From The Source: Jim McDowell, Chief Executive Officer, BAE Systems Australia | ADM Nov 2010

March 2011 will mark Jim McDowell’s 10th anniversary as CEO of BAE Systems Australia.

Belfast-born, he has spent most of his working life in the aerospace and defence industries in the UK, Africa, Asia, the US and Australia.

He was appointed CEO of BAE Systems Australia in 2001 and in 2008 oversaw the purchase of Tenix Defence, transforming the company into Australia’s biggest defence contractor.

He spoke to ADM’s Editor-at-Large, Gregor Ferguson, shortly before the 2010 Land Warfare Conference.

Profile: Jim McDowell

1978 Short Brothers, Belfast

1994 VP, Sales, Marketing & Commercial, Shorts Missile Systems Ltd

1996 Executive VP, British Aerospace (Singapore)

1997 President, North Asia, British Aerospace (Singapore)

1999 Managing Director, Asia & Sub-Saharan Africa, British Aerospace

1999 Regional Managing Director - Asia, BAE Systems (Hong Kong)

2001 CEO - BAE Systems Australia

2007 Council of the University of South Australia

2008 Oversees acquisition of Tenix Defence

2009 Chairman, Advisory Board, Defence Systems Innovation Centre

2010 Chairman, Division of Business Advisory Board, UniSA

2010 Chairman, Expert Panel on the Future of Apprenticeships in Australia

2010 Member of SA Defence Reserves Committee

ADM: How is BAE Systems travelling at present?

McDowell: Tolerably well, I would say.

It’s a big year in terms of numbers: we’ll do just under $1.8 billion in turnover, which thanks to our exchange rate is more than £1 billion.

We’re seeing the whole effect of the Tenix acquisition over a full year and we have worked through the year in a way which one could reasonably have foreseen, so it’s been quite well-planned.

ADM: When you’re turning over that sort of money, are you big enough to have a knock-on effect on the parent company’s share price.

McDowell: I don’t think directly of share price but rather operational performance that underpins the share price.

ADM: Looking to the future of the business now, there’s a 10 year Defence Capability Plan (DCP) due out later this year, against the background of an Strategic Reform Program (SRP) which aims to reduce Defence spending.

How do you reconcile the requirement for industry growth on the one hand to meet the requirements of the DCP with a need to trim back costs to the ADF at the same time?

McDowell: Well I don’t quite see it in those terms.

I see money coming out of the sustainment account and going into the acquisition account.

Given that we play on both sides of that equation, albeit more on the sustainment side, there’s still two opportunities for growth.

One is the funds that are supplementing the acquisitions accounts – to fund the DCP; and two is the efficiencies to be driven under SRP because, provided we do the exercise properly, and we examine each sustainment task end-to-end, this should throw up opportunities for industry to do things more efficiently that are currently being done on the other side of the contract.

ADM: What about the SRP’s effect on sustainment?

Because if the government’s spending 10 per cent less on sustainment, that’s 10 per cent less revenue for the industry as a whole.

McDowell: Well no, it’s not: it’s 10 per cent less in the budget.

Some of that money gets spent in the industry, some of it gets spent in government.

So our view would be that there are some things we can do more efficiently than government or the uniformed services and therefore, provided the exercise is done fairly, then if we can identify those opportunities we can supplement the income that’s coming out through the acquisition.

ADM: Is that an area where you think you can actually help Defence achieve its objectives?

McDowell: My biggest concern is that industry isn't engaged often enough across the lifecycle; we tend to get involved rather late in the design/development/procurement process and then in a very contractual way in the aftermarket as opposed to being involved in the proper end-to-end evaluation from the concept to the disposal of systems.

ADM: What about the Priority Industry Capabilities (PICs) and the Strategic Industry Capabilities (SICs), because these are the bedrock if you like of industry policy. Is there enough work in the DCP to sustain and grow these economically?

McDowell: I don’t know.

I mean my personal view is that the PICs were first thought of by Bronwyn Bishop and they’re still not sufficiently defined for anyone to be able to make a judgement as to whether they’re useful or not.

In the meantime, we’ve just got to get on with it.

ADM: How about the PICs which reside within BAE Systems?

I think one of the areas where you do have a national strength – almost a strategic strength – is electronic warfare.

How is that travelling?

McDowell: It’s doing what we said it was going to do.

It’s going to shrink in size to a core capability of 100 or so people over the next 12 months.

Whether that’s then an appropriate level is something that I can decide economically – i.e. that’s the amount of people that there’s work for and I’ll leave it to government to decide if it’s strategically the right number.

ADM: Sticking with industry policy, is BAE Systems going to sign an Australian Industry Capability deed with the DMO, as Boeing and Lockheed and Raytheon and Thales have done?

McDowell: Yes, when the new government is ready and when we all get our act together to get the document negotiated and funded and so on.

We were negotiating with government just before the election so we expect to pick that up some time fairly soon.

ADM: So who actually benefits most from the AIC program?

McDowell: I actually don’t know because I don’t know how it’s working with Thales or Boeing or whoever else has one.

You know, in theory it’s one of those mutually beneficial things where you’re a bit of a matchmaker, where you bring the local SME supply chain, particularly, into a position where it’s much easier for them to do business with us as a worldwide prime.

So in theory we’re both benefiting from that, but you’ve got to figure the major beneficiary should be the SME supply chain.

ADM: One of the issues for Australian companies is that the local market is really too small to generate the volume and the mass that they need for sustained growth.

How does an Australian company deal with that?

McDowell: Well again I’m not sure I would agree with the statement because the fact is the US budgets are flattish; the European budgets are on the way down; the Australian budget is on the way up, so ipso facto there’s growth.

Now whether you can accommodate all of the players is another matter, but nonetheless this is a market which is showing a growth trend, not a flat trend or a downward trend.

Now whether or not all those projects can get through first and second pass and get released in accordance with the plan is a practical question that’s interesting, but the market itself on paper shows growth.

I mean I’m not saying you couldn’t get more efficient by being more consolidated but that then makes it very hard to run the competitive nature of defence policy here that’s still clearly key to the policymakers.

ADM: Looking at BAE Systems’ presence here in Australia, the company’s had a footprint in this country for 50 years now, mainly as a result of early British investment but are you finding that your sister companies in the US are actually playing a stronger role in the Australian market these days?

McDowell: Yes, insofar as that’s where we can source product.

I mean BAE Systems Australia is an Australian company with its own capabilities, so our major aim is the support and sustainment of the ADF, mostly in the aftermarket but sometimes with product like Nulka and so on.

Then one of the other things that we do, which is a second order matter for me, is we are a shop window for products from our other home countries.

The two biggest of those where we do most of our design and development is the UK and the US, but also Sweden and South Africa.

In so far as we’ve got more product in the US now than we used to have, at both sub-system and system level, obviously from my point of view they’re more important than they have been in the past, simply because there’s more of them.

Don’t forget only 19 per cent of BAE Systems’ revenue last year came from the UK.

ADM: Looking at a couple of the specifics, how are you working in relationship with BAE Systems in the US as far as Overlander Phase 4 is concerned?

Because you’re one of the contenders for the JLTV program.

McDowell: Well we’re on two teams, as you know, one which we lead and one in which we’re participants.

We will support the JLTV in the current line of competition for Phase 4.

Obviously we hope it’s our JLTV that gets up.

We just think that’s the smartest and best way, the most value for money for the Australian taxpayer to join a large US program with very similar requirements into which we, Australia, have been able to enter our requirements and a huge buy.

We’re working closely with our colleagues in the US to support their bid into Australia, should that happen, for Phase 4, whether that be with regard to sustainment or partial build or getting Australian companies into the supply chain, all of those options are being looked at.

ADM: Our requirement under Phase 4 amounts to about five per cent of the total US requirement for the JLTV and yet it’s still the biggest project of its kind in the Western world outside the US.

Do you see potential for a significant local assembly program, given the sheer number of vehicles we’re going to buy, (approx 1,300)?

McDowell: Well, 1,300 is a big number but not compared to 60,000.

I just think, like all of these things, a value judgement has to be made: do we want this at the cheapest price?

Do I want a MOTS product which we can sustain through life in Australia, and thus gain both the intellectual property to provide that sustainment and the revenue and industrial base to do it?

Or do we want to increase the price by doing some of that build, assembly, or partial build or whatever in Australia, and does that give us more industrial value?

And that’s a call that will have to be made.

In the end, that is a Defence call. Some people will tender it one way and other people will tender it another way and the people who decide who’s going to win that will be the people who make the call.

ADM: What about in Project Land 400, because that’s going to be of a similar sort of size, possibly even bigger, but coming quite soon after Overlander Phase 4 gets resolved.

Where do you see a role for BAE Systems in Land 400?

McDowell: Well again we’ll do a couple of things.

One, whatever product or products are being developed by our BAE Systems industrial counterparts in the UK, the US, Sweden and South Africa, because we have four places where we design and develop land-based products, so we will have a suite of products and intellectual property and ideas that we will be bidding in Australia from there.

We would not make the mistake of trying to design an Australian-only vehicle.

Therein lies the path to creating both an orphan and an economic disaster.

ADM: Going beyond armoured vehicles, which are the topical at the moment and probably will be until the middle of next year or beyond, what other sectors of Australia’s land systems market do you think hold the greatest potential for sustained growth?

McDowell: I was almost tempted to say UAVs but it’s quite hard to see the programs and whether DCP is going to do anything quickly in that sector.

Our UAV growth will come from ourselves to our parent company, and anything else we can do internationally.

Communications: with the revival of JP2072 in the DCP, obviously we feel that we were a very close second last time round and therefore that we have a real chance of bidding that program and winning it, and that will obviously be good for us.

And if you take SATCOM in that communications market, as well, and you look at the other phases of JP2008 then obviously we have an interest in those and feel we’re reasonably well placed to grow in that sector.

ADM: Looking beyond land systems and explosive ordnance, where do you see the greatest potential for growth right across BAE Systems of Australia’s business portfolio?

McDowell: There are two areas.

One is obviously maritime, with naval ship-building – albeit we have a pesky gap for everybody between 2015 and 2018 where there’s not much ship-building activity.

But after that you’ve got the OCV, the Future Frigate and the submarines coming along.

Given the capacity constraints in Australia, provided we can find our way through that gap with the capability intact, then there is a staggering amount of work available.

ADM: It amounts to nearly 40 separate vessels, about 140,000 tonnes of dead weight of construction, which if you don’t spread it out makes for a huge spike and then a huge hangover afterwards.

McDowell: Yes, I think there’ll be some sensible policy discussion.

The main thing is through these next four to five years we have to get ourselves efficient and competitive through AWD and LHD, plus the support of the current platforms like Anzac, FFG and the amphibs, and that’ll put us in a position to have a discussion with government that says, “In order to meet this huge build program we need to find a way to sustain that capability which we will have built over the next three or four years”.

We don’t want to lose that efficiency, we don’t want to start again.

And if you look at it that way there’s enough work for everybody.

ADM: So is the work you’re doing on the AWD and the LHD your preparation for those future opportunities?

McDowell: Yes.

The one thing that we can control is our performance.

So if we can get that right…

And the things we don’t control are when stuff pops up and the new DCP, what government policy is, etc but I would rather have that discussion from a standpoint of being an efficient supplier.

The other growth market for us is security, a partial defence market.

So whilst you have all those curious other agencies, you know, your DSD and those sorts of guys and cyber, all of that is fungible across the commercial market, the banks, the insurance companies, the other agencies of government – the Attorney General and so on – so we see significant growth there, particularly around cyber and the movement of product that we have in the Detica company in the UK and the US into this market.

ADM: Would you care to put figures that?

McDowell: The maritime market is in the DCP so you’ve just got to add the numbers up.

Security is a very, very, fragmented market, that’s what makes it hard for us, that’s why it’s been very hard for defence companies to penetrate it I think.

We probably have a small $20 million business today in security: could we get that up to $100 million in five years?

I would think so.

ADM: The first of the ANZACs to be fitted with the new CEAFAR and CEAMOUNT radars, HMAS Perth, was supposed to sail today from the CUF down in Western Australia.

Is the rest of the ASMD upgrade going to be carried in WA or could some of it be done in Williamstown as well?

McDowell: We are currently only contracted to do the first one.

But if we were contracted to do the rest, they would all be done in the west.

That’s where the experienced workforce will be.

ADM: The Joint Strike Fighter (JSF) is still the biggest project in the DCP.

What does that mean to BAE Systems Australia?

What’s the potential, both for manufacturing and in service sustainment?

McDowell: Well in manufacturing we still hold out the hope that we’ll be able to get the vertical tails done here and we’re closing in on a final decision this year, and that’s a $500 million opportunity for us, give or take.

We’re still quite confident we can get that up.

For sustainment, I think the jury is still out because we don’t know the sustainment model for JSF period, never mind the model for Australia.

So how much will the RAAF want to take up the global sustainment solution?

How much will they feel they need to have in Australia?

How much of that will Lockheed want to prime?

How thick or thin will that prime contract be?

But I would have hoped that we could sustain our workforce in Williamstown, as the F/A-18 runs down, to take over that work, so that’s obviously our plan.

Whether that comes to pass or not, I think there are too many decisions still to be made for me to really confidently predict that.

ADM: Finally, to explore your view as a global player, you’ve expressed the view that you shouldn’t try to duplicate what’s already available at a global level here in Australia, and if you’re actually going to go into the export market it’s global supply chains rather than competing with established players that seems to be the more promising model.

Is that a reasonable summary?

McDowell: Yes, except where you have a product that’s in a real niche, like a Nulka for example, which is effectively a piece of US capability, as the vast majority of it is deployed on US naval ships.

So I think you could enter the export market with that but otherwise I think you’re on a hiding to nothing.

For example, an armoured vehicle trying to take on the US and the Europeans in the quantities in which they’re building these things: you may sell a couple of hundred but certainly not enough to cover your investment.