Examination of Witnesses (Questions 100
- 119)
WEDNESDAY 19 JUNE 2002
MR BRIAN
PHILLIPSON AND
MR SIMON
KIRBY
Chairman
100. So the amount you had invested was included
in that £75 million?
(Mr Phillipson) The amount we had planned to invest
was included, yes.
Mr Robertson
101. In the Task Force it says, "Of the
estimated £75 million investment shown for the Clyde, the
following items have been specified.", and it goes on to
list them. In fairness that would show things that are going to
be invested in, not that have already been invested in. You are
now telling me then, if half of that had already been invested
before the Task Force had met, you are now counting them as another
good bit of work you have done, but it is not.
(Mr Kirby) I can submit to the Committee a piece of
paper that outlines the £75 million.[4]
As I say, pages 43/44 of the document outlines the investment
plan by year. This year we have committed to spend I think it
is £9.6 million to be precise, and we will spend £9.6
million this year in our Clyde yards.
(Mr Phillipson) Please understand that
this was an investment strategy to support a business strategy.
The business strategy was formulated as we went through the year
2000. What we did with the Task Force was to test that strategy
and also look at, for example, how we could mitigate the redundancies
that resulted from the downsizing. This was not about a deal;
this was about delivery of a business strategy that made sense
for the shipyards, its work force and our shareholders.
Mr Lyons
102. Mr Phillipson, the last time we took evidence
we heard about German shipbuilding and the use of a co-ordinator.
Do you have a view on that, and are there any advantages or disadvantages
in having that position in Britain shipbuilding?
(Mr Phillipson) To be honest, I do not have a clear
view, and the reason is it depends on the powers or responsibilities
of that individual. I have seen a little bit of the work of these
individuals in Germany. I worked in Germany for three years in
the aerospace industry, and they also have an aerospace co-ordinator.
It can be very helpful but it very much depends on his role and
responsibility, and what we can look to that individual for.
103. But, in terms of German shipbuilding, something
comparable in terms of power and responsibilities may have a chance
of success in the way the Germans have?
(Mr Phillipson) It might. I suspect it is a different
situation in the UK. If you look at the way the German industry
is structured, if you look at, for example, investment opportunities
they have had in East Germany because of unification and you look
at some of the history of co-operation between their yards and
you compare that with the history in the UK of quite severe downsizing
in recent years, fierce competition between the yards, we are
in a different situation, so the precise German solution I suspect
might not be ideal for our situation. I think we could have a
situation where there was a stronger representation in Government
for the interests of this industry but how we do that and what
we do I do not have a clear view about. I doubt whether the precise
German model would automatically be the best thing for the UK
Mr Lazarowicz
104. Broadening the subject beyond BAE itself,
can you tell me how competitive you consider the UK shipbuilding
industry to be and what more could be done to improve competitiveness?
In particular, I know there is a shipbuilding forum which was
set up a few years ago. What is your assessment of that forum
in helping improve the competitiveness of the industry?
(Mr Phillipson) I will defer to Simon on the shipbuilding
forum because I have not personally attended it but, on the competitive
issue generally, firstly it is very difficult to measure competitiveness.
We operate in the UK warship market primarily and one of the distinctive
features about that market is our defence forces hate coming second.
As a result they have fairly demanding requirements and standards;
they like warships that win. Those standards are not the same
as the standards that other people operate to. If you compare
what is required to design and build a UK warship with others,
you have not got a like-for-like comparison. Again, it might be
interesting to ask the Minister later this morning whether he
feels he gets good value for money on the warships he buys. My
advice is they do very well. The MoD believes the value for money
they get from British industry is excellent and if you compare
us with the United States, for example, who do have similarly
demanding design standards, and I think we are extremely competitive.
Occasionally we get the opportunity for a straight head-for-head
comparison for value for money competitiveness. When we do, all
the evidence is that we are very competitive, but you have to
recognise some differences. For example, because we are a war-shipyard
we carry a level of overhead that some commercial yards would
not. If you look at the manhours it takes us sometimes to do a
job, the manhours can be very competitive with a commercial yard,
but because they are having to carry the overheads of the warship
business, if we load the manhours completely with those overheads,
we are not competitive. That is why for infill-work sometimes
we have to not recover all of our overheads to remain competitive,
but on a like-for-like comparison there are bits and pieces of
evidence that say we are very competitive, but it is difficult
to get like-for-like because the UK does demand some quite high
standards in its warships—higher than many other nations.
105. But where we can get a like-for-like comparison,
can we get improvements in our competitive position?
(Mr Phillipson) Yes, and typically they come about
through investment. We have an example at the moment which is
not Scottish but I will quote it to you nevertheless, on the astute
nuclear submarine programme, we have invested in a fair degree
of automation around manufacturing the rings of the hull, and
we can demonstrate that we have a huge improvement in quality
and a 30 per cent reduction in cost in manufacturing the structure
of that submarine compared to its predecessors, and it is largely
down to some particular pieces of investment we were able to make
both in the design of that product and in its manufacture. If
you look inside the Type 45 today there are many examples where
we are able to design and invest in manufacturing to take cost
out of that product. What we have not done in the last few years
is invested in some of the R&D that would have made that easier,
or the skills development or the facilities development, and one
regret I have is that when you come along with a big programme
like Type 45 it is a wee bit late to do the R&D. We have had
examples where, faced with tight budgets, we have taken the challenge
of that budget but, frankly, we did not get the R&D done before
we took the challenge and sometimes when you then introduce novel
techniques to take cost out they backfire on you a bit, and we
have examples where we have introduced very new technology, and
it has not gone right and it has cost us a lot to sort the mess
out. But in general you have to keep improving competitiveness,
you have to keep investing in both design for manufacture and
the manufacturing skills and facilities, but finding the money
to make those investments is difficult; the UK is not a big investor
in R&D in these areas; in fact, on the contrary, in the warship
field we traditionally have had many of these skills in the MoD,
and until programmes like Astute and Type 45 the design authority
for warships was always in the UK MoD; they did their own internal
R&D and they basically instructed the industry how to build.
That has changed in the last few years, but in two ways: firstly,
they pushed the responsibility out to industry but, secondly,
they have stopped investing in it and they are having to downsize
their own technical skills but there is not an easy means for
us to up-skill our facilities and there is not the money available
to transfer the R&D and the know-how and the facilities, and
we have had some difficulty because of that. Going forward, we
have to invest continually in improving our design skills, our
manufacturing skills, and our manufacturing facilities because
this is a treadmill. You cannot stand still: it is about continuous
improvement.
(Mr Kirby) On the Shipbuilding Forum, it has been
running I guess for about three years now. In terms of views,
it is a useful exchange of views within the shipbuilding community
and interested parties and I think that is what it is: a useful
forum for an exchange of views. Whether it could be made more
effective I am not sure. It relates partly back to the point of
view that you have a shipbuilding co-ordinator and the role of
that, to give that some real teeth to achieve. But I think the
Forum itself is a useful forum for an exchange of views. It gives
people the opportunity to understand what is going on nationally
and internationally, but that is about it.
106. Do you not think it might be a good idea
to lift it up from being a platform for the exchange of views
to something more, particularly given the discussion we had earlier?
(Mr Kirby) Exactly what form that would take I am
not sure but I would say certainly we would welcome an opportunity
to discuss how it could be used more effectively, yes.
Mr Carmichael
107. Is "useful forum for an exchange of
views" a polite way of calling it a "talking shop"?
(Mr Kirby) You can make your own judgment on that
but I think it could be made a more useful forum. It has the right
people—or it could have the right people there supported
by industry. Certainly we would commit to that and we would be
quite happy to engage on discussion on how that could be done.
It does bring in the shipbuilding co-ordinator debate and what
the role of that person would be, because clearly they would be
the focal point of that forum.
Mr Carmichael: To use another polite euphemism,
I hear what you are saying!
Mr Joyce
108. Mr Phillipson, what you said earlier about
Britain's armed forces not wanting to come second is entirely
understandable. There are areas of procurement strategy, not necessarily
naval, where the Government and the armed services themselves
have accepted an element of compromise, where they have chosen
to buy off-the-shelf or abroad and have compromised on the design
spec that they then lay down to the industry. Is there any scope
within shipbuilding or not?
(Mr Phillipson) Yes, and I am a big enthusiastic fan
of smart acquisition when it works well. You may be aware before
taking this post I ran the Type 45 programme for its first two
years. On that programme, unusually, MoD started off with some
clarity about the budget that was available, and they had some
very key requirements that could not be compromised but beyond
that they were up for compromise, and they were willing to engage
with us wholeheartedly, and really effectively, in discussing
what the trade-offs were as we went through the design to be able
to satisfy the needs of all the user community—and that
is complex because there are people writing requirements, people
operating the ships, people operating support arrangements, all
having an impact, and corralling that group to participate in
those trade-off discussions is not easy. But it worked well on
45 and continues to do so, and we have been able to make some
pretty massive trade-off decisions, many of which had benefits
downstream for the next 20/30/50 years. We have clear through-life
benefits because we have adopted a different approach. I do believe
at the moment, and my experience at the moment is on the naval
side of MoD, there is a real enthusiasm for practical decision
making about what is needed, and what is not because it is archaic.
There are areas where commercial standards are ahead of military,
and we need to drop the military and move to the commercial, but
with some care and sometimes there is a danger of not doing enough
work really to understand the implications of the change, and
that comes back to R&D. It would have been really nice if,
over the years, we had spent more money on R&D to say, "Can
we apply these commercial standards in the military market?".
Regrettably we have not done that yet; I think it is something
we need to pay more attention to in the future and, by the way,
we also need to do it with a community who can use the R&D.
It is no good paying a five man consultancy team to do a report:
you really have to take the designers who have to design the warships
and have them understand how you can migrate standards. But it
is going on; it is the way forward; there are a lot of examples
on it that are there now on Type 45 but it still has to be fit
for the purpose, and the purpose is still "do not come second".
Mr Weir
109. Throughout the evidence hearing most witnesses
have stressed our need to increase exports, and Scottish Enterprise
said that sustainability on the Clyde was dependent on at least
one new export order a year. Can I ask you to what extent the
longer term future of shipbuilding on the Clyde is dependent on
winning at least one new export order a year? What size of export
order would you require, since there is obviously a wide spectrum,
and is it a realistic target to ask for one a year?
(Mr Phillipson) You ask the question in a good week,
and any of you free on Saturday morning are welcome to come and
join us watching the launch of our third OPV for Brunei from the
berth in Scotstoun, and it is only a couple of weeks now since
we were awarded the Queen's Award for Export Success from export
shipbuilding. We can export ships; I think the Malaysian Navy
which has two excellent frigates are delighted with their product
and very interested in procuring more, and the Bruneian ships
are tremendous. We do need a reasonable level of export business
as part of the business plan that we have put forward with the
Task Force. You can equate it approximately to about a ship a
year but it very much depends on the size of the ship. At the
moment we are putting through the Bruneian ships; we have three
on the river at the moment—or will have on Saturday. They
are about the size of ship that probably fits the bill. If we
get one or two larger ships they keep us going more years, so
it is a very rough measure, and it is about a ship a year. So
if we get an order for two or three ships that is fine; that will
keep us going a year or two, but we do need a level of export
work. We did show the Task Force the workload forecast for the
business and you can identify in that the work we know about,
the probable work, and the possible work, and in that possible
slice there is a fair amount of export. Again, the good news is
I can see customers who could give us the work we need for the
next few years, and we are in very active discussions, and I do
know we have had strong personal support from the MoD at Secretary
of State level in recent weeks, so I am optimistic that we should
be able to bring some of these orders in but it is a tough market
out there. We did present some evidence to the Task Force about
how many orders there are out there, and if you look back over
the last few years there are not that many. We are in the up-market
end: we do not sell floating bath tubs with a pea shooter on the
end but serious warships, and much of the market is closed to
us because people want to design and build their own products.
The open market to us can, however, still potentially deliver
the level of business we need, and we are very actively pursuing
that.
110. You say much of the market is closed. Given
that we are discussing the fact that the UK wants, quite rightly,
to keep its warship manufacturing within the UK and you are finding
that other countries are doing exactly the same, you mentioned
Brunei ships, do you have any other orders on the books for export
at the moment?
(Mr Phillipson) We do not have any other export orders
on the books at the moment. Regarding people wanting their own
capability, a number of things go on. The Task Force report, for
example, talked about technology transfer. Now, that is important
in some markets. There are markets that are completely closed.
The United States are not going to buy offshore—"Buy
American". France and Germany are similar sorts of markets.
There are markets that are closed because of defence policy matters—Taiwan—but
that still leaves a fair part of the world that does buy offshore.
Some of the nations that are growing their industrial capability
want to use purchases as a way of technology transfer and grow
their own capabilities. We have not done a huge amount of that
in the shipbuilding arena but are prepared to. We have done a
lot in the aircraft area where we have taken products and put
them into licensed manufacture in other countries and grown their
capabilities; we have the skills to do it and regrettably it is
part of the business we are in, so we will bid work of that kind.
If people want it, what we will typically try to do is say, "We
will build the first one or couple and then teach you how to build
the rest", and that is part of the business we have to be
in. So we will do that where necessary but we do try quite hard
to make sure we get a decent slice of it first before we start
transferring it across.
111. So is there a diminishing market? The logic
of what you are saying is that there has been a diminishing market
for a number of years but that you are transferring technology
effectively to other areas for ships.
(Mr Phillipson) Yes, and that comes back to the point
about competitiveness. The demands of the market move on year
by year; we have to keep running ahead of the other guys. So as
we see more demand from the product what we have to do is invest
in where the demand is going and be prepared to release to some
of these other nations yesterday's capability in technology. Frankly,
for some of them, that is all they can cope with. If you have
not built warships, do not try to start on a nuclear submarine
or an aircraft carrier because you will not do it. You have to
start with something simpler. But it is the nature of these sorts
of businesses that, because nations want their own capability,
to survive you have to keep ahead of them and be in a position
where you can offer something special that they cannot easily
reproduce locally.
112. Are you also trying to get non military
work in the export market?
(Mr Phillipson) Yes. As was explained in the Task
Force Report, the strategy is to use commercial work to infill
gaps. It is not a market where we believe our skill-set and our
facilities can be competitive on the world scale as a profit making
business, and I think the history of British shipbuilders over
the last few years, and even European shipbuilders, largely confirms
that.
Mr Sarwar
113. To safeguard the long-term future of the
shipbuilding on the River Clyde, it is the unanimous view that
BAE SYSTEMS has to bring in commercial and export orders. The
Government can give you full support—and I am sure the Government
is, along with trade unions, the Scottish Executive and everybody,
but unfortunately there is a fear among the politicians and trade
union members that when it comes to tendering at competitive prices,
BAE SYSTEMS so far has not been able to. Is there a realistic
chance that in future you will be able to offer competitive prices
during tendering for export and commercial orders?
(Mr Phillipson) Specifically, I can quote you the
example of the anchor handler we launched and delivered on budget
earlier this year, competitively priced, and very successfully.
It was a classic piece of commercial infill and it was a good
programme. We will continue to bid for and win programmes of that
kind but the strategy we outlined to the Task Force, the strategy
which the Task Force confirmed after detailed review as being
robust and sound, was that commercial work is infill. We are basically
a defence contractor building complex warships; there is a market
for our export product; we need to win some of that export market;
and that is what we have built our strategy around.
Mr Carmichael
114. Can I try and pull together some of the
threads about commercial shipbuilding that you have already referred
to? There is on record Government encouragement for outfits such
as yourself to go into commercial shipbuilding. To paraphrase
what you are saying this morning, you seem to be saying, "That
is not what we do and it is difficult for us to do it". Firstly,
you indicated that you have tendered and you have sometimes not
been successful in respect of contracts that you feel really you
could not have bid for any more cheaply. Could you give me some
indication of the percentages we are dealing with here of bids
successful against bids made, in very round figures and, to go
on from that, what active and material encouragement are you getting
from the Government to support the development of commercial shipbuilding
on the Clyde? Finally, on subsidies abroad, you were talking about
inexplicable failures to win contracts. Are you saying that is
because you think that there is some force behind the bid that
is successful that is helping them make that bid and, if you have
these suspicions, do you ever follow them up?
(Mr Phillipson) In terms of statistics, I do not have
any. It may be we can generate some but I do not have any. On
the question of support for commercial work from the Government:
I am not sure particularly that I am aware of any. Simon, are
you?
(Mr Kirby) I think we have had occasional instances
where we have been put in touch with particular opportunities
and that is about as far as it goes and we have explored some
of those opportunities that I have been aware of. Whether there
has been any other I would not know but that is about the extent
of it.
115. So it is mostly just up to yourselves?
(Mr Phillipson) In terms of making sense of a piece
of business, yes. To give you a different example, one of the
areas where some European yards have been extremely successful
is the cruise liner industry. In France, Italy, Finland, there
are yards churning out very large numbers of cruise liners. The
United States had a problem with this because most of the cruise
liners seemed to be operating either to Alaska or around the Caribbean,
and if you go to Miami you will see half the European product
there and the United States' Government and its shipyards thought
it was a bit of a problem, so they passed the Jones Act which
says that if you want to operate in and out of American ports
you have to build your ships in America. We could try that in
the UK but we have not got that big a cruise industry anyway and,
frankly, the consequences in the United States have not been great.
I know of one yard which took an order for two cruise liners,
a military yard, which took the order knowing that they were going
to lose a fortune on them and they were priced way above European
levels. That particular order has now become a casualty of September
11 and various other things, but it is absolutely clear in the
United States that, despite very aggressive government intervention,
their experience so far of having cruise liners bid for and made
by their defence yards has not been good. It has delivered nothing
by way of output yet. There is evidence of other programmes in
the United States where they force commercial ships into defence
yards, and that has been disastrous. I honestly do not believe
there is any good evidence that you can take a competent warship
builder, with their overhead and cost structure, and apply that
to the aggressive commercial market there is out there now because
you are competing with eastern European nations, Far Eastern nations,
nations which have had masses of subsidies, have a much lower
cost base and are not required to deliver profits. It is a jungle
out there. The subsidy issue is very difficult. We do not, as
a matter of policy, make it our main business in life to find
out how other companies finance themselves. That is not our bread
and butter. I can tell you that it is not as simple as direct
subsidy is. A lot of things go into how you make a price and what
are allowable costs. The UK Ministry of Defence has an overhead
structure, which they agree with contractors periodically, that
says what you are allowed to charge to a programme and what you
are not allowed to charge to a programme. I have done a lot of
business in the United States. I can tell you that doing business
in the United States is much more attractive than doing business
in the UK because the two departments of defence have very different
approaches to risk and what is an allowable cost. That is not
a subsidy; it is just a different charging structure. The UK MoD
wishes industry to be the holder of risk. The United States Government
will not allow industry to hold development risk. They say development
risk has to be held by the government and development is cost
plus. Most of our business is first of class development. We are
carrying huge risks, often with slim profit margins. In the United
States you would not be allowed to carry the risk. You must get
all costs plus a margin. That is not a subsidy. This is a difficult
area. I believe we can make sense of the business plan we have
with export business and UK business and occasional commercial
input. What is important for us is that we make sense of our business.
116. The business for outfits such as yours
going into commercial shipbuilding is really a bit of a red herring,
is it not?
(Mr Phillipson) I honestly believe it is. You can
look at some of the yards that have tried that in the UK. For
example we have Govan in our portfolio, a yard with a commercial
background. We have seen Cammell Laird recently trying to break
back in and then it failed. This is not an area where I think
the UK can easily get back into being a big supplier. We get the
odd bits and pieces, yes, mainly on a limited profitability in-fill
basis.
Mr Joyce
117. Following through that assumption that
you are essentially a warship builder and that you build essentially
for a home market, which is the Ministry of Defence, a large critical
mass, the Ministry of Defence clearly wants conversely to purchase
products produced at home. What would the effect be on Scottish
yards in terms of winning work if the Scotland were not part of
the UK?
(Mr Phillipson) I am really not sure I am qualified
to comment on this.
Chairman: I do not think you are qualified,
Mr Phillipson, to answer that.
Mr Duncan
118. I turn to the evidence about the Task Force
report, which is an excellent document in terms of providing a
route map through this whole issue. One of the recommendations
was that we need to explore the further opportunities for collaborative
ways of working through the industry. After the report, have there
been any changes and how is that working in practice? What gains
could be made and what beneficial consequences could there be
for Clydeside in particular?
(Mr Phillipson) I am enthusiastic about getting better
relationships around UK industry. I think that we have to look
at how we survive and thrive nationally. This is not a big enough
market for us to be at one another's throats, and, in particular,
there are some things on the horizon which demand all we have
in the UK, and I look at the aircraft carrier in particular. Building
two carriers in this country is going to demand the best of what
we have got, wherever it is. I have been very pleased on Type
45 that we have been able to establish a really good relationship
between the prime contractors, the shipyards and Vosper Thorneycoft
as a major subcontractor—and that is working. That will
continue to work for a long time to come. We have put those players
together and I personally have watched over them the last 18 months
or so. These are guys getting on with the job. It is working well.
We have a close relationship with Swan Hunter and the ALSLs. They
are the lead yard and we support them. We are working very closely
and very well with them. I think there are more things of that
kind we need to do. The carrier does provide a good opportunity
for us to make it happen. Again, I come back to some comments
I made earlier this morning about ongoing discussions with MoD
on how we approach the carrier programme, not at prime level but
at shipyard level. As an industry, we do need to sort out with
MoD and the primes how we can work together, how we need to work
together, to deliver the design and build those ships in the timescales
that everybody wants. So I am enthusiastic. We are beginning to
make some progress. However, I would also say that we still have
a long way to go, specifically in terms of the Clyde. We see the
Clyde as being our centre of excellence for design engineering
of surface ships and also to build a first of class. The facilities
and the workforce on the Clyde, let us be quite honest, are the
best in the UK and the biggest in the UK by a significant margin.
If we are going to see more collaboration in the UK, I can only
see the skill base we have in the Clyde as being good because
I see that as being the centre of gravity, the nucleus, around
which we can build those relationships.
Mr Robertson
119. In the Task Force report it talks about
the Government's role and co-operation with various Ministers.
Have you had contacts with the Scotland Office in regard to ongoing
business?
(Mr Phillipson) I might ask Simon to answer on a more
traditional basis rather than from my recent months in post.
(Mr Kirby) If you look back over the last 12 months,
we have had dialogue with the Scotland Office and the Scottish
Executive really around the whole issue of shipbuilding in the
UK, where we see the Clyde fitting in. As Mr Phillipson has just
described, from a surface ship point of view, that primarily is
round Clydeside.
4 See Ev 48. Back
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