An Arms Deal Becomes a Jobs Deal in Australia

By Rob Taylor Features Dow Jones Newswires

CANBERRA, Australia--A contest to equip Australia's military with new armored vehicles is emerging as an economic battleground for regions hit by mining and manufacturing downturns, with one bidder pledging to revive a pivotal part of the country's former auto industry.

Continue Reading Below

British defense giant BAE Systems PLC said this week that it would build 225 wheeled combat vehicles in a former Melbourne car factory that until recently was one of Australia's manufacturing jewels, if it wins the opening part of bidding against Germany's Rheinmetall AG.

At roughly US$11.2 billion, the armored-vehicle contract is among the most lucrative deals of its type at the moment. The country's conservative government will decide the winner early next year.

Australia was the world's fifth-largest arms importer last year, according to the Stockholm International Peace Research Institute, accounting for 3.6% of global weapons imports.

The country has embarked on a US$156 billion plan to reshape its military into one of the most potent small forces in Asia-Pacific, a region facing security challenges such as North Korea's nuclear and ballistic-missile program, China's growing naval strength, and uncertainty about U.S. defense policy.

Over the next decade, Australia's military will receive new warships, advanced submarines, stealth warplanes and amphibious forces, in part to safeguard South China Sea and Indian Ocean sea routes that carry around one-third of global maritime traffic.

Continue Reading Below

The defense-hardware splurge is being viewed as a bonanza by Australian state governments anxious to tap new sources of growth and jobs as the economy struggles to adjust to a slowdown in resource exports and a global shift toward cheaper manufacturing centers.

"Victoria is the traditional home of vehicle manufacturing, and this project would create thousands of jobs at a time when our automotive sector is in transition," said Daniel Andrews, premier of the southeastern state, after BAE's announcement Tuesday. He pledged unspecified backing for the company from his center-left state Labor government.

BAE sought to bolster its candidacy by offering to build vehicles at a former car plant operated by Holden, a General Motors Co. subsidiary.

Holden was once a symbol of Australia's postwar manufacturing success, while Victoria was the country's answer to Detroit: an industrial heartland now losing traditional manufacturing jobs. This year, Holden followed Ford Motor Co. and Toyota Motor Corp. in ending production in Australia due to competition from lower-cost imports. GM had said the pullout would result in more than 2,900 job losses.

BAE said it would build a defense center in Holden's former Fishermans Bend engine plant that would manufacture its AMV35 armored vehicle, offered in partnership with Finland's Patria, if the company wins the contract. "We can be part of Victoria's ambition to develop a defense industry that is globally focused," said BAE Systems Australia CEO Glynn Phillips.

The armored-vehicle project, known as Land 400, is the largest undertaken by Australia's army, which has fought alongside U.S. forces in every major conflict involving Washington since World War I. The program aims to replace, in stages, a range of wheeled reconnaissance vehicles and Vietnam War-era troop carriers.

The second, larger phase involves replacing an additional 450 tracked troop carriers with vehicles featuring advanced armor, lower profiles and remote gun turrets.

The project is expected to create several thousand direct and indirect jobs, according to state and federal government projections and the manufacturing sector.

Last month, Rheinmetall chose Queensland state--where 20,000 jobs have been lost since 2015 in a mining downturn, according to the state's resource industry--as its preferred site to build its Boxer armored vehicle should it win the contract battle. The Queensland government, which also offered unspecified backing to create jobs in defense, said the German company's move was a vote of confidence in the state's defense-industries sector.

While details of regional incentives aren't usually made public, state governments offer enticements such as preferential tax treatment to attract investment. The arms companies have been courted by various states in return for local manufacturing involvement, while state and federal lawmakers have lobbied for contracts in job-starved constituencies.

Rheinmetall, already the largest supplier of military vehicles to the Australian military, said that if successful, it would establish a production line in southeast Queensland to design, build and export military vehicles, turrets and tactical equipment, creating advanced manufacturing jobs.

Australia's government plans to lift military spending to 2% of output by 2021 and has pledged to spread construction of naval frigates, submarines and patrol ships to help struggling regions protect jobs and prolong a record 25-year growth streak.

BAE is also in that contest, putting forward its Type 26 frigate against designs from Spanish state-owned shipbuilder Navantia and Italy's Fincantieri SpA.

The Asia-Pacific is expected to be the main growth area for armor over the next decade. China, India, Malaysia, Pakistan, the Philippines, Singapore, South Korea and Thailand all have armored-vehicle replacements under way. Middle East nations including Saudi Arabia and the United Arab Emirates are re-equipping as conflict continues in Syria and Iraq.

Write to Rob Taylor at rob.taylor@wsj.com

(END) Dow Jones Newswires

August 02, 2017 05:18 ET (09:18 GMT)