Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  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 companies.

  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.

Mr Butterfill

  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 a whole?
  (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 side.
  (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 how?
  (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.

  11. Why?
  (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 of—to paraphrase—ensuring that by virtue of investment in technology the US retained their competitive position in the important area of aerospace.

  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 subject.
  (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 launch aid?
  (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 industry.
  (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 course—but 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.

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