Confidential government report warns 1,500 SME defence contractors at risk of failure

Over 1,500 small- and medium-sized defence contractors could collapse due to the Federal Government’s budget cuts, according to an internal report drafted by the Enterprise Connect group and delivered to Industry Minister Greg Combet.

Australian Industry and Defence Network president Graham Biesse told SmartCompany this morning the industry remains upset about the cuts and has heard anecdotally that many of the organisation’s members are on the brink.

“This has exacerbated the situation, particularly with the SMEs working in the manufacturing industry. They’re the ones that are going to be hurt the most,” he said.

The warning comes after an aerospace manufacturing company producing parts for the Joint Strike Fighter was placed in administration last year.

A spokespesron for industry and innovation minister Greg Combet told SmartCompany this morning the Government “places a high value on the continued strength of Australia’s innovative and highly skilled defence industry”.

“The Gillard Labor Government approved more Defence projects last year than any Australian Government ever has”.

According to The Australian, the leaked report warns as many as half of the 3,000 SMEs that provide equipment and services for the Australian Defence Force are at risk of collapse – the same companies that are “driving innovation and delivering niche capabilities”.

“SMEs play a crucial role in ensuring the long-term viability and prosperity of the broader domestic defence sector,” the report says.

“A significant number are not sustainable and there is a risk that many of these clients will not survive, let alone drive innovation and become globally competitive.”

Industry veterans say the business can be fickle, as even minor changes to government funding can mean all the difference for a smaller SME.

The new report apparently mentions a South Australian business facing delays due to the Joint Strike Fighter project, along with a smaller company that invested in new technology to create equipment for the navy.

“Currently the company is yet to obtain a Defence contract, is facing financial instability after investing significant personal funds and struggling to retain a team who are necessary to ultimately deliver the technology,” it says.

While Biesse says he is unaware of this particular report, he isn’t surprised by its supposed findings.

“We’ve spoken to a number of our members and sought comments on what’s happening. And quite a number of them have expressed concerns.”

“This is what happens when you reduce the budget in a specific industry by a large amount.”

The government reduced the ADF budget by $5.5 billion in the recent federal budget, even as the report warned, “the most significant and immediate issue facing defence SMEs is a lack of predictable and continual work flow”.

Biesse says while it’s unlikely these companies will be able to simply turn around and find other work, it’s possible with some effort.

“There are quite a few barriers to entry in working in defence, especially at the top level of reporting and compliance that you need. We’ve seen a large number of companies just cease trading.”

“Some of them end up diversifying and get through it, but many of them leave for less risky areas.”