Examination of Witnesses (Questions 140
- 162)
WEDNESDAY 6 MAY 1998
SIR RALPH
ROBINS and MR
PHIL RUFFLES
140. If government funding is prematurely stopped
does that lead to a development gap?
(Sir Ralph Robins) Absolutely. Our worry
right now is twofold: that MOD research and development is declining
rapidly and the little research and development help that there
is in the DTI, CARAD, which is aimed at aerospace, is under threat.
CARAD has been very, very important to us. It is 50/50. We match
what is put in by DTI and there are several areas, on the Trent
for instance, low emissions combustion, further developments of
the hollow fan, which really have been jointly funded by DTI and
ourselves and that is the one per cent and shrinking relative
to the Americans' four per cent.
141. Your answer to the question: what should
government do? would be what? They should put more in?
(Sir Ralph Robins) They should certainly
not cut it any further. The Foresight process did produce a very
clear programme for the aerospace group and that would require
more funding. As I remember it, that required growing to £100
million a year from government, growing to £100 million a
year from industry. That would have produced, had it proceeded,
some very interesting future technology. The danger we have today
is that we may all be doing very well, based on funding which
came to us and we matched it ten or 15 years ago and that is not
being replaced today.
142. You talked about the university sector.
What mechanisms do you use to find out from the university sector
what potential research is going on there which might be of interest?
(Sir Ralph Robins) We work with them
in joint ventures. We have 15 joint ventures with universities
at the moment and they are very powerful and very effective.
143. Suppose there were some crazy inventor
in some crazy centre, how would you get to them?
(Sir Ralph Robins) I do not know. We
work with the most reputable universities and we tap pretty well
all the ideas which are around. It usually works the other way
round. We have a problem or we have an idea and we need a great
deal of brainpower put on it. We can supply the money, they can
supply the brain power. The UTCs have been a great help to us
and it makes a very rapid draw through, through academia into
a product. We can be looking at five years from academia to a
saleable product, which is pretty fast.
144. You have no suggestions how to improve
that process? It is satisfactory?
(Sir Ralph Robins) Certainly the way
we work at the moment.
(Mr Ruffles) The way we work is very
satisfactory but it is not a common approach outside of pharmaceuticals.
It is very close to what pharmaceuticals do, which is embedded
laboratories in academia. That is not general in manufacturing
industry.
Mr Beard
145. To what extent has your civil development
benefited from the defence-funded development?
(Sir Ralph Robins) In the past a great
deal. There is no doubt about that. It does bring us on to another
topic which is a favourite of mine, which is dual use technology.
Increasingly it is quite difficult to differentiate between a
defence use and a civil use of a piece of technology. It is not
only in the engine business, it is particularly true in electronics
where defence is increasingly dependent on commercially generated
electronics. We are running demonstrator commercial engines today
at higher temperatures than some of the military requirements.
We are beginning to feed back. Historically it has been very important
that we are able to take defence-generated technology and use
it in civil products. Increasingly we are going to see dual use
of technology but where is it going to be funded? One of the things
which we need to see, as the Americans have done very successfully,
and MOD are beginning to look at more and more, is that we go
on funding it as though it was defence, even though it may have
civil applications ahead of defence applications, though it will
have both in the end.
146. In your paper you mention that you have
various processes that you use to identify products for which
there is likely to be a demand in the future. Could you outline
what those processes are? Are they specific to Rolls-Royce or
are they more general processes?
(Sir Ralph Robins) They are not specific
to Rolls-Royce; they probably are specific to the aero-engine
and aviation industry. We have a 20-year forward look at the market.
Then we look at what we think that is going to generate in terms
of product requirements 15 years ahead, 10 years ahead, five years
ahead. We then flow from there to what sort of technologies will
be required and what we shall be doing now against those requirements.
The market has been easy in a way to understand as far as civil
aviation is concerned. It has been growing continuously since
the jet age, since the early 1950s, at about five per cent per
annum compound but that is the mean line. What it has had is big
perturbations on it and they are very difficult to predict. The
mean growth has gone on and it is still going on at five or six
per cent per annum. Military has been terribly difficult to predict
because it has gone through this huge decrease and has now stabilised
and from our point of view is strengthening again. We do our very
best to understand these markets. We also have an industrial business
which is £1 billion turnover which is in power generation
and electrical equipment. We do our very best to understand these
markets. We share our market forecast with other people in the
business. We will talk to Boeing and AirBus Industrie and we will
see what they are saying and we may not entirely agree but it
all helps give us some sort of faith. Then the difficult bit is
making a judgement of what sort of products the market is going
to require. We made a decision in the mid-1980s that we could
see bigger and bigger aeroplanes coming simply because there is
going to be growth, the infrastructures will not grow at the same
pace, you cannot increase frequencies, therefore big aeroplanes,
therefore big engines. We made a decision to go to the Trent which
is a big engine and it will now drive every big aeroplane which
anybody is thinking of designing. That is where an act of faith
comes in. You are really backing your judgement at that point.
We backed our judgement and got it right. We do everything we
can to keep cross checking but once you are down the path of a
big engine project like that, you have to see it through. You
just have to get those judgements right.
147. This is a crucial part to your development.
How do you organise this within Rolls-Royce? Do you have a member
of the Board whose responsibility is to define these requirements
and keep constantly in touch?
(Sir Ralph Robins) We are organised such
that the civil engine group is run by a senior executive, the
military engine group is run by a senior executive and we have
our Alison operations in America. They are held responsible for
an understanding of their market and there are industrial people
similarly. It would be wrong of me to say they do not get quite
a lot of advice from me and others because we are all watching
what is happening in these markets all the time, as well. We review
it very regularly. We have just in fact gone through the process
in the last week of looking five, ten, 15 years out again at the
markets, rechecking them, checking the products. It is a continuous
process really. The bit which is not continuous is once you commit
to a project you are committed and that is going to be 15 years
of negative cash. If you get it right it is going to be maybe
a 100-year programme. That is one of the things people do not
recognise about this business. We ran the first Dart in 1946.
We sold the last production Dart in 1986 and we shall be making
spare parts in 2026. The Trent is only five years into this process
and it will be going long after we have all gone.
148. Those are quite big and risky bets you
are making.
(Sir Ralph Robins) Yes.
149. Could you have done it without the subsidies
and the defence support you have had?
(Sir Ralph Robins) We need all the help
we can get, competing with these two American companies who clearly
get much more help from their government. It also explains something
we have not discussed, but possibly should. It also explains why
we offered the Government a risk and revenue sharing position
in the ongoing development of the Trent. We simply cannot do everything
ourselves, neither can the two American companies. The Trent programme
up to this present time has had about 20 per cent of it in other
people's hands, in Germany, in Japan, in France, in America. Basically
they pay for the R&D at the front end and they take a share
of the revenue. It is a risk situation. You could imagine the
problem we have is balancing the P&L account when we are writing
off £200 to £250 million a year. The risk and revenue
sharing is a tremendous help in that, in that it is front end
money which enables you to get through 15 years of negative cash.
In the past pre-1986 we had the Government involved in risk and
revenue sharing and we offered them the Trent and the Government
have come in as a risk and revenue sharer. It is quite interesting
that these are profitable programmes for the Government. We pay
at the moment £30 million a year back to HMG based on investment
positions they took prior to 1986. If I am right about the Trent,
and it is a 50, 60, maybe 100 year programme, they will be getting
big returns from the Trent for ever because these things just
go on and on and on. In a way it is a little bit off the point
of research but it is very much on the point of development because
the size and the suddenness of the development programme, where
you are going to spend £500 million in three years, is a
huge strain on the P&L account when you are determined to
write it off in the year in which you spend it.
Dr Kumar
150. No doubt you are familiar with the Foresight
Programme. To what extent are the results of your in-house processes
linked in with the results of the Foresight Programme in determining
areas of national priority? How have you in Rolls-Royce benefited
from your involvement with the Foresight Programme as such?
(Mr Ruffles) I was actually the Vice-Chairman
of the Defence and Aerospace Foresight Panel so we were very much
involved in the Foresight Programme. As far as the process itself
is concerned, some of what we do internally we actually transferred
into that programme and also some of the things we learned from
other people have now transferred back into our own processes.
In both ways we benefited. There are three things which came out
of the Foresight Programme, two of which have been successful
and one not. The first was creating a greater community in the
research and technology environment, a networking which everybody
recognises was beneficial. The second, which came out of the defence
and aerospace panel, was that we set up a series of working parties
looking at the key technologies which came out of Foresight and
out of that we are beginning now to create centres of excellence
in academia, in the aerospace sectors, which mirror the technology
centres I talked about within Rolls-Royce. That is becoming a
way for the industry to work. The third area, which was the disappointment,
comes back to the question of funds. Recommendations were made
in the Foresight Programme, based on comparisons with the United
States, France and Germany on suggested levels of government investment
and everything that has happened since then has gone in the opposite
direction to the recommendations which were made. In fact government
support has gone down whereas the recommendation which was that
it should go up, particularly in the area of demonstrators.
Dr Turner
151. Coming back to government funding, I should
like to explore the difficulties which may lie in different objectives
of different government departments which you have worked with,
namely the DTI and the MOD. In your own evidence, you suggest
that it is more difficult to match your technological objectives
with those of the MOD than with the DTI because of the DTI's different
driving force in trying to promote industry whereas the MOD just
want to be able to kill people. How serious a problem is this
for you? How do you expect to overcome it?
(Sir Ralph Robins) The MOD's objectives
were your words, not mine. I shall have to be careful that they
do not get on record as attributed to me. Putting it in a slightly
different way we clearly get the best value when we are totally
aligned. If the funding body and ourselves are aiming at exactly
the same objective, then it is likely that the synergies will
be greater and we will get there more quickly. With a programme
like CARAD, which is aimed at improving technology and civil engines,
and our job is improving civil engines and selling them, obviously
there is a great alignment. The MOD programmes are obviously against
meeting military operational requirements and that is their first
priority. The alignment is not always as direct as one would get
with the DTI. Having said that, we worked very, very closely with
MOD and I have really been very impressed in the last year and
a half, two years, with the way that MOD have seen the changing
scene as far as technology is concerned and in particular this
dual use situation, because spin in and spin out are now about
equal values in the defence business and it has become very much
more important for defence agencies, MOD and DOD, to work more
closely with industry than they did in the past. We have a very
close relationship with MOD and we do with the DOD. Last week
I was in the Pentagon—I go there quite often. I go to the
MOD a great deal. The scene has changed and there is a closer
alignment of thought now between industry and the defence business
on both sides of the Atlantic than there was five or six years
go when it would have been simply perhaps your definition.
152. I was probably being a bit unkind to the
MOD. What you are saying relates specifically to the next question
I wanted to ask about the impact of Defence Diversification Agency
on research cooperation between yourself and the MOD as outlined
in the Green Paper. What impact do you think it will have on your
future operations?
(Sir Ralph Robins) The Green Paper is
a good start. A lot of people are thinking about the ways in which
one can use defence spending on a wider basis. What it is not
possible to do is the simple thing which is to turn defence companies
into making civil products but that is not the case. There is
obviously the opportunity to use defence research on a much broader
field providing people can get at it to exploit it. It really
gets back to the point I was making at the beginning: intellectual
property which just sits somewhere is not very valuable unless
people know about it and know how to exploit it. The Green Paper
starts to talk about opening up some of the research which sits
in DERA to a wider group of companies to enable them to exploit
it. That is good. There was a bit of a tendency in the Green Paper
to talk about SMEs all the time and whilst we all love small companies,
it is a fact that in many of these areas it is only big companies
who can exploit this technology and take it to market. There is
more work to be done but the fact that there is a Green Paper
and that discussions are taking place is very encouraging.
153. Do you feel that the large number of different
government schemes designed to encourage more industry investment
in research is confusing or is it right there should be various
different schemes to reflect the different needs of particular
companies, coming down to incorporating SMEs, presumably, and
the diverse objectives of government departments? Do you think
there is just too much?
(Sir Ralph Robins) It is not too much.
We do not mind however many schemes there are if they help towards
our objective which is improving our technology and improving
our sales. We do not find the schemes confusing, because we are
a big company. I can imagine that SMEs might, but it is difficult
for me to cast myself in that role. We are in day to day contact
with MOD, DTI, DOD, we almost instinctively know what is happening,
but a small company must find it quite difficult.
Chairman
154. If you have a very specialist supplier
who is a very modest SME and that SME is having some difficulty
understanding its way through Whitehall, would you, as Marks &
Spencer probably would, help your supplier to see the light so
they can help you in due course?
(Sir Ralph Robins) Absolutely. Increasingly
our relationships with suppliers are long-term relationships where
we open up our books to them, show them the market, show them
the opportunity. We put groups of engineers into them quite often
to help them through production problems.
155. Because it is in your interests?
(Sir Ralph Robins) Absolutely so; absolutely
so. When a part of an engine fails, even if we have had nothing
to do with it, we still get the blame. There were some classic
cases of gearbox failures a year ago which were not even our design
but they were mounted on our engine so it was a Rolls-Royce issue.
We have a huge incentive to help them to funding, because the
more they can be helped the better they are likely to be for us.
We actually expect them to share our funding and risk and revenue
sharing and it is in our interests that they know everything we
know and have all the help that we have.
Dr Turner
156. You clearly go out of your way to help
the small companies you are actually involved with. Do you have
any comments about what could be done to help other small companies
in general get through this confusion?
(Sir Ralph Robins) I do not know. It
is difficult for me to see it from their viewpoint. Because we
are so close to what is happening we do not find it confusing.
One of the things which is quite important is if you look at most
of the small high tech companies in this country they tend to
be around our sites and British Aerospace sites, some of the big
pharmaceutical companies' sites. One of the things that big companies
are constantly creating is small companies. Around our big aero-engine
site in Derby there are many small companies who are run by people
who grew up in Rolls-Royce and left and did their own thing. It
is true of Bristol and true of British Aerospace sites. It is
not the answer to your question but it is quite important. We
are generating quite a number of small companies and the people
who go into them, if they came from Rolls-Royce, have some feel
for some of the things we are talking about so that helps. I just
do not know what else we could do to help them really except through
the trade associations. We do help in the SBAC.
157. Do you find a problem with short-term duration
of the schemes and a tendency to go off into new directions too
quickly before they have actually worked themselves through?
(Sir Ralph Robins) CARAD has not been
that way. I do not think we have really suffered particularly
from that. The main worry we have is that these schemes are disappearing
altogether.
Mrs Spelman
158. My question was about the CARAD programme
really and to ask you in a nutshell what you have really gained
from your involvement in the CARAD programme and also your view
about the long term.
(Sir Ralph Robins) We are worried that
it is under a lot of pressure and it has been decreasing. What
have we gained from it? If you look at the very successful Trent
programme, there are several pieces of technology in that engine
which are directly the result of joint DTI Rolls-Royce funding
under the CARAD scheme; low emission combustors are world leading
in the Trent; some advances have yet to be put into the engine
in fan technology; there may be others; three dimensional aerodynamics
throughout the whole machine. All these have been pump primed
by CARAD, so very important.
159. The long-term prospects for the programme?
(Sir Ralph Robins) We do not know. It
has decreased down to about £20 million in total from £25
million where it started. We just get an uneasy feeling that it
is going to be less than that next year or not there at all. That
would be very bad news if it were not there at all and expose
us even more to our competitors. The other funding which is interesting
is a possibility of European funding but there was very little
in the fourth framework. We do have aerospace better recognised
in the fifth framework but it is a subtle problem for us. It requires
collaboration with the European engine companies and the continental
European engine companies are tied to our two US competitors.
Frankly, we are not too keen on collaborating with some of them.
160. My second area of questions is intellectual
property rights. How serious do you think the problem of inappropriate
retention of intellectual property rights by government departments
is?
(Sir Ralph Robins) That flows to the
issue we raised previously and DERA may have been cross-questioned
on this. We certainly believe that if intellectual property just
sits somewhere and is not exploited it is of no value. What we
should like to see is a way through, exposing the intellectual
property which sits in DERA and other research areas to industry
so that we can jointly find ways of exploiting it.
(Mr Ruffles) As far as Rolls-Royce is
concerned our relationship with government, on intellectual property,
is not a problem. We find government is fairly flexible over how
it handles intellectual property. The only time it becomes difficult,
and understandably so, is when there is a national defence interest.
The system is a bit slow sometimes but on the whole government
is very flexible.
Dr Jones
161. You have mentioned your competitors in
America and the support they get from their government. Could
you briefly describe the difference and what has been the trend
in other countries? You say the trend has been a reduction in
this country. Have you had any feedback from the Government about
the proposals for Foresight action, your demonstrator programme?
(Sir Ralph Robins) One can concentrate
the whole comment on the United States because that is where the
competition is. Frankly the rest of the world is tiny in this
business. There are only three large manufacturers: ourselves
and two American manufacturers. The United States has always,
through a whole range of different agencies, put a lot of money
into aerospace and by different agencies I am talking about DARPA,
NASA, the Department of Energy put quite a lot of money into aerospace
strangely, and several other agencies. Last year, as far as we
can establish, more than US$500 million went into the civil engine
business alone in research relative to US$40 million in this country,
to give you some sort of scale. That is just research in civil
engines. There are all sorts of other areas. The military is 100
per cent funded whereas we are increasingly in joint funding.
They have over the years had an opportunity called IR&D which
is where if you fund your own research and development but you
can recover it in the overhead structure in government contracts
which is quite a soft way of helping industry. There are many,
many areas where the help to the US industry is profoundly more
than we have been used to.
162. Are there any obstacles, apart from the
cash, which prevent us from going down that line and thinking
of competition?
(Sir Ralph Robins) Obviously America
is a very much bigger and richer country and that is an issue
in this and their military is very, very much bigger, their programmes
are very much bigger. One of the reasons we have become big in
America is to follow the funding and we have been fairly successful
in doing that. In this country we have all got very good value
for money. It is interesting that the Pentagon feels that in value
for money British defence is very good; certainly we in Rolls-Royce
think that we are very good in value for money. We spend half
as much as our competitors and we stay competitive but it gets
more and more difficult. Our worry is that there are some areas
where a lot of money is spent where they may make a breakthrough
which we can never catch up on and there are areas like advanced
materials where a great deal of money is being spent. We spend
quite a lot ourselves, we work with the universities and we work
with DERA in advance materials. There are all sorts of structures
which we pursue in this country but the fact is that there is
not as much money being put into it. Fundamentally it comes down
to how much money you are going to put into research and in the
US in the defence business they have cut manpower much more rapidly
than they have cut research and development.
Mr Chairman: We must stop there. In my opinion,
and I am sure the Committee will agree with me, this has been
an excellent session. It has been most helpful to us and it may
well be that on reflection there are still a few questions we
should like to put to you and we hope you would cooperate by giving
us answers in writing. Thank you both very much indeed for the
time you spent with us. I do understand, Sir Ralph, that you are
receiving an award this evening. You wanted to be away at five
o'clock. It is two minutes to five o'clock. I hope we have not
delayed you. We congratulate you on your award and hope you enjoy
your evening.
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