Finding our Next Generation of Defence Entrepreneurs

Mike Kalms, Defence Industry Lead Partner

The Defence Industry Capability Plan (DICP) was released last month, the headlines focused on Australia’s refined list of ten Sovereign Capabilities, but perhaps the most important information – sizing Australia’s Defence industrial base – was buried deeper in the document.

In a nutshell, the issue is this: Australia has begun a major re-capitalisation of its Defence asset base. Ships, submarines, armoured vehicles, aircraft. Over $200B to spend, with the strong caveat that those companies that win the work build local industrial capability.

When Primes are tasked to invest billions locally, they need sub-contractors of scale. But in Australia they largely don’t exist.

“In Australia, the Defence industry consists of large global Defence companies (primes), their major subcontractors (sub-primes), relatively few medium-sized businesses and a large and wide base of SMEs with fewer than 25 employees” (2)

On top of that, the SME’s that do play in Defence – do so infrequently. Eighty percent of them do defence work infrequently. Figuratively, Monday to Thursday they deliver contracts in the utilities sector, mining, resources, transport or consumer markets, on Fridays they do Defence.

Figure 1 – Defence work is rare for 4 in 5 of the businesses that comprise our Defence base (2)

 

 

 

 

 

 

 

 

So the challenge is to rapidly find and build a new generation of Australian business able to shoulder the scale of contracts our Global Primes are about to place on the market. Are we doing that? And what’s the consequence of getting if wrong/right?

Building Medium Defence Industry

There are several attractive programs that assist Australian business invest and grow in the Defence sector. The Innovation Hub, Next Generation Technology Fund (with its various Cooperative Research Programs), Export Support Initiatives, and now Sovereign Industry Capability Priority Grants mean business can access capital.

That’s good. So why do so many in industry feel like something’s still missing? Of the 30 odd grant announcements so far, the majority go to Universities and business with a Defence pedigree. They feel like capable companies, safe investments.

But is that the group that’s going to establish a new echelon of ‘Defence Mediums’? Businesses that take billion dollar sub-contracts from France’s Naval Group, that deliver locally within a Raytheon global product line, that employ 1,000s (not 10s) of Australians in Western Sydney or Henderson, and who work >75  percent of the time in the Defence sector ensuring they build deep talent and reputable quality.

New Entrepreneurs

Where do women and men who create billion dollar businesses come from?

The data says they rarely come from ~10 year old fabrication/services SMEs that have employed ~25 people in a non-dynamic sector like the Australian Defence market of the last 20 years.

It’s common for research to describe entrepreneurial motivation in six dimensions:

  1. a need for achievement,
  2. bias to risk taking,
  3.  tolerance for ambiguity,
  4.  locus of control,
  5. self-efficacy, and
  6. strong goal setting.

Such motivation often drives the entrepreneur to do multiple start-ups, to regularly fail and to acquire diverse sectorial experience – all these are generally seen in the negative by Defence decision makers.

Figure 2 – Modern Entrepreneurs re-invest. Today’s Australian Defence business doesn’t (4)

 

 

 

 

 

 

 

So whilst we should all applaud the investment on Defence industry by government, perhaps the piece that’s missing now is the entrepreneur program that finds those ~40 individuals who will – like Atlassian or Tesla – take an idea and scale it to build the ‘Defence Mediums’ we need.

Does it Matter?

Maybe Australia doesn’t need a cluster of vibrant Defence Mediums. Whenever a company approaches ‘the middle’ it seems to quickly get acquired. That’s a very natural part of the start-up lifecycle – so maybe we shouldn’t worry.

But it does seem like a strong middle is closely associated with vibrant exports. Today, Australian defence business generates between $1.5B to $2.5B per annum in exports. This is a notoriously difficult number to calculate. But if we take it at face value, Australia’s share of global defence trade (estimated at $31B in 2016) is around 5 percent.

Aren’t local Australian entrepreneurs leading emergent Mediums more motivated to stretch and push for export growth, compared to US-based corporates who own a relatively small, likely-substitutable, subsidiary on the other side of the world?

Big local companies more often secure big local contracts I reckon.

1. P123 of the Defence Industry Capability Plan April 2018

2. P127 of the Defence Industry Capability Plan April 2018

3. From Shane, Locke and Collins 2003

4. P130 of the Defence Industry Capability Plan April 2018

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