As the treasurer lauds supply-side economics, a once-controversial recovery theory is gaining traction.This is the essence of modern monetary theory – that government budgeting is nothing like household or business budgeting, for the simple reason that government can create money.
Leading shipbuilder may be forced overseas
It starts with a giant cutout: a computer-guided router moves over a sheet of aluminium laid flat on a table, cutting as many shapes as possible without wastage.
“It’s a bit like a giant Ikea flat pack,” says Wayne Murray, chief of Australian-based shipbuilder Austal’s yard in Cebu in the southern Philippines.
In another big shed, the bits are being put together: no allen keys here, just flaring welding torches. The end result is a huge catamaran in gleaming metal, workers busy fitting internal wiring and preparing to insert Rolls-Royce gas turbine engines and water-jet propulsion units. Alongside, a sister vessel is rising from the floor, weld by weld.
When completed later this year for Taiwan’s Brave Line, these two 50-metre ferries will take up to 550 passengers at speeds up to 74 kilometres an hour from the big city of Kaohsiung to the scenic Penghu islands in the Taiwan Strait.
Brave Line’s order, valued at $44 million with an option for a third vessel, is in the bulging order book for high-speed aluminium ferries that has Austal doubling its capacity and the 500-strong workforce at this shipyard on Cebu island.
On the other side of the world in Mobile, Alabama, shrouded in more security, Austal’s 4000 American workers are completing the eighth of 15 near frigate-sized ships for the United States Navy. Known as the Independence-class of littoral combat ships, the needle-nosed trimarans are armed with rapid-fire guns, helicopters and missiles. The US Navy uses them in the South China Sea, among other places. Each costs about $580 million, with Austal reporting a 7.6 per cent profit margin.
Last year, Austal was one of five commissions awarded by the Pentagon, each worth $US15 million, for US-based shipbuilders to come up with designs for a new frigate. It is a long shot for a design based on a trimaran hull − no other navy has ordered this type from Austal – but at half the cost of a conventional frigate, the class offers a quick way for the US Navy to rebuild its fleet to the target set by Donald Trump of 355 ships. Selection would be a “game-changer” for Austal, propelling it into the big league of arms suppliers, says analyst Aiden Bradley, at Perth investment firm Hartleys.
Currently, Austal seems poised to report a big jump in profits, from a meagre $15 million recorded on $1.3 billion in revenue in 2016–17 after a lot of special charges. In July–December 2017 it reported $25.6 million net earnings on $653 million in sales.
But amid this success, a question is forming. Can Austal keep building ships in its home base at Henderson, just south of Perth?
Two years ago, Prime Minister Malcolm Turnbull’s government announced an ambitious program for domestic naval shipbuilding, based on $90 billion in contracts to re-equip Australia’s forces. The big ships, the frigates and submarines would be built by successful tenderers in Adelaide at the government-owned ASC yard that built the Collins-class submarines and is finishing the last of three air-warfare destroyers. Smaller patrol vessels would be built at Henderson in Western Australia.
Christopher Pyne, the minister for defence industry, saw this development as launching Australia into the big time as a military equipment exporter. It would be ironic if the result of the tender process was to force Australia’s most successful private-sector exporter of naval vessels overseas.
With most of the contracts now awarded, Austal has been left with minor pickings, a $335 million order for 21 small patrol boats, which will be donated to Pacific island countries. A $3.6 billion order for larger offshore patrol vessels for the Royal Australian Navy went to German shipyard Lürssen, which had partnered with Civmec, heavy engineers with as yet no shipbuilding operations. Austal had teamed up with another German naval yard, Fassmer.
The navy’s focus on capability eclipsed the government’s industrial policy, says Marcus Hellyer, defence procurement expert at Canberra’s Australian Strategic Policy Institute. “I suspect that when Defence and government went out to the market, when they said it had to be built at Henderson, they were assuming the only people in Henderson would be Austal,” he said. “Then the market turned around and surprised them.”
Civmec will now construct its own new yard at Henderson just to build 10 offshore patrol vessels (the first two will be built at ASC, to fill a gap foreseen in its workload). It’s a recipe for future overcapacity, as occurred in WA after the boom in work for offshore gas platforms, said company analyst Bradley.
Then in May this year, Canberra announced that a $35 billion contract for nine new stealthy anti-submarine frigates was going to Britain’s BAE Systems, beating designs from Italy’s Fincantieri and Spain’s Navantia. Austal had teamed up with ASC to offer local content for BAE but there is no mention yet of what, if any, work will be spun off for them.
At Henderson, facing the winter-blue waters of Cockburn Sound, orange-clad welders are high up on gantries completing a 109-metre catamaran ferry for Denmark’s Molslinjen, capable of carrying 1006 passengers and 425 cars. The first Pacific patrol boat, destined for Papua New Guinea, is already in the water, and the next three are forming in a nearby shed.
It’s a long way from founder John Rothwell’s start making tinnies for WA cray fishermen, after migrating at age 10 with his Dutch family and leaving school at 15. Rothwell sold that business in 1984 to big-spending Christopher Skase, and bet the proceeds on newly opened China being interested in fast aluminium ferries. Rothwell founded Austal in 1987, listing it in Australia in 1998, and remains its chairman with 9.4 per cent ownership.
Now the American business is the tail that wags the dog, contributing 85 per cent of revenue. “While things have been disappointing here, in the US they’ve got a lot of political goodwill over there, among Alabama politicians,” said Perth analyst Bradley, adding: “That is glaringly different to how they’ve been treated and perceived here in Australia.”
Meanwhile, six years after it began operations, Austal’s Philippine shipyard is starting to balance the home base at Henderson in civilian work. It’s been a process for the shipbuilder that started when the resources boom left it facing a shortage of skilled workers in Australia. One of the next builds in Cebu will be an 83-metre trimaran ordered by JR Kyushu Jet Ferry for $68 million, to run between Japan and South Korea. By the end of this year, the yard will be able to build the biggest vessels in Austal’s catalogue, such as two 117-metre ferries ordered last year for $190 million by Fred. Olsen Lines to serve Spain’s Canary Islands.
Now the Cebu yard is training its third batch of new local hires as welders and its second batch of electricians. “One of the biggest attractions is that all of our workforce can speak English, so communication is immediate,” said Murray. “You find Filipinos all around the world, so they’re very flexible, very accommodating, and pleasant people to deal with.”
With quality kept up to the same standards as Henderson − Cebu recently delivered a luxurious 56-metre ferry with reclining seats and large picture windows for Germany’s Förde Reederei Seetouristik, for runs to the Heligoland islands in the North Sea – Austal can take advantage of the country’s low labour costs.
Around Asia, Austal is also spruiking another ship it builds for US forces, a 103-metre catamaran known as the Spearhead-class, which can deliver 300 troops and vehicles, or a field hospital, at 43 knots. “There is a need for those sorts of vessels around the Asian region,” Austal’s chief defence salesman, ex-RAN rear admiral Davyd Thomas told me at Henderson. “They’re an exercise of sovereignty. They can take troops to islands that you wish to have a presence on …This is our niche, this is what we do: high-speed, rapid deployment, troops and equipment and the like.”
The Philippine navy, long used to hand-me-downs from friendly powers, was recently allocated 77 billion pesos ($A1.95 billion) for new ships by President Rodrigo Duterte. “They really don’t like that they’ve got this second-hand stuff,” Murray said. “When they come down here and look around our design facilities, they walk out with chin higher, knowing they have this in-country capability.” Austal is ready to build and deliver in Cebu, even a littoral combat ship if Washington authorised the technology transfer. “We have the capability, undoubtedly,” he said.
But what will be left at Henderson when the Pacific program finishes, while better margins divert civilian orders to Cebu, and US naval orders must by law be fulfilled in a US yard?
Before the bad news on the offshore patrol vessels, Perth brokerage Argonaut saw Austal’s anticipated involvement as “very important in underpinning the Henderson operations with a steady baseload of work for at least a decade from 2020”. Utilising up to half the capacity at Henderson, it would have lifted confidence in the Australian operations.
“The big question mark is over their Aussie business, which continues to lose money, and whether Austal is an Australian company in five years’ time,” adds Aiden Bradley. It’s not exactly a triumph of industrial policy for Christopher Pyne.
This article was first published in the print edition of The Saturday Paper on Aug 4, 2018 as "Shipping out".
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