Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



  40. You have the good fortune that the answer to your bid is going to be in the immediate period before the general election so your lobbying strength is probably stronger than it has ever been for a substantial increase in this vote. Can you tell us whether you have put in a bid and if so how much and what do you hope to achieve if that bid is acceded to?
  (Mr Marshall) No, we have not put in a bid per se. We have put in a case to continue the programme, that it should not be zero, but in a sense the bid, the amount that is spent, is a matter not between the SBAC and the DTI but between the DTI and individual companies who undertake programmes. Many of those programmes actually continue through time in an industry where we are on a very long time basis; a programme even of research is not simply undertaken in a year or a specific time period, it may be spread over several years. There are essentially commitments in the existing CARAD programme which will take us forward from programmes which already exist.
  (Mr Maciver) That is a very important point. Small though it is, it does mean that certain programmes do continue which might well be squeezed out under the normal commercial pressures. It does give some stability and continuity because it involves a commitment by the individual companies to spend as well. It does give some continuity to R&T programmes because however committed we are to that, there are always things which get pushed out at the edge and perhaps should not be. It is helpful in that regard. It is right to say that it is not for us to make a bid, it is for us to make the case for continuing support, which we have done.
  (Mr Weston) Clearly our lobbying in this area is not very effective if over the last eight years this has fallen from £100 million to £20 million. The thing we all ought to be really worried about is that if we were sitting discussing this in France or Germany or Italy or Spain or the United States, then we would be looking at £20 million and asking whether that really indicates we are serious about this. We have talked a lot about how important it is for industry to be competitive. The environment in which we have to operate is not only one in which we have to match our competitors' levels of pricing, but also productivity and levels of efficiency, there is also a competitive environment in terms of the help and assistance which is available from governments in this respect. By any standard the UK falls a long way short of what is available in our major competitors' home markets around the world. If we tie that back to what we were talking about earlier, the jobs actually follow the technology and the technology gets put in place where people are prepared to invest in the technology. It is absolutely a very serious point when we say that this industry in the UK is living off the investment we put in in the 1970s and 1980s. At some point we are going to pay the price for not putting it in in the 1990s and beyond.

  41. How much do you think it should be instead of £20 million? What do you think it should be in order to enable it to be competitive?
  (Mr Weston) We felt it was woefully inadequate at £100 million. You need a much more considered answer to what is the right level. The right level is a competitive level. Finding out what a competitive level is, is quite difficult because the amount of aid which actually flows through into some of these industries elsewhere is not always done in an above board and fully publicly visible method. If you want an answer to that question I would rather take it away and give you a more considered answer.

  42. It is just that time is running out.
  (Mr Weston) Having fought hard over a decade to see it go from £100 million to £20 million I am not sure that trying to make a really strong case for what this ought to be is actually at the top of our list of priorities because of what we think is actually achievable. If we thought there was some real desire there to restore this to the sort of level we think we need to be competitive with the other nations around the world, we would probably be prepared to put quite a lot of work into it.
  (Mr Maciver) It might be helpful to make some more precise comments in writing on the whole question of R&T in the industry. It is a very, very complex issues. We can give some comparisons; that is the ideal thing. We are focusing on CARAD because it is the area which is doable. Ultimately what we need to understand between us is whether the level of R&T in our industry is competitive with what is happening elsewhere. That is a more complex question but we can give some helpful data as part of a follow-up to this meeting, if you agree.


  43. That would be very helpful. I have to say to you that we meet a lot of businesses, not often as successful as yours, and the idea of them going with begging bowls to Government in 2001 ... One can see the point of it in 1979 but you have been very lucky to have still been getting handouts as long as you have been, given that most other businesses do not get any assistance at all these days.
  (Mr Rose) There is an issue of connectivity. We have to recognise that the inability at the technological lead in this industry will have a consequence on the success of the industry in the UK.

  44. Surely £20 million is not going to make that much difference?
  (Mr Rose) Twenty million will not make enough difference and is clearly a lot less than £100 million, but a lot more than zero.

  45. Surely there is more than one way to skin the cat. We can talk about the fiscal regime which operates in this country. There must be other ways in which Government is pouring out money to you.
  (Mr Rose) You are tending to use words which are more emotive than they need to be.

  46. I was trying to help.
  (Mr Rose) We are in a global competitive industry. We have choices. An important point was made earlier in the situation of Rolls-Royce which is that we have increased our R&T spending but we have increased it outside the UK. Over time that has an implication for the location of the decision process and jobs.
  (Mr Maciver) Your point is a perfectly reasonable point to make. The playing field is not as we would have it, the playing field as it is.

  47. It never was.
  (Mr Maciver) The fact is that other countries have deliberately targeted aerospace for very focused research in areas directly in competition with activities in the United Kingdom, in some cases new entrants. The level of spending on total development & technology, by the companies here is at a very high level. In my own company's case we are spending on total development and technology some 11 per cent of revenue on this area. We are spending at a very high level. The fact is that if a specific technology is targeted and developed in a particular country, that is where it will be developed through to production. It would be very much simpler from our point of view if we were entirely masters of our own destiny. We set out to compete and we win or lose on our capability. That is not the reality of the situation. The good point when you look at this challenge is that the industry is successful, it is not supporting a failing industry as so often has happened in the United Kingdom. This is supporting a successful industry with long-term growth and which will in total make a major contribution to rebalancing the skills base in the United Kingdom. From an economic and social point of view, I do not think we have any diffidence in stating this case. If you construed anything I have said as a threat, that is most certainly not the intention. This is meant to be a very sober appreciation of the realities of the world in which we are.

Mr Chope

  48. May I ask something about R&D tax credits. Would R&D tax credits for every firm make any difference?
  (Mr Marshall) We are engaged in seeking to answer that for ourselves and possibly make a proposition into the Treasury for the upcoming budget on that issue, associated particularly with the smaller companies. One of the points you heard earlier was that they are being required to spend proportionately more investment in this area in order to compete in their supply chain. When we look at our own statistics, we see that the distribution of company R&D spend does fall off quite dramatically at the lower end of the supply chain which is traditionally what you would expect and we are seeing that has to change. We are seeking a view as to what extent a tax credit would help that.

  In some ways, perhaps one could see that it could. Perhaps Mr Wood would like to answer that from the point of view of a company in that situation.
  (Mr Wood) I would echo Mr Marshall's comments. It is getting increasingly challenging. The opportunities are definitely there, but we are being asked to do more and more and told to undertake more and more in terms of research and development. Not only that, if you look at the industry, something peculiar to the industry is that the programmes in which we are involved are very, very long term. When a small and medium-sized enterprise takes on a programme, as my own company does and other SMEs, we are often looking at a payback, in other words we actually look to generate revenue positively, after eight years; it can be anywhere between six and ten years at present. Clearly the upfront costs in research and development costs are the biggest part of that financial model.

  49. Could you share with us the submission you make to the Treasury on this?
  (Mr Maciver) On the pure technology side the timescales we are talking about are much longer than that. While some companies can stand the pain the industry as a whole may not, even if ultimately, and it jolly well should be, the technology is entirely viable. It takes a long time to get there, that is the reality of the business.


  50. Is it not the case that the Treasury take a grim view of applications for tax breaks for research and development and they tend to argue that they are throwing good money after bad in so far as the people who do not need it, do not know what to do with it and the people who do are doing it anyway? Is there any new way of presenting this in terms of the training of workers along with the question of R&D? It does seem that you are singing an old song here and it is one which comes out every year from British manufacturing. I am not being negative, I am merely commenting.
  (Mr Maciver) This is a personal view rather than speaking for the whole industry, but on the question of tax I share some concerns about that. It may well make a difference with smaller companies. Much more important than that, there is a very real risk that because of a lack of focus, it is not particularly directed, it is not particularly effective. In this whole arena the Government does spend a great deal on research. We do not even need to be talking about spending more money. The question is whether it is focused as far as this industry is concerned in the most effective way and whether, though it is not a question any of us can wholly answer today, but we believe the answer is no, it is competitive with what we see being spent elsewhere. In the case of the United States the argument is overwhelmingly that it will not be. It equally applies to areas which have not traditionally been strong competitors of ours; Germany is a case in point. It is that overall position which is important and I certainly would not see tax methods as being the ideal way of dealing with it. That view may not be shared by my colleagues.
  (Mr Wood) One comment which does apply to small and medium-sized enterprises is that it is not just that we are having to invest for the long term but our customers are actually coming to us expecting to have technology on the shelf. If we do not have technology on the shelf to respond to their requirements, we simply do not get the opportunity to bid. We do have a fairly clear idea of the directions in which we should move, but we do have to start developing technology well ahead of specific programmes to be able to offer it to our customers. That is putting yet again great strains, understandably, on companies of our size.

Mr Laxton

  51. I should like to return to this question of sourcing and the supply chain. Mr Rose has talked this morning about the situation with Rolls-Royce, that they are looking to outsource. I do not know whether you are ultimately wanting to move as far as GE for example. You said something like 90 per cent of your manufacturing is potentially outsourced. We have quite a lot of written evidence from organisations and trade unions who are complaining for example about air brakes being outsourced in Uzbekistan, work going to Poland, not from Rolls-Royce but other companies in the aerospace industry. As an organisation are you able to give us any indication of how much work has been outsourced into places like Poland and Romania at the expense of UK jobs?
  (Mr Marshall) The answer is no, I cannot.
  (Mr Weston) I suspect we are in the dock on this, so maybe I ought to pick it up. Two comments. Firstly, we do need in a number of areas in order to secure export orders to put some work into the countries which are buying the products. That is part of the marketing of these products, particularly on government contracts, to be able to demonstrate locally that the entire economic benefit of the purchase is not flowing overseas. The amount of work we have put out for that purpose is tiny. I cannot remember the number off hand but I can supply it to you after the meeting. For every bit of work we put out we get an awful lot more work back in and that is how we generate a lot of the very substantial export business we are actually bringing to this country. The only other kind of work we have outsourced is that we have to make sure that we are competitive in the market in which we operate and that means we cannot afford to do jobs in house where the cost and overhead structure of our own company makes them uneconomic. For example, we run very extensive in-house training and development schemes, we run an in-house virtual university, all these sorts of things actually add to the overhead burden on the business, not to mention our investment in some of the very advanced CADCAM systems or data processing. There are always going to be some jobs that somebody with five lathes in a garage down the road can do more cheaply because he has a lower overhead structure and our job is to try to make sure that the jobs we do in-house are ones where all our investment actually pays off in terms of the efficiency with which we can compete. That means over the last decade we have taken a strategic view of the manufacturing activities we can do in-house and at a world effective market price so we are not penalising our ability to sell the end product. That means we have outsourced a lot of work to the sub-contracting industry around the UK which operates on a different overhead base to us. We have had some products which have been in uneconomic areas of the market. We were very heavily into the regional aircraft business with turboprops and things; we used to make Jetstreams at Prestwick. That is a very unhealthy position to be in if you have jobs which are hanging on bits of work where you are destroying value and losing money because the end product is not competitive in the marketplace. What we have done in Prestwick in the last decade is we have taken all that work out, some of the shorter term elements of that we have subcontracted into parts of the world which can do it at the price the market demands. Over time we have been substituting that with some really high quality work we can make money on on the Airbus and the Boeing programmes. That is actually what has been going on. In terms of involvement in the workforce in what we are doing, unless we can actually demonstrate we are making those kinds of decisions on a fair and equitable basis we very rapidly get to the point where we do not have the support of either the unions or the workforce. It is entirely understandable in areas of the business where we are reducing some of our sites and building up at other sites that under those circumstances the sites where they are seeing reducing workloads are asking why every available piece of work cannot be brought back in house. Quite clearly if it is undermining our ability to sell a product in the overseas market or it is a totally uneconomic thing to do, that is not going to provide us with long-term stability round the rest of the world. I shall give you the numbers of what we actually have out in some of those countries at the moment. It is tiny as a proportion of our total manufacturing workload in aerostructures.
  (Mr Maciver) What Mr Weston has just gone through would be fairly typical, not necessarily in the question of offset trade which you mentioned at the beginning but many of the other factors will be common to most of us. Certain things will be squeezed out. My impression, and we shall look further at this, is that the impact to date is not huge, but there will be a trend and what we have to do in the interests of the industry and the interests of the economy generally is make sure that we are securely established in high technology, high skilled work, where we will be competitive in the long term. Certain work under economic forces will migrate in my opinion, whatever we might say or wish today here. While it is not a big thing today, to have the illusion that employment can be secure based on uneconomic processes or processes which very rapidly become uneconomic is not a sensible way to proceed. While you can support that sort of thing for a limited time, eventually you cannot. We have seen that sadly in a number of other industries. What we are doing is trying to plan and look ahead as to how we reshape the industry where it is not vulnerable to things of that kind. There may be a trend; I would not want to pretend otherwise.

Mr Hoyle

  52. I should like to take up that point because it is very, very important. I do not know of any contracts or any orders which have been placed for Eurofighter by Poland. As tooling is being done for Eurofighter in Poland, could you explain what contracts we have had with Poland and have you any contracts from Romania yet as work is being placed there? Offset? We do not see any returns at all. Normally I can understand the benefits of offset but we do not see any orders actually coming in.
  (Mr Weston) We have sold AS90 howitzers and communication equipment to Poland. We have offers on the table in Poland at the moment for both Hawk and Grippen. It is probably the most important market in central Europe. It is the largest economy in central Europe. It is one of the new entries into NATO. It is a very important market for the future. The pattern of that is getting some of that down in advance to stand us in very good stead for some of the other contracts which are due to come up shortly.

  53. I must not have put the question correctly. Offset on aircraft. How many firm orders are on the table now for Romania and Poland and is it not true that the Americans are showing us a clean pair of heels when it comes to the NATO military aircraft order?
  (Mr Weston) We have not sold aircraft into Poland yet; I have just said that we have two offers on the table at the moment for contracts. The tooling work which has actually gone to Poland is tooling work which we have outsourced from our own factories anyway because we can get the tooling done at something like half the internal rate. Therefore we do maintain an internal tooling capability which we do need in order to make sure we can run the factory and deal with issues when our suppliers let us down. Tooling is not an activity which we can produce competitively within the overhead structure we have with what we can buy it in for from elsewhere either in the UK or overseas.

  54. Romania?
  (Mr Weston) I shall have to check what we have sold in Romania. We have sold military equipment into Romania in the last few years. It is an area where there is potential for the future.

  55. You will let us know what orders you have had.
  (Mr Weston) I shall give you how much work has gone out to those sorts of countries and to other countries round the world where we have sold military equipment, where we have put offset packages out. It is a tiny proportion of our total aerostructures manufacturing workload in the UK.

Mr Laxton

  56. You said earlier on that work is being outsourced, low value work; it is something we accept is inevitable, is going to happen and probably at an increased pace. The other thing is that there has been a step change in the industry in terms of the direction of outsourcing and the impact of outsourcing is that a lot of UK jobs are at stake. As an industry, in terms of publicly funded projects, do you not feel that you morally owe it in a sense to the UK employee to use your very best endeavours to keep work inhouse in the UK? I am starting to get a bit of a feel that that is not necessarily the position you are taking as an industry.
  (Mr Rose) I am in danger of repeating what I said earlier but what we have done by being competitive as an industry is create jobs. This outsourcing is not necessarily outsourcing outside the UK. We have created jobs in the UK supply chain but they had to be the right jobs, doing the right things and doing them competitively, otherwise we shall not be able to retain our competitiveness there, we shall not act as a route to market for that supply chain. There is no change in commitment and one cannot talk about these as though the industry is not taking a moral approach. The industry has to be competitive and in order to do that it has to have the most competitive possible supply chain. The reality is that as we gain market share as an industry we have created jobs in the supply chain. Speaking simply for Rolls-Royce, over the period from 1995 to 2003 we shall have doubled the number of jobs in the supply chain. That is a good consequence of the gains we have achieved in terms of market share through competitiveness. The last thing we want to do is to feel constrained to be uncompetitive, because over time that will simply cause a decline in the market share and a loss of jobs. This supply chain will not be as capable of supporting, for instance, a US supplier of similar equipment because plenty of capacity exists in North America to support Pratt & Witney and GE; similarly in other parts of the industry. They will tend to go for that local supply chain. The same pressures will exist on them to put work out around the world to sources of lower cost.

  57. Yes, but the increase in jobs in the supply chain is not a one-sided equation is it? The other side of the equation is the shedding of directly employed people, for example within Rolls-Royce. One of the concerns I have is that it is not just about the supply chain, it is looking at taking chunks of the business and whole chunks of it going abroad, not just supplying but it now looks as though you are going to be shifting whole chunks of activity abroad.
  (Mr Rose) Broadly the consequence has been a much stronger company, more capable of competing in the world and therefore more capable of sustaining a supply chain. We keep on coming round to ensuring that we have the competitive environment here both in terms of the manufacturing infrastructure but also the technology to ensure that we maximise the opportunity here. If we can be more successful by being more broadly based, then it is a good thing. As an example, we set up BMW/Rolls-Royce in 1989 and the fear at that time was that that would in effect constitute an export of jobs. What it actually constituted was the creation of jobs because the work which went into our own facilities as a result of our ability to invest in new product was at least as great as it was on any domestically owned product and it would not have existed at all if we had not been able to enter into that joint venture and access the funding. We simply would not have done the programmes. It is always important to balance: the greater success of the business has created a greater pool of job opportunity. It does not all accrue to the UK, but more accrues to the UK than would be the case if you did not do the programmes. We have a very clear choice: do not do the programme; do not have the opportunity.
  (Mr Maciver) In total we are not looking at a mass exodus of jobs or anything of that kind. There is a rebalancing and you are right to be concerned because we share long-term concern and that is the basis, for what we have been concentrating on very much are the long-term factors for a successful industry in the United Kingdom. If we operate as we can and should and it does very much have to be a partnership here, there is no reason why the industry should not continue to grow and succeed. All of us have circumstances where there is rebalancing; some things are less successful, some things are better done elsewhere. There will always be movement and there will be quite a slow but steady efflux of lower value jobs. I do not believe that will be an enormous factor, certainly not over the next few years in the industry. I may be wrong. Correct me if I am giving a wrong impression here from a statistical point of view but I do not think I am. It is right to be concerned but I would not focus on short-term movements. It is the underlying factors which create health in the industry because we see today the vulnerability of some other industries which have lost their technology and decision-making base in the United Kingdom. What is important is what is as much of a guarantee as you can get in an uncertain economic world, what are the factors which will ensure the long-term success and long-term high value employment in the United Kingdom?
  (Mr Weston) May I try to put it in a macro perspective of what is actually going on? If we look at the industry as a whole we have essentially got two parts of the civil aircraft industry where there is significant growth and where in the high grade aerostructures manufacturing the UK can still be really competitive. Essentially the channels to market for that activity are through Airbus and Boeing. We have all been working very hard to build up a successful Airbus, the A380 where we are talking about an additional 20,000 jobs in the UK on the back of that. From the aerostructures manufacturing point of view, the centre of that activity is at Broughton. We have also been working hard in our non-Airbus parts of the business to try to get more and more Boeing work in. Every time the UK buys a Boeing aircraft, we work hard with Boeing to get additional high grade aerostructures work in to keep as much of that activity going as possible, so we have the UK manufacturing base locked into the two channels to market where we can actually generate economic value and wealth. On the military side of the business, we do have a declining manufacturing base because over time we are selling fewer but much more effective military products. We have built 800 and something Tornados, we are going to build 620 Eurofighters; Tornado was split between three nations, Eurofighter is split between four. We can still generate a very successful export business on top of that and in order to do that we shall have to give some of that work overseas. We have been very successful historically in generating the economic benefit for our customers overseas in non-aerospace manufacturing related work and the amount of work we have had to give away is much less than would otherwise have been demanded. We do not have a huge difference in objective there between politicians, the unions, the people working for the company or indeed the company itself because it is in our interest to keep the throughput through the factories as high as possible because it keeps our costs down and our overhead base down. The less adjustment in employment levels we have to make, the more economic that is as well. We do need to recognise in the defence and military side of the business that we have a shift away from some of the traditional manufacturing patterns. They are still very important and a lot of people are still employed in it but we are not going to need as many as we had a decade ago. What we desperately need is a lot more people who are able to do the higher value added engineering, software and systems skills, where just at the moment, although we are the largest employer of graduates in the country, we are trying to recruit something like one in seven or one in eight of every engineering graduate in the UK who actually goes into industry. As a result of that we are not able to satisfy all our demand from the UK and we are recruiting something like 13 to 15 per cent of our high grade engineering, software and system jobs from the rest of Europe. They work in the UK and pay tax in the UK. Those are jobs which would be available to people from British institutes of higher education and universities if we were producing more. The company is also dedicated to lifelong learning for those who work for us. We have open learning centres in all our sites. We run a virtual university internally. Traditionally we have put that infrastructure in to be available to all those people who want to use it. Increasingly we are now beginning to work with the unions to say if we have this long-term shift going on and we have this infrastructure in place, how do we pick the best and the brightest of people who have skills for which we have a declining requirement and put them through those training and upskilling schemes to satisfy the areas where we have more demand? We are now beginning to look in areas where we have to face up to compulsory redundancies which is always absolutely the last resort and whether we should be better off spending that money taking people out of work and putting them through full-time education in order to get them reskilled. It is not something we are trying to firefight on 50 jobs in Preston or Romania: it is something we are trying to take the macro view of and what the real things are we have to do to get that right for the future. We will generate more wealth in this country by having lower grade jobs where we are not competitive done elsewhere and making sure we have enough people available to do the high skill jobs with a lot more value added which will generate more wealth for the UK.

Mr Berry

  58. I have no complaints about the general comments Mr Weston has made, though I might say in passing, particularly about BAE, which is a company for which I have great admiration ... I have to say Mr Rose's comments about Rolls-Royce were staggeringly complacent, given the thousands of jobs which are currently ... You may frown but I have constituents who would think what I am about to say is totally moderate and reasonable in the extreme. There are thousands of jobs currently on the line at Rolls-Royce, yet we are being told the purpose of this exercise is to ensure more high value employment in the UK and to create jobs. Mr Rose talked about creating jobs. Can you tell me how the current job cuts at Rolls-Royce will end up creating more jobs in the UK?
  (Mr Rose) Yes. The way that it will end up creating more jobs is by allowing us to be competitive, which will allow us to sell more product. If we cannot be competitive, and it is important to recognise that in every sector we are in we compete with some of the largest companies in the world, if you look at the energy business we compete with Siemens, ABB, Alstom and so on, and GE in the aerospace business similarly, there will be no jobs if we cannot sell product at a profit, so that is the way you ensure jobs in the long term.

  59. I understand that but we have had to drag out of you any recognition of the current job losses that Rolls-Royce is discussing at the moment. You have not volunteered that information. Are you saying that the nett effect will be more jobs at the end of this? Are you saying that you sacrifice 4,000 or 5,000 jobs now in order that over the next couple of years there will be 6,000 or 7,000? What kind of figures are we talking about? The impression you have given in your own previous answer was that this is unambiguously a job creation exercise and I am simply saying I do feel that is being a little complacent.
  (Mr Rose) No, I think what I said earlier was entirely factual which was that our ability to be competitive and successful in the market has factually resulted in an increase in the market share of the company, an increase in the revenue of the company, an increase in the purchases made on the supply chain and therefore an increase in jobs.

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