Australian government, meanwhile, tends to wait for well tested, “off the shelf” systems to buy, an approach that’s both naive and anti-competitive. For many high-end, complex products, the home country of the foreign competitor is often a significant and early customer. If Australia doesn’t support its own, then that puts us all at a serious disadvantage.
There is little or no incentive to build difficult or complex products here in Australia if the government has an automatic preference to buying foreign goods and services, particularly for major procurement. Indeed, it is a vicious cycle and mentality that affects Australian jobs and prevents us from growing local industries and capability.
Problem #2: Australia needs to better at funding technology development, especially in Defence.
To date, the only real investments by Defence in technology development have gone into three foreign companies – Airbus, Boeing, and Anduril.
The $40 million Airbus contract was won in a Defence Science and Technology Group (DSTG) STaR Shots program (now defunct). The RFP for this program, aimed at developing Australian capability, specified that Australian companies had to work under a foreign prime to win the contract!
The $100-plus million Loyal Wingman drone project was started by the Australian subsidiary of Boeing, a large US prime, with the aim of developing non-ITAR technology (now a moot point). Boeing took a gamble that the Australian Defence department would co-invest in developing an ‘Australian-made’ drone, which they eventually did. Since then, however, the price has gone up multiple times. According to market rumours, it now costs as much as an F-18.
US startup, Anduril, came in with a proposal, and a lot of cash, to the Defence department for an underwater drone and won a contract totalling $140 million. Meanwhile, Australian underwater drone company C2 Robotics was left out, although it eventually got a contract for $4.6 million.
I don’t blame these US or UK companies for winning the contracts, as they are maximising profits for their owners. It is the Australian government that needs to change.
Problem #3. Defence has decided to onshore US primes to manufacture missiles here, and probably a lot of other defence products after that.
Our government’s highest ambition for Australian tech companies is to feed into a bigger foreign supply chain. Yet, as discussed in the Developing Australia’s Defence Industrial Base report commissioned by the Sovereign Australian Prime Alliance (of which we are a member) and AIDN, foreign companies manufacturing off-the-shelf defence products in Australia will predominantly use their home country supply chains.
It takes a long time to build a supply chain when you are developing complicated technology, and foreign prime suppliers must undergo a rigorous process that could take multiple years to comply.
In times of stress (as we saw in COVID) or conflict, these supply chains could be intercepted by the home country for their own domestic purposes. The US president, for example, has broad powers to redirect US company manufacturing efforts in times of war.
Australian-owned companies rely primarily on Australian-based supply chains. Our company, for one, works with 300 local suppliers
Moreover, foreign company profits are returned to the home country and taxed there. Retained profits are used for R&D in their home country and any intellectual property, even if developed and paid for/subsidised in Australia, are owned by the foreign company
Relying on non-sovereign technologies means that the Australian government would have less control over the development, maintenance, and updates of the systems crucial to its operations
If what Australia wants is sovereign control over its critical assets and infrastructure, then what we need are Australian-owned companies to provide these Australian-made, Australian-controlled sovereign tech and capabilities.
Defence procurement process is a key to success
Australia to date has a poor record in designing and building significant defence technology. A key reason, perhaps the primary reason, is our defence acquisition process.
Programs are announced on such short timelines that only off-the-shelf solutions can be provided; and no part of the acquisition program offers sufficient development time and funding for an Australian company to develop its own capabilities.
This contrasts starkly with most of our allies, whose acquisition processes include multi-year development timelines and programs.
For example, the UK/European Hypersonic Meteor air-to-air missile entered service in 2016. Its development program started in 1994, with a contract decision in 2000. The Meteor’s first flight was in 2006. The development program was fully funded by the UK/Euro government, with 12 years between the initial proposal stage and the first production vehicle.
In 1973, two US companies submitted proposals for the next main battle tank of the US, the M1 Abrams. Each company was given funding to produce a prototype, which they did in 1976. Chrysler won the contract in 1976, and the first production M1 was made in 1979. Seven years separated the initial proposal kick-off stage and the first production vehicle.
In 1979, the US Army drafted final specifications for a High Mobility Multipurpose Wheeled Vehicle (HMMWV). Chrysler Defense and Teledyne Continental also produced competing designs in 1980.
In 1981, the Army awarded AM General a contract for the development of several more prototype vehicles. The three companies were chosen to design and build 11 HMMWV prototypes. AM General was awarded an initial contract in 1983 for 2,334 vehicles, with the first vehicles delivered in 1985. Again, this program took seven years between the initial proposal kick-off stage and first production vehicle.
For the Virginia class nuclear submarine built in the US, a design study was initiated in 1991. In 2001, ten years later, the winners of the bid built a quarter-scale version for testing. The first Block I submarine was commissioned in 2005. In 2008, the first Block II submarine was launched, requiring only 25 per cent of the labour build hours. The US started working on the successor to the Virginia class in 2014, with an expected first vehicle 30 years into the future.
Pick almost any major weapons platform developed in the allied world, and you’ll see the same pattern: a multi-year period of requirements development, followed by a multi-year call for proposals and prototypes, and a decision to award initial operating contracts.
Our allies give their domestic defence companies years to develop prototypes, sometimes decades. In Australia, we don’t even get a chance to compete.
Invest 10 per cent into future Australian capability
I strongly believe that local Australian companies can develop major capabilities from low TRLs at the same, or lower, total price as foreign defence products, provided they are given the same development time that our allies provide their primes.
This is very different from the way Australia currently funds and buys defence assets, and a seismic change from the policies and procedures of its Capability Acquisition and Sustainment Group (CASG).
But as Albert Einstein said: Insanity is doing the same thing over and over again and expecting different results.
One way to start the change could be to mandate that any purchased foreign major weapon platform will need to include a 10 per cent budget allocation for funding the Australian development of a future vehicle, or at a major subsystem of a future vehicle. Ten per cent is close to what the US spends on R&D as a percentage of its total defence budget.
Take for example the $16 billion F-35 Program. If we used 10 per cent of that funding for future fighter technology and development, I believe we could design, test, manufacture and build a full prototype of a long-range stealth drone, or next-generation missiles to fit on the future fighter. The same could be applied to the $12 billion Land 400, the MQ-4C, and DEF 799 satellite programs.
Australian companies will never be able to develop major defence systems without substantial R&D funding. This is what all our allies do, and how their home country champions sell that capability to Australia (although with jobs and revenue going overseas).
Ultimately, if Australia really wants to make a lot more of the major platforms that we will need in the future, then a $33 billion budget, 10 per cent of the expected $330 billion spend over the next 10 years, is the order of magnitude required.
With that backing, I believe Australia could design and build the next generation of submarines, stealth drones, long-range missiles, armoured vehicles, orbital launch vehicles and sophisticated satellites. That’s $550 million a year into each of these systems, and close to 3,000 people working on each of these systems. Can we do it? Gilmour Space, with under 200 employees, has designed and built an orbital launch vehicle in the past five years.
We should follow the US example and give Australian-owned companies the opportunity to develop impactful defence products. This means five-to-ten-year programs of hundreds of millions of dollars and a lot more risk-taking by the government. It worked for the US, UK, Korea, Israel, Japan, Singapore… and it can work for Australia to build a stronger sovereign defence industry underpinned by local prime contractors and companies.
Adam Gilmour, CEO and co-founder of Gilmour Space Technologies. An Australian-owned rocket and satellite company, Gilmour Space Technologies plans to launch an Australian-made rocket to space this year. A lifelong space fan, Adam believes that rockets can be made smaller, cheaper, faster, and that the new space industry, and Australia, would benefit from having more dedicated access to space.
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