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61 DEPARTMENT OF INDUSTRY AND COMMERCE INCLUDING THE AUSTRALIAN CUSTOMS SERVICE

1r@ws Mease News ] R$.B8S6 ' IMMEDIATE RELEASE MONDAY 13 AUGUST 1984 64/84

GOVERNMENT POLICY ON AEROSPACE INDUSTRY

Government measures to encourage further development of the Australian aerospace industry were announced today by the Minister for Industry and Commerce, Senator John Button.

The measures follow a review of the inudstry and are aimed at creating market opportunities and overcoming the industry's major problems.

Under the package of measures:

- an Aerospace Industries Council is to be formed to review future prospects for the industry;

- the Bureau of Industry Economics is to carry out a

detailed analysis of the industry's structure and performance

- a working group is to be established with representatives

of the Government, unions and employers. It will review international market opportunities for aerospace products and define the problems that must be overcome to optimise exports

- present methods of injecting Government Defence Outlay funds into the industry and of placing work with the industry will be reviewed

- new steps are being taken to co-ordinate the development of space policy.

. . . 1 2

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Senator Button said the industry faced major problems '

including:

- over-dependence on the defence sector;

- a new generation of aircraft which require less maintenance;

- the need to expand overseas sales.

"Despite these problems the industry has significant growth

potential", Senator Button said.

"It has recently begun to develop new export markets, and these can expand further because of the emergence of new market opportunities for civil, defence and space products.

"Primary responsibility for growth must rest with the industry, but the Government can assist by providing a

policy framework that will encourage growth.

"The moves I have announced provide such a framework and should lead to the formulation of policies directed at expansion of this substantial and significant industry.

"They are only the first steps in the development of longer term policy. The outcome of some of the reviews already underway and those that I have foreshadowed will be important elements in our policy considerations.

"In total, the aerospace package is another step in our drive to revitalise Australian industry and to give new heart to a manufacturing sector now emerging from recession."

A DETAILED STATEMENT BY THE MINISTER, CANVASSING THE CURRENT SITUATION FACED BY THE INDUSTRY AND ITS FUTURE PROSPECTS, IS AVAILABLE FROM:

Public Relations Section Department of Industry and Commerce Phone: (062) 724514

CANBERRA 13 August 1984 Media Contacts:

Department of Industry and Commerce Tony Davis 72 3317

Senator Button's Office: Tony Ferguson 73 3405

AEROSPACE INDUSTRY

BACKGROUND : AUSTRALIA AND THE WORLD

The world aerospace industry includes organisations (private

and often Government) concerned with the manufacture and

maintenance of aerospace equipment and systems. It can be subdivided into three broad product groupings: civilian air platforms and parts, military air platforms (including missiles, targets and decoys) and parts; and space related activities

such as the manufacture of satellites, launch vehicles and earth stations. It is an extremely large, diversified and diffuse industry.

The industry has strong links with other broad industries

such as the electronics, communications and software industries. Many of the products and production processes of the aerospace industry incorporate products from these other areas. Some firms in the industry tend to concentrate on one broad grouping. Others, such as the US Hughes Aircraft Company have interests including guided missiles,

avionics, communications satellites, electro-optics, airborne radars, air defence command and control systems and industrial electronics.

The Australian industry in the civil and military air

platforms sectors mirrors the world industry, if on a small scale. By contrast, the space segment of the Australian industry is embryonic; despite growing commercial interest only a handful of firms have even tiny space activities.

Unfortunately, available statistics covering industry structure and performance are extremely poor; the only reasonably adequate statistics cover that sector of the industry primarily engaged in aricraft maintenance and

construction. In 1982—83 there were 36 firms primarily enSaged in aircraft maintenance and construction, employing more than 11,000 people, with annual sales of $502 million,

and exports of aircraft and aircraft parts of $31 million.

An industry survey (conducted by the Department of Industry and Commerce) suggests that these firms generated further

export income of perhaps $18 million from the sale of maintenance services.

2.

Despite the undoubted capability of the industry in a number of areas, its performance over the last decade when measured

at constant 1974-75 prices has been patchy.

Employment has remained relatively stable, generally at 12,000 to 13,000, while turnover fluctuated between $195m and $230m. Capital investment fell from a high of

$56.lm in 1972-73 to a low of $5.lm in 1977-78, before gradually rising again.

Exports, after falling to a low in 1973-74, have displayed a fluctuating but upward trend. From a $2.3m low in

1973-74, exports peaked at $22.8m in 1980-81 before dropping again to $12.2m in 1982-83. By contrast exports for the six months to December 1983 were $12.3m (1983-84 data subject to revision). In addition exports of maintenance services

are now running at over $20m per annum.

In addition to the aircraft maintenance and construction sector, there is a further group of firms involved in avionics and in the supply of components and services (particularly computer software) to all three segments of the world

industry. These include companies not normally identified with the aerospace industry.

AEROSPACE INDUSTRY

STATEMENT BY THE MINISTER FOR INDUSTRY AND COMMERCE, SENATOR JOHN BUTTON.

PART 1: BACKGROUND

Since coming to office I and my colleagues, particularly Mr

Scholes, Mr Howe and Mr Jones, have held discussions with a

wide variety of interests, including unions and the major

aerospace companies, concerned with the Australian aerospace

industry. These discussions revealed that the industry

faced significant problems but also had signifcant

development prospects, prospects in accord with the

objectives of the Government's general industry policy

stance. The discussions also revealed that the minimisation

of the industry's problems, and the maximisation of its

development opportunities, required the development of a new

policy approach. >

To achieve this, the Government has undertaken a review of

its industry policy in the aerospace area, and I want to

announce today the results of that review.

Historical Problems

Prom its establishment before the Second World War,

significant segments of the Australian aerospace industry

have concentrated on meeting local defence needs, becoming

dependent on defence orders and on defence funding.

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This dependence on the defence sector has created real

difficulties. Cycles in defence spending determined by

changing strategic needs, equipment life and the small scale

of procurement, differing replacement patterns and budgetary

changes have generated boom/bust cycles within the industry,

particularly for those firms most dependent on defence

spending. These cycles have made longer term planning very

difficult, and created staffing difficulties. Because the

skills involved in the industry are to some degree unique,

skilled staff lost during a downswing cannot be easily

replaced in the upswing.

These cycles have varied in composition as well as

intensity. Thus over recent years the industry's emphasis

has switched away from the construction of complete

aeroplanes with high local content towards a greater

reliance on assembly and maintenance operations and the

manufacture of components. Now the industry faces new

pressures for change because of falling maintenance

demands.

The new aircraft (including helicopters) entering the

Defence forces require less maintenance, while new

competitive threats are emerging in the developing Asian

aerospace industries.

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The industry has responded to its changing situation by

seeking commercial export contracts. In doing this, the

industry has had to overcome a number of difficulties.

International contracts require the supply of a fixed price

product at a specified time. Further, that price must often

be maintained over a long period. Thus successful

competition on international markets requires not only

marketing skills but also special production and commercial

skills. It can also require significant capital investment

and a willingness to incur actual losses on preliminary

contracts. Overseas firms are often further down their

learning curves, while loss-leader orders may be necessary

to gain initial credibility as a supplier.

The Australian industry has not found it easy to meet these

challenges. Some firms used to defence based cost-plus

contracts have found it difficult to compete for fixed price

contracts. There have been major structural problems as

well.

By world standards, the Australian industry is small and

fragmented. While a measure of specialisation does exist,

forced in part by Government actions following the 1974 IAC

review of the industry, there is still a high degree of

commonality among the major firms in the industry. This

need not matter where the firms are dedicated to world

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markets, but does matter where the majority of the business

is local. In addition, to the degree that industry

specialisation has been forced by considerations relating to

defence needs and the Defence Outlay, rather than determined

by the wider market needs, it may well be sub-optimal from

an industry efficiency viewpoint. In addition to any

inefficiencies flowing directly from fragmentation, the

smallness of the various firms severely limits their ability

to fund product design and development activity and to

participate in new projects.

Export Markets

Despite these various difficulties, the industry has begun

to develop new export markets, some of which, in both civil

and defence fields, are based on offset opportunities

generated by the Government. Exports of goods and services

now generate 33 per cent of Hawker de Havilland's turnover

and over 90 per cent of Australian National Industry's

National Forge Division's aerospace turnover. The problem

the industry now faces is how to extend these export

activites and, in particular, how to take maximum advantage

of the new business opportunities that have begun to emerge

within the world aerospace industry.

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The growing cost of developing new civil and military

aircraft has "broken down some of the traditional barriers

limiting our export opportunities. Individual companies or

even national industries can no longer afford to bear the

development costs associated with the larger civil

airliners, engines or military aircraft. This has led to a

reduction in the number of prime contractors, particularly

for large airliners, and the emergence of new concepts such

as risk sharing or industry co-operation agreements. As a

consequence, smaller national industries now have the

opportunity to participate in the development of new

products.

Space Programs

In addition to the opportunities offered by the new risk

sharing arrangements, the emergence of a growing space

sector also offers the aerospace industry new

opportunities.

The non-communist space industry began with the American

drive for space launched by President Kennedy in 1961. The

US program was followed by the development of space programs

in Canada, France, UK and Japan. By the end of the 1970's,

two important trends were clear. First, the

internationalisation of space, as the growing Canadian,

European and multinational (particularly Intelsat)

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commitments bore fruit. Secondly, a growing defence

emphasis in the development of new technologies.

As the space programs grew, so did the commercial activities

necessary to service them. These activities are now very

large indeed. Between now and 1990 an average of twenty-

three geostationary satellites is expected to be launched

each year, representing a total investment of about $16.5

billion.

This large and growing market is marked by four key

features:

. a continued domination by national space programs

. despite this, a growing commercial involvement as

private firms moved from the provision of goods and

services to national space agencies to the direct

commercial use of space

. an important role played by national space policies in

shaping R & D and its spin-off to industry

. domination, particularly in satellite construction, by

a limited number of firms in the US and, to a lesser

extent, Canada, Japan and Europe (particularly

France).

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Australia was involved early with space. Despite this, we

did not develop a space industry. In part this reflected

our lack of national planning and commitment, in that no

attempt was made to make use of the industry development

potential associated with space activities. But it also

reflected some weaknesses in our industrial structure.

Australian companies had not developed sufficient skills,

information or motivation to participate.

Nevertheless, the growing space segment does offer Australia

opportunities. Reflecting this, an embyro space industry is

beginning to emerge, centred on the aerospace industry and

with links to the electronics, telecommunications and

information industries.

The Challenge Ahead

To take advantage of these various new international market

opportunities,· the Australian industry has to extend further

the skills already learnt in commercial export work. In

particular, risk sharing proposals involve both considerable

and long term capital investment and the acquisition of new

project and risk management skills. Further, to participate

in the space industry, Australian industry must gain the

necessary technical skills and space qualifications.

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These are difficult challenges, but they must be met. The

Australian aerospace industry can no longer depend upon the

local defence market. If it is to grow, and I believe that

it has the potential to do so, it can only do so by fully

entering the world market.

The drive here must come from the industry itself.

Government has an important role to play in the creation of

a secure policy framework that will facilitate growth. But

no amount of Government support can substitute for the

industry's own drive and commercial judgement.

PART 2: PROBLEMS AND POLICIES

From an industry policy viewpoint, the problem is to develop

policies that will facilitate longer term growth. Against

the industry background outlined we can group the problems

these policies must solve into four categories:

improvements in industry performance and structure,

reductions in impediments to international marketing,

encouragement of new development projects, and the creation

of a new framework for industry policy development.

Improvements in Industry Performance and Structure

I suggested earlier that the Australian industry was

fragmented with many small firms. To the degree that these

marketing drive in all three areas must come from the

industry itself, but there are a number of steps the

Government can take to make its task easier.

Offsets is one policy instrument that is of particular

importance to the industry in all three areas. On April 3

the Minister for Defence Support and I announced that the

offsets program would be subjected to its first independent

review by an outside Committee. Obviously I do not want to

prejudge the results of that review, but there are some

general comments about the present operations of the offsets

program that I should make.

From an industry development perspective, offsets programs

as they now operate are important in that they can open new

market opportunities for Australian firms. But if these

market opportunities are to lead to longer term industry

development, two important conditions must be met. First,

the general industry policy framework must be such as to

allow industry to take maximum advantage of the new

opportunities. Secondly, the operations of the offsets

program must be consistent with our general industry policy

objectives. If these two conditions are not met, then

offsets are likely to generate reduced and short term

benefits.

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During the period leading up to the submission of proposals

for the supply of helicopters to the Australian Navy, Mr

Howe, Mr Scholes and I all made it clear to the parties that

the G-overnment placed great weight on the development of

Australian Industry Participation and offsets programs that

would provide longer term benefits to Australian industry.

To reinforce these efforts I established, following

discussions with Mr Howe, an Interdepartmental Committee to

review the options open to us for the establishment of an

export oriented helicopter industry. The Committee will

complete its report shortly.

I mentioned that our coordinated approach can often bring

tangible benefits. In this regard I am heartened by the

programs put forward by two main contenders for the Navy

purchase, both of which reflect the advice given by

Ministers in that they do offer tangible and export oriented

longer term industry benefits.

The overseas marketing of civil and defence related

equipment raises somewhat different problems. In

particular, the successful marketing of defence related

equipment often requires technical support from the

Australian armed forces. It can also raise sensitive

foreign policy problems. Tor both reasons, Government

involvement in the sale of defence related equipment is

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necessarily higher than in the civil area. In these

circumstances, it is important for the Government regularly

to review its approaches and policies to ensure that our

export opportunities are optimised.

The Government has therefore decided to establish a

tripartite working group to review international market

opportunities in the aerospace industry and to define the

problems that must be overcome if these opportunities are to

be optimised.

The third market area, space related products, again raises

different problems. Australia's present involvement in this

area is still very limited. Further, investigations carried

out by my Department and by the Department of Science and

Technology suggest that local industry has a number of

problems to overcome before domestic involvement can

increase. These include lack of knowledge of international

market opportunities, limited technical expertise in some

areas, and a fragmented Government approach to space which

makes it difficult to maximise the industrial opportunities

offered by existing space programs.

To assist in the process of policy development in this area

the Department of Trade is already examining aerospace

equipment and services in its overall review of industry

export capability and potential. .

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The Government is also examining the need for a national

strategy to develop Australia's scientific, technological

and industrial capability for supply of space products and

services. In this context, the Minister for Science and

Technology has asked the Academy of Technological Sciences

to review our existing and potential involvement in space.

The CSIRO has also established a Space Science and

Technology Study Group (to review CSIRO's present and future

involvements in space research). Once these reports have

been received, the Minister for Science and Technology and I

will take a submission to Cabinet to ensure an appropriate

direction for our space policy and that we take full

advantage of the opportunities offered by that policy.

In the meantime, the Departments of Industry and Commerce

and Science and Technology will continue their work in this

area (in co-operation with other Departments where

appropriate, such as the Department of Trade), with a view

to organising a series of industry seminars outlining the

existing opportunities offered by our space programs.

Policy Framework

The various measures I have outlined in this statement

represent only the first steps in the development of longer

term industry policy in the aerospace area. To ensure that

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this process is effective, we need a framework within which

industry policies can be developed in a co-operative and co­

ordinated fashion.

The absence of such a framework has been of real concern to

myself and to my colleagues, and has made it very difficult

for us to consider the development of policy towards this

industry in any co-ordinated way.

To overcome this problem I intend to establish an Aerospace

Industries Council within the general industry council

framework. This Council, which will be serviced by the

Industries Council secretariat, will allow the aerospace

industry to discuss its problems in the context of the

Government's general approach towards industry policy,

making its views known both to the Australian Manufacturing

Council and to the Government. As a first task, I intend to

ask the new Council to review development prospects for the

aerospace industry and to identify problems that must be

overcome if these prospects are to be realised. The Council

will thus be able to make an immediate contribution, while

providing a framework within which the industry implications

of the various steps I have announced today can be

considered.

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structural features reduce the industry's ability to compete

on international markets, it is clearly important to try to

find ways to overcome these problems.

Moves in this direction have already begun. The formation

by Commonwealth Aircraft Corporation, Hawker de Havilland

and the Government represented by the Government Aircraft

Factories, of the Australian Aircraft Consortium to design

and build the Wamira, a new basic trainer, is one example.

The consortium approach does have problems, but it allows

firms to pool their skills and resources, accepting risks

that would otherwise be unacceptable.

In other moves, a task force established by the Minister for

Defence Support has reviewed the operations of the

Government Aircraft Factories to try to find ways to improve

the efficiency of its operations.

Then, too, in May, Hawker de Havilland announced that it had

decided to introduce Australian equity. The Government

strongly welcomes this move. Not only is it consistent with

the objectives set out in the Government's foreign

investment policy, but it is a sign of Hawker's willingness

to move in new directions.

Over the coming months, I intend to pursue further my

discussions with the industry on ways of improving its

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structure and performance. However, I have already found

that the Government's efforts in this regard are hampered by

our inadequate data base. While the Government does have a

general understanding of the industry's problems, we lack

the statistical base to quantify these problems adequately

and to monitor the effectiveness of our policies over time.

To overcome this problem I have asked the Bureau of Industry

Economics to carry out a detailed analysis of the industry's

structure and performance.

A particularly important influence upon industry performance

is the relationship between the industry and our defence

needs. As a major supplier of defence products, the

industry's ability to meet defence needs and the cost to the

Defence Outlay of the maintenance of that capability, are

clearly important policy considerations. At the same time,

the industry's dependence on the local defence market and on

defence funding has strongly influenced its operations. For

all these reasons, the Government is reviewing the present

methods of injecting funds into the industry from the

Defence Outlay and of placing work with the industry.

International Market Opportunities

We can divide the international market into its civil,

military and space related segments, each with somewhat

different problems. As I suggested before, the main

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PART 3: THE PATH AHEAD

Over recent months the industry and the Government have been

involved in a series of discussions on aerospace development

projects, largely centred on export markets. These projects

cover a wide range of products and involve supply periods

extending well into the next decade.

There is no doubt that the industry has obtained

considerable benefit from the operations of the offsets

program. This together with existing offset obligations

combine to provide an excellent spring board for our

industry to follow up the initial successes achieved. There

are already indications that some firms who achieved initial

success as a result of offsets are now operating in export

markets outside the offset program.

There are obvious problems in trying to estimate particular

industry achievements as far ahead as the 1990's.

Nevertheless, I am confident that in the next decade or so

the aerospace industry will continue to show significant

increases in export sales of both civil and military goods.

In this period the total export market available to the

industry amounts to several billion dollars. We can gain a

'significant share of that business.

o

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A good example of the development opportunities within reach

of Australian industry is the $24 million contract recently

awarded to Hawker de Havilland Limited by British Aerospace.

Under this agreement Hawker de Havilland will supply

airframe components for the Airbus A320 with deliveries

commencing in June 1985 and continuing until at least 1992.

This contract continues the Airbus Industrie/British

Aerospace association with the Australian aerospace industry

- Australia is now supplying components for all three Airbus

programs.

There has also been a long and rewarding relationship

between the Australian industry and Boeing with exports in

the last 15 years exceeding $150 million. Contracts with

Boeing are continuing with the local industry being

sole-source suppliers for some airframe components. Boeing

and three Australian manufacturers signed agreements in

September 1983 to explore possible Australian industry

participation in a future jet airliner program. In

addition, Australian engineers will participate in Boeing's

product 'development activities. This could lead to a

significant upgrading of our skills in this area. Work

flowing from a continuation of this close relationship could

be significant.

On the home front, the RAAF has a requirement for 69 of the

Wamira basic trainer aircraft with a side-by-side seating

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arrangement . This will provide an opportunity to exercise

our design and development skills, with the aircraft "being

designed to meet stringent fatigue life requirements. It

will also act as a platform for us to seek export markets.

In this regard a tandem variant of the Wamira has "been

shortlisted for the UK Air Force requirements and the total

free world market for aircraft of this type could exceed

$700 million. This is indeed a market worth pursuing and I

am pleased to see that the consortium charged with producing

the prototypes of the Wamira is already active in the world

market.

The helicopter segment of the world industry could also

place considerable work with Australia in the years ahead.

Without prejudging the Interdepartmental Committee's report

on helicopters it is worth noting that one of the major

world producers, Sikorsky, has committed itself to place

work to the value of about $23 million in Australia

regardless of the outcome of the Navy contract. Some of the

contracts involved could provide opportunities for follow on

work.

Discussions are in progress for co-development of a new

aerial refuelling system. Because of the delicate stage of

the negotiations between the parties I am not able to give

full details of the work package. However, it could provide

work valued at almost $100 million over an extended period.

* -1

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This would be a risk sharing arrangement with no direct

Government assistance.

The measures we are setting in train will assist the

aerospace industry to become more responsive to

international market opportunities and to achieve its

undoubted growth potential. It is up to the industry to see

that the opportunities over the horizon or maximised.

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