Examination of Witnesses (Questions 1
TUESDAY 23 JANUARY 2001
MR K MACIVER,
MR D MARSHALL,
MR J ROSE,
MR J WESTON
1. Good morning, Mr Maciver. Perhaps you could
introduce your colleagues and then we shall get started.
(Mr Maciver) May I first of all say thank
you for the opportunity to talk to you. I am Ken Maciver, currently
President of the Society of British Aerospace Companies, SBAC.
My `real' job is Executive Vice President of TRW and specifically
I manage the aeronautical systems group based in the United Kingdom,
which some of you may remember better as Lucas Aerospace. On my
left is John Weston, Chief Executive of BAE Systems and currently
Vice President of the SBAC. John Rose is Chief Executive of Rolls-Royce
and a past President of SBAC. David Marshall is the Director General
who runs the Society and last but not least is Richard Wood, Chief
Executive of Weston Aerospace who represents the small and medium-sized
enterprises. Between us we cover the entire spectrum, from the
two big companies, myself the equipment sector, which accounts
for quite a large part of the industry, and Mr Wood the smaller
2. In the note you sent us you make the point
that the UK aerospace industry is now perhaps better described
as the aerospace industry in the UK. Could you perhaps expand
on that? It sounds like the first of a series of questions in
an exam. We do not want it to be like that but it would provide
us with a useful introductory peg. Could you give us an idea of
what your perceptions are of the distinction between a UK aerospace
industry and a worldwide industry of which you are a part?
(Mr Maciver) The background to that is that the industry
is becoming very global. My own company, a case in point, a long
established British aerospace equipment company, is now owned
by TRW, a Cleveland Ohio based multinational, but as a company
we still operate in the United Kingdom and our management is based
in the United Kingdom. The fact is that the ownership is no longer
a simple matter. We need to recognise that in this industry it
is based very heavily on the technology and skills in the industry
and that technology is mobile; the jobs in the industry, which
you will all be interested in, and we are a major employer, will
follow the technology. It is very important to recognise that
you cannot assume that a British label means that the technology
and the jobs stay here. We are working in a global environment
and that is really the purpose. My colleagues can say the same
thing. They might be British registered but they have major investments
in the United States and elsewhere. The companies will increasingly
operate on that global basis. I hope that explains the point.
3. How then do you see the British part of a
worldwide industry sitting alongside the European Aeronautic Defence
and Space company (EADS)? This is a French, German and Spanish
conglomeration. Is that a challenge or a threat? Here are the
Europeans getting their act together in a way that we do not seem
to be a part of.
(Mr Maciver) The formation of EADS has been a major
event and it does in effect own 80 per cent of the Airbus company
and it is therefore in prime position in terms of decision making
and many, many of the decisions which affect the British industry
will be taken on the continent of Europe. In other words, there
will be no national sentiment from that point of view and on some
of the decisions even a slight disadvantage. There is no reason
why we cannot compete in that environment if we have the basic
technology and the skills. These are the two things on which the
industry depends. If they are not here, then the rest of the industry,
as we have seen in other industries, will not be here. I am not
being pessimistic. Let me make it quite clear that I take an optimistic
view, but it has to be based on that.
(Mr Weston) BAE Systems does not see EADS as a competitor
in any shape or form. In virtually every sector where we are in
the same line of business we are actually in it as partners. We
are obviously partners in Airbus and last year we were successful
in putting that together as the Airbus integrated company for
the first time, something we have been trying to do for the best
part of a decade. We are partners with them in Matra British Aerospace
Dynamics in the guided weapons business and in Astrium the space
business. If we look at the makeup of the two companies, we do
something like 25 per cent or slightly over of our turnover in
joint ventures with EADS and they have something approaching 70
per cent of their turnover in joint ventures with us. Our relationship
is very much one of partners rather than competitors. We also
tend to overlook occasionally the degree of involvement that BAE
Systems have around Europe. The bulk of our employment is still
in the UK but we do have 15,000 employees outside the UK around
Europe both in our joint venture companies and our singly owned
companies. As well as the joint ventures, we have the collaborative
programmes in Europe and we also own 35 per cent of the Swedish
aerospace and defence industry. The reality is that we have two
large companies in aerospace and defence in Europe: one is EADS
and one is BAE Systems, but they do work very much in partnership.
4. I see from that the close-knit European setup.
But there is the gorilla across the Atlantic, as it were. There
is this massive concentration in the US. How do you feel about
the balance? Is there ever going to be a proper Atlantic balance
or do you come in as the junior partner in any type of arrangement?
(Mr Maciver) It is a global industry and to be cost
effective and to succeed in the industry we all have to participate
in the US market by various means. The larger companies invariably
have a major presence in the United States with that in mind.
(Mr Rose) Clearly the US is the largest single market
and it is important to recognise that. For instance, the Department
of Defense is our biggest defence customer and American Airlines
is our biggest airline customer and so on. As a market it is profoundly
important. To be effective there, you have to have a presence
there. I would just reiterate that because of requirements to
be competitive and to have access to markets we are increasingly
global. We have one third of our workforce overseas. The biggest
single location is North America but we have significant employment
in Europe and elsewhere. That will continue because of access
to market requirements, but also because those countries where
we have locations have a benign environment from the point of
view of research and technology funding. We have to be there in
order to benefit from that. Looking at research and technology
as distinct from product development, Rolls-Royce have trebled
their research and technology acquisition spending over the last
five years, but all that increase has come in countries other
than the UK because there has been an increase in R&T support
in the USA, in Canada and in Europe in general and there has been
a decrease in R&T support in the UK. In the longer term that
has some significant implications because by definition global
businesses make different sorts of decisions about how they prosecute
their business in the future.
5. Mr Rose mentioned defence and of course defence
is a very large part of your business generally. Do you think
as an industry you are excessively dependent on defence contracts,
either from our own Government or from overseas governments?
(Mr Rose) Speaking specifically for Rolls-Royce, it
is 20 per cent or less of our business. All our growth really
has come from success in commercial markets over the last decade
or so. We have moved from a business which was dominated in the
early 1980s by defence and HMG to one which is a global player
in commercial markets. I do not think we are over-dependent on
major contracts, but clearly it is important that we do participate
in that sector for all the reasons that have historically been
important: it drives technology and it ensures participation in
major long-term programmes.
6. How far does that apply to the industry as
(Mr Rose) It is a different balance for the industry
as a whole.
(Mr Maciver) In general it would be slightly greater
than in the case of Rolls-Royce. In the case of my own company,
we vary year by year but on average I would say 70 per cent civil,
of which the largest part is the large airliner business; we are
talking purely of the aeronautical business, the aircraft business.
(Mr Weston) We are 75 per cent defence.
(Mr Maciver) That is in total, not just the aeronautical
(Mr Weston) Yes, that is the whole of BAE Systems.
(Mr Marshall) Take the industry as a whole, in 1980
it was about 65 per cent defence 35 per cent civil; in 1999 it
was 55 per cent civil and 45 per cent defence.
7. Is that a healthy balance?
(Mr Marshall) The UK's proportion of that military
has significantly fallen over that period. So the majority of
that military is export. Is that a healthy balance? Yes, if it
is a healthy industry.
8. That leads me on to UK Government support.
You have already mentioned that you are I presume rather unhappy
about the reduction in support for research and technology. How
happy are you with the support you get from the UK Government
overall? What about ECGD? You gave some evidence to us in 1999.
Would you like to comment on that as well as the other issues?
(Mr Rose) We are uncomfortable with the direction
things have been taking with ECGD. It is really tremendously important
in a market which is dependent on exports that we have a competitive
export support arrangement. By that I mean competitive with the
key nations which are involved with our industry which are USA,
Canada, Germany and France. The direction things are moving at
the moment is making ECGD less competitive and that will have
implications for the customer. Clearly what they are trying to
do is access the most competitive forms of funding and that is
part of their decision process.
9. Are other export guarantee organisations
representing other countries more competitive in that sense and
(Mr Rose) They are different. All of them package
their finance in different ways. For instance Exim do have the
advantage of lower rates in absolute terms and they work closely
in the tax enhanced environment with mechanisms such as the FISC
the Foreign Investment Sales Corporation. That is a particular
example but it might be useful if the SBAC were to write a letter
which showed the relative competitiveness.
10. A note would be very helpful. Would you
like to expand on the R&T problem too?
(Mr Rose) Over the last 17 years in the UK R&T
spending has gone down by about three per cent per annum.
(Mr Marshall) R&D spending.
(Mr Rose) In other countries it has gone up, particularly
in the US and France and Germany.
(Mr Rose) I can only assume that there is a commitment
from those people who control the budgets to invest in high value
added manufacturing. The example of the US commitment is the commitment
by whichever government was going to be in power to the establishment
of a Blue Ribbon Committee on aerospace to look at ways ofto
paraphraseensuring that by virtue of investment in technology
the US retained their competitive position in the important area
12. Is this related to the fiscal climate?
(Mr Rose) It is related to intent. There is a very
clear and explicit intent in some of these countries that they
will have a successful technology-based manufacturing industry.
(Mr Maciver) There is a variety of levels. The critical
thing is research and technology, that is the investment in the
underlying technology. That comes from both within our companies
and the Government spends a great deal on research, a lot of which
goes through academia. There is defence research and technology.
Everything starts from that basic technology. That is the enabler.
Beyond that figure Mr Marshall quoted for research and development
is the investment in specific programmes like the Airbus A380.
I can only endorse what Mr Rose said. It is very clear even countries
which have had a relatively weaker system such as Germany have
targeted investment in this area. They see it as a very attractive
industry in terms of the skills, value creation and general social
and economic contribution and also in some cases, I suspect in
the United States, it is seen very much as strategically important
to retain a dominant position in the industry. It is such an important
(Mr Weston) A number of factors come to bear on this
and for me they start with the fundamental funding which is available
for research and technology to which governments around the world
do make some significant contribution. David's figures in terms
of the long-term decline of that in the UK, although it has been
rising in other countries, are probably the most important indicator
in that particular area. Added to that is the concern, and this
is not something which has happened in the last year or two but
has been going on now for the best part of over a decade, that
in the defence arena as well the reduction in investment in the
fundamental technology, reduction in the number of demonstrator
programmes and the increasing tendency for MOD to run competitions
and look at buying equipment off the shelf is of long-term concern
in terms of the research, technology and development base of the
industry. It particularly underlines the transatlantic gap between
what is actually going into that in the US market as opposed to
the European market in general with that underlying reduction
in R&T being a major feature of the UK position.
13. Mr Maciver mentioned the A380. Government
announced £530 million of launch aid for that and then there
is another £19.5 million RSA for wings. Does this not compare
well with what other governments are doing and in particular what
the US is doing? If so, why does the US make such a fuss about
(Mr Weston) It is very important to understand that
aid is not the correct term: it is repayable launch investment.
We do pay all the capital back and we pay a commercial return
on the money, indeed the Treasury has done remarkably well out
of the investments they have made on the Airbus products over
the years. That is very much one of the tools for financing the
development and that comes beyond the fundamental research and
technology. You can only actually get into that technology if
you have already conquered the issues in the fundamental technology.
Yes, repayable launch investment is a tool by which we counterbalance
some of the benefits the US industry gets by the channels which
featured very much in the 1992 bilateral between Europe and America
on what the rules were within which major civil aircraft programmes
were actually going to be launched. At the moment, though we can
argue about the relative benefits we get out of that, as opposed
to the Americans actually going to their different systems of
support, the issue we are just addressing comes before we get
to the launch investment stage. We have no complaints whatsoever
at the moment about the excellent support we have from the Government
on repayable launch investment on the A380. We are very confident
that is going to provide a very significant uplift in employment
in this industry in the United Kingdom.
14. The US has screamed about it a bit despite
the fact that they get all sorts of covert aid through their military
(Mr Weston) The last time we tried to take an objective
view of what the relative benefits were, we were looking at a
CARAD programme which was possibly pumping in as much as £100
million a year; it is now down at £20 million a year. We
felt the equivalent figure for what we felt the US industry were
getting by indirect sources was close to $3 billion per year.
It would be very unfortunate if repayable launch investment led
to a trade dispute with the US. The Europeans do have very, very
strong arguments on their side to counter the US position.
(Mr Maciver) Putting the repayable launch investment
to one side, CARAD is one form of Government investment in research,
the basic technology. It is a relatively small amount but money
also goes through academia, goes through ourselves. We spend money
ourselves of coursebut what determines the future health
of the industry is the totality of that expenditure. We are in
fact working with the DTI to obtain a better view of the competitiveness,
but all the indicators we have are that the total investment in
research and technology, whatever we as individual companies spend,
is falling back compared with the established competitors and
new entrants, in particular Germany. That is the issue. In the
industry, when you attempt to sell a new product, particularly
the kind of sophisticated equipment my own company makes, unless
you can demonstrate to the customer the technology before they
even invite bids from you, unless you can demonstrate that you
have the technology and it works, you are not even in the race.
That is really the fundamental issue for the industry.
15. The impression is that the industry is dominated
by a relatively small number of large players. How much room is
there for smaller companies, for the SMEs within the industry?
Are they all getting a fair share of this particular cake?
(Mr Maciver) Yes, people are very much aware of BAE
Systems and Rolls-Royce, but there is enormous value creation
in the medium-sized equipment companies, apart from TRW, Smiths,
Cobham, companies of that kind. A very large part of the value
is created at that level. They are very, very important factors
but it is not an industry which, with all due respect, is purely
focused around Rolls-Royce and BAE Systems. The whole industry
depends on a quality supply from small and medium-sized companies.
We all have a supply chain and it is very much in our interest
to have an efficient supply chain. You may wish to come back to
it but the SBAC has invested a great deal of time and effort with
DTI support in trying to improve the competitiveness of the supply
chain. From that broad start perhaps you would be interested in
what Mr Wood has to say, speaking from that sector.
(Mr Wood) Let me start by saying that our own SBAC
statistics suggest that there are somewhere between 1,000 and
1,200 small and medium-sized enterprises, so there is a considerable
amount of activity at that level within the industry. The most
remarkable thing which has happened over the past few years has
been the consolidation of the industry and the demonstrable shift
towards globalisation. Is there a future for us? Yes, there clearly
is. It is, however, getting very much more challenging. The challenge
for SMEs today is to make sure that they can become part of a
competing supply chain. That is the challenge. There is a role
but what we have to do is make sure we can compete effectively
and globally and that is causing us to have to do a number of
things in a positive sense either in terms of improving our own
competitiveness or, just as importantly, forming alliances to
enable us to compete globally.
16. Does the Government help you enough as a
small company? Cobham also employs a lot of my constituents. Do
you get enough help?
(Mr Wood) We have had considerable help and very useful
help in terms of improving our competitiveness and that is vital
if we are to compete and bid.
17. What form does that take?
(Mr Wood) In the form of a number of initiatives under
the Competitiveness Challenge. They have included initiatives
such as the Supply Chain Relationships in Aerospace, the Lean
Aerospace Initiative (SCRIA), LAI, and that again in its latest
form holds the Master Class initiative.
(Mr Maciver) We would describe a company like Cobham
as a medium-sized equipment supplier, substantially larger than
the kind of company Mr Wood is talking about, the true small,
medium-sized enterprise. You can argue, while clearly we have
things to do, that the larger companies are better able to look
after themselves. Where the SBAC has made a very strong effort
is to help the smaller companies who may not have the know-how
themselves to know how to set about providing that assistance.
We have had substantial support from the DTI in doing that.
(Mr Rose) Clearly it is important to focus on the
smaller companies, but many of them actually get to market by
virtue of their relationship with the larger companies. It is
quite an important way of tying together all of the issues. They
get to market on product and they get to market on product which
has developed because you have the technology available to do
it at an appropriate risk level. In our case, we buy in about
65 per cent of every engine we deliver. In fact the amount we
buy in will increase over time so that the balance moves closer
to 75 per cent. The result of the successful market has meant
that over the last five years we have doubled the spend in the
UK supply chain, from about £600 million to just over £1
billion and that is continuing to increase. That will have a multiplier
effect because of the move away from domestic manufacture in the
company to an increasing reliance on the supply chain. Therefore,
clearly, in order to sell that product we need good support from
ECGD. There was a point where ECGD was very much focusing on the
smaller companies and help to smaller companies. The reality is
that some of the best help they can give to smaller companies
is allowing the whole product to be sold because that is the thing
which brings together all the different components. It is very
important, because you tend to want to access a supply chain which
is close to your technology and where the product is being developed,
that that product continues to be developed in the UK, which again
is a major argument for ensuring that we continue to own our intellectual
property in the UK. It is transparently clear that the supply
chain will migrate to the location where the IPR exists over time
and that is a long process. There is a huge commonality of interest
between this 1,500 strong smaller companies supply chain and the
interests of the smaller number of higher profile large companies.
(Mr Weston) As Rolls-Royce we still buy in 65 per
cent of everything we sell and that percentage has not changed
greatly over the last few years. Secondly, just as BAE Systems
and EADS were formed in answer to the challenge thrown down by
the US industry in their own prime contractor consolidation in
the early part of the 1990s, very significant consolidation has
been going on again particularly in the US in the supply industry
which is something the full effects of which have yet to be felt
within the supply chain. That again is something we should be
thinking about for the future.
18. What is your relationship with ECGD at the
moment? I am getting rumours about an unwillingness on the part
of the Export Credit Guarantee Department to give proper support
for Airbus projects and the Airbus contracts. That begs the question
as to what people will support, but are you happy with the treatment?
This has become a theme of ours. We have been looking at ECGD
over several years and we get these rumours and stories and sometimes
they have substance and sometimes they do not. In your endeavours
worldwide to sell the new Airbus, are you getting the kind of
backing from the UK Government you think you deserve?
(Mr Weston) In terms of political support and a desire
to provide an element of ECGD support, that is definitely there
very strongly. I share Mr Rose's worries though that if we look
at the trends in terms of where ECGD appears to be moving, there
does appear to be a desire to cut back on the degree of risk and
some other issues. This gets quite complex so Mr Rose's idea of
dropping you a note about this is a good idea. We are in danger
in the sale of the full Airbus product, where the credit insurance
being provided is shared internationally between the credit insurance
agencies of the major manufacturers which make up Airbus, of the
UK portion of that being on worse terms than that available from
the other European nations. That is obviously going to affect,
if that develops into a long-term trend and you get a significant
difference, where Airbus think about placing work because of the
support which would actually be available for them when it comes
to selling the end product.
19. ECGD have an environmental screening programme
which as an industry you are not as yet covered by. Do you have
any fears about being subjected to an environmental dimension
to their scrutiny or is that something you can live with?
(Mr Weston) Industrially we take environmental issues
very seriously; certainly in terms of my own company we do have
an environmental policy, we are a relatively clean industry. As
an industry as a whole, we are obviously quite challenged by some
of the targets laid down, for example, in the Kyoto agreements.
Despite the significant improvements, we are generating over time
with the improvements in technology, at the other end of the scale
the tremendous growth in air transport is pushing up the volumes.
Getting those in balance so we actually hit the targets is a challenge,
but I do not see us particularly threatened by people asking whether
we are environmentally friendly before we think about where other
assistance comes from. The SBAC might be better qualified to comment
on that and Mr Rose might have some views.
(Mr Rose) The simple point on ECGD, and it applies
to the environmental approach, is that it should not be unilateral
and outside the other mechanisms which are there to put pressure
on industry to behave appropriately from an environmental point
of view. There is international legislation which applies to all
of the industries in the markets we are on, with which we are
forced to comply in order to be able to be in the industry at
all. To the extent that unilaterally ECGD as a vehicle takes views
which are different from the internationally accepted practices,
that is disadvantageous, albeit provoked by the right intent.
We need to recognise that there are mechanisms which exist for
ensuring that compliance occurs.