Category: Business General

Australia’s Berry Amendment

The Berry Amendment requires U.S. defense procurement come from domestic sources, Australia does not have an equivalent.

The U.S. protects its national interests and its domestic defense capability and capacity through a series of strict common sense procurement rules governed by legislation such as the Buy American Act and the Berry Amendment.

In order to protect the U.S. industrial base during periods of adversity and war, Congress passed domestic source restrictions as part of the 1941 Fifth Supplemental Department of Defense (DOD) Appropriations Act. These provisions later became known as the Berry Amendment. The Berry Amendment (Title 10 United States Code [U.S.C.] §2533a, Requirement to Buy Certain Articles from American Sources; Exceptions) contains a number of domestic source restrictions that prohibit DOD from acquiring food, clothing (including military uniforms), fabrics (including ballistic fibers), stainless steel, and hand or measuring tools that are not grown or produced in the United States. The Berry Amendment applies to DOD purchases only.

The [CRS] committee supports maintaining the integrity of section 2533a of title 10, United States Code, commonly referred to as the `Berry Amendment,’ which requires 100% U.S. content for certain products sourced for the Armed Forces. The committee is concerned with protecting the supply chain and domestic production base for components and weapon systems that are vital to the Armed Forces. In addition, the practice of sourcing certain products and materials from foreign entities in violation of the Berry Amendment may harm the domestic industrial base, as well as result in U.S. job losses. Therefore, elsewhere in this Act, the committee includes a provision that would require the Inspector General of the Department of Defense to periodically review the Department’s compliance with established restrictions.

Congressional Research Service, Valerie Bailey Grasso, Specialist in Defense Acquisition, February 24, 2014, https://fas.org/sgp/crs/natsec/RL31236.pdf

Relevant to Galactic Bioware is the US DOD’s Harnessing Emerging Research Opportunities to Empower Soldiers (HEROES) program which is strengthening each year.

The budget request contained $115.2 million in PE 62143A for Soldier Lethality Technology. The committee is aware of the work being done by the U.S. Army’s Combat Capabilities Development Command (CCDC) Soldier Center in improving the protection, survivability, mobility, and combat effectiveness of the Army. The committee is also aware that the Harnessing Emerging Research Opportunities to Empower Soldiers (HEROES) program is an ongoing joint research and development initiative involving both academia and industry that accelerates research and innovation through integration of intellectual assets and research facilities. The committee believes programs like HEROES provide benefit to research in areas of advanced ballistic polymers for body armor, fibers to make uniforms more fire resistant, and lightweight structures for advanced shelters that provide tangible benefits to the warfighter. To ensure the Army remains at the cutting edge of technology in these critical areas, the committee recommends an increase of $5.0 million in PE 62143A for the HEROES program.

NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 2020, Report of the Committee on Armed Services, https://www.govinfo.gov/content/pkg/CRPT-116hrpt120/html/CRPT-116hrpt120.htm

Perhaps the closest Australian equivalent is the Land Combat, Amphibious Warfare and Special Operations stream of Defence’s innovation priorities. A focus on special operations capabilities including enhanced human performance.

Land forces require the mobility, firepower, protection and situational awareness capabilities to deploy quickly, achieve their objectives and return home safely.

Defence is seeking innovative proposals for leading-edge equipment to bolster ADF land forces in these capability areas, including amphibious warfare. The Defence Innovation Hub is seeking innovative approaches to developing advanced protection systems for vehicles and individual soldiers that do not inhibit mobility, developing technology underpinned by automation, autonomy and autonomous systems to provide capability enhancements to the land force, enhancing the efficiency and effectiveness of combatants in hostile environments through the use of new and emerging technologies, and delivering improved signature management and disruption technologies.

Australian Defence Force’s Defence Innovation Hub

Australia’s approach through the Australian Government’s Commonwealth Procurement Rules (CPRs) is significantly less developed, less ambitious and may require attention given worsening regional geopolitical conditions.

The Commonwealth Procurement Rules provide an exemption for “procurement of goods and services by, or on behalf of, the Defence Intelligence Organisation, the Australian Signals Directorate, or the Australian Geospatial-Intelligence Organisation.” but do not mandate an explicit preference for domestic supply where that supply exists or could exist.

The Australian Defence Force is undergoing a review intended to strengthen how defence does business with Australian industry but sets out no specific objectives. The 2016 White Paper outlined a strategy for resetting the Defence-industry partnership through the Centre for Defence Industry Capability (CDIC). The purpose of the CDIC is to provide strategic leadership for the sector, and to help build the capability and capacity of Australian industry to support the ADF.

The CDIC will be funded at approximately $23 million per year, which will be redirected from existing Defence industry programs funding. The CDIC is designed to help transform the Defence and industry relationship, and to fund new industry development, critical skilling and export programs, as well as facilitate access to Defence’s new innovation programs for small to medium enterprises. In consultation with Government, the CDIC will drive the strategic vision for the defence industry sector, building on the capability needs identified in the Integrated Investment Program. The CDIC will focus on delivering initiatives within three core activities—industry development, facilitating innovation, and business competitiveness and exports.

https://www.defence.gov.au/whitepaper/Docs/2016-Defence-Industry-Policy-Statement.pdf

The “Final Report” handed down by the CDIC in 2020 does not quantify any goals for domestic procurement percentages or minimum dollar spend in the domestic sources. The 2020 Defence Strategic Update and 2020 Force Structure Plan also does not quantify any Australian procurement goals or objectives. Throughout 2020, the Minister for Defence Industry engaged with the Australian Defence industry and identified a number of opportunities to improve Defence engagement with [Australian] industry and to build a more resilient Defence industrial base, but only at a procedural level.

A key opportunity identified is that it may be timely for the Department of Defence (Defence) to conduct a review of the Australian Standard for Defence Contracting (ASDEFCON) suite of tendering and contracting templates and relevant procurement processes and practices to support these objectives. 

https://www1.defence.gov.au/business-industry/procurement/contracting-templates/asdefcon-suite#ASDEFCON%20and%20Defence%20Procurement%20Review

The articles go on to say “Some of the opportunities for Defence procurement contracting processes and practices identified by the survey responses include:

  • simplifying and streamlining the ASDEFCON contracting templates;
  • removing complexity and onerous flow down obligations that lead to additional cost and risk to the suppliers;
  • developing subcontracting templates for industry to use;
  • expanding Defence commercial acumen within its procurement practices;
  • mandating Defence payment terms through the supply chain and considering partial payments of milestones to facilitate cash flow to industry, including small to medium enterprises (SMEs); and
  • relaxing some barriers to industry’s (particularly SMEs) participation in Defence’s supply chain.”

Much more could be done to stimulate and sustain a robust domestic defence industry in Australia and there seems to be political ambitions to do so, but it has to start with public quantified goals for domestic supply to incentivise talent to start and work for Australian defence companies. Current (public) goals for the domestication of defence supply are unquantified and not timelined. Australia does not have the demand or budget to be self-reliant across the military and intelligence capability spectrum, but in certain spots, could benefit from publicising the intention (subject to availability, quality and performance of course) to transition specific spending from foreign suppliers to domestic ones. This could enable crowding-in and a right-sizing of private investment that is matched to the potential transitioned spending. Done well and in focused “bite size” waves, the Australian economy generally will benefit as will the security outcomes in an increasingly uncertain future.

Oligopolies are great for entrepreneurs

An oligopoly has various academic definitions that describe the same kind of market structure: an inefficient market with market power concentrated in a small number of firms where consumers are overpaying for the particular good or service at a given level of quality. Overpaying takes various forms including an inferior product being overcharged for, or an OK product commanding a significant price premium due to the market structure (e.g. artificially restricted supply).

Sometimes oligopolies are disguised as competitive markets, sometimes this is by accident but most of the time, this is by design of the key market actors.

In Australia, superannuation is an example of a large oligopolistic market. It spends millions of other people’s money to maintain the illusion of competition, but does not have the reality of it.

How to work out if a market is an oligopoly

  • Market share is consolidated in a small number of large firms.
  • The large firms have been in the market for a long time i.e. none of the large incumbent players are new firms (new being post-internet era).
  • Limited technology absorption and adoption by the large market participants i.e. products are not evolving with the times.
  • Market share not correlated to product or service quality or price i.e. better products don’t gain market share over time.
  • Good entrepreneurial businesses acquired quickly and shelved or drowned by regulators in uneven scrutiny.

Why is it preferred to enter oligopolies over competitive markets as a start-up?

  • Compared with competitive markets, in oligopolies incumbents have forgotten how to compete and are easier to outmanoeuvre at market-entry and going forward.
  • The people who made the oligopolist firm what it is today are generally no longer involved in the business and have been replaced with salaried bureaucratic executives, not founder executives.
  • The oligopolist will have lost its talent edge and will likely have no “zero to one” credentials to respond to you if you can hit the market with genuine innovation.
  • The market size & revenue opportunity is easy to model as you just need to sum up the current market impact of a few incumbent firms to get an accurate picture.

What are some of the challenges in fighting oligopolists?

  • The oligopolist gravy train runs deep and much deeper than you think. Do not underestimate the supply chain, distribution chain, media and regulator alignment to the status quo and mean-reversion impact that they will have against your entry. To survive, you will often have to show the ecosystem around the incumbents that there will be more gravy with you or you need a thick enough skin / capital moat to blast through them and not require their support.
  • You can accidentally invigorate the opponents & create excitement in the market which has the impact of money & talent flowing to one or more of the incumbents when they see the potential of what you’re doing, making them worthier competitors. You need to remain discreet for as long as possible, and when you do launch, strike hard and fast and manage leaks / defection risk carefully until launch.