CHAIR —Would you like to make an opening statement?

Dr Anderson —Yes, I would, thank you.

CHAIR —Please go ahead.

Dr Anderson —Firstly, thank you for the opportunity to meet with you and present the submission to your committee. I am representing BAE Systems Australia. I am the research and technology manager. My role involves managing the internal portfolio for the company, as well as managing relationships with external research providers, such as DSTO, CSIRO, universities and our company’s research establishment in the UK.

BAE Systems is an international company engaged in the development, delivery and support of advanced defence and aerospace systems. BAE Systems Australia and our predecessor companies have been designing, integrating and maintaining military systems for Australian defence. We have over 2½ thousand employees within Australia. Our prime sites are in Adelaide, Canberra, Sydney, Williamtown and Melbourne. Our employees have key skills in engineering and systems integration.

Our strategic intent is to become the Australian Defence Force’s through-life capability partner in integrated military systems and support solutions. Our strategy is executed through five core business units, which include information architecture, force awareness and protection, military air support, airborne early warning and control programs and operations. We are a matrix organisation and have functional units to support these business units. As R&D manager I sit with the engineering function and report directly to the director of engineering.

BAE Systems R&D activities are focused on applied research in niche areas, as opposed to basic or fundamental research. Our aim is to increase the technology readiness level of research products to a point of maturity, such that they can be exercised and exhibited in CTD or capability and technology demonstrator programs.

In Australia research activities are managed through distributed special purpose research and development teams embedded in the business units. We do not have a research cell as such or a research and development department. The entire portfolio is managed essentially through myself. It is a full-time position and we use all the project managing processes to manage each project. We plan our research on an annual basis. The company business planning process establishes an R&D budget. Headline investment areas or key strategic capability areas provide us with a top-down approach to determining our research portfolio. We also receive detailed R&D proposals which provide a bottom-up approach. We have a research and development board which meets regularly to assess proposals and allocate funds. We also have a strategic science and technology advisory board. The acronym is SSTAB for that. We have external memberships and that board evaluates long-term strategic direction for our investments.

Our aim is to allocate funds across all capability domains. This is a real challenge. Another challenge of course is ensuring that we demonstrate the bottom line value of our research investment. We recognise the benefit of collaborative partnerships with other research institutions as I have mentioned before—DSTO, CSIRO, universities and our international overseas establishments. In our submission we presented two successful examples of the commercialisation of technological innovations, the ship air defence model, or SADM, and the ongoing development of the Nulka active decoy missile.

These are my opening remarks. I hope I can answer any questions you might have regarding them.

CHAIR —Thank you very much. I still do not have a clear perspective on the company. You have 2,600 employees in Australia.

Dr Anderson —Yes.

CHAIR —What do they do?

Dr Anderson —Our strategic vision is to be the through-life capability partner in integrated military systems and support solutions. There are five business areas. Information architecture provides communications and command support intelligent aspects of network centric warfare. Our core capabilities are in communications, engineering services, maritime electronic support systems and command support intelligence.

CHAIR —Sorry: 2,600 people doing what? You have 2,600 employees.

Dr Anderson —Within Australia. A thousand are in Adelaide, and 1½ thousand are distributed around the country.

CHAIR —What do they do?

Dr Anderson —They are mainly engineers. There are software engineers. We are systems integrators. We provide also support solutions to the defence industry. Our main customer is the defence industry.

CHAIR —I will try once more because I genuinely do not—

Dr Anderson —Sorry, no, that is okay.

Mr QUICK —You manufacture the various—

Dr Anderson —We manufacture. We are prime contractors on certain projects. We integrate systems. We develop software for defence systems and military systems.

Mr QUICK —We are a bunch of pacifists. Do not worry about it.

CHAIR —Can you just tell us a bit about Nulka. You say you maintained the patent. What does that actually mean? Somebody else developed it. The Americans essentially developed it, right, and you have maintained—

Dr Anderson —It was a combined effort. It was separated into two different areas. The Americans developed perhaps the electronic component of the Nulka. The hovering rocket part was an Australian invention.

CHAIR —What does it mean that you maintained the patent?

Dr Anderson —That means financial, I think, just maintained, so the patent did not run out. Our main involvement in Nulka at the moment is in manufacturing components for it and also upgrading various components. We have a contract to manufacture the thrust control vector unit, or electronics; not the main electronics, but the flight control units, the various components of the—

CHAIR —So essentially updating and keeping the patent current.

Dr Anderson —Yes.

Dr JENSEN —I will throw in one for the committee work and one technical question. As far as Nulka is concerned, can you enunciate the conception of the idea and how you went through the idea to market? I realise some of this is prior to the time of BAE Systems but I guess there are companies—GAFF, for instance, which is now part of BAE, is it?

Dr Anderson —I suppose the key employees within GAFF came across to BAE. We have a number of key employees—

Dr JENSEN —Can you go through the innovation path from the conceptual idea to actually selling these things.

Dr Anderson —Sure. The system is designed to protect naval ships from the threat of any ship missiles. It started perhaps in the early seventies when they needed to rethink about how they could protect these sorts of ships. The system uses a unique combination of the hovering rocket motor, as well as electronic warfare technologies. It was developed over a period of about 30 years. I suppose the main innovation from the Australian point of view was the development of the hovering part of the rocket. As you know, most rockets, when you light them, tend to go off at a rapid pace. This rocket required a slow-moving speed and required a vertical hover manoeuvre and a slow manoeuvre away from the ship, so that the innovation came in the design of what we call the thrust vector control which controls the movement of the rocket.

As I said before, the electronic warfare, the smarts part of it, which basically emulates the signature of the ship, was developed internationally. Developing the smarts for the hovering rocket was one thing but getting support for it to become a commercial reality was another and, as I indicated in the submission, only when we received high-level support from within the company, within the government, within Defence, did it become a reality. That is a very top level, rough overview of the development; the technology was there, the people were there to develop this.

Dr JENSEN —And there was a perceived need?

Dr Anderson —Yes.

Dr JENSEN —Now for the techo question. I alluded to this earlier. The problem with a system like this is that ships do not act in isolation; they act in groups. Having Nulka’s spoofing missile away from your ship might be actually seducing it onto another ship.

Dr Anderson —Sure.

Dr JENSEN —What measures are being taken to—

Dr Anderson —That is all about situation awareness. You would not obviously shoot a Nulka decoy into the surroundings of another ship. In terms of the rocket itself, it has a certain control path but its situation is that it is with other ships in that area which will make it steer away from that. In terms of controlling the decoy accurately, improvements are always going on with that. In terms of being aware of your surroundings, that is another story, if that makes sense.

Dr JENSEN —Yes, it does. I guess there is a slight problem there in behaviours of missiles and so on.

Dr Anderson —Yes.

Dr JENSEN —It is a very complicated situation.

Dr Anderson —It is.

Dr JENSEN —But Harry asked for a techo question so I thought I would put in a techo question.

Mr JENKINS —I thought Ms Anderson answered it very well.

Mr QUICK —The customer focus: the defence industry, what you represent in the way of science and innovation, is completely different from any of the other evidence we have taken because—

Dr Anderson —We are focused.

Mr QUICK —you are focused. But from my reading there is almost an unlimited budget. Let us put it this way: the American defence industry seems to have an unlimited budget in their spending and involvement with someone like BAE Systems. What sort of company is it? Is it responsible to shareholders?

Dr Anderson —Yes. We are an international company and I think if you are referring to US defence and US spending, we do have a US arm of the company. I am referring to BAE Systems Australia.

Mr QUICK —Yes, because there would not be too many companies where you would have a lead-in time of 40 years and still be finetuning something, and yet you have a guaranteed sale, irrespective of how long it takes, because there is a licence to print money in the defence industry—like your vacuum cleaner or whatever widget you decide. There is heaps of money in research and development. That would be unlimited because there is a potential. We are building two or three destroyers here, which cost hundreds of millions of dollars. After the Falklands thing where the Exocet, or whatever it was, put the frighteners up everybody, we are prepared to spend whatever it takes to develop some sort of system to prevent that happening.

Dr Anderson —Sure. I will just pick up on two points. If you are referring to the US budget versus the Australian defence budget, it is vastly different. That is one point I will make.

Mr QUICK —But you must work in collaboration because it is something that we do to add to their product. What sort of value do we get out of that? Do we have half the value or a third of the value because we can design the hovering rocket part of it and they have the other part? How does it work?

Dr Anderson —The IP for all of that is retained between the Australian and US governments for the development of that. It is normally through joint collaboration; in rough terms it is fifty-fifty for the IP sharing. I am sensing a bit of mixing between government funded things. We are a commercial organisation and we do have to be competitive for various projects.

Mr JENKINS —I suppose it gets back to the chair’s original question about what maintaining the IP means, because we have the 30-year history where DSTO was our agent and the US Navy was the American agency, but it then got to a stage of ‘product development’ that was being put in place, and then you as a corporate entity come in and you have described it as maintaining the IP.

Dr Anderson —Yes.

Mr JENKINS —We are trying to come to grips with what is the commercial relationship between ourselves and the people that hold the patent. Do you do work under licence?

Dr Anderson —We are the prime contractor for Nulka within Australia. Our contracts and our funds come through the Australian government which, as I said, is probably a joint US-Australian fund or budget. But we are basically the prime systems integrator or prime contractor for the Nulka within Australia. We also developed the smarts in terms of that.

CHAIR —Who owns the patent?

Dr Anderson —It is a joint US-Australian—

CHAIR —But who owns it now?

Dr Anderson —I could not answer that question. I can take action to get that.

CHAIR —It is just that I am not sure.

Mr JENKINS —It would be helpful, to the extent that you could clarify that, to understand how BAE Systems Australia get involved. Are BAE Systems Australia the only people that manufacture Nulka or is it manufactured elsewhere?

Dr Anderson —We manufacture part of the rocket. As I said, there are about 100 different components.

Mr JENKINS —You are developing the hovering rocket.

Dr Anderson —Yes. The actual rocket element is manufactured elsewhere and it gets assembled in a plant in Victoria. We manufacture some of the components, we get some of the components in from the US, other components are manufactured in Australia. We assemble it in a plant within Victoria.

Mr QUICK —When they are sold, is it fifty-fifty between us and the Americans?

Dr Anderson —When they are sold?

Mr QUICK —To the navies around the world?

Dr Anderson —I would not be able to answer that question in terms of split.

CHAIR —I think we probably have acquired the patent because Australia has never been very good at protecting their patents, especially Defence.

Dr Anderson —I would love to take action to find out.

CHAIR —That would be good, if you could advise.

Mr QUICK —I have been desperately trying to think of a peaceful use for the hoovering rocket, getting back on the vacuum cleaners. We have the hovering rocket.

Dr Anderson —It is peaceful in that it is meant to thwart—

Mr QUICK —I understand its situational awareness and readiness and all that. Whether these sorts of things lead to a certain market or not could be debatable, because somebody could come up with a better part of a whole product and put you guys out of business, whether it is the hovering part or the part that would allow us, in Dr Jensen’s situation, to put up one rocket and not have it flying around hitting other people; so there would always be improvement. Regarding the sort of skill set that either works directly for you or in collaboration, to what extent does Australia provide a skilled work force for that, and to what extent does Australia provide a skilled work force that then can put that research to practical use?

Dr Anderson —You are referring to the Nulka?

Mr QUICK —Or any other examples that you have, not just particularly to the Nulka.

Dr Anderson —Following on from Nulka, Australian resources developed, as I said, the hovering rocket in the mechanism to keep this thing stable, which is a very difficult thing to do. That has led on to other work in other missile programs. That is an in-house capability. The flight control unit, the smarts or the algorithms behind keeping it, is now an in-house capability. As I said, we have received other contracts based on that resource capability.

Mr QUICK —Other contracts? What sort of products?

Dr Anderson —The Evolved Sea Sparrow Missile is another that we support; any ship missile.

Mr QUICK —So it is an attacking one rather than defensive?

Dr JENSEN —It is defensive.

Dr Anderson —It is an antiship.

Dr JENSEN —Because with enemies attacking you, you shoot down either their missiles or their aircraft.

Mr JENKINS —What missile is that?

Dr Anderson —ESSM is the acronym. It is Evolved Sea Sparrow Missile. That requires a really fancy manoeuvre to do what it has to do. The thrust factor control unit, which is the unit that actually controls the direction of the rocket, and the flight control unit, the smarts to do that were developed within the country, within BAE Systems.

Mrs VALE —Susan, we note that you work very closely with the Australian government, particularly the Australian Defence Force and DSTO. Have you been able to take any advantage of any government programs for innovation or for commercialisation of your product? Have there been any government programs that have assisted you?

Dr Anderson —The CTD program—that is, the DSTO capability and technology demonstrator program—is a very effective program for us to, as it says, demonstrate any capability that we have. We currently have a couple of CTD programs with Defence. We are entering into more each year if we apply and are successful in doing it. That is one area. I know an R&D Start application was prepared but not submitted, so it may be something we look at in the future. All eligible research investment is also claimed under the R&D tax concession scheme. While that is not a driver it is an enabler and it does help us in our path. We do use that.

Mrs VALE —When you actually do take the government’s assistance programs, is there any responsibility on behalf of BAE Systems to negotiate the IP in any way? I ask that because I think it is in the Nulka program that IP is actually owned by the US and Australian governments. When you develop systems that are obviously important for our defence purposes, is there any government interest in maintaining some IP control?

Dr Anderson —From our point of view we cannot hope to own all the IP of things that we work with. As I said, we are systems integrators, so we generally put a lot of different systems with a lot of different IP ownerships together. We have to understand the technology. Having effective ownership is what we need to be able to take whatever it is into the operating environment. It is effective ownership of IP, I suppose.

Mr HAYES —In terms of your 2,600 employees, I understand a fair portion of those are engineers or scientists involved in the developing and maintaining of programs. How difficult has it been to attract that level of scientific knowledge into the organisation? Is it sourced in-house or do we have overseas people coming in for it?

Dr Anderson —We have a mixture. We recruit local. We have an active recruitment campaign within universities. I think there are two competing factors: we are in South Australia in a defence hub, so it is a positive factor. Our location within South Australia, being relatively remote, is perhaps a negative factor. We do, as I said, recruit actively within Australia. We also have some international people but in the main it is within Australia. In a lot of cases we realise that graduates or people coming in need training to get up to the level that we require within projects, so getting a skilled work force is good but we also have a heavy emphasis on educating.

Mr HAYES —So working collaboratively with other bodies also helps that work?

Dr Anderson —Yes, definitely with universities and DSTO.

Mr PRICE —Getting back to the chair’s question but framing it in a different way, how many engineers and scientists do you employ?

Dr Anderson —What is the split?

Mr PRICE —You can take it on notice.

Dr Anderson —I will take it on notice. I would say the bulk, about 80 per cent, would be engineers and scientists.

Mr PRICE —What is the percentage of your turnover that the company spends on R&D?

Dr Anderson —In terms of the R&D tax concession, or the eligibility criteria for that, we are at approximately 15 per cent.

Mr PRICE —Fifteen per cent of your turnover?

Dr Anderson —That is how we measure it.

Mr PRICE —Internationally is that about average or below average?

Dr Anderson —For the type of company that we are, that is about average.

Mr PRICE —In terms of exports, what is the value of your exports?

Dr Anderson —That is again something I will have to take on notice. I could not give you an absolute value or a relative value.

Mr PRICE —Over the last decade or so it is fair to say that there has been quite a bit of change in DSTO and the recognition of bringing people in earlier. Do you have any comments to make to the committee about the relationship you have with DSTO? Are there things that we can still further improve to get products commercialised?

Dr Anderson —We currently have an industry alliance agreement with DSTO. We have had it for three years and we are looking to renew it to a strategic R&D alliance agreement. That provides a mechanism for us to collaborate with DSTO from top-level management down to working groups. Over the years we have been improving our relationship with DSTO under that alliance agreement, that arrangement.

Mr PRICE —Pardon my ignorance, but is there a difference between an alliance and a strategic alliance?

Dr Anderson —Yes.

Mr PRICE —Is it a higher level?

Dr Anderson —I think it is. It essentially means the same thing but under the strategic R&D alliance agreement there are more mechanisms for interaction. That is my understanding of the main difference between the two. It is somewhat of a name change but I think also the deal is that there are more mechanisms and things for interaction. That is a good thing because we find that relationships are born over a number of years and through regular interactions with DSTO. On our front, going and talking to researchers at the working level as well as talking to their bosses and the director of the labs is the way to go. We have been doing that more actively this year.

Mr PRICE —In terms of cultural cringe, we are always being told we are two per cent of the world market for everything and therefore we should not expect to be able to innovate and have products. If you look at, say, what the Israelis are doing in defence science, research and innovation, it would be fair to say that we lag somewhat behind. Our strategic circumstance is somewhat different to theirs. But why is it not a fair criticism by the committee to say that both DSTO and its commercial alliance partners are really failing Australia because we do not have the same level of product development in this country compared to a much smaller nation like Israel?

Dr Anderson —You probably hit the nail on the head with your first comment by saying our strategic position is different. We do not have the same immediate level of threat as Israel or any other country like that.

Mr HAYES —How does Australia increase the level of self-sufficiency in some of these military products beyond what is being done today?

Dr Anderson —You are asking why don’t we invest more?

Mr HAYES —Yes. Why don’t we have more products?

Dr Anderson —I would say that we have an active and healthy budget investment. I am not sure how to answer your question.

Mr HAYES —What I am saying is that we import so much of what we are. It is very fashionable for people to argue for overseas and off the shelf is best and, whilst our strategic circumstances are different, there may come a time when we cannot ring the Pentagon and start ordering things off the shelf. Then we may be in some difficulty.

Dr Anderson —Are you talking about increasing the capability in-house now?

Mr HAYES —Absolutely. What is the satisfaction level we should have? How do we judge how well we are doing? You referred to Nulka, and I have forgotten the name of the thing, but there is an equally famous system that failed and was closed down after costing about $300 million. Whilst we celebrate Nulka, we do not track the failure. I cannot think of its name.

CHAIR —Nobody remembers failures.

Mr PRICE —No. I watched it, but sometimes you can learn from failures. Sorry, but I am not satisfied. You are saying you have this great relationship with DSTO; you are a good company doing good things.

Dr Anderson —We are improving the relationship, yes.

Mr PRICE —I accept all of that. But what benchmark do we use? It could be possible, if we look at the way the defence industry performs today, that we are underperforming significantly. We should be trying to develop more in-house capability.

Dr Anderson —I suppose that comes back to the Defence budget and how much money they have to spend. We of course contract based on the Defence budget and the procurement profile et cetera that Defence dictate. In terms of me commenting on Defence’s strategic—

Mr PRICE —Defence always argues an acceptable premium of five or six per cent for Australian manufacture. We still buy a lot overseas. Okay, getting nowhere.

Dr Anderson —Sorry.

Dr JENSEN —Susan, your business is very different to a lot of other submissions that we have heard because effectively you have a captive customer and relationships that are well developed. Is there a lot of work done in developing additional relationships, let us say, overseas in other markets; maybe not even military markets—looking at some ‘peaceful’ applications of the technology?

Dr Anderson —Our main thrust is the defence market, Australian defence primarily, and then international defence agencies.

Mr PRICE —Do you think the hovering technology has a household application?

Dr JENSEN —They are searching for it. Some of the systems integration work and so on could be quite useful in other areas as well. Do you simply see your relationship in terms of Australian defence as the core business and basically, if Australia decided to halve the Defence budget tomorrow, your company would effectively go belly-up, or are there contingencies? Are you developing other markets?

Dr Anderson —The defence market is our primary customer. We do not figure that defence will go away overnight. But it is a competitive environment; we are not the only defence company.

CHAIR —That is certainly true, and your aspirations are fantastic.

Mrs VALE —This committee has identified a new market: that would be for a hovering vacuum cleaner! With regard to your industry alliance agreement that you have with DSTO, does that also include the IP of your end product?

Dr Anderson —That is on a case by case basis. It is normally discussed up-front with DSTO and any other organisation. It depends. As I said, it is really effective ownership that we are after. We want to be able to use it, to take it into the operational environment, whether it is a licence or a full ownership.

Mrs VALE —You do not mind as long as you get—

Dr Anderson —It is effective ownership.

Mrs VALE —I understand.

Mr QUICK —Susan, you say there is no centralised research cell. Who decides the proportion of research funding to be allocated to the various things? Is it success driven—someone has done something so they receive more—or does everyone get 20 per cent out of the fund?

Dr Anderson —It has to be in line with our strategic intent, to start with. We have a certain budget delivered out of our business plan. We have a certain budget to work with every year, which is decided on a merit basis. If it has a past history performance, that always helps, but it is decided on an annual basis. We have certain capability areas that we want to enhance.

CHAIR —Susan, we are sorry. We are politicians and we have misled you: we have one last question.

Mr JENKINS —I did not want to offend Roger by talking about peace! I am interested in the IP and maintenance stuff. I take it that takes some input from patent lawyers?

Dr Anderson —This is the IP relating to?

Mr JENKINS —Just keeping it up to scratch would require submission of updates or something.

Dr Anderson —We do not have many patents in terms of IP. But we have a commercial department and a legal department and we have agreements.

Mr JENKINS —You do it in-house?

Dr Anderson —Yes.

Mr JENKINS —That is what I am seeking. You are of a size that you can adequately cover that by in-house people?

Dr Anderson —Yes. We have commercial and legal people to do that.

CHAIR —Thank you very much. Are there any concluding remarks that you would like to make?

Dr Anderson —Just to thank you for the opportunity. I will also follow up on the action I—

CHAIR —We would be grateful. In terms of patents, we would also like an elaboration of what you mean by ‘effective ownership’.

Dr Anderson —Okay.

CHAIR —That is quite important in the case of defence organisations. Thank you very much.

Dr Anderson —Thank you.

[11.40 am]