Examination of Witnesses (Questions 82
- 99)
WEDNESDAY 19 JUNE 2002
MR BRIAN
PHILLIPSON AND
MR SIMON
KIRBY
Chairman
82. Good morning, gentlemen. Can I welcome you
this morning to the Scottish Affairs Select Committee at Westminster.
As you know, we are currently carrying out an investigation into
employment in shipbuilding on the Clyde, mostly at the behest
of Mr Robertson, who represents a shipbuilding area. We are glad
to see you, Mr Phillipson. We understand you are not long in your
position and, therefore, we are really very grateful to you for
coming along this morning. We aim to finish your session by 11.15,
but if you feel at the end there is anything you want to say that
has not been covered please indicate that to me. Could you introduce
yourselves and tell us your position for the record?
(Mr Phillipson) Thank you. I am the Managing
Director of the Sea Systems Group within BAE SYSTEMS. My colleague,
Simon Kirby, was formerly the Managing Director of the Marine
Business Unit and is now the Managing Director of the Type 45
programme.
83. In your written evidence, BAE SYSTEMS explained
that the original plan for a thousand redundancies was "part
of an overall restructuring and due to a shortfall of work in
the near term". Why did BAE SYSTEMS announce a thousand redundancies
on Clydeside in July 2001 when around half of that figure now
looks more likely?
(Mr Kirby) First perhaps I need to explain a bit of
the background behind the announcement last year and the restructuring
that formed our Three Yard Strategy, and the fact that the announcement
was based on the Three Yard Strategy. If you go back two years,
the business had two shipyards, one in Barrow which we know as
VSEL and the Scotstoun yard which was known at the time as Yarrows,
and that was under the Marconi business. In December of 1999,
the business bought the Govan yard off Kvaerner. At the start
of 2000, Marconi was merged with British Aerospace to form BAE
SYSTEMS and during 2000 BAE SYSTEMS, having this new business
with three shipyards in it, undertook a strategic look at how
it was going to best deploy those three shipyards, and I think
headlines out of that strategic review were the fact that there
was a history of under-investment in the yards; over capacity
in the three yards; and lack of clarity on workload that those
yards were going to launch into. Really, on a history of the Clyde,
commercial shipbuilding in the Kvaerner yard and frigates/warship-building
in the Yarrow's yard. Also, the frigate programme in Yarrows which
has gone on since the mid-1980s, even in the late 90s, was not
delivering a profitable business. So they are headlines around
where the business was in 2000. That then led to a strategic review
which really is outlined in the Task Force Report which I am sure
you have all read, and that strategic review really came into
a plan then of Govan being a steelwork centre of excellence, the
Scotstoun yard being an outfit, manufacturing and first-of class
Type 45 centre of excellence, and the Barrow yard being an assembly
and submarine centre of excellence. So we then had a strategic
plan for the three yards which I am sure you have read about in
the Report, and the summary was robust in terms of a plan. Going
into that through 2000 we did not have clarity on what workload
we were going to put through that three yard plan. The key points
really were the ALSL announcement and the Type 45 announcement
which then gave us clarity of what base workload we had to support
the Three Yard Strategy. That came out from an ALSL point of view
in November 2000 and then in July of last year the Type 45 announcement
was made which we welcomed because that was a significant change
in the way we procured warships in the UK. The business plan that
drove that showed a short term problem on the Clyde in terms of
workload, and the ALSLs did not fully bridge that short term gap
to the Type 45 workload. At the time that was a thousand people
too many on the Clyde compared with what workload we had to bridge
the gap to the Type 45 programme kicking in in 2004. We did a
number of things to try and mitigate that number, and really the
real clarity we needed was a Type 45 decision which we made in
July—which we welcomed because it gave us the base workload
to underpin our ten year business plan but unfortunately it did
mean we did not have sufficient workload on the Clyde so the announcement
was made at the same time.
Mr Lyons
84. On the question of the thousand redundancies,
there is a view quite widely held I would say among people in
shipbuilding that what you basically did was exaggerate the situation
to a scale of about a thousand and attempted to do two things:
one was to build political pressure through the trade unions who
responded through redundancies and get some action that way, and
almost promote orders that way as well. What do you say to that?
(Mr Kirby) That may be a view but it is certainly
not the position. We have a pretty robust way of business planning
but ultimately we are in a multi-project business environment.
Programmes change as you go through the life cycle of an overall
programme but the thousand people last year was the information
we had available at the time. History has said that, as we are
today, over 500 people left the business and we have been able
to work very hard and mitigate round about 16 per cent, I think,
of the thousand in terms of redundancies. So that may be a view
but it is certainly not the intent of the announcement made last
year. Absolutely not.
Mr Robertson
85. Moving on to your Three Yard Strategy, during
evidence taken, the one thing that was obvious was that none of
them had any faith in the company's Three Yard Strategy. Ron Culley
said, "I am sure anyone designing a shipyard from scratch
would not go about it in this way",[1]
and the Union said less polite things. Could you comment on that?
(Mr Kirby) I think it is fair to say
that in July last year there was some scepticism around on the
Three Yard Strategy. Since then we have done a lot of work with
the Task Force. In fact, we have taken a number of the Task Force
into confidentiality agreements and taken them into a lot of the
detail behind the strategy. We had to form a strategy that addressed
the underutilisation, the efficiency levels, and return our three
yards to profitable business. We believe we have done that: that
is underpinned by a business plan that involves investment linked
to order winning. What I would say is that you have made one quote
there, and there are several other quotes from within the Task
Force that do agree it is a robust and coherent strategy—from
both Mr Culley and a number of trade unions officials as well.
There are always different views on these matters and there is
no doubt it is a significant change in the way we deploy our three
shipyards to that history has shown, but there are several examples
within the world of shipyards that have gone down this type of
strategy.
86. Have you got to a stage where you have a
strategy written in tablets of stone or, as most companies always
do with plans, are you always revising and looking at it? In effect,
do you look at this strategy on a day-to-day or month-to-month
or year-to-year basis?
(Mr Phillipson) I think it is really important that
you appreciate the level of detail that the Task Force went into
to understand the strategy and why it was appropriate. Their documentation
of that strategy in the report is excellent. It makes it clear
that they support the strategy. For all Ron Culley might take
the view with a blank sheet of paper you might not end up here,
given where we have come from and the state of the market, the
Task Force chaired by Ron Culley did agree this was the best thing
for us to do. It also recognised that that strategy was dependent
upon various things happening in the future—for example,
winning new business. As we progress through the implementation
of that strategy, if we are able to achieve the assumptions we
made in deriving that strategy, we will continue with it. If we
do not, we will have to reconsider. The situation today, a few
months down the road, is that we have taken the ALSL order and
the Type 45 order; we are on track for that strategy, but if it
is to be delivered over the next ten years, which was the timeframe
documented in the Task Force Report, we have other decisions which
are not entirely in our hands. If we are successful in winning
the business we seek to win, then we will expect to maintain that
strategy.
Ann McKechin
87. The Clyde Shipyard's Task Force recommended
as one of its top recommendations that the UK Government should
re-state its shipbuilding policy. The Shipbuilding and Marine
Industries Forum is currently considering a draft plan. Would
you like to indicate what further clarification you would be looking
for on shipbuilding policy for the future?
(Mr Phillipson) I know you are following our interview
with the Minister and I would be interested to hear whether you
ask him that question. The policy is reasonably clear and it is
the policy of UK Government to build military hulls in the UK.
What is not quite so clear is the detail behind that, and one
particular area where I would wish some clarification is whether
it is MoD policy that we are simply assemblers of metal or whether
we must have the capability to design and build ships. So a very
specific clarification for me would be what is the extent of that
policy of building hulls in the UK and, very specifically, is
there a requirement for us to maintain a design capability or
does UK not consider that to be important. I would really like
some clarification on that.
Mr Duncan
88. The Clyde Shipyard's Task Force Report's
recommendation 7 suggested that, "The DTI should continue
to engage with the MoD to consider the industrial implications
of procurement strategies", and recommendation 8 indicated
that there were perhaps lessons for Government therein. How do
you feel that procurement strategies could be improved?
(Mr Phillipson) One of the challenges of a business
of this kind is that to continue to deliver the complexity of
products that are required, for the budgets and timescales available,
demands the best in terms of skills and facilities. Developing
those skills and facilities demands investment. We live in a market
where we have predominantly one customer—the UK Government.
Other customers are small by comparison. If you are selling Mars
Bars you can guess what the market will be—it averages out—but
it is very difficult to guess when you have one customer and his
decision-making is so significant to what you do. It is very difficult
to make investment in skills or facilities if you are faced with
uncertainty. What the Government has done in the past few months,
which we are very pleased about, is they have given us a significant
measure of certainty about the Type 45 programme, and in the discussions
about deriving the 45 strategy, which took nearly two years of
intense discussion with MoD, industrial issues became significant.
One significant factor was that these are big ships; investment
is required to build them; you cannot make investment without
certainty so we agreed on a six-ship programme with MoD. The DTI
does contribute to those discussions and it does contribute to
export discussions. I think the progress on 45 is very significant.
It is the right direction to go in. I think the right issues were
put on the table and I think it was a good decision, but what
I would say to you is we need more. There is still significant
uncertainty in our business; there are significant decisions we
need to take about investment for the future where I think we
need more reassurance about what MoD's intentions are, and that
is a conversation which goes on, and the DTI supports those conversations,
and in principle there is support—for example to export
discussions and DESO[2]
and things of that kind. The mechanisms are there. What we need
to do is make sure they work fully and there is a proper appreciation
of how difficult it is to maintain capabilities and facilities
when there is uncertainty. I think at the moment we are making
good progress on these discussions; Type 45 was a watershed; the
whole approach of smart acquisition makes it easier to have those
discussions, and I am optimistic that the MoD will pay more and
more attention to those issues given some of the very big decisions
in the future. A particular example I might quote to you is the
carrier. You know we have made some announcements about our preference
of where we would like to build the carrier, and we have leased
Inchgreen to give ourselves a facility to do that. If we need
to start making investment in either design capability or manufacturing
capability to meet MoD's programme for that carrier, we need some
reassurance that they want us to make those investments. If at
the end of the day they decide they do not want to use our facilities
or our people, that would make those investments nugatory. We
cannot take a punt on a decision about sourcing a programme as
big as that and we are talking to MoD about how they will approach
the procurement policy and how they can give us some reassurance
in timescales that would allow us to take investment decisions.
So I am optimistic but it is vitally important that we recognise
that we do have a fundamental partnership between the customer
community and the supply community in this industry; we have to
recognise that.
Mr Robertson
89. Have you any concerns about the Government's
procurement policies?
(Mr Phillipson) Yes.
90. What are they?
(Mr Phillipson) In a nutshell they concern the investment
decisions I have talked about. If you look at many other shipbuilding
industries, whether civil or defence related, they have often
had a different sort of relationship with their customer community,
which has given them more confidence about investment. If you
look at the history of the British shipbuilding industry over
the last thirty years or so, stability is the one thing we have
not had. It has been very different with a background of short
term decision making to take business decisions, and as it has
turned out we are not in something like the cruise liner industry
where you have a healthy market with lots of people buying. We
have basically one customer and their decisions are life and death
for individual shipyards. Over the last few years we have seen
those life and death decisions; we have also seen people, frankly,
being over-optimistic on some of their bids because they see these
as being survival issues, and sometimes the MoD has got very good
value for money as a result of that, but what they have not done
is to have the industry in a position where it could continue
to invest for the future. So I do have concerns. However, I am
also optimistic that currently we seem to have some very level-headed
sensible conversations, and Type 45 for me really was a watershed.
The decision to move from some of the early views on procurement
strategy to the six ships strategy we have, although you might
say from a Scottish point of view having a large piece of the
ships being built on the south coast might not be ideal for Scotland
but, from a national point of view, it gave three yards, two companies,
the ability to make investments with some certainty. We do need
more of that; we need procurement policy to continue paying adequate
attention to the difficulties you have in maintaining skills and
facilities if you have not got some certainty.
91. Do I gather from that that you do not think
the policy is consistent?
(Mr Phillipson) I am not sure I know how to answer
that. It is not consistent. It changes over time. If you look,
for example, at many of the changes that have come about with
smart acquisition and smart procurement over the last two or three
years, the relationship between MoD and suppliers has improved
markedly over that period, and we can now consider things and
discuss things much more positively and creatively to find win/win
solutions than was the case perhaps four or five years ago. So
you are continually seeing detailed changes in the policy. In
terms of the macro policy, it is not clear to industry where the
UK MoD feels it is necessary to preserve a national capability.
I made the comment earlier about ship design. Frankly, I do not
think the future of the UK is welding together hulls to somebody
else's design. We need to be in the high value-added business
where we can also have some skills we can export and create more
business from export. That means we need a whole product capability
and I am not sure at the moment whether UK policy stretches that
far. We know, for example, at the moment they are competing a
carrier programme at the prime level between a French company,
that can quite rightly claim experience in building aircraft-carriers
more recently than British industry, and a British company. I
am not part of that competition; I am waiting for it to end so
that one of these guys can tell me whether he wants to use our
shipyards, and we do not know that. If the UK policy is they are
going to weld steel to somebody else's design, they may not need
my design force. If they do not, it would be helpful if they tell
us all now.
Mr Sarwar
92. MoD advised shipyards to become as "innovative,
efficient and productive as possible in order to compete for MoD
commercial and export orders". BAE SYSTEMS has pledged 75
million pounds investment in Govan and Scotstoun yards over the
next ten years and it is very clear that German yards are successful
because of the high level of investment and this is the view of
Scottish Enterprise, that the success of this strategy depends
upon how much investment BAE SYSTEMS makes in the yards on the
Clyde. Has sufficient investment been made in the Clyde shipyards
to ensure that they are innovative, efficient and productive?
(Mr Phillipson) The really simple answer is no. These
yards have been starved of investment for a very long time; this
industry has been starved of investment. If you look at the investment
in skill base, in developing people skills and not just facility
skills, it does not put us up on the world stage alongside the
best facilities around the world. It is our view that, if we are
able to implement the strategy we outlined with the Task Force,
we will be able to equip these yards to do the work we anticipate
them undertaking and they will be adequately equipped to do that
work. The difficulty we have as a company is our investments have
to be justified in the eyes of our shareholders, so there has
to be business which will recoup those investments. Many of the
investments you see in overseas yards were not made against that
background. You can argue about how various things are financed
and certainly at the moment within the European Union we have
a set of rules about subsidies and grant-aid and things of that
kind which appear to be fairly clear; but they were not always
of that clarity, and there certainly have been situations in the
past where facilities have been invested in by agencies other
than the company; and the costs carried by somebody else. Frankly,
we have such a facility ourselves: the Devonshire dock hall in
Barrow was largely written off over the Trident programme and
we still have the benefit of using that facility, but we clearly
have not had the ability to make the levels of investment in the
past that some of the continental or Far Eastern yards have had.
Some of those yards are nationalised with the different demands
coming from their national government, and I could quote some
of the French yards that really do not make money at all, ever,
and that is tolerated by their owners. My owners regrettably cannot
tolerate that. We are a public company and investments have to
be related to the business we can get. If we can deliver the strategy
we have, we will have yards that are more competitive and better
equipped than today and they will perform well on the programmes
of work they have in front of them. That is the intent of the
strategy and we believe we can justify that £75 million worth
of investment against the business we have identified in our strategy.
93. I am not sure I have the answer yet. You
have one order from the Government for a Type 45 destroyer and
your part of the bargain was that you invest £75 million
in those yards. Are you saying this is not enough to justify a
£75 million investment?
(Mr Phillipson) No. I have to draw your attention
to the detail of the Task Force report. It was very clear; we
have a plan for £75 million worth of investment over the
next ten years based upon the strategy we were following. That
strategy also very clearly requires us to win other business.
The investments that are required for the Type 45 are not £75
million. Now I did see in the evidence to the earlier hearing
some comments about apparent vagueness of our investment plans.
Our plans are not vague: we have very detailed views about investments
we would like to make but some of them are commercially sensitive.
An example is the carrier programme. When we met with the Task
Force we were not ready to go public about our approach to building
the carrier. This is a competition both at prime level and at
the shipyard level: there are various people making plays to build
that carrier: one of the things we wanted to do was build it on
the Clyde. To do that we had to secure appropriate facilities.
Fortunately the Scottish Executive were very helpful and via Clyde
port we have been able to arrange a long term lease for Inchgreen,
which is just down the river from our facilities, and we announced
a few weeks ago that we have leased it, and what our pitch is,
our strategy, for building the carrier. Until we had secured that
lease we were not ready to make that announcement. Inchgreen carries
with it a number of other investment requirements, which are part
of the £75 million. They are justified by the aircraft carrier
programme. I cannot commit to those investments today: I do not
need to today—they are in the ten year plan—and within
that plan we will know whether we will have the opportunity to
build the aircraft-carrier or not. That is one of the key decisions
which was identified to the Task Force as underlying our future
strategy, as were successes in some export programmes. Now, we
are working extremely hard to deliver the order intake; we are
very active in the export markets at the moment; and with MoD
and the carrier prime contractors—I am optimistic we can
achieve the business plan which we outlined to the Task Force.
A year or a few months down the road we are on target for our
investments; we planned to invest £9.6 million this year,
we are on target to make all of those investments; we have delivered
the ALSL and the Type 45 orders; I will not comment in detail
in public but I can see export orders that will deliver what we
need to do in the medium term; we are in detailed discussions
and are getting support from senior politicians in the UK to help
with those export opportunities, and I can see a carrier programme
which I think is going to need our facilities and our people,
and we are talking to MoD about getting surety about our role
in that programme. So this is not a one-off strategy but one that
requires things to happen and, as they happen, we can justify
the investments.
Mr Robertson
94. The unions have voiced the opinion that
the bidding you have done for some of the ships recently have
not been done in good faith, and you did not really want to win
the orders in the first place but you felt you had to put bids
in. Could you comment on that?
(Mr Phillipson) I am disappointed by the comment.
I think some of the people who have made those comments, when
we sit and talk to them and talk through what we have done, do
not necessarily sustain those views. We have been bidding very
aggressively to put work into these yards. There are instances,
I have to say, where we do not sometimes understand why we do
not win bids. We have instances where we have put bids in barely
covering the direct cost—certainly not making a profit and
not recovering all of our overheads, and sometimes it appears
as if contracts go elsewhere for prices that barely seem to cover
the materials, let alone the labour. The difficulty you have in
this industry is that many yards are filling gaps. Commercial
work for us, for example, is in that category. We are fundamentally
a warship-builder; the skills for warships are not the same as
for commercial ships but sometimes it is appropriate for us to
bid for commercial work to fill a gap, and frankly we will do
that by underbidding. We will not expect to make the level of
profit on a commercial bid that arguably my shareholders would
like me to. So we will bid sharp, and others will do the same.
We do not know their cost structures, or their situations. Sometimes
they will undercut us because they are in a position to take a
bigger loss on that bid than we are. We cannot take unlimited
losses. We do bid very sharp.
95. They refer to the Task Force document which
even the Scottish Task Force said was a bit vague, and they said
particularly in the case of Scotstoun yard that part of the investment
had already been done before the investment had been announced
in the Task Force document. Are we hiding investment in a previous
time, so the money spent is not as stated?
(Mr Kirby) No, that is not the case. In the Task Force
document there is an overview of what investment we plan to do
in the short term within the £75 million. Within this year's
plan there is £9.6 million worth of investment, broadly 50/50
between the two sites, which has been committed to be spent this
year, and we are quite happy to submit an additional paper to
the Committee in terms of what forms that £9.6 million, and
also what forms the investment over the next two to three years
to support the Type 45 programme.[3]
96. That would be very helpful but, if I can
prove you are wrong and you did have that investment spent before
the Task Force paper went to press, would you reinvest more money?
(Mr Kirby) That £75 million is defined in the
report. I am quite happy to take you through that. I am absolutely
confident that £9.6 million is this year and I can give you
that full breakdown -
97. That is not what I was asking you. If I
can prove you invested that money before the agreement was made,
will you reinvest it?
(Mr Kirby) I am not sure I understand when the agreement
was made. We make investments around programmes. We have an ALSL
programme; we have a Type 45 programme and the investments are
specifically around those programmes.
98. Again, I will press the point and probably,
Mr Phillipson, you should answer this question. If I can prove
to you that that money was invested before any agreements were
made regarding the Task Force, will you re-invest that same amount
of money and make that £75 million back up to £75 million?
(Mr Phillipson) Let me be very clear. We will make
investments appropriate to support our business. The business
plan, as we explained to the Task Force, demands and justifies
an investment plan over the next ten years which we calculate
to be £75 million. We have committed that, if we can achieve
the business strategy that we are seeking in the market place,
we will make the investments to support that strategy. We had
a detailed view about what we saw that £75 million going
on, and we still have that detailed view. I regret I will not
indulge in an abstract conversation about what was or was not
said at what point in time, but I will happily talk you through
where we see the £75 million going. If necessary we will
supply that as commercially sensitive information, and we did
share some of that with some of the Committee but it is commercially
sensitive and is not in the public domain. Many of the investment
plans for this year were explained in great detail on the Task
Force report; they were published; and we are on with those investments.
99. I have to say that we have voiced the opinion
before, not just in this Committee but with many MPs, that your
company do not tell us the whole story, and I have to say that
the good faith you are not showing by not investing this money,
if it can be proved that this was previous investment that had
to be done in the first place which has nothing to do with the
Task Force report, it means I have to say that we cannot take
on board some of the things you are saying. I ask you again, if
I can prove to you that this investment was going to be invested
long before the Task Force sat, will you bring that figure up
to the agreed £75 million stated within the Task Force agreement?
(Mr Kirby) Can I clarify the background to that? The
£75 million was not a deal done with the Task Force; it was
a business plan we formulated and described earlier during 2000
and 2001 which forecast an investment programme against time and,
on day 1 of the Task Force, I presented to them an overview of
that investment. So it was centred around the investment programme—not
a deal done with the Task Force. It coincided and the Task Force
were very supportive of the fact we were doing it, but it was
a separate business planning exercise.
1 See Ev 12. Back
2
Defence Export Services Organisation. Back
3
See Ev 48. Back
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