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Joint Standing Committee on Foreign Affairs, Defence and Trade - 31/10/2014 - Defence industry exports

STOCKER, Mr Rohan, Chief Executive Officer, Marand Precision Engineering Pty Ltd

CHAIR: I welcome the representatives of Moran Precision Engineering to today's hearing. This is a public hearing and a Hansard transcript will be made. The subcommittee prefer to hear evidence in public but we may agree to take evidence confidentially if that is appropriate. The subcommittee may publish confidential evidence later but we would consult with you before doing this. In addition, if the subcommittee has reason to believe certain evidence may reflect adversely on a person we may direct that the evidence be heard in private.

All witnesses who give evidence to the subcommittee are protected by parliamentary privilege. It is against the law for anyone to threaten or disadvantage a witness because of the evidence given to a committee. It is also a contempt to give false or misleading evidence to a committee. Witnesses should be aware that if they make adverse comment about another individual or organisation that individual or organisation will be made aware of the comment and given reasonable opportunity to respond to the subcommittee. If a witness objects to answering a question they should state the grounds of the objection and the subcommittee will consider whether it will insist on an answer.

Thank you for being here at reasonably short notice. Given the work of Marand, although you do not have a submission we feel we can gain a lot from talking to you. I invite you to make an opening statement before we proceed to questions.

Mr Stocker : It is a pleasure to be here today. As an opening statement, perhaps I can spend a couple of minutes making sure you understand a little about the Marand business. The Marand business is a privately owned small to medium enterprise with about 250 employees, the majority of whom are based in Victoria. We have a 45-year history—for most of that 45 years we were an automotive business. Up until 10 years ago we were in excess of 90 per cent in the automotive industry. Today we are less than half a per cent in the automotive business, and we are probably 10 times the size we were 10 or 12 years ago. We are an engineering solution provider. While we are a manufacturing business, about 100 employees out of the 250 are shop floor, blue-collar, traditional fitters and turners, electricians et cetera, and then we have a very large contingent of project managers and designers, systems integration people, software people, control systems designers et cetera.

The business today is probably 50 per cent defence and aerospace and the other 50 per cent is in the rail and mining market, where we design and build machinery for the maintenance of rolling stock. We basically produce machines to help the likes of Rio Tinto or Pacific National or BHP with the maintenance of their rolling stock. In defence and aerospace we work both in the commercial sector for the likes of Boeing and in the defence sector, in aerospace. We also do a little bit of defence work in the LAND vehicle space, where we have supported the likes of Thales, General Dynamics, BAE Systems and a few others over the last 10 years or so.

In the defence field perhaps we are most well-known for our work on the F35 program. We started on that program pretty much right from the start of Australia's involvement, back to 2002. We received our first contract from Lockheed Martin in very late 2002 or early 2003, and we have basically had continuing work from them to now. We have done well in excess of $100 million worth of business on the F35, with a forecast for probably 10 times that over the life of the program—somewhere between $1 billion and $1.2 billion over the next period of years. We have three main areas of business in that area—we design, manufacture and export production tooling. We have done production tooling in the aerospace sector for well over 30 years, previously supplying the likes of Boeing, Hawker de Havilland, Government Aircraft Factories—Australian entities—with tooling for both commercial and defence—everything from A380s, 777s and 747s but also things like the F18 Super Hornet program. We have designed and built tooling of the F35 and we have exported that all around the world. Over 700 of our tools have been shipped to the US and a similar number to BAE Systems in the UK and to other partner countries where parts are being made for the F35. All but two countries have our production tooling.

The second string to our F35 program is the engine installation removal trailer. This is the device that is used to install the engine in the plane and remove the engine from the plane. This is a substantial piece of support equipment that was designed and developed by Moran over the last 10 years or so. It is not a build-to-print to a Lockheed Martin design. We have basically designed that device, which is quite a substantial piece of equipment. There are in excess of 4,000 machined components in every trailer and about 12,000 parts on the overall bill of materials for the trailer. We designed that to solve a problem the program had. The trailer is used to build the plane but it is also used to maintain and sustain the plane—whether it goes shipboard or into various aircraft hangars and what have you. That is now dealt with by the recurring manufacturing of the engine trailer.

The third string to our F35 bow is the vertical tails. We now also manufacture and assemble the vertical tail. The plan is for us to have about a third of the vertical tails the program will need. We have 722 vertical tails to supply over the next, approximately, 15 years. We have delivered the first three of those. The first one was delivered on 30 March this year. Next year we will do a few more and then a few more again the year after. Gradually we will ramp up to about 70 per year. Hopefully that gives you some feel for the Moran business.

Separate to the F35, we have been working with support via the global chain over the last four or five years. We have also had some success in that area. We supply F15 ground support equipment to the Boeing organisation, which gets shipped to, I think, Qatar. We have about three years' work building support equipment for the Boeing organisation for that program. Does that give you a feel for the business?

CHAIR: It does. It gives us a feel for a very successful business that obviously invests a lot in developing its own IP and innovation, which is fantastic. What percentage of your business is export as opposed to serving, for example, the mining and rail sector?

Mr Stocker : That is a challenging question to answer because we are a cyclic business—with the rail projects in particular. If you went to the end of the 2014 year, around 60 per cent or 70 per cent of the business is export. In 2015 and 2016, the percentage will drop a little bit—probably to around fifty-fifty. That is basically because we have two large domestic rail infrastructure projects on at the moment. It is not that the export business is not growing; it is that the domestic business in those two particular years will be increasing at a greater rate.

CHAIR: How much of what you do in the export market is build-to-print and how much, as with the engine trailer—is it your own IP being exported? Do you have a feel for the breakdown there?

Mr Stocker : Even with the engine trailer, while we developed the IP, the IP is part of the program's IP today. We developed that on contract to the program. Otherwise, it again depends on which year you ask the question for. With the developed IP, if you look at the work we have done so far exporting to the defence sector, probably 60 per cent or 70 per cent of that is based on IP that we have designed and developed—the engine trailer based IP and some of the tooling. Then you have the vertical tails. It is not our IP on the vertical tails. The tail had already been designed prior to us becoming the second source on the vertical tail.

CHAIR: With the vertical tail fin—and I am asking you a range of general questions here to get a sense of the environment that you are working in as an exporter—are the numbers that you are talking about the potential, or do you have a firm contract to provide those, or is that contract subject to ongoing competition in terms of cost and quality?

Mr Stocker : We have a long-term agreement in place between us and our customer, which in this case is BAE Systems. This is an overarching, long-term agreement. It incorporates the business planning, the business assumptions, the contracting methodology, if you like. Then the individual contracts come out on an annual or, in the future, probably a five-year basis to underpin each lot-by-lot procurement. That is the commercial and contractual arrangement.

CHAIR: If we are looking to grow defence exports then clearly in the case of someone like Marand—you have the quality, you have the systems, you have the contacts and you have a well-established name in the market—there is probably not a lot that government can do in your case; but, if there is, please tell us. From your experience over obviously a number of years as you have developed from automotive into this area, are there paths or particular barriers that you see government could try to remove, whether it is marketing whole-of-government interface with other governments to open up markets or whether it is support to develop R&D? What things do we need to do to help other companies enjoy the kind of success that Marand has?

Senator O'NEILL: This is all done with generous citizenship to share your knowledge with others now!

Mr Stocker : We have had some success with customers other than the F35 program. It would be fair to say that we have had more success with the F35 program. We see one of the main differences is that there is probably a tighter connection between the procurement and the customer—so, our customers as in Lockheed Martin and BAE Systems—and the procurement compared to the global supply chain where there is access to the market but there is not necessarily the same tie-in to a particular project. So I think it is anything that can be done to get that extra string to the bow. It is not necessarily a tight connection on F35 or a 'you must do this' or 'you must do that', but there is at least a connection where the equivalent of the Australian industry plan is reported back; it is followed up. There is basically a three-way tie-up between industry, the NAC focal JSF division, and the customer. For us, that is the main difference between those two.

We do not expect the government to do the sales and the business development for us, but we do appreciate it when there is help and support in that area. There are opportunities and doors that can be opened by the government that we cannot necessarily open ourselves. That is always a fine balance. It is up to us to go and win the work, but we have seen through many missions, whether it is team Australia, federal missions or Victorian government trade missions and what have you that there is no doubt in the defence environment that it helps to have someone there helping to open the door for us to start business.

CHAIR: We have had a number of people give evidence that, because a prime has an obligation to meet an offset in another country, offsets in other countries is actually a barrier to Australians getting into a global supply chain there is almost no incentive to take us on, almost regardless of cost or quality because they have got to meet those other offsets. Have you come across that very often?

Mr Stocker : I have come across lots of discussion about it, and I am sure the offsets exist. That said, we have been extremely busy with F35 and growing that side of the business, and I do not think it has affected us there. But no doubt it does exist and does affect other areas of the business, but it is not something which I am particularly expert in.

CHAIR: Are you involved with the DMCC?

Mr Stocker : We are not a member of the DMCC, but we do have regular engagement and discussions with them.

CHAIR: If in a bid to try and encourage more development of IP and innovation in Australia should we adopt a model like the US does with Defense Advanced Research Projects Agency, DARPA? When it identifies a problem, it outsources to industry, universities and other people the problem and the funding to develop a solution, but then the IP issues are sorted out collectively. Is that the sort of thing that Marand would look to get involved with, or would you rather invest in your own processes and IP as a company?

Mr Stocker : We would very much be interested in getting involved in programs such as this. In fact, different parts of our business in the past have done exactly the same thing in other industries. So, we have had quite a relationship with the likes of CSIRO and some of the universities over the years. We have been members of various CRCs and we see opportunity there.

We develop IP or IE on contract for other customers or we develop it for ourselves. We do not mind, as long as we can come up with the right business arrangement to do it.

CHAIR: Can I just take you to export controls? Do you have any suggestions or comments on DECO, DFAT and Customs? Any suggestions for how we could improve that process? And the second part of the question is: do you have any concerns about the DTCA, that as that gets finalised and rolled out in the next six months or so that e a significant cost burden, or a dampener, on your ability to develop IP?

Mr Stocker : I do not really have any concerns or comments with any of it. I do not see any of that as a big issue for our business to date.

Senator O'NEILL: Firstly, thank you for your passion about your business—it is palpable. I felt like you yourself had almost constructed each one of those items that you have exported! I suppose that is a critical ingredient of the success. But with the transition right now for many companies from the automotive industry into new engineering space—we have been hearing, and I guess, patriotically, that the capacity is there—the transition that you made then is of interest to me and, I am sure, to other people. If you could make a few remarks about that it would be helpful.

But for the purposes of this inquiry: we have heard about trade missions, and you mentioned Team Australia and Victoria. Who helps you the most, and in what way? Are they compatible? Do they compete? Do they create more confusion in the export market for people who do not know—they thought they saw the Australians last week and now there is another? I am just interested in your long experience in those two spaces, if possible.

Mr Stocker : The second one first: lots of people help us. Lots of people like to help us and lots of people offer help, which is great. There are all sorts of different federal and state government agencies and industry associations. We have been helped and assisted by many people over the last 10 years or so.

At times that has ranged from very good, very well coordinated, very strategic and well-thought-out help through to areas where it has maybe not been as aligned as it could have been, and all of the above in-between, basically. So it is difficult to pick exact examples, but there are many people—

Senator O'NEILL: Can we look at the very effective, and why?

Mr Stocker : In terms of overseas missions, or trade shows or the Farnborough Airshow or something like that, it is definitely more effective when the different agencies work together to work out who is leading something, who is in the background helping and supporting and where there is a combined effort and structure to go forward. F35—again because it is tied into a procurement and a big direction—has been reasonably well coordinated for us. In that case the Department of Industry—and excuse me if I get any of the departments wrong!—and Defence have worked reasonably well together. They have both been at the table most of the time, but we have known who has led on which particular issue. I think there was enough clarity between what they were doing for the Victorian state government to play their role. They have also helped us over that journey as well. But each knew their place and each worked together to make that work.

Some of the different trade missions, trade shows and events sometimes come out of the blue a little, and maybe could be just a little more coordinated.

Senator O'NEILL: Okay. That is very interesting. That is a lot to do with the personnel leadership, plus also some systems.

Mr Stocker : Yes.

Senator O'NEILL: With your capacity to transition from automotive into this space: what were the critical things that helped you to make that transition effectively?

Mr Stocker : I think the fact that we are a knowledge business helped us a lot—we are an engineering design capability and innovation capability in the business, not just a manufacturing business. I think that helped us. I also think that time is a key aspect. By the time F-35 and our opportunities there came along, we had already been supplying the likes of Boeing with quite substantial amounts of tooling. We had also been supplying Qantas and Ansett and other airlines at that point in time with ground support equipment and the like. I think it is quicker and easier to move if you are an engineering and knowledge based business than just a recurring manufacturing business. It is harder to change products.

Senator O'NEILL: Yes, because you are at the edge of the design process almost all time, whereas the other one is more static. I see that you won a significant award: there is an article here on your website, 'A tail of two cities', with regard to being named International Procurement Team of the Year. That is a pretty impressive win.

Mr Stocker : Yes. We are very proud of that win. That is the CIPS award, which is a European-based procurement organisation. It is their peak award for procurement relationships. That award was jointly won by BAE Systems and Marand for the work that has gone into the vertical tail exercise over the last four years. It built on the top of three BAE Systems awards within the organisation, up to the chairman's award for a procurement and relationship of working together.

Senator O'NEILL: And at the same time you delivered 1.3 million pounds in savings. Was that because of that procurement capacity?

Mr Stocker : It was because of the things that we have done together to identify ways to take cost out of building the product we had to build, whether that was how we shared the technology, how we added to the capability of BAE; basically, by working together, we were able to take those cost savings out of the projected costs of the program.

Senator O'NEILL: We are hearing more and more about collaboration and there have been models through Enterprise Connect about collaborative clusters around key industries. But one of the issues that keeps coming up is IP: IP management, IP ownership, IP development, collaboration and negotiation. What do you see in Australia—is it being done well? Are there issues or problems? What needs to change, particularly in the defence space, around the issue of IP?

Mr Stocker : Firstly, on collaboration: we collaborate with a lot of different organisations, but they generally look very different to us. I think collaboration works really well when you all need each other—when you bring something else to the table. And the BAE Systems case is just like that. BAE Systems spoke to us very early on in our vertical tail relationship, four or five years ago, about the need for us to bring something to the table; for us to put something into the BAE and Marand relationship that actually helped make them make the vertical tails better, or that helped them think about how they manage their business better. I think that is the link back to those awards. We believe we have done that.

Senator O'NEILL: Was that IP, or was it management capacity?

Mr Stocker : It is not product-based IP, but it is perhaps process and systems, and how to go about certain things, that I think we have perhaps added to that collaboration. But that collaboration is quite an easy one to make work, because Marand and BAE Systems are very different organisations—a very different size, very different scale, very different needs—and we were able to collaborate particularly well.

Senator O'NEILL: If you were able to give us some recommendations around what we could do to improve our capacity in this space, what would they be? We have just heard this morning about how we are down the food chain, in terms of other competitors with whom we often compare quite well. What are the stumbling blocks? What are the critical things that would need to change from a government point of view, or from an industry point of view?

Mr Stocker : In terms of collaboration?

Senator O'NEILL: In terms of anything from your experience to improve the capacity of Australian businesses to be able to plug into defence exports.

Mr Stocker : I think we have covered a couple of them already. I spoke about leveraging off the money we are actually spending. I am not necessarily talking about offsets there, but making the most of the fact that we are at the table spending a considerable amount of money. Another one is the broader government and industry groups and companies working together in as strategic a way as possible, with a long-term view. It has been one of the great things for us about the F35—it was not all over in a year or two years, so we were able to invest and think about the future in the long term. We can build that collaboration and relationship for the long term, as well, rather than quickly.

In our SME space, we have invested heavily in our people. We have brought a mix of our own people up in the business and we have also brought in the right people from the outside. We see that as absolutely key in this space: unless you bring some knowledge and some capability and build the right relationships with the customers, it is very challenging to do it. SMEs often struggle in that space to be able to afford to bring people in or train their own people up. We are fortunate that we are big enough to have enough momentum to do that.

I have a note here: 'appropriate financial support'. I want to emphasise that there is a whole spectrum of what I mean by financial support—at one end you have grants and loans and things, and somewhere back from there you have what Efic can help with in terms of exports and what have you; all the way back to statements of support from government, be that from ministers or from Defence itself, around the robustness and rigidity of the programs—how solid they are about the procurement and investment decisions that are going to happen. For us that is all financial support. Some of it may not actually be money handed over, but it enables us to go and have money handed over. Depending on the size of the investment, the time spent and everything else, sometimes you need a far extreme out here. We have had some help there. Sometimes you only need this bit. But without any of that it is very hard—in the Australian market, anyway—to get the financial support that is required.

Mr NIKOLIC: I congratulate you on the success of your company, particularly the expansion to Geelong. I know the member for Corangamite will be thrilled with any future expansion you might have in mind, in light of the news out of some of the car companies. I wonder, as Ford and others have made these investment decisions, has that had any sort of impact on you? I know you are reliant on a variety of different components to do what you do. Has that had any impact on your business at all?

Mr Stocker : Not today. We were really, by the time the car companies made the decisions they made, a long way out of that industry. As I said we still do a very small amount, but it is a very small percentage of our business today. There has been substantial change in the automotive business progressively over the last 10 years. The final announcements are the end, but in terms of the underlying business there has been substantial change already over the last 10 years. We have not seen that have a major impact on us.

Mr NIKOLIC: Looking forward, with huge US and other investment in the F35, you would be looking forward to the sustainment phase of the program now and the opportunities there. What do they look like? I am particularly interested in what that might mean for other businesses in the Australian supply chain, potentially, in the longer term.

Mr Stocker : It is still a moving feast in terms of sustainment and how that may be structured. We are doing our best to understand what the Australian government might do, what our US and UK customers might do and how sustainment may be structured. We are not sure at this stage exactly what the size, shape and feel of the sustainment will be. Rest assured we will be considering it—keeping our eyes open and trying to understand it—and we will do the best for our business in that space. But today it is still early days.

Mr NIKOLIC: We had some evidence today about the challenges of operating in foreign environments. I imagine you have had a fairly close interaction with the US regulatory environment. Are there any challenges there, or has it been relatively seamless?

Mr Stocker : There were some eye-openers for us very early on, 10 or 12 years ago; but there are no challenges we see there that affect us greatly today.

Mr NIKOLIC: To what extent are you reliant on broader US, or other component maker, IP for what you do? Have you found that challenging in anyway—the broader IP picture—in relation to your specific contribution to the project?

Mr Stocker : I do not think I understand the question.

Mr NIKOLIC: I guess there is a lot of intellectual property surrounding the JSF. There is obviously a Lockheed component, there is a Pratt & Whitney component and there are others. To what extent is your access to that broader foreign IP a condition upon which you require access to that information to do what you do?

Mr Stocker : In order for us to carry out any of our F35 work, we need IP shared with us from Lockheed Martin, from BAE Systems. Much of it is US government IP to enable us to go on and carry out their work. We have not had any challenges there. There are some constraints and there are some things we need to do within the business to make that happen, but we are able to do that and we have been able to do it over 12 years now.

Mr NIKOLIC: From your own IP perspective, one of the things that you have done very successfully is the quicker curing of carbon fibre composites.

Mr Stocker : No, that is Quickstep.

Mr NIKOLIC: Quickstep, the lead-in organisation to yours. To the extent, within your business, that you have things you would like to protect, have you found that challenging? I imagine there are a lot of companies around the world looking at your success and wondering how they might leverage that for their own purposes.

Mr Stocker : We have other IP in the rail side of our business, in particular. In that area we actually sell the products, so we do our best to protect that IP and sell those products. But a large part of our business is about generating the IP for someone else on a contract, on a paid arrangement. We have done that in the renewables sector, we have done it in the defence sector and we have definitely done a huge amount of that in the automotive sector. In most situations we are generating that IP for someone else for them to go on and protect. Our know-how is in how to do that.

Mr NIKOLIC: In terms of what you have succeeded with to date, how do you promote what you do? Clearly success and a proven record of performance in contractual terms is important to winning new business. How do you promote what you do and to what extent are you supported in promoting what you do by Australian government agencies and others?

Mr Stocker : Because of the style of business we are in, most of our promotion is via relationships. It is relationship based selling and techniques to move from one organisation to another or throughout an organisation. We also promote ourselves at various trade shows. We are a regular participant at the Farnborough air show, the Paris air show, the Singapore air show, the Melbourne air show. We are normally supported at those air shows by the likes of Team Australia. Sometimes there is a mission that ties on at the front or back of those. We have been supported there by the federal government quite a bit. We will also do minister-led trade missions, whether federal versions or state versions. In the last two years I have been on two Victorian government defence orientated trade missions to the US, which were very valuable for us. A lot of our promotion is within the companies we already work with, but we also do trade shows, missions et cetera to spread the word little wider.

Mr NIKOLIC: I put on the record my very strong support for the F35. I have a nephew who is a F18 pilot. His group tell me that this is a wonderful aircraft. I notice that there is a persistent group of critics out there. As a component provider to the 35, I am interested in whether you have a perspective about the F35 and its capabilities.

Mr Stocker : We obviously think it is a wonderful program. We have full confidence that our government and other governments are making the right decisions with their procurements. We think it is a very exciting program to be part of.

Mr NIKOLIC: And with the technical challenges identified and overcome to date, your sense is that those are the normal sorts of development challenges of any new major project of this sort?

Mr Stocker : Yes. I think we have the nice perspective now of being on the program for 12 years. We have seen several challenges come and go already. We are involved in projects all around the world—defence projects, rail, large infrastructure projects for mining companies, and we have been involved in many automotive projects. Nothing comes without its technical challenge and everything has a few glitches, up and down, along the way. This is a massive Defence program. It is a wonderful program to work on and we have full confidence that the program will go full-steam ahead.

CHAIR: In terms of sustaining both your production workforce and your design-and-engineering workforce, could you talk a little bit about your engagement with universities, TAFEs and apprentices and, specifically, programs like SADI or other Defence programs? Is there more the government can or should be doing to help build and sustain the level of competence in Australian industry?

Mr Stocker : If you think about making sure we have the right people into the future, SADI in particular has been a very good program for us. We have been a significant user of SADI, where we have been able to develop our people, in particular, around the vertical-tail exercise but also to help us with the engine trailers, the tooling and much of the other work that we have done. SADI has been a very good support for Marand. It was challenging earlier on, but over the last few years it seems to have been really targeted and has worked very well for us.

You often hear about the challenge with recruiting skills and what have you. We have not found that to be a major challenge, even through the mining boom, with engineers. We have always been able to, basically, find the people we need to find, plus we have a lot of people who have been with us for a long time. We employ graduates straight from the universities. About 10 per cent of our blue-collar employees are apprentices, so we run with about 10 to a total shop-floor count of about 100. We are constantly replenishing and replacing through the young guys coming through. We see plenty of opportunity for engagement with the universities and the public researchers and what have you, to help us, and we have been helped along the way, at various times, when we have needed more support or more advanced work.

CHAIR: Thank you for participating in the hearing today and thank you, more broadly, for your contribution to our Defence and our broader-industry sector and for all those young people whose career opportunities you are opening up. We really appreciate that. You will be sent a copy of the Hansard transcript. If there are any factual transcription errors that you note, please feel free to make contact with the secretariat who will work with you to address those. Thank you very much for appearing.

Mr Stocker : Thank you for the opportunity.