Select Committee on Defence Appendices to the Minutes of Evidence


Submissions from BAE Systems on Royal Ordnance Defence Strategy (24 January 2002)

  Further to your letter of 11 January, please find enclosed a paper on BAE SYSTEMS RO Defence Strategy, which I hope answers the points raised.

  We would be pleased to meet the Chairman and other Members of Parliament if they would find that useful. In the meanwhile, please do not hesitate to let me know if you have any further questions.

BAE SYSTEMS RO Defence Strategy

  British Aerospace, which acquired Royal Ordnance in 1987, merged with Marconi Electronic Systems (MES) in November 1999. The Land & Naval Systems (LANS) business of MES was then merged with Royal Ordnance to become the RO Defence business within BAE SYSTEMS. Over the last two years RO Defence has been integrating these two businesses and determining a forward strategy for consolidation and growth.

  The worldwide reduction in demand for defence equipment and services has led to a consolidation and downsizing of the RO Defence business over the last decade. As an example, in 1987, at privatisation of Royal Ordnance, the UK MOD ordered ammunition products to a value of circa £250 million per annum. That volume has now declined to an annual order value of less than £100 million per annum. We consider this to be a permanent market adjustment and this downturn in volume production has greatly impacted on the utilization of our production capacity. The Company is operating in a fiercely competitive home and overseas market and it needs to be optimally sized to be a viable business to compete in the market place.

  After many years of review, consolidation, investment and restructuring, in 1998 Royal Ordnance reluctantly announced the closure of its propellant manufacturing facility at Bishopton, Renfrewshire, following the decision by the UK MOD to place a contract for the new AS90 Modular Charge System with the South African Company, Somchem. This closure announcement led to an enquiry by the House of Commons Defence Committee which questioned the security of supply of propellant for future munitions manufacture. Suitable alternative sources of propellant have been secured through Nitrochemie in Germany, and the re-qualification programme is on track. Every opportunity for employees from Bishopton to re-skill, re-train and re-locate within the company has been provided, and the site will formally close in May this year.

  The merger of Royal Ordnance with LANS brought together two complementary weapons businesses. Given the decline of that business sector and after absorbing significant operating losses over three years, the decision was taken to close our site at Nottingham and transfer and relocate the activities at that site to Barrow and Leicester. Prior to the announcement of this decision, consultation did take place with TU's and with MP's but no viable alternatives to closure emerged from those discussions. All manufacturing ceased at Nottingham last year and the site will formally close early this year. A number of employees have transferred to Leicester and Barrow.

  Also related to the reduction in production volumes of military munitions and in particular the end of the contract with the UK MOD for the Charm III DU rounds for Challenger II, we recently announced the closure of our RO Speciality Metals facility at Featherstone. This decision was taken after consultation with the UK MOD. The site will close at the end of this year, but options are being sought for the sale of the civil Tungsten business. Again, employees will have options to transfer to other parts of RO Defence or BAE SYSTEMS, or to re-skill and re-train for other suitable local employment.

  In March last year, after extensive consultation with the workforce and its Trade Union representatives, we reluctantly announced the closure of our facilities at Blackburn. The activities at Blackburn have been progressively transferred to new facilities in the UK; the Vehicle Electronics business has relocated within the Blackburn area itself. The fuzing business has been partly outsources, to both UK and overseas businesses and partly transferred to Glascoed in Wales. It is our intention to sign a long-term partnering agreement with an overseas supplier for the design and delivery of our future fuzing needs and it is hoped that our partner will choose to maintain a fuze assembly facility at Glascoed.

  In December 1999 RO Defence signed the Framework Munitions Partnering Agreement with the UK MOD for the supply of a specified list of legacy ammunition products. This Agreement provides RO Defence with a five year rolling order book for munition supply, and a ten year horizon of the MOD's requirements. This gives us greater visibility of MOD requirements to enable us to pursue the right strategy and invest in the right technologies and facilities to meet our customer's future needs. Since signing this Agreement, RO Defence has successfully extended the arrangement to include munitions management and contract assessment work, in keeping with our desire to maintain our relationship on future ammunition products.

  The Agreement with the MOD provided us with the breathing space in which to optimise the size of our manufacturing capacity and in which to determine our future product and service offerings. Unless we continue to reduce our manufacturing capacity, our offering of legacy products under the Agreement, at the prices enshrined within it, would result in significant operating losses for the Company. Without a review of forward strategy we would be unable to provide the appropriate technologies and bid competitively for the future products and services that will eventually replace the legacy ammunition products in the Agreement's Schedule of Requirements. RO Defence would then no longer be a viable business. Our strategic review indicates that we need to invest in our systems integration capability, our prime contracting skills, our core lethal package technologies, our high-value added manufacturing base and our service and support capability. We are in close consultation with the MOD about our forward strategy to ensure that we can continue to provide them with the products and services they require well into the future, onshore UK.

  Pursuant to this Company strategy, over the past 12 months RO Defence has been reviewing both its manufacturing and its insensitive munition capability to enable it to deliver a cost-effective solution to the customer. This review will have an impact on two RO Defence sites, namely Birtley and Bridgwater. The Company is in dialogue with the UK MOD and with the Trade Unions (at national and local level) about the implications this will have on the business, and they have established joint TU/Management working groups to review all of the options in more detail. It is anticipated that the initial findings of the working groups will be available towards the end of February 2002. At the same time, due to the cancellation of a non-defence related order for automotive initiators, we are considering the options for the Chorley site, which makes detonators and initiators. The loss of the above order has resulted in a significant loss of contribution to overhead at Chorley and has raised doubts as to the future viability of manufacturing operations at the site. Accordingly, a similar review of options is taking place in consultation with our workforce representatives.

  RO Defence has a strong order book and is well positioned for the short-term. We have a strong relationship with our principal customer and a strong presence in the artillery systems market, which shows indications of growth over the next 10 years. We have an emerging relationship with the US DOD on the lightweight towed howitzer programme and we are successfully transitioning out of non-core business areas. Our Rocket Motor business at Summerfield may shortly find a secure future as part of an Anglo-French joint venture. We are reviewing offers for our German small arms subsidiary, Heckler and Koch, with a view to finding a purchaser who will continue to invest in that business for the future. We are investing significant sums of money in our facilities at Barrow and at Glascoed and our small arms ammunition factory at Radway Green. We are continuing to invest in future technologies at our Leicester Engineering Centre of Excellence, technologies that will allow us to become a worldwide provider of Integrated Weapon Systems. Much of this activity is high value-added, onshore UK. In 2001 our combined capital expenditure and Private Venture R&D investment amounted to just over £30 million and our current planned investment continues at an average level of £27 million per annum through to 2005. We believe, therefore, that RO Defence does have a bright future, but it needs to get to the right size and shape to be able to sustain and grow its core business activities and move aggressively into new market and product areas. The Company is investing significantly in the facilities which are key to the success of its core business, and also in the personal development of its people. There is a clear, structured programme for investment in new product development and future technologies to ensure that we are the Company of choice for the future.

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