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Economics References Committee - 14/04/2015 - Future of Australia’s naval shipbuilding industry

THOMPSON, Mr Glenn, Assistant National Secretary, Australian Manufacturing Workers Union

Committee met at 09:31

ACTING CHAIR ( Senator Edwards ): I declare open this hearing of the inquiry by the Senate Economics References Committee into the future of Australia's naval shipbuilding industry. The Senate referred this inquiry to the committee on 25 June 2014 for report by 1 July 2015. As part of the broader inquiry, the committee resolved to inquire into the tender process for the Royal Australian Navy's new supply ships as its first order of business. The committee reported on that matter on 27 August 2014. The committee also reported on developments related to the acquisition of Australia's future submarines. This report was tabled on 17 November 2014.

The committee has received 37 submissions, so far, which are available on the committee's website. These are public proceedings, although the committee may determine or agree to a request to have evidence heard in camera. I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as contempt. It is also a contempt to give false or misleading evidence to a committee. If a witness objects to answering a question the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer having regard to the ground which is claimed. If the committee determines to insist on an answer a witness may request that the answer be given in camera. Such a request may also be made at any other time. I welcome the representative of the Australian Manufacturing Workers Union. Do you have any comments to make on the capacity in which you appear?

Mr Thompson : I appear today on behalf of the union and our members that work in shipbuilding across the country.

ACTING CHAIR: Thank you for appearing before the committee today. I invite you to make a brief opening statement.

Mr Thompson : The AMWU has presented evidence to this committee on a number of occasions as you have travelled around the country. We have presented evidence of the capacity of every major shipyard in the country. We have discussed what in our view is needed for an efficient and sustainable naval shipbuilding industry. We have discussed the importance of the industry to the Australian economy and, crucially, the ability for the nation to defend itself, especially in increasingly uncertain times. We have discussed the industry's importance to its workers, our members, their families and their communities.

I am going to keep my opening statement to recent developments rather than rehashing old evidence. Since we last gave evidence several things have happened and several things have not happened. First, the thing that has not but, in our opinion, should happen is that the government has to clarify the process around the future submarine program. We are still effectively in limbo, and thousands of jobs in Adelaide are still hanging in the balance around the government not having made a commitment on an Australian build of future submarines. The government needs to make clear that the build will occur in Australia and that the process underway is a genuine one that does not favour one of the three options over the other. While Senator Edwards, in recent comments, believed that there was a commitment from the Prime Minister on the night prior to a leadership ballot, the Senator seems to be the only one who is satisfied with the assurance that this will be a genuine process. Our members at ASC certainly are not comfortable with that.

Now onto things that have happened. First, the government has rejected the option of a bipartisan agreement and process for future submarines build to ensure that they are built domestically. This was a proposal that, if implemented, would see no capability gap. It would have seen a domestic build and it would have seen the country's defence needs met. Needless to say we are a bit disappointed with the position the government has taken. The second thing that has happened is that the government has released the Defence First Principles Review. We participated in that review, made submissions outlining the same issues that were previously presented to this committee—like the importance of naval shipbuilding to our members, their community, the national economy and national security—and the importance of a continuous build program to maintain sovereign shipbuilding capability. While this review was not specifically aimed at shipbuilding, we must admit that we are disappointed that the words 'shipbuilding' or 'future submarines' or the term 'continuous build' do not even rate a single mention in this First Principles Review. The review does go at length into procurement processes, but avoids discussions on specific projects or even the issue of impending losses of much of our Navy shipbuilding capacity. For the crucial issues this committee is looking at, it does nothing. In our view it is a huge lost opportunity.

The final thing to happen was a speech the Defence minister gave on 31 March, which I am sure this committee would be aware of. In the speech the minister said a lot of things that we welcome. He correctly identified that naval capability is crucial to our national security. He correctly identified the need for industry to be able to plan for certainty. But he also said things that we have strong issue with. One of the most galling, especially to our members in the industry, was the statement that the valley of death cannot be avoided. He said:

… the valley of death can’t be prevented now …

The committee knows that this is simply not true, since your first recommendation identified how it could at least significantly be mitigated by reopening the supply ship tender to Australian shipbuilders and ensuring those ships are built in Australian yards.

The AMWU has been urging the government to fill the valley of death with a fourth AWD, as outlined in the 2013 white paper, and by accelerating the Pacific patrol boat tender process; reopening the tender for the Antarctic icebreaker, after the tender process effectively collapsed; and bringing forward the future frigate build. But, rather than take actions to fill the valley of death, the government's actions have ensured that it does not get filled. And now the minister, in our view, is effectively throwing up his hands in defeat as if there was not anything the government could have done. To use the Prime Minister's own analogy, it is like the arsonist complaining about the fire. It is an insult to hardworking Australian shipbuilders who have faced and are facing losing their jobs because of government actions.

The second thing that was strongly—

ACTING CHAIR: Are you nearly there?

Mr Thompson : I am nearly finished, Senator, yes.

ACTING CHAIR: Okay.

Mr Thompson : The second thing that we strongly object to is how the minister framed the issue around continuous build. We welcome the government for the first time recognising the importance of a continuous build program in shipbuilding. It is a step in the right direction. We have been arguing for a continuous build for a long time. But, after saying that it is something that should be explored, the minister then went on to put the conditions that Australian industry needs to improve productivity before a continuous build program can be implemented. Either the minister does not understand the point of a continuous build, or he is setting the stage to pull the plug on the industry and blame workers in the industry rather than taking responsibility himself.

As the committee knows, the whole point of a continuous build is to provide the certainty and steady stream of work that is needed to build skills and capacity and improve productivity, a lesson learnt when building the Anzac frigate class. Without a continuous build, we are always playing catch-up because what progress is made is lost between projects. The minister demanding that industry improve before he will agree to a continuous build program is effectively like a doctor saying he will treat you once you are feeling better. It is a nonsense and, we think, a cruel comment. We fear that, if it is a plan, it is a plan to fail from the outset.

We need the government to take action now, not one that promises action in the future when jobs and capabilities will already be lost. Our members' jobs rely on it, as does the long-term security of all Australians. Thank you.

ACTING CHAIR: Thank you, Mr Thompson. Before I go to Senator Xenophon: where do you think the genesis of the valley of death comes from?

Mr Thompson : The genesis of the valley of death, as this committee has heard on a number of occasions, is a systemic issue with shipbuilding in this country, and it has been from day dot.

ACTING CHAIR: So where does it come from? Where did it arise? How did it come about? Why is this being talked about?

Mr Thompson : Because there is not a continuous—

ACTING CHAIR: Where was the genesis? Where did it start?

Mr Thompson : Where did it start? As I said, Senator, this is an issue that has been an ongoing problem ever since Australia has been involved in building ships. We had a situation where we had an opportunity for a long-term continuous build around Anzac.

ACTING CHAIR: No, where do you think it started? Why are we coming into this decline of work for Australian workers?

Mr Thompson : It started because there is no work coming through the pipeline and—

ACTING CHAIR: Where did that start?

Mr Thompson : It started from decisions of government.

ACTING CHAIR: When was that?

Mr Thompson : As I said, this has been an issue that we have been dealing with for at least two years, but it is an issue that has been known for four years plus.

ACTING CHAIR: Four, five, six, seven years?

Mr Thompson : Senator, it has been known. There was a commitment. There was a decision taken by government to re-enter and build three warfare destroyers.

ACTING CHAIR: So 2007, 2008, 2009?

Mr Thompson : When the decision was taken to build the warfare destroyers, there should have been a long-term plan put in place that looked at the industry beyond the destroyers.

ACTING CHAIR: What were you saying back then, in 2009 and 2010?

Mr Thompson : We have always been an advocate for our members and in the industry around jobs.

ACTING CHAIR: I am not questioning that.

Mr Thompson : What I can say is that, back in that period that you are talking about, I myself was not responsible for this sector, so I was saying nothing. Our organisation regularly deals with issues around industry policy, jobs, training, skills et cetera.

ACTING CHAIR: Yes, but nothing was happening there, was it?

Mr Thompson : I am sure that it dealt with this issue specifically in that space.

ACTING CHAIR: Nothing was happening in that space. In the shipbuilding space from 2007 right through to—

Mr Thompson : I cannot comment, Senator. I was not involved directly.

ACTING CHAIR: You have studied history. You have drawn from it. You are drawing on it with your testimony this morning. The reason that we are approaching this is that there was no action in this area, and the systemic problem that you are talking about goes back some time.

Mr Thompson : As I said, the government took a decision to build three warfare destroyers as part of naval requirements—I assume coming out of defence white papers. There has been, and there needs to be, a bipartisan political view to look at the long-term requirements of our Navy and the industry that is required for that.

ACTING CHAIR: But there was bipartisan support right back through the Rudd-Gillard-Rudd government. There is bipartisan support now to get on and make sure that our defence industry and our capacity are indeed world class. So why didn't—

Mr Thompson : I am referring specifically to the decision that was taken to build three warfare destroyers. On the issue in relation to what would come beyond the warfare destroyers, there was no—

ACTING CHAIR: The submarines?

Mr Thompson : There are other ships, and there are other things to come. We have Armidale class patrol boats. We have Pacific patrol boats. We have supply ships. We have future frigates. There are questions around hydrographic vessels. There is a whole raft of issues that everybody is well aware of that Navy requires at some point.

ACTING CHAIR: You and I have been in enough hearings and heard from enough people to know that this area has been neglected for a long period of time, and now we are in this position where we are trying to get some catch-up. Just blaming the government for last week, last month or what have you—please, it is a bit twee.

Mr Thompson : Senator, we have—

ACTING CHAIR: Senator Xenophon.

Mr Thompson : I will leave it.

Senator XENOPHON: Perhaps, Mr Thompson, I will follow through from Senator Edwards's line, the chair's line, of questioning. It has been put to me that the previous government should have acted in respect of the submarines but failed to do so, but I guess we have the government that we have now, and they have got to make the decision. It is very rare for me to praise Senator Edwards, but it is fair to say that, if it was not for the comments he made on the eve of the leadership spill—it actually did elevate the issue of the submarines to a national perspective, which I thought was useful. Is that a yes?

Mr Thompson : Yes, I would agree.

ACTING CHAIR: Thank you.

Senator XENOPHON: It might be the only time he gets praise from the AMWU! Can I just go to a few issues in terms of productivity. The defence minister said in a speech on 31 March of this year at an ASPI conference that he was very critical of the productivity of our shipbuilding and said words to the effect that our productivity is 30 or 40 per cent below other countries'. It has been put to me that that is itself misleading because, if you are dealing with first of class, of course you are not going to have the same efficiencies. What is your understanding of the minister's comments, and what do you say to the minister knocking Australian productivity on shipbuilding?

Mr Thompson : I do not know what the minister bases those on, but Senator Edwards made the point that there is bipartisan support in relation to the warfare destroyer project. We all know, and we have heard evidence given to this inquiry, that the Australian government, with bipartisan support, acknowledged that there is a premium built into the existing project. We also know that it is well known around the world that first of class, first of boat, always has a start-up and a learning process. I can only give anecdotal evidence on the basis of what my members, or our members, are telling us in relation to the productivity gains from the start to where the project is at now.

Senator XENOPHON: Sure. I only have a couple more minutes and I do want to put some broader issues to other witnesses in respect of this. Dr Andrew Davies and Dr Mark Thomson, from ASPI, have recently suggested that problems with the AWD program were not only to do with low productivity in the Australian shipbuilding yards but also with a translation of the design-to-build stage. What they have said and what I have heard from people within the industry is that, for instance, drawings had to be redone up to four times, in some cases. They were found to be unfit for purpose, given that Navantia, the Spanish company, had successfully translated this design in other countries but not here. What is your understanding, from your members, about issues that have nothing to do with your members but have to do with systemic issues of design?

Mr Thompson : You are absolutely correct. We have had members—for example, one of our members who was working in the design and engineering at Forgacs, in Newcastle, was directly involved in the redrafting, redrawing, of all the drawings so that they could be interpreted and be fit for purpose for our shipbuilders to build that product.

Senator XENOPHON: So the drawings were not suitable. They could not be used. That is pretty extraordinary.

Mr Thompson : That is my understanding, yes.

Senator XENOPHON: I want to race through a few things, and I will put this to the other witnesses as well. Some analogies have been drawn with our auto sector. When Holden made the decision to leave Australia, as a manufacturer, that precipitated Toyota's decision to leave, because it lost that critical mass in the auto sector, in terms of the component sector and the supply chain. The supply chain effectively would have collapsed after 2017, so everyone went.

It has been put to me that in respect of the shipyards at Newcastle, Williamstown, WA and here in South Australia it is a delicate ecosystem. If we do not act to avoid the 'valley of death', in terms of the AWDs, the future frigates, it will have an effect on the entire supply chain, which could affect future submarines. Is that your view or can the submarines stand on their own?

Mr Thompson : That would be our view.

Senator XENOPHON: Your view is that they are all integrated.

Mr Thompson : It would be our view that if the valley of death came in there would be a significant impact on the supply chain. That would be our view. There was evidence given to this inquiry, on another occasion, around the volume of companies specifically reliant on Collins' sustainment. It would be our view that if there were a decision to wind down the industry there would be a direct correlation in the supply chain of companies that rely on Defence.

Senator XENOPHON: This is not just a South Australian issue, then. This is an issue that affects national shipbuilding. If we do not ensure that the ships, the AWDs, the future frigates, are built in Australia it could impact on the supply chain insofar as the submarines as well—they all feed off each other.

Mr Thompson : Absolutely. There are people in the supply chain who are in states that do not build ships but are in the supply chain for the purpose of the projects that we are currently undertaking.

Senator XENOPHON: I want to drill down on this. Interstate, the media focuses on this as a parochial South Australian issue, but what you are saying is—where are you based, Sydney or Melbourne?

Mr Thompson : I am based in Melbourne.

Senator XENOPHON: You are saying that there are national implications if we do not get this right. There could be a collapse of the entire naval shipbuilding industry unless you have a future frigates going, unless you have submarines being built here. Is that what you are saying?

Mr Thompson : That is what I am saying. I have always said this is not just a South Australian issue. South Australia is an important part of the shipbuilding industry across Australia. What I am saying is that in Victoria—and other witnesses may be able to elaborate on this—there are companies within the supply chain, from across Victoria and I would say from all parts of Australia, that support those projects.

Senator XENOPHON: The success of one is contingent on the success of the other.

Mr Thompson : Absolutely.

Senator XENOPHON: If a decision is made to build the submarines here, but a decision is made not to build the future frigates here—or not in time—that could, in fact, have an impact in jeopardising the submarine project, because the supply chain would be compromised.

Mr Thompson : That could be the case. I am aware of just one example. On the build of Collins class, that provided significant work for Forgacs in Newcastle. Forgacs was responsible for some pipework and also some loom work, as were many others in the supply chain on that project, which was obviously based here at ASE, in South Australia.

Senator XENOPHON: Finally, it has been put to me that a potential political solution for the government would be to announce that the submarines would be 'built here', which would involve basically just an assembly job. I think 70 per cent of the value of the Collins-class project was here in Australia apart from some intellectual property, some engines and the like. Overwhelmingly, Australian value was added to the project. But that could mean just putting the bolts together here in Australia. It would have the illusion of building them here, but the value could be as low as 10 or 20 per cent. Is that something your members have heard or are concerned about—that there is an illusion of them being built here but in fact the economic benefit and the jobs benefit would be minimal?

Mr Thompson : I raise the issue in relation to the current competitive evaluation process that is going on and how open and transparent that process is. I assume they, like possibly you, are unaware of what it is that government is asking of them. We have always taken the view that the vessels should be built here in Australia. I do not know the scope of what government is asking in relation to that, but I would be concerned if this were a simple matter of sending Ikea packs to Australia and adding no value to building our industry.

Senator XENOPHON: Ikea wouldn't work; they're Swedish and have been excluded from the process, so we won't have Ikea submarines!

So there is an issue. Thank you for that.

Senator KETTER: Thank you to your union for its important contribution in this industry which is so important to our country. I want to go back to your comments about the issue of productivity and the minister's almost requirement that it is going to be necessary for us to achieve international standards of productivity for the industry to survive. Can you give us some indication of whether there is any evidence in Australian shipyards that we are already meeting some of these international standards of productivity?

Mr Thompson : What I can say is that, putting aside the issues that Senator Xenophon raised in relation to what I will call teething issues in respect of the design and what was provided to our shipbuilders, in talking to the companies that I have on a limited basis and in talking to our members, with those things sorted out—the building of blocks, the consolidation of blocks from the start of ship 1 to ship 2—the productivity has accelerated exponentially. There are figures floated around from 30 to 45 per cent. There is data which I am not qualified to comment on of shipbuilders first of class, first of boat around the world, and it is my understanding that, for first of class, first of boat, Australia is very well placed in the top echelons of what is understood to be acceptable internationally for a first of class, first of boat.

Senator KETTER: I would have thought that a steady stream of work is an important factor in achieving the knowledge and skills necessary to get to those productivity standards. What is your view about that?

Mr Thompson : Absolutely. This is why we argued at a previous Senate inquiry in relation to the decision of government not to allow Australian shipbuilders to participate in the tender process for the supply ships.

Senator XENOPHON: What was that, $2 billion?

Mr Thompson : I think it is about $2 billion, but do not quote me on that. The simple fact is that the argument that was being put forward then was that we only needed one or two and would not need another one for 30 years, the point being that that was about keeping our builders in work and keeping their skills up to speed and practice. There has been evidence given previously by, I think, the CEO of DMO about the learnings of the Anzac frigate project. We built eight frigates and I think we built a further two for the New Zealand navy—10 vessels in total—and that project turned and came in on time and on budget after boat 5.

Senator KETTER: Can you explain to us how world-class productivity levels can be achieved if you do not do this learning-by-doing approach?

Mr Thompson : They cannot be achieved if there is not a continuous flow of work. You just cannot turn them on and turn them off like a tap. It is as simple as that.

Senator KETTER: So is the minister effectively setting us up for failure by requiring these world-class levels of productivity?

Mr Thompson : Of course you always strive to continually improve. I think the minister is either misinformed in relation to the purpose of a continuous build by setting a bar—you cannot have one without the other. I think that is the simple point. But, in relation to setting up for a fall: that is a concern of ours.

ACTING CHAIR: Thank you very much for your testimony this morning. Thanks for coming over from Melbourne; it is good of you to be here.