Australia’s defence manufacturers are essentially a cottage industry, with the average supplier employing only 13 people and achieving net annual sales of about $2.2 million.

These averages, drawn from the annual review of the industry by the Australian Bureau of Statistics, obscure the contribution of the major suppliers, such as BAE Systems, Lockheed Martin and Thales, but also underline the challenge of scaling up the domestic contribution to defence capability.

The typical manufacturer supplying Defence would be classed by the ABS as either a small (5 to 19 employees) or medium (20 to 199 employees) business enterprise.

While just under 70,000 people are employed across 5,500 private businesses supplying Defence, most are in services sectors. They keep the department ticking over, rather than contributing to the acquisition of new military capabilities.

For example, 24,400 of them work in information technology, legal, accounting and other professional services; 13,300 in construction; 4,100 in transport and warehousing; 2,900 in administrative support and 2,800 in education and training.

Only 11,400 workers are employed by 904 manufacturing businesses supplying Defence. These businesses include many highly innovative firms working on advanced  technologies in specialised niches.

The recently announced first round of defence industry development grants illustrates the typical scale of the sector. The Western Australian engineering firm Veem, which makes marine propulsion and stabilisation systems and has about 180 employees, received a $1 million grant to help buy a  machining tool and scanner for making propellers.

Queensland-based space technology start-up Black Sky Industries received $910,000 to purchase mixing tanks for making solid-rocket propellant. Victorian firm Total Precision Products, which has about 80 employees, received $491,000 for highly precise machining equipment.

The round of grants extended to 58 firms for a total of $16.5 million. The scheme is capped at $170 million over four years, with in batches every two to three months.

In the war in Ukraine, small and medium enterprises have made outsized contributions to military firepower, notably through development of drone technology. Three of the recipients in the first round of defence industry grants were involved in drone or counter-drone technology.

A common complaint among small and medium enterprises is that they face difficulty in dealing with defence procurement practices that have evolved to suit the needs of the prime contractors. The focus of the new industry development grants on this sector is therefore welcome.

However, the scheme is tiny compared with the Defence capability acquisition program, which is approaching $20 billion a year. A similar amount is spent sustaining equipment that is  already in service.

The lack of scale undermines the idea that boosting defence manufacturing would have multiplier benefits for the wider economy. Domestic manufacturing contracts with Defence represent 1.3 percent of the national manufacturing value-added, but with the decline of the importance of manufacturing in the last two decades, they contribute just 0.07 percent of GDP.

The ABS shows that the value-added (a measure of production, sale value less inputs value) on manufacturing contracts for defence was $1.96 billion last year. Of this, $1.5 billion was from the manufacture of transport equipment, while $275 million was on machinery and equipment, $29 million on clothing and footwear, $12 million on furniture and $8 million on polymer and rubber products.

Defence spending on manufacturing is strongly skewed to South Australia due to its role in shipbuilding. The state generates 35 percent of the value added in Defence manufacturing contracts, although it accounts for only 6 percent of the value added in manufacturing nationwide.

South Australia’s share is followed by 23 percent in New South Wales, 13 percent in both Queensland and Western Australia, and only 8 percent in Victoria.

Defence spending with local suppliers has been rising. The value added from manufacturing contracts with Defence has increased at 7.7 percent a year for the past four years.

While the focus of the military capability acquisition program is on hardware and manufacturing, some services sectors, such as information technology, engineering and design, also contribute.

The value added from information technology contracts with Defence has risen by 10.7 percent in the past four years. It reached $1.93 billion last year, which is only slightly less than manufacturing suppliers’.

The net Defence sales of other professional service providers was $3.5 billion. This has risen by 14.5 percent annually for the past four years, possibly boosted by preliminary work for the AUKUS nuclear powered submarine project. Defence is an important customer for the professional services sector, accounting for 2.8 percent of its national value added.

The construction sector is a big defence supplier. Building construction for Defence added $900 million in value last year, while heavy engineering added $500 million and construction services $175 million. However, defence contracts account for less than 1 percent of value-added by the national construction industry.