The Collins Class Submarine Story

by Peter Yule

  lems as there were inherent conflicts of interest between Kockums’

  position as a major shareholder, major sub-contractor, and design

  authority. Further, the difficulties encountered by Kockums in the

  1990s had led to a decline in its capability and Briggs felt that

  it no longer had the design expertise to overcome the deficien-

  cies in the submarines. In his view a sale of the shares to HDW

  would not resolve these difficulties. After carrying out technical

  due diligence on ASC, HDW indicated that it could not promise

  to do better than Kockums with the noise or propeller problems.

  Further, HDW insisted on complete control and Briggs felt that

  ‘we were going from a Kockums frying pan to a HDW fire’.2

  Following the lead set by Don Chalmers in 1998, Peter Briggs

  and the submarine capability team looked to the United States

  Navy for technical advice and assistance. The Americans offered

  their leading submarine builder, Electric Boat, as a technology

  partner so that ASC could turn to them for help rather than to

  Kockums or HDW. They had several motives for their involve-

  ment. As the US Navy was supplying Australia with highly clas-

  sified equipment for the fast-track project, the Americans were

  concerned that their technology would not be secure in a Swedish

  or German-owned shipyard. It is also widely believed in Sweden

  and Australia that the Americans were keen to become involved in

  the conventional submarine business.3 During the Cold War their

  all-nuclear submarine fleet tracked the Soviets through the world’s

  oceans, but in the vastly changed situation of the late 1990s they

  became more interested in the shallow waters of South-East Asia

  and the conventional submarines that operated there. It is also

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  widely believed that the Americans were interested in using Aus-

  tralian submarine technology to build submarines for Taiwan. The

  assumption drawn from these considerations is that the US Navy

  discouraged the Australian government from allowing HDW to

  retain Kockums’ shares in ASC.

  The government for its part was keen to encourage Electric

  Boat’s involvement, partly because of the assistance that might be

  available for the submarines but also in the hope that the com-

  pany might be a buyer for shares in ASC. John Moore strongly

  supported American involvement. He recalls that by mid-1999, ‘I

  had lost all faith in Europeans – they were obstinate, unhelpful,

  downright rude and technologically backward’.4

  The scepticism of some in the submarine project – such as Greg

  Stuart, who saw Electric Boat as technologically overrated and

  ignorant of conventional submarines – was ignored in the rush to

  enlist American aid.

  There was thus strong opposition to HDW holding shares in

  ASC, but as the owners of Kockums how could the Germans be

  kept out? The answer came, not surprisingly, from the ubiqui-

  tous Peter Horobin, who had long railed against the conflict of

  interest inherent in the structure of ASC and, from his time advis-

  ing AIDC, was one of the few people who knew the contractual

  background of the whole project. Horobin met with Peter Briggs

  in Perth in December 1999 and advised him that the takeover

  of Kockums by HDW gave the Commonwealth the right to pre-

  emptively purchase Kockums’ shares in ASC. Peter Briggs and

  his team saw this as a way to take control of the project, while

  John Moore enthusiastically said: ‘We’ll do it and get rid of the

  buggers.’

  Prime Minister John Howard ‘nearly fell off his chair’ when

  John Moore told him of the proposal to buy Kockums’ shares,

  saying: ‘We’re meant to be privatising things and here you want me

  to buy a company?’ However, John Moore managed to convince

  him and on 5 April 2000 the cabinet agreed to buy all of ASC.

  Negotiations over the next few months led to a final purchase

  price of $33.8 million, plus a $20 million dividend which was

  divided between Kockums and ASC.5

  While the decision to buy Kockums’ shares in ASC was a short-

  term response to the problems of the submarine project and also

  reflected a desire to encourage American involvement with the

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  submarines, little consideration appears to have been given to the

  long-term consequences for ASC and Australian naval shipbuild-

  ing. Rejecting HDW meant abandoning the possible long-term

  benefits of becoming part of a German/Swedish/Australian consor-

  tium with the greatest body of conventional submarine expertise

  and the largest order book in the world. The possibilities included

  working with a company with ‘a kindred design philosophy’,6

  building submarines for Asian navies, developing air-independent

  technology and having greater flexibility in the design and build-

  ing of future Australian submarines. The alliance with Elec-

  tric Boat has no prospect for export sales because the United

  States does not sell submarines and it would be extremely wary

  of allowing ASC to sell submarines that incorporate American

  technology.

  Doug Jones, a lawyer at Clayton Utz who advised on the pur-

  chase, says that the purchase of Kockums’ shares effectively con-

  verted the Commonwealth into the prime contractor for the sub-

  marines, and as such it should have had much more control over

  the project. However, the Commonwealth held its shares partly

  through the Department of Industry (the Kockums shares) and

  partly through the Department of Finance (the AIDC shares), so

  it did not speak with one voice. Jones observed that the takeover

  did not solve the poisonous relationship between the contractor

  and the Commonwealth, with continuing bitter disputes. ASC was

  still treated as a separate entity even though the Commonwealth

  owned the company.

  An immediate and predictable consequence of the sale of its

  shares in ASC was that Kockums lost interest in ASC, although it

  remained the design authority for the Collins class. Tomy Hjorth,

  who had been chairman of ASC throughout the 1990s, told the

  government that ‘Kockums would be tough in the future with

  regard to its commitment’. With no financial interest in ASC and

  amid the turmoil of the merger with HDW, it is not surprising

  that support for Australia’s submarines became a low priority for

  Kockums.

  The position of Kockums in the project was further affected by

  a deterioration in its relationship with ASC during the fast-track

  program. Previously they had stood together in resisting the navy’s

  claims that the submarines were seriously flawed, but there was

  growing frustration among ASC staff, who felt

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  caught between the customer, who was giving us grief and

  saying ‘we don’t like this’ and we were turning to Kockums

  and s
aying ‘this doesn’t work’, and they were saying ‘yes it

  does – your sailors aren’t operating it properly’. And we were

  taking this message back to the customer and the customer

  gets even more annoyed thinking we were trying to evade

  responsibility.7

  During the fast-track program there was great pressure to act

  swiftly and the relationship became even more fragile, with ASC

  and Kockums ceasing to work as a team. ASC found it did not

  have time to work through Kockums as Kockums’ response times

  for design changes were too slow for the fast-track timetable.

  Consequently ASC effectively took responsibility for the design

  itself.

  Kockums moved its staff off the ASC site at Osborne to an

  office in central Adelaide, consequently losing touch with what

  was going on with the submarines and being increasingly left out

  of the loop between ASC and the capability team. An indication

  of the changed relationship was that in much of the litigation that

  took place in 2001–03, ASC took the side of the Commonwealth

  against Kockums.

  The ASC board was restructured, with the Swedish board

  members replaced by Commonwealth nominees and John Prescott

  taking over from Tomy Hjorth as chairman. At the end of January

  2002 Hans Ohff retired as chief executive officer, to be replaced

  later that year by Stephen Gumley, a Tasmanian Rhodes Scholar

  with a PhD in fluid mechanics. He had worked for a number of

  high-tech Australian companies and spent some years with Boeing

  before coming to ASC.

  Gumley says that when he started at ASC the starkest issue was

  low morale because the building contract was almost finished and

  the company had no certainty of future work. At that time the

  chances of getting the through-life support contract for the sub-

  marines appeared bleak. ASC needed to repair its relationships

  with the navy and the Defence Department and demonstrate that

  it could successfully carry out maintenance and repair of the sub-

  marines. This meant that the relationship with Kockums needed

  to be sorted out, and in particular the intellectual property issue

  needed to be resolved. Gumley’s strategy was to turn ASC from a

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  building company into a maintenance company, and for this it was

  critical to get the through-life support contract. Although one of

  the main arguments for building the submarines in Australia had

  been to give the infrastructure and expertise to maintain them,

  the bad blood between the company and the Defence Department

  meant that there was a real possibility that ASC would not get the

  support contract, with the department investigating several other

  options. It was not until December 2003 that the contract, worth

  about $3.5 billion over 25 years, was awarded to ASC, ensur-

  ing that the submarines will be maintained through their lives by

  those who built them. This contract symbolised the government’s

  acceptance of the strategic importance of the submarines and the

  need to give them effective long-term support.

  Along with the long-term support contract, the issue of the

  design authority for the submarines was critical in the early 2000s.

  Until 1999 it had never been questioned that Kockums would

  remain the design authority, but the takeover by HDW, the per-

  ception that Kockums’ design capability was declining, and the

  closer ties to America of both the Australian government and the

  navy led to changing views of the position. The crux of the matter

  was a series of bitter battles between Kockums and the Com-

  monwealth over the ownership of the intellectual property of the

  submarines’ design.

  While Kockums was a shareholder in ASC and closely bound

  up in the project, intellectual property was rarely if ever discussed.

  However, the change in the firm’s position led to hurried perus-

  ing of the contract as lawyers sought to determine who owned the

  design of the submarines. Kockums, particularly after its takeover

  by HDW, was determined to protect its rights. The merged com-

  pany was the world leader in conventional submarine building and

  it did not want a possible ASC/Electric Boat consortium to emerge

  as a competitor. Kockums was wary of the increasing American

  involvement in the Collins project and feared where this might

  lead. Undoubtedly, they had heard the rumours emanating from

  Canberra that the government wanted General Dynamics, Elec-

  tric Boat’s parent, to become a major shareholder in ASC. Indeed,

  the government had made a decision to introduce Electric Boat

  as a capability partner and potential 40 per cent equity owner of

  ASC.8 It was these fears that lay behind Kockums’ reaction when

  its propeller was sent to America.

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  The Commonwealth initially believed that it had few rights to

  the intellectual property, but advice from Clayton Utz indicated

  that this was not necessarily the case and it decided to fight Kock-

  ums’ attempt to keep the propellers away from the Americans.

  Although two propellers had already been sent to America, Kock-

  ums took action in the Federal Court to prevent further shipments.

  In April 2001 Justice Wilcox dismissed Kockums’ application,

  largely because the despatch of a third propeller could not fur-

  ther harm Kockums, but he did confirm that Kockums owned the

  design rights to the Collins class submarines. A later appeal over-

  turned the original judgment on the ground that Justice Wilcox

  had ‘erred in process’, but the original question of the provision

  and use of intellectual property was left undecided.

  After the initial Federal Court decision, project director Paul

  Greenfield and project commercial manager David Elliston held

  discussions with Kockums and HDW on the terms of a possible

  settlement and drew up a draft agreement. Greg Stuart believes

  this would have been an excellent solution and would have given

  a long-term alliance with a company with ‘a kindred design phi-

  losophy’. However, when they took it to Mick Roche, the head

  of the Defence Materiel Organisation, he said there would be no

  settlement yet because ‘They haven’t bled enough’.9 It took three

  more years of bitter dispute before a settlement was reached.

  The propeller case was only the most prominent of a wave

  of litigation between Kockums and the Commonwealth between

  2001 and 2003 involving intellectual property rights and technical

  disputes. Kockums’ general counsel, Bo Benell, believes that the

  Commonwealth pursued these vigorously in the expectation that

  Kockums would ‘give up’ and it was only when it became clear

  that Kockums was going to fight that the Commonwealth began

  to think of making a settlement.

  When the two sides began negotiating, one of the central

  issues became the welding defects on the Swedish-built sections of

  Collins. Collins return
ed to ASC in Port Adelaide in April 2001 for

  its first full-cycle docking, a regular maintenance period intended

  to take between a year and 18 months to complete. Simon Ridg-

  way, who was ASC’s project manager for the full-cycle docking,

  recalls that during routine inspections a large number of weld

  defects were discovered in sections 300 and 600, the two sections

  that had been built in Malm ö. Although welding problems had

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  been identified while the sections were still in Sweden and these

  had been worked on at various times by ASC, an independent

  review found numerous faulty welds and cracks in the Swedish

  sections while the Australian-built sections showed close to zero

  defects. The consequence for Collins was that the full-cycle dock-

  ing took four years to complete.

  However, the news of the defects was far from unwelcome to

  those involved in the negotiations with Kockums over intellectual

  property, as it gave them a strong bargaining chip. Kockums was

  looking for a payment of about $50 million for its intellectual

  property, and the cost of fixing the welding defects was a use-

  ful tool for bringing that sum down. While not denying that the

  welding was poorly done, the Kockums view is that the Common-

  wealth exaggerated the defects because they saw it as the ‘counter

  to use to trade for Kockums’ intellectual property’.10

  The issues were discussed with considerable vigour until the

  middle of 2004, when a settlement was finally agreed. The central

  terms of the settlement were:

  Defence and ASC have full access to Kockums’ intellectual

  property for maintaining, supporting and upgrading the

  Collins Class submarines throughout the life of the Class.

  Formal termination of the various contracts between the

  parties for the design and construction of the submarines,

  and subsequent settlement of all claims arising from these

  contracts.

  Provision of a contract under which Defence and ASC

  may have access to Kockums’ design services for support of

  the Collins Class submarines as required.11

  Kockums was paid $25 million for its intellectual property rights

  and was released from its warranty under the contract.12 The

  settlement gave the Defence Department, ASC and their sub-

  contractors access to Kockums’ intellectual property, within a