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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313
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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315
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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317
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
