Memorandum submitted by the Society of
British Aerospace Companies Ltd
INTRODUCTION
With 154,000 people working directly in the
industry, the UK has the world's second largest national aerospace
industry in terms of employment and the largest in Europe. UK
Aerospace enjoys a spread of manufacturing capability unrivalled
outside the US. In particular, the UK is especially well represented
in the depth and breadth of its equipment sector, where some 70
per cent of the value of a typical aircraft is added. UK Aerospace
is a knowledge-intensive industry, accounting for 13 per cent
of the UK manufacturing's entire research and development (R&D)
spend. Commitment to R&D extends deep into the aerospace supply
chain, with over 50 per cent of supplier firms reporting some
R&D activity. UK Aerospace is a leading exporter, accounting
for 70 per cent of the nation's total exports and enjoying a consistently
healthy trade surplus. UK aerospace sales have risen steadily
since 1993, with world market share increasing from 9 per cent
to 13 per cent. The main area for growth has been in the civil
sector, now accounting for over half of UK aerospace sales. In
the defence market, the most important customer for many companies
is no longer the UK Government.
GLOBALISATION
As a result of international collaboration and
foreign direct investment, UK Aerospace is in the forefront of
globalisation. UK companies employ nearly 40,000 outside the UK
with a turnover of over £4 billion. Equally, foreign-owned
companies located in the UK generated nearly £2.5 billion
in turnover supporting over 20,000 jobs. Recent international
linkages include the creation of BAE SYSTEMS, of Thomson-Racal
(now Thales), Westland-Agusta, Rolls-Royce's acquisition of Allison
in the US and conversely TRW's acquisition of Lucas Aerospace
in the UK. As a result, the UK Aerospace Industry is now perhaps
better described as the Aerospace Industry in the UK.
A key issue facing the industry is the extent
to which the UK is able to command the development and manufacturing
high ground in a globalised aerospace industry. In large measure,
this is accomplished through control over intellectual property,
which is the product of public and private investment in research
and development. It is also dependent upon the UK creating a favourable
environment for investment generally in the high technology industries.
The UK currently has control over the bulk of
its critical intellectual property. This translates into high
level participation in leading programmes in Europe and North
America. Again, the equipment sector is especially well-regarded
on both sides of the Atlantic for the quality of its technology
and its products. Maintaining this level of control and activity
will be a critical element in maintaining a world class aerospace
industry in the UK.
SUPPLY CHAIN
The effects of globalisation and the need to
remain competitive in a world market—especially as more
business is sourced globally through e-commerce market places—is
putting particular pressure on the UK-based supply chain. There
are currently over 1,500 companies in the UK-based supply chain.
However, prime contractors and leading equipment companies world-wide
are reducing the number of individual suppliers and are expecting
companies to carry higher levels of technical and financial risk.
Furthermore, as the global primes become more vertically integrated,
companies further down the supply chain may find it more difficult
to compete effectively. As a result of these pressures, supplier
companies must invest in continuous improvement programmes to
upgrade their skills base and manufacturing efficiency.
ISSUES
1. The competition for location of high technology
industry
International acquisitions and mergers are creating
transnational aerospace companies with a global reach and matching
commercial strategies. Aerospace companies now have a choice where
to locate investment. These firms act as "routes to market"
for national supplier companies and make a massive contribution
to the overall health of the UK aerospace industry. The UK Government
has to accept the fact that it is part of the competitive process.
As in other key knowledge-driven industries, government policies
and choices will have a decisive impact on the future of UK aerospace.
If the UK is to retain and to attract investment in the highest
value-added aspects of aerospace, the leading aerospace firms
need a favourable business climate.
RECOMMENDATIONS
UK Government should closely monitor the pace
and implications of globalisation on the UK industry.
In particular, the Government must continue
to improve the research base climate for investment in high-technology
manufacturing.
2. Research and technology
UK Aerospace is a leading-edge, high-tech industry
heavily dependent on high levels of research and development.
UK Aerospace is living off the results of past investment in technology.
This "seed corn" is not being replenished at a rate
that will enable the UK to retain its position in world markets.
Between 1980 and 1998, aerospace R&D in the UK fell in real
terms by 45 per cent compared to a rise of 33 per cent in France
and the US, and 196 per cent in Germany. Funding for the Civil
Aviation Research and Development programme (CARAD) has fallen
by 80 per cent in real terms to £22 million since its inception
in 1972. There is an increasing risk that leading companies will
focus core research activities in countries with a more supportive
regime with a consequent loss of high value manufacturing and
business to local supplier companies. Without adequate and properly
channelled R&D funding the global aerospace industry will
invest its highly mobile capital elsewhere.
Given the depth and breadth of the UK aerospace
equipment sector, the Government must further encourage R&D
throughout the supply chain. In this respect, the Government should
ensure that the benefits of publicly funded R&D are more widely
spread and that the equipment sector has secure access to adequate
levels of support.
RECOMMENDATIONS
The Government should increase the level of
support for aerospace research and technology acquisition and
ensure that the equipment sector in particular receives adequate
support applied directly to industry. Active consideration should
be given to schemes designed to recycle some of the returns to
the Government, currently around £100 million per year, from
past public investment in civil programmes.
The Government should support the development
of large scale demonstrators to allow UK companies better means
of carrying out proof of concept research.
The Ministry of Defence (MOD) should increase
the proportion of the defence budget allocated to research.
Overall priorities within the science budget,
and the academic research base in general, should be more carefully
matched to the needs of industry to achieve a better return to
the economy and as a first step to restoring the historic level
of funding.
3. The risk of hollowing out of the industrial
base
The leading companies are increasingly buying
from a global supply chain, demanding ever higher standards of
quality at lower cost and from fewer suppliers. This means that
UK suppliers must adopt the most advanced production and management
systems and accept higher technical and financial risks. There
is a danger that the UK aerospace industry base will be hollowed
out, losing vital business and employment to foreign suppliers.
Helped by the DTI, industry is already investing
heavily in new techniques, including increasing use of business-to-business
e-Commerce, and processes designed to drive down costs and to
add value throughout the supply chain. The DTI sponsors a variety
of crucial schemes including the Master Class Engineer programme
and the Lean Aerospace Initiative, which help to develop lean
manufacturing techniques and improve fundamental productivity,
and the SCRIA programme, which helps companies improve relationships
throughout the supply chain. This highly productive partnership
between Government and the industry must be continued and further
expanded, particularly in respect of aerospace SMEs and the larger
supplier companies facing increased global competition.
RECOMMENDATIONS
The Government should extend the availability
of research and development tax credits to a wider range of supplier
companies. In the shorter term, it is essential that action be
taken to reduce the cost of investment capital and ensure the
availability of highly capable human resources.
The Government should establish a development
fund for the UK Aerospace supply chain which would fund, on a
commercial basis, research and development projects, attracting
private as well as Government funding.
The Government should continue to support policies
that help small business improve competitiveness, such as the
DTI's Competitiveness Challenge.
4. The Government as customer
Industry is fully committed to the principles
of Smart Acquisition. These have to be driven forward into full
implementation and extended to international programmes. The MOD
must capture the improvements implied by modern supply chain management
concepts. The MOD should also fully accept that its procurement
choices and research priorities still have a profound impact on
the competitiveness of UK industry. The MOD's increased interest
in internationally-sourced, largely off-the-shelf solutions will
also have a detrimental effect on the UK's R&D base. In addition,
the Defence Evaluation Research Agency (DERA) continues to attract
a dominant share of Government R&D funds. To make an efficient
use of resources, a close, trusting and mutually beneficial relationship
between Industry and DERA is essential. The part privatisation
of DERA must be carried out so that this positive relationship
is fostered.
RECOMMENDATIONS
The Government must drive forward the full implementation
of Smart Acquisition, with full open consultation with industry.
Government should ensure that strategic industrial
considerations are an integral part of the Smart Acquisition process.
The Government should ensure that the part-privatisation
of DERA does not undermine the mutually beneficial relationship
between Industry and retained-DERA, and that New DERA does not
retain special status with the MOD which would afford it commercial
advantages over the private sector.
International collaborative programmes should
be managed in a way that recognises the political imperatives
of each partner whilst attempting to introduce as many elements
of Smart Acquisition as is practical.
5. The importance of export supports
Government support for exports is vital. The
long-term decline in Government expenditure in military aerospace
projects, combined with the relatively small domestic market for
civil aircraft, has helped make the UK one of the most export-dependent
aerospace nations. Loss of UK support, and in particular any weakening
of the invaluable service offered by the Exports Credits Guarantee
Department (ECGD), could not only lead to lost business but would
also send the wrong signals about UK commitment to our European
partners. Proposals to change the requirements for ECGD could
constrain its ability to offer consistent support for UK exporters.
Current proposals, which are of particular concern,
include:
— The setting of arbitrary pre set
transaction limits for individual territories. This could lead
to large transactions being unable to proceed even in circumstances
where the risk and premium income associated with the transaction
is otherwise acceptable;
— Delaying the provision of a committed
offer of support by ECGD until the time of contract or loan agreement
signature. Currently commitments are made at the time of submission
of a firm proposal by the exporter, subject only to the territory
remaining on cover. This is consistent with export customers'
requirements to receive firm commercial and financing proposals
in advance of the commencement of contract negotiations;
— A reduction in the choice and flexibility
of the terms applicable to fixed rate CIRR lending which represents
a significant deterioration in the terms previously available.
RECOMMENDATIONS
The UK Government must continue to support export
sales through the ECGD and ensure that it continues to take the
long-term view necessary to provide consistent support to the
industry.
The Government should ensure that changes to
the ECGD's terms of reference will still enable UK exporters to
receive the same level of support as that which is available to
our overseas competitors.
The Government should ensure that changes to
the supports made available by ECGD to exporters are not made
unilaterally without:
— Full consultation with ECGD's principal
exporter clients, and
— The securing by ECGD of agreement
to similar changes from other Export Credit Agencies which supports
UK exports' competitors and partners.
6. The Environment
The aerospace industry is responding to a number
of environmental challenges, in particular, emissions and noise
control, posed by the rapid expansion of air transport. UK industry
is devoting considerable effort and resources to find technological
solutions to these problems. While accepting its responsibility
to reduce aircraft emissions and to mitigate other environmental
effects, aerospace should not be burdened with regulations not
applied to its main competitors. This would penalise UK companies
without making a significant impact on the environment.
RECOMMENDATIONS
The Government should consider the industrial
implications of environmental regulations such as the Climate
Change Levy, and seek the adoption of comprehensive international
solutions to the environmental problems posed by air transport.
Such policies should embrace the aerospace industry,
the airlines, airport operators and air traffic management.
The Government should also direct public research
funding in identifying the way forward for sustainable aviation
in support of one of the UK's major wealth creators.
7. Education and training
A world-class high technology Industry such
as UK Aerospace is dependent on a reliable stream of high-quality
engineering and science graduates. While industry plays a key
role in attracting the highest quality UK graduates in sufficient
numbers into industrial careers, the Government needs to do more
to increase the quantity and levels of competence of science,
engineering and technology graduates. There is also a need to
develop more vocational routes to expand the supply of Craft and
Technician level personnel. Equally, reskilling the existing workforce
is perhaps as important a task as recruiting new blood into the
industry.
RECOMMENDATIONS
The Government should encourage and support
Education/Industry liaison programmes which promote engineering
at all levels as an attractive career option, and the Aerospace
Industry as a desirable environment in which to base such a career.
The Government should ensure that the skills
needs of the UK's industrial base are adequately promoted in the
education system. The Government should further encourage the
take-up of vocational training and qualifications.
The Government should consider abolishing the
age limit on state funding of modern apprenticeships and develop
generally a support mechanism to assist companies in reskilling
and upskilling.
A WORLD-CLASS
INDUSTRY
In conclusion, UK Aerospace is by any definition
world-class, offering enormous benefits to the UK economy as a
whole. However, fundamental pressures for change are being brought
to bear which the industry together with Government cannot afford
to ignore. The industry's continued prosperity and world-class
status requires a strong partnership between Government and industry.
8 January 2001
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