Australian defence industry is struggling through a period of cognitive dissonance. The Albanese government keeps declaring that it is spending unprecedented amounts on defence capability, yet Australian medium and small defence firms are struggling, with many on life support and some companies deciding to switch it off and move on to other, less fickle markets. So what’s going on?

The Government is correct in saying an unprecedented amount is being spent on defence capability. It’s planning to spend $16,674 million on Defence’s capability acquisition program and $17,157 million on Defence’s capability sustainment program this year. Both figures are comfortably the largest on record. Of course, much of this ‘bigness’ in spending is just because Australia is bigger—with a bigger population and a bigger economy as a result and we’ve been experiencing significant inflation. Australians are using historic levels of oxygen too, because in 2024, Australia’s 27 million people breathe more than the 19 million Aussies did back in 2000.

But as a percentage of GDP nothing much has changed—the defence budget has hovered a few hundreds of a percentage point either side of 2% of GDP for the last six or seven years, and even under the Government’s own budget figures, that’s not going to change for another three years. So claims about unprecedented spending don’t mean the Government has made defence one of its highest priorities.

The key question we’ll look at here is whether that money is flowing to Australian businesses, particularly medium and small companies, who have systems our military could use.

As always, we are working with incomplete data. Since 2012-13, Defence has released figures breaking down Capability Acquisition and Sustainment Group’s acquisition and sustainment spending between ‘local’ and ‘overseas’. Interestingly, the acquisition and sustainment pictures are the mirror image of each other. Broadly speaking, over the past decade or so, around one-third of the acquisition dollars have been spent locally and two-thirds overseas. However, two-thirds of the sustainment dollars have been spent locally and one-third overseas. Another interesting aspect is that the total for acquisition and sustainment over that period are in the same ballpark—$87.3 billion for acquisition and $79.7 billion for sustainment.

But means $53.7 billion has been spent locally on sustainment compared to $31.2 billion for acquisition, suggesting working in the sustainment space seems to be a safer, more dependable strategy for local companies than attempting to survive in the acquisition space.

Nevertheless, the local share of CASG’s acquisition spending has been growing, averaging 40% over the past four years. That’s around $3.5-4.0 billion per year. Meanwhile, the local share of sustainment spending has remained a remarkably consistent two-thirds share, or $5.5-6.4 billion per year. Despite our request, Defence hasn’t provided its estimated figures for 2024-25, but if we assume that this year’s local share of acquisition and sustainment spending remain around 40% and 67% respectively, that suggests a very healthy sum of around $9-10 billion is going to local industry. And that’s just CASG’s spend; it doesn’t include spending by Defence’s other groups and services on things like facilities or IT.

But there’s a very big qualification around these numbers: they don’t come with Defence’s definition of ‘local’ and ‘overseas’. If ‘local’ is consistent with documents such as the 2024 Defence Industry Development Strategy, then it’s simply any business with ‘an Australian-based industrial capability and an Australian Business Number.’ Numerous commentators have pointed out the vacuousness of this definition.

It means that the dollars going to a ‘local’ company could immediately be sent offshore to import components or indeed entire systems from overseas. Overseas primes all have Australian-registered subsidiaries, but the bulk of the high-value components they are assembling into platforms here are imported from overseas. So there no way to know how many of those dollars are staying in Australia or flowing down to Australian medium and small companies, other than to accept whatever information the prime contractors disclose (which we’ll discuss below).

Another way to get some perspective on this issue is to look at the Top 30 acquisition projects in Defence’s 2024-25 portfolio budget statements (Table 54). The PBS lists the 30 projects with the highest planned spend for the year (not the largest total budget). We’ve ranked them by Military equipment Acquisition spend, though once you add in Other Inputs to Capability (such as facilities, science and technology support, etc), the order changes a little.

There’s lot of observations we can make about the composition of the Top 30. For example, despite the Defence Strategic Review’s reduction in the planned infantry fighting vehicle fleet from 450 to 129 vehicles, Defence is still planning on spending nearly $2.5 billion on armoured and protected vehicles this year. That’s still less than what it’s budgeting to spend on nuclear-powered submarines—eight years out from the planned arrival of the first one.

But we’ll stick to unpacking where the money is going here. We’ve done that by sorting the Top 30 projects into the four following categories:

Overseas acquisition / Military-of-the-Shelf

Primarily local assembly of overseas design

Primarily local design and construction

Mixed.

Due to the lack of public information, particularly around ‘ICT-heavy’ projects focused on command, control, communications, computers, and intelligence, we may have gotten some wrong, but they are mostly in the bottom third of the list. Moreover, since categories 2, 3 and 4 are all heavily dependent on overseas components, there may not be much difference between many of the projects in terms of Australian content. So a mis-categorisation of a few projects doesn’t change the overall assessment. (Defence supplying actual figures would be very welcome, of course, if highly unlikely.)

That assessment is that the vast bulk of the funding is going overseas. 16 of the projects, and 13 of the top 17, are in the first category – foreign acquisitions–nearly all from the US: a sign of our near total dependence on US defence industry and its offshore supply chains. There are some exceptions to this destination, such as the Norwegian Naval Strike Missile which presumably makes up part of the nearly $700 million going on maritime GWEO and maritime mines from Rheinmetall’s Italian subsidiary. Regardless, nearly all of these 16 projects’ military equipment spend for 2024-25 of $7.854 billion is going directly offshore. That’s 66% of the Top 30’s total value.

It’s easy to see why the Stockholm International Peace Research Institute has consistently ranked Australia in the world’s top five arms importers over the past two decades. This flow of cash directly into the US arms industry, however, may help to keep Australia in Donald Trump’s good books as he ranks friends and enemies according to the size of their trade deficit with the United States. The extent to which it will create a self-reliant ADF is debatable. And the extent to which our military will be reliably and rapidly resupplied with US-sourced items in a conflict where the US is hard pressed to meet its own needs is also questionable.

Another six projects are based on local build of foreign designs with the bulk of high-value components sourced from overseas. It’s not until we get to number 18, the Collins life-of-type-extension that we find the first ‘primarily local design and construction’ project, and even there the major components such as the new main motors and diesel generators for the submarines are coming from overseas. Even the supposedly joint – US-Australian combat management system used by the Collins is almost entirely US.

We can get some more detail around where the money is going from projects’ public Australian industry capability plans, posted on Defence’s website, noting that only a small percentage of companies post plans, some plans are forward looking (i.e., presenting future opportunities rather than reporting achieved Australian content), and there’s no year-on-year break down so we don’t have information specifically for 2024-25. Moreover a myriad of terms is used for Australian industry content (or capability or activity….).

One such term is Australian Contract Expenditure—and the percentages vary dramatically. Hanwha Defence Australia’s recently released plan for its infantry fighting vehicle project claims an ACE of 57.5%, but that figure would seem to include HDA itself as only 39.5% is subcontracted to Australian industry. HDA’s plan for self-propelled howitzers is lower at 46.4%. Raytheon Australia’s ground based air defence plan seems lower again. Its 2022 plan states ‘Raytheon Australia signed the Contract with the Commonwealth in June 2019 with a total value of $680M (GST exclusive), including a Local Industry Activity value of approximately $144.6M (GST exclusive).’ That suggests a Local Industry Activity percentage of only 14.7%.

But even with ‘local’ subcontracts, we can’t simply assume the money stays in Australia. ASC Shipbuilding’s (essentially a subsidiary of BAE Systems) 2020 plan for the design and mobilisation phase of the Hunter frigate project stated that the value of the four-year contract awarded to ASC Shipbuilding is $2,258 million with the Australian Contract Expenditure at $1,263 million with the potential to grow. However, seven of the eight subcontracts that had been placed at that point were with the local subsidiaries of major overseas defence companies such as Boeing and Lockheed Martin. So even though over half the value of the head contract flowed to Australian companies, it’s hard to know how much work was being done in Australia.

The huge spend on overseas sourced equipment, platforms, systems, weapons, software and spare parts, whether directly from foreign firms or indirectly through their Australian subsidiaries creates an equally enormous vulnerability in supporting our military during a conflict. That’s because a major conflict is when the ‘global supply chains’ that Defence officials and ministers like Pat Conroy extoll are likely to break and when foreign governments will almost certainly divert supplies for their own militaries’ priority needs before helping even the closest of mates and allies.

Overall, one can understand why Australia medium and small companies are feeling like they are missing out despite a top-line defence budget of $55.7 billion—it’s   because they are missing out. But there’s more at stake than hurt feelings. It’s unlikely that this division between local and overseas spending will create a resilient, capable defence industrial base, and without that, we won’t have a resilient, self-reliant defence force.

Dr Marcus Hellyer is Head of Research at Strategic Analysis Australia. He is also Director Strategy for a small Australian company in the defence sector.