The peak body representing the companies, the Australian Industry Development Network, claims a "sense of desperation" is emerging among SMEs in the wake of Defence's new industry strategy, as prime contractors - often heavyweight multinational vendors - show signs of resisting sub-contracting Defence business to them. AIDN said it is preparing to survey its members to ascertain the full scale of the problem.
The issue has gained new heat in light of recent political arguments over the scale and nature of Australia's ICT trade deficit, presently calculated at AU$14.4 billion.
Survey organiser, John Englaro, who runs his own SME, Systems Integration Services International, said the SME tech sector involved with Defence would shrink to a fraction of its current size within two years if the department does not provide greater assurance that indigenous SMEs are not cut off from Defence work.
"The picture that's emerged is that there are around 15,000 to 20,000 SMEs that are left trying to do business in Defence now and most of them would basically cease to do business with Defence over the next 18 months to two years," said Englaro.
AIDN claims the ability of SMEs to participate in Defence work has gradually eroded since Defence replaced its offsets scheme in 1998 with the Defence Industry Investment Recognition Scheme (DIIREC), designed to smooth the path for the importing of technology the government deemed to be critical to Australia's defence. Defence's new industry strategy to reduce the number of contractors it dealt with, by concentrating on dealing directly with primes only, followed last year.
A Defence spokesperson told ZDNet Australia that by using a smaller number of main contractors the department can mitigate the risks and taxpayer expense associated with managing many direct contracts.
According to John Small, Executive officer AIDN NSW and former head of the NSW Defence Materiel Organisation (DMO), Englaro's forecast for the indigenous SME sector is not outlandish.
Small said there was no significant guidance from Defence as to how relationships between primes and SME would be managed, apart from saying any contract has got to provide value for money.
"It depends, and what it depends on is the primes. If you consider that the primes are overseas companies whose interests are to maintain their work offshore and do as little as possible in Australia the amount they'll contract out to SMEs in Australia will be minimal and John's right," said Small.
Small said that would be the case for some big companies but not necessarily all of them. He said some prime contractors, such as Tenix and Australian Defence Industries, who were working on Defence's naval procurement exercises, had indicated they were willing to work with SMEs. However, these were sectors where local manufacturing capabilities had already reached maturity.
Defence said its new strategy would be articulated fully through investigations presently being conducted in each of the sectors in which it conducts business: aerospace, naval ship building, electronic systems and land.
Small said the sectoral investigations are unlikely to reveal the difficulties that SMEs face across the board and that he has seen no evidence emerge from them on how relationships between primes and SMEs would be managed.
"In general [Defence] are not putting in place, neither within their sectoral studies nor beforehand, measures that in any way guarantees or encourages primes to use SMEs," said Small.
Englaro said that primes simply were not interested in picking up the mantle of responsibility for SMEs left by the government.
According to Englaro primes are demanding that indigenous SMEs -- which according to AIDN on average turn-over between AU$1 million and $AU10 million -- shoulder the same contractual burdens that the government places on them.
"[SMEs] just don't have the financial strength to get involved in these drawn out procurement exercises and certainly don't have the ability to give bank guarantees, or performance guarantees or indemnities," said Englaro.
Small said that one of the strengths that has worked in favour of SMEs, Defence's commitment to ensuring that its purchases can be repaired, modified and upgraded in Australia, may also be weakening.
According to Small primes now control Defence long-term equipment logistics and support contracts as they are being tendered out concurrently with defence purchase contracts.
Defence said that while it remained supportive of groups such as AIDN, it would stand by the record of its Australian industry involvement programs and that it will continue to give a high priority to Australian involvement, with special attention given to developing industry capabilities.
The Department said that it exceeding government-wide industry involvement benchmarks mandated under the Commonwealth's Financial Management and Accountability Act 1997. The federal government has set an indigenous industry involvement target for all government departments of 10 percent. Defence has achieved a figure of 18 percent in FY2000-2001.
The department said its $AU200 million-plus investment in the Joint Strike Fighter (JSF) program and AIDN itself was evidence of Defence's desire to improve SMEs ability to compete on a global level. It said that the prime contractor for the JSF program Lockheed Martin, would invite 20 Australian companies, many of which it claims are SMEs, to bid for work on the program.
Small concedes that there are positive signs that the Joint Strike Fighter program for Australian industry but he questions the usefulness of Defence's involvement figures and challenges its assertion that it is committed to developing industry capabilities that would improve its ability to be a technology exporter.
"There are certainly some highly technical and capable Defence that make up that 18 percent but whether they make up a large part of that 18 percent, I'm sure they can't tell you," said Small.
Englaro agrees.
"The 18 percent Defence talks about is very low value stuff," he said. "It's the couriers, the newspapers, the lunches -- it's got no strategic technological value for Australia".
In any case, said Englaro, Australian industry involvement guidelines equate multinationals that have a registered office in Australia to indigenous enterprises.
"Multinationals have would tend to maintain intellectual property in strategic development and manufacturing facilities overseas, so they will go down to the lowest common denominator to achieve Australian Industry Involvement consistent with what defence wants," he said.
According to Small, Defence hasn't nominated any strategically important capabilities held by any particular companies that it needs to maintain within Australia.
"[Defence] has taken the view that the commercial market will maintain them. However if you look at the commercial market in Australia you'll notice that the commercial market is busy taking things offshore," said Small.
But beyond the commercial considerations there may also be implications for the effectiveness of Australia's Defence forces.
The Defence Science Technology Organisation in cooperation with a number of companies has developed unique sonar processing capabilities designed to work in Australia's shallow warm waters. Small said the company that currently bears the bulk of the responsibility for maintaining the capability, Thales Underwater Systems, would soon dramatically decrease the size of local operations as projects it was working on draw to a conclusion.
According to Small the Defence Electronic Systems working group responsible for the sonar capability is yet to identify it as strategically important.
"I would guess that unless defence takes a strategic view of how they maintain that capability in the future, Thales on its own will have difficulty doing it," he said.
AIDN believes its survey could reveal embarrassing instances of incompetence costing SMEs potentially millions of dollars in intellectual property.
Small said that in more than one instance, SMEs have shared proprietary product ideas and solutions with Defence in informal discussion only to find them publicised to competitors in tender documents later.
Small said it usually happens to smaller companies further down the food chain that have less experience with the government procurement processes.
"It's something that happens a lot more than once, it's clearly something that's completely unethical and, in fact, it's probably illegal to use a company's proprietary ideas and put them in a public tender," he said.
Englaro said many SMEs are having negative experiences dealing with Defence but fear placing their businesses at risk if they speak out about them.
The survey is designed to give SMEs a safe avenue to voice their experiences with the performance of Defence's industry involvement policy without fear of repercussions.
Australian Defence annual budget is AU$12 billion per annum.
That's almost equal to Australia's ICT trade deficit of AU$14.4 billion.
You go figure. !!!!