Supplementary memorandum submitted by
the Society of British Aerospace Companies Ltd
INTRODUCTION
Success in aerospace stems directly and fundamentally
from technology and the national technology base that creates
it. Continuous investment in technology acquisition (TA) over
a long period builds up the intellectual property (IP) which is
embedded in specific products. Acquiring such a body of knowledge,
expertise and experience constitutes one of the most formidable
barriers to entry to countries and companies seeking a foothold
in the global aerospace market. The SBAC contends that the UK's
total TA effort (DTI, MoD, EPSRC and industry) is no longer competitive
compared to that of our major competitors. While private industry
is able to fill some of the gaps, enhanced public support for
TA is still necessary to sustain its competitive challenge over
the next decade.
TECHNOLOGY AS
A STRATEGIC
ASSET
Control over IP represents a strategic asset
for a national aerospace industry operating in a global marketplace
and vital as a means to pin down increasingly mobile transnational
aerospace companies. At its starkest, sales and high quality employment
follow the technology. Similarly, control over critical technologies
makes a vital contribution to national security enabling the national
armed services the ability to specify their own equipment and
to support such equipment operationally. In the context of international
collaboration, national IP allows the UK to participate at the
highest level in joint programmes and to have a strong influence
over development and the distribution of work.
THE TECHNOLOGY
ACQUISITION PROCESS
TA must be distinguished from the dedicated
research and development (R&D) associated with specific products.
There is no clear boundary between pure research leading to TA
and some of the applied research conducted in the early stages
of programme design and development. However, conceptually they
have a different function and are subject to different funding
streams. TA is essentially generic, generating a stream of data,
knowledge and proven ideas which is available for commercial exploitation
often over several generations of products. As such, TA benefits
industry generally as much as individual companies. Its benefits
and effects cut across the different sectors and tiers of the
industry.
TA is often very long term. UK firms are still
benefiting directly from investment in generic technology made
in the late 1950s and 1960s. Examples include research into wing
aerodynamics conducted by the RAE Farnborough (now part of DERA)
which fed into the UK contribution to Airbus. Similar investments
were made in aero-engine fundamental technology by both government
and industry that underpin the RB211 and Trent families. Comparable
histories can be traced in respect of the UK avionics and equipment
sectors. The TA process involves a number of public and private
agencies—companies, national research establishments, and
academia. It also requires sophisticated, complex and expensive
research infrastructure such as wind tunnels and test facilities.
The generic, long-term nature of aerospace TA
helps to explain why funding has to be shared between public and
private agencies. While private companies do invest in some areas
of basic research, the bulk of their investment requirements must
be devoted to the launch of individual programmes and the satisfaction
of specific customer requirements. Publicly funded aerospace TA,
whether located in private industry, academia or national research
associations is therefore entirely appropriate. This reflects
practice in all of the major aerospace producing states and in
other high technology, science-based industries. In economic terms,
this represents an aspect of "market failure", where
state intervention redresses deficiencies in capital market behaviour
to satisfy public welfare goals.
Investment in TA can be highly leveraged. That
is to say for a relatively modest level of funding, large returns
can be generated, although in any given instance the outcome may
be highly uncertain—another reason why private capital may
hesitate to invest in TA. Certainly when compared to the non-recurring
costs of a large new civil airliner or aero-engine, or the development
of a complex military aircraft, TA is a small part of national
R&D investment.
However, to achieve a world class capability
in aerospace, with a critical mass of IP, the sums needed for
an adequate TA programme are not trivial. There is also an additional
feature of the aerospace innovation cycle that adds to the cost
of TA. There is a crucial link to be made between generating basic
concepts and commercially useful research. This gap can often
be filled by Technology Demonstration (TD). TD aims to reduce
the technical and ultimately the financial risk of developing
specific products for civil and military customers. TD sometimes,
though rarely, entails the development and construction of a complete
aircraft, engine or sub-system prototype. More usually, TD involves
bench-top equipment and, increasingly, computer simulation. TD
often includes the integration of several technology streams,
bringing together the work of several agencies, companies and
academics.
The importance of TD was noted by the House
of Commons Select Committee on Science and Technology in a recent
report. The US government invests heavily in TD generally, and
not just for aerospace as a means of reducing the risk of new
technology and paving the way for successful commercial exploitation.[1]
UK GOVERNMENT SUPPORT
FOR TECHNOLOGY
ACQUISITION
UK public investment in aerospace TA and related
TD has fallen significantly over the past decade. The DTI funded
Civil Aircraft Research and Demonstration (CARAD) programme has
fallen from £104 million in 1972-73 to £21 million in
1998-99 (in 1999 terms) a fall of 80 per cent over the period
in real terms. Currently set at some £22 million a year,
CARAD's contribution to UK aerospace TA is very modest indeed,
certainly when compared with our major competitors (see Attachment).
Given the high leverage effect noted above, even at this level
of funding CARAD still makes a significant impact on UK aerospace
TA. CARAD promotes collaboration in an effective way between the
various agencies involved in aerospace TA and give companies opportunities
to use such collaborative research to develop the overall business
supply chain and suppliers as well as gaining new technology.
Without CARAD, the aerospace industry would be seriously disadvantaged
when bidding for places on international collaborative projects.
Although making a useful contribution to UK
aerospace TA, CARAD should be seen, as part of a total publicly-funded
TA programme. In this respect, there is a serious shortfall in
overall spending on UK aerospace TA. This has been exacerbated
by a similar decline in the MoD budget for TD and an increasing
tendency to buy equipment off the shelf (see Attachment). Aerospace
TA is supported in academia through the EPSRC and other Research
Council activity. However, there is no clear understanding of
the total available nor of its direction. The SBAC contends that
without necessarily constraining academic research, the UK Government
should ensure that there is a closer match between Research Council
funded programmes and UK industry priorities. In order to move
forward on this issue, the DTI should be encouraged to undertake
a formal audit of UK spending on aerospace TA with international
comparisons.
While the consequences of this deficiency may
not yet be apparent in terms of market share and commercial success,
failure to replenish the national stock of critical technologies
is having a profound and inexorable impact on UK industry competitiveness.
UK located companies will begin to lose their competitive edge.
Those with the option of investing abroad where the TA climate
is more favourable will move core operations abroad. High value
manufacturing, employment and business for the national supply
chain will follow. The UK will cease also to be an attractive
location for inward investment in aerospace.
There is no absolute answer to the question
of how much should be invested in aerospace TA. It should be sufficient
to enable UK industry to remain internationally competitive. Nor
should any improvement in funding be seen only in terms of additional
public expenditure. Following CARAD practice, industry would match
increases in public funding.
THE SBAC FORESIGHT
ACTION INITIATIVE
This principle underpinned the SBAC's Foresight
Action initiative (See attachment). The proposed Foresight Action
programme aimed progressively to redress the shortfall in mainly
civil or dual use TA (dual use TA would have both civil and military
applications). Foresight Action drew together the interests of
several companies and academic researchers and focused on a number
of identified TD programmes. Foresight Action envisaged a public-private
partnership investment increasing over three years towards a total
annual spend of up to £400 million shared equally between
industry and government. In the event, only one of the Foresight
projects moved forward, the BASTION advanced guided weapons programme
part funded by the MoD. Even this is now under threat as MoD support
comes to an end.
TECHNOLOGY ACQUISITION—THE
WAY FORWARD
The report from the Foresight Aerospace and
Defence Panel recommended increases in TD investment by both the
DTI and the MoD.[2]
While these were again quite modest proposals, they reflect a
consensus that the UK Government seriously underfunds industry
relevant basic and applied research. The clear message from the
aerospace industry is that the UK is losing ground against its
major competitors and a more favourable TA climate overseas will
encourage the migration of core research activities with the implication
that high value manufacturing jobs and business for local suppliers
will follow. There is already some evidence that UK companies
are increasing TA activity overseas. Aerospace TA conducted by
UK aerospace-owned companies in the US as a percentage of turnover
has increased from 0.6 per cent in 1996 to 4 per cent in 1999
(See Attachment).
There is no doubting the importance the UK aerospace
industry attaches to repayable launch investment for specific
projects. But this does not support the generic TA on which the
health overall of the industry depends. In the civil aerospace
sector, the Treasury is receiving some £100 million net of
total public investment in civil programmes, including CARAD and
launch investment in Airbus and aero-engines. Recycling some of
these returns into a programme of TA and TD activity would go
a long way towards redressing the deficiency in UK TA support,
with benefits spread across the entire industry.
SUMMARY
Success in aerospace stems directly and fundamentally
from technology and the national technology base that creates
it.
Control over IP represents a strategic asset
for a national aerospace industry operating in a global marketplace
and vital as a means to pin down increasingly mobile transnational
aerospace companies.
A more favourable TA climate overseas will encourage
the migration of core research activities with the implication
that high value manufacturing jobs and business for local suppliers
will follow.
The SBAC contends that the UK's total TA effort
(DTI, MoD, EPSRC and industry) is no longer competitive compared
to that of our major competitors. While private industry is able
to fill some of the gaps, enhanced public support for TA is still
necessary to sustain its competitive challenge over the next decade
The generic, long-term nature of aerospace TA
helps to explain why funding has to be shared between public and
private agencies. While private companies do invest in some areas
of basic research, the bulk of their investment requirements must
be devoted to the launch of individual programmes and the satisfaction
of specific customer requirements.
The DTI should be encouraged to undertake a
formal audit of UK spending on aerospace TA with international
comparisons.
Recycling some of the returns HMG is receiving
from past launch investment in a programme of TA and TD activity
would go a long way towards redressing the deficiency in UK TA
support, with benefits spread across the entire industry.
9 February 2001
RESEARCH, TECHNOLOGY AND DEVELOPMENT (R&D)
IN THE UK AEROSPACE INDUSTRY: FACTS AND FIGURES
THE AEROSPACE
CYCLE
Technology is the lifeblood of aerospace. Although
there are many difficulties in defining and measuring technology/knowledge
creation over time, there are some basic concepts which are relevant
to all industries including aerospace. Many aerospace companies
generate revenue models which cover 20-40 years and a typical
life-cycle will cover conception, marketing, research and development,
production, after-sales and disposal. The national aerospace trade
association of all European countries (including the SBAC) make
use of the following definitions for the knowledge creation process:
AECMA DEFINITIONS OF AEROSPACE R&D AND
PRODUCTION
| Life-cycle Segment
| Activities included |
Research & Technology
(R&T) |
All activities in the fields of studies, research, generic technologies as well as prototyping and demonstrators, representing activities which are not directly attributable to products. They can, thus, be regarded as generic activities and are designed to maintain or expand knowledge and/or the technological basis.
|
| Development (D) | Development of a product leading to a series production of that product. It generally also includes acceptance testing and certification.
|
Research &
Development (R&D) |
Sum of all R&T and Development activities (sometimes written in full as R&T,D).
|
| Production | From an industry perspective, production is understood here as turnover generated from sales of products manufactured in series production, from after sales as well as from maintenance and overhaul services. Sales of single units (eg scientific satellite) are not included (they are included under Development). From a government's perspective, industry production for governments is understood as procurement of products manufactured in series production, of after-sales' products as well as of maintenance and overhaul services.
|
| Operation | All activities necessary to operate existing aerospace hardware. Activities related to operations of commercial aircraft by airlines or of military aerospace equipment by the armed forces are usually excluded.
|
Source: SBAC, AECMA.
The OECD provides international analyses of R&D expenditure
under the guidance of the Frascati Manual. The Frascati Manual
subdivides R&D into three related activities: basic research
is experimental or theoretical work undertaken primarily to acquire
new knowledge of the underlying foundation of phenomena and observable
facts, without any particular application or use in view; applied
research is also original investigation undertaken in order
to acquire new knowledge. It is, however, directed primarily towards
a specific practical aim or objective; and experimental development
is systematic work drawing on existing knowledge gained from research
and practical experience that is directed to producing new materials,
products or devices; to installing new processes, systems or services;
or to improving substantially those already produced or installed.
Identifying the boundary between basic and applied aspects
of R&D is often difficult and subjective. Many commentators
combine the overlapping parts of these two categories into a wider
grouping called "strategic research". This is achieved
by taking advantage of the definitions contained in the OECD Frascati
Manual. This allows for the optional further breakdown of basic
research into "pure-basic" and "orientated-basic"
and the long-standing UK practice of subdividing applied research
into "strategic-applied" and "specific-applied".
Strategic research is the sum of orientated-basic and strategic-applied.
The wider term "strategic research" described work that
has evolved from pure-basic research and where practical applications
are likely and feasible but cannot yet be specified, or where
the accumulation of underlying technological knowledge will serve
many diverse purposes.
WHY CONDUCT
R&D?
The socio-economic objectives for R&D are extremely diverse.
Both the OECD and EUROSTAT publish similar objectives for R&D
and the global economy. Budget appropriations for R&D are
disaggregated into 13 mutually exclusive chapters (aerospace related
chapters labelled in bold):
1. Exploration and exploitation of the Earth
2. Infrastructure and general planning of land-use
3. Control and care of the environment
4. Protection and improvement of human health
5. Production, distribution and rational utilisation
of energy
6. Agricultural production and technology
7. Industrial production and technology
8. Social structures and relationships
9. Exploration and exploitation of space
10. Research financed from general university funds research
with very general objectives
11. Non-orientated research as in chapter 10 but not financed
by general university funds
12. Other civil research, all other civil work not included
in any of the preceding chapters
13. Defence research and development for military purposes.
Five of the 13 major socio-economic objectives of R&D
are aerospace related. In addition, many of the major objectives
are sub-divided in categories which contain many further areas
of aerospace related items.
UK GOVERNMENT EXPENDITURE
ON R&D
Numerous studies have concluded that total UK R&D spending
still lags that of other major industrialised nations. After a
fall in total R&D spend during the 1990s, the UK Government
has sought to increase both the profile and the levels of R&D
spending in the UK (eg Competitiveness White Paper, Foresight
Program etc). In 1997, total R&D expenditure in UK amounted
to £14.7 billion. The UK Government financed roughly a third
of this expenditure (the rest being accounted for by business
and overseas sources). As a performer, UK Government carried out
roughly 14 per cent of the total R&D spend in 1997. Some of
the key points for UK Government financed R&D are:
— Total Government funded R&D across all industries
in the UK has fallen by 20 per cent in real terms from £5,766
million in 1986-87 to £4,607 million in 1998-99.
— Experimental research has fallen by 46 per cent
over the 13 year period from £2,974 million to £1,592
million in real terms.
— Basic Research (which broadly represents Research
and Technology) has increased by 44 per cent over the same period
from £569 million to £819 million in real terms.
UK AEROSPACE R&D
Technology is the lifeblood of aerospace. Without the UK's
heavy up-front commitment to the R&D phase of many large-scale
projects, such as the Eurofighter and the A380, UK aerospace would
not now be at the forefront of the industry's major developments.
In order to ascertain the level of the R&D spending in Europe,
each member state (including the UK) undertakes an annual aerospace
survey via the European Association of Aerospace Industries (AECMA).
The following caveats should be noted when interpreting the proceeding
results:
— There are known differences between aerospace
figures from the SBAC and Government sources. The SBAC makes use
of both a wider sample of aerospace companies and a wider definition
of aerospace than Government based SIC codes. Care should always
be taken with cross-sourced data comparisons.
— Although the SBAC samples around 200 aerospace
companies per annum, obtaining reliable R&D data from smaller
companies is often extremely difficult. In cases of non-response,
the SBAC estimates R&D spending for larger companies and assumes
zero R&D for smaller companies.
Bearing these in mind, the main points from the SBAC annual
survey are as follows (detailed results are presented in Annex
A):
— Total R&D spend in the UK Aerospace Industry
totalled £1.8 billion in 1999 (implying a 10.3 per cent intensity
ratio of turnover), of which £242 million was spent on R&T
alone (1.9 per cent intensity ratio).
— Total R&D has increased by 19 per cent in
real terms from £1.5 billion in 1996 to £1.8 billion
in 1999.
— However, the proportion of this solely related
to R&T has fallen by 35 per cent in real terms from £351
million in 1996 to £242 million in 1999.
— The UK Aerospace Industry owns substantial overseas
assets and in 1999 these companies generated £4.3 billion
in turnover and employed over 38,000 people.
— Although total R&D amongst these overseas
business units has remained fairly constant between 1996 and 1999
at around 5-6 per cent of turnover, total R&T has increased
from 1 per cent of turnover to 4 per cent of turnover.
— The majority of this incremental increase in R&T
has occurred in UK-owned aerospace business units based in the
United States.
GOVERNMENT FUNDED
AEROSPACE R&D
Government funding of aerospace R&D can arrive to industry
directly or indirectly via other bodies (UK Government funded
aerospace R&D initiatives are listed in Annex B). Essentially,
there are three main R&D funding sources in the UK for the
Aerospace Industry:
— Ministry of Defence (MoD)
— Department of Trade and Industry (DTI), including
the Office of Science and Technology (OST)
— Engineering and Physical Sciences Research Council
(EPSRC)
Within each of these organisations there are separate R&D
budgets to support various types of R&D activity (the potential
beneficiary of R&D funding must determine which of the budget
sources applies to their particular R&D opportunity). The
UK Government also indirectly supports the UK Aerospace Industry
via the European Union (EU). The EU Framework 5 programme, started
in 1998, continues to provide focused European support for R&D,
with considerable funds now allocated to SME and IT/e-business
R&D ventures. Framework 6 in due to commence in 2002. Some
of the key results for Government financing of UK aerospace related
R&D are:
— Although direct Government financed UK Aerospace
R&D has increased from £579 million to £653 million
between 1996 and 1999, as a proportion of total R&D it has
fallen from 38 per cent in 1996 to 36 per cent in 1999.
— The Civil Aircraft Research and Technology Demonstration
(CARAD) Programme supports pre-competitive research and technology
demonstration (R&TD) to enhance civil industrial competitiveness.
The five-year phase of the current CARAD III programme ends in
March 2001.
— Total CARAD funding has fallen from £104
million in 1972-73 to £21 million in 1998-99 (in 1999 terms)—a
fall of 80 per cent over the period in real terms.
— In 1989-99 the Ministry of Defence (MoD) received
£2.3 billion via Government for total research and development.
— Although it is not known how much of this expenditure
ultimately ends with the aerospace industry, the largest beneficiary
of the MoD expenditure for R&D (approx. £1 billion per
annum) is the Defence Evaluation and Research Agency (DERA).
— Total MoD Government funded R&D has fallen
by 33 per cent in real terms from £3,140 million in 1986-87
to £2,096 million in 1998-99.
— Total research expenditures increased by 4 per
cent and development expenditures decreased by 42 per cent over
the time period.
1
House of Commons Science and Technology Committee, Second Report,
Engineering and Physical Sciences Based Innovation, Session
1999-2000, HC 195. Back
2
Office of Science and Technology, Action for Future Air Systems,
Technology Foresight, Defence and Aerospace Panel, December 2000. Back
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