Memorandum by Northern Defence Industries
Ltd
INTRODUCTION
Northern Defence Industries Ltd (NDI) is a not-for-profit
company of some 170 companies operating in defence and aerospace
supply chains, mainly located in the north east of England, Yorkshire
& The Humber. Unlike most other clusters it is interested
in all the defence operational environments- land, sea, air and
space.
NDI is a business services company that matches
supplier capability with the procurement requirements of the global
defence and aerospace industry. Its principal roles are to provide
business opportunities, intelligence and supply chain services
to its members. It creates partnerships with prime contractors
such as Raytheon, SAAB Bofors Dynamics, Lockheed Martin, BAE Systems,
Thales, United Defense, Boeing, Avis Vickers and Maersk. It recently
led a group of SME's on a visit to South Africa where it worked
with BAE Systems to identify opportunities to do business under
BAE's "offset" obligations. It will support ten SME's
at the Farnborough International exhibition and exhibits at DSEI.
Its current projects include NLAW; Javelin;
CVF; MK45 naval gun; Watchkeeper; FRES; FCLV, FCSV and MARS. Its
funding comes from the private sector, regional development agencies
and the EU. It collaborates with representative trade bodies such
as SBAC; DMA.and SMI; as well as the DDA; DPA; DLO; DESO and DTI
to advance the business interest of its members.
KEY PROJECTS
NDI has a keen interest in CVF. It arranged
for both BAE Systems and Thales to present to the region and through
newspaper campaigning stimulated some 200 small companies in the
north to register as potential suppliers.
NDI recognises that there is a requirement in
coming years for some 600,000 tonnes of naval shipping. It is
also keenly aware that the timing of programmes does not appear
to have been co-ordinated. The various project teams seem to suffer
from what has been called stove-piping. The result is that there
is at the moment a concentration of the construction phase of
major projects at the back end of the decade (eg CVF, MARS, JCTS)
while the middle years may experience a dearth of orders. No business
can carry the costs of several years of empty order books even
though the workforces and their capabilities represent a strategic
national asset which will be necessary to meet requirements and
in-service dates.
The UK- and in particular the shipbuilding industry-has
in the past suffered a lack of long-term investment in equipment,
technology and a skilled workforce. Such short-termism must be
an inevitable consequence of companies with excess capacity and
wafer thin profit margins. Capabilities shed now will be sorely
needed in the future, and cannot be recreated rapidly, not least
because employees laid off retire or get new jobs out of their
trade. Young people observe the cyclical nature of the industry,
and even in the declining number of instances where training places
are available, are not motivated to enter the industry.
The MARS project is important to rectify the
eternal ravages of seawater; to improve capability; and to enable
the UK to scrap its single hulled supply vessels. It represents
a major manufacturing challenge with up to 10 hulls. However it
seems to be beset by indecision, best illustrated by earlier talk
that "we mustn't solutioneer" when discussing whether
airships or ships were the way forward! It seems inconceivable
that the project will emerge unscathed from financial review,
and yet it represents an effective way to replenish order books.
Treasury investment to bring forward some parts of the requirement
either by new build or conversion could yield operational savings
by expensive to run ships being taken out of service early, as
well as enabling the UK to meet its environmental commitments.
FRES similarly seems to be suffering "paralysis
by analysis".
In our region Alvis Vickers could be said to
be on an order drip-feed and as a consequence its supply chain
is less able to make the investment decisions that are required
to ensure it can buy cost competitive, technically acceptable
components from the UK industrial base in the future when they
are required.
Major projects such as those mentioned and others
represent real opportunities for our members and others, but there
are lessons from NDI experience on the successful bid teams for
NLAW and Javelin. In both of these the prime contractors set cost
and technical targets for the NDI supply chain to meet. They didn't
indulge in wasteful and time-consuming competitions to drive down
the sticker price at the expense of industry's overall costs and
they created an atmosphere of trust with the supply chain which
carries over into innovation to meet mutual goals because the
interdependence of the whole supply team is recognised.
IMPLEMENTING DEFENCE
INDUSTRIAL POLICY
It is worth observing that the MoD spends some
£12 billion a year on goods and services, while the sponsoring
ministry for the defence industry, the DTI, has a budget for supporting
industry of only around £750 million. There is a clear disconnect.
If Government were to recognise that its Defence Industrial Policy
should be extended to encompass the concept of nurturing the capabilities
the MoD is going to require to fulfil its future needs, this would
be helpful. There is a feeling abroad in the industry that DIP
requires more substance to the political direction of ministers.
MoD seems to take the view that its spending
power cannot be used to support economic development and that
competition is important. This argument does not sit well with
the tax payer or owner managers of industry who observe and are
the victims of the attrition that is obvious in the domestic manufacturing
and engineering industry. Arguably MoD policy is responsible for
the lack of competition because it does not engage directly with
larger SME's and system integrators who can provide viable competitive
solutions just as they do, for example, in the automotive, oil
and gas and electronics industries.
There seems at present to be little evidence
that the DIP is pushing defence spending though to the real economy
or indeed that the MoD's discretionary expenditure could be seen
as a form of regional development, which is not constrained by
EU rules.
There is a constant concern that prime contractors,
because of the nature of their vertical integration, will seek
to use their own assets first. The Boeing divestiture of component
plants in the US (some to GKN) might represent a potential change
in the business MoDel, as does BAE Systems' statements that they
see themselves as a systems house not as a "metal-basher".
Metal-bashers would feel more comfortable doing business in such
a world. External SME sub-contractors will be reluctant to inject
their innovation where there is no genuine partnership because
they will fear for the protection of their intellectual property.
The composition of the NDIC as a "big boys
club" does little to help the SME community. The one non-major
company members' remit is unclear and no communications mechanism
exists for SMEs to a body which seems increasingly to be THE main
conduit for MoD consultation with industry. The full impact of
the DPA Supplier Relations Group has yet to be felt at lower levels
of the defence supply chain.
As far as we can observe, the DIP doesn't really
recognise the time and cash costs of sustaining a business in
the peculiar environment that is defence procurement. The greatest
constraint is the time bidding takes both in bid preparation and
the long lead time before orders are placed and fulfilled. During
that timescale there is a real risk that capability can disappear.
If an SME can stay the course—a difficult proposition at
present—the reward lies in a long period of supply. If this
includes through-life sustainment, it can be a useful underpinning
of an SME business plan.
There is however a cultural point that the MoD
does not always recognise; that the SME community is not like
the primes. They have no deep pockets and they represent a present
capability not necessarily a future intention.
Export opportunities would be very welcome to
SMEs, but the focus of DESO is principally on prime contractors.
SME opportunities may be traded away to secure contracts—analogous
to our own policy of offset obligations. However, the £2.4
billion of unfulfilled obligations makes some wonder whether the
IP programmes have the necessary teeth.
There is a clear view that the primes look after
their own interests—which is only to be expected of course.
But who will protect the weakest, the SME's? Government policy
measures do not always recognise realities. The ability for SMES
to charge interest on overdue accounts sounds attractive—but
SMEs fear the impact on client relationships of demanding it.
And pre-printed prime contractor terms and conditions leave little
scope for negotiation!
Another example is the Aerospace Innovation
& Growth Team. Successive chairs, by the nature of their backgrounds,
are likely to be more marginal in their understanding of the nature
of SME innovation and growth. Bureaucracy and shortage of risk
financing are likely to be key issues for them. Perhaps MoD prime
contractors should be required to account for their stewardship
of SME supply chains in a form of MoD corporate and social responsibility.
SMART ACQUISITION
Better, faster, cheaper.
A majority of the capability in a fraction of
the time.
Incremental acquisition.
We see scant evidence of it so far.
The response of industry to Operation Telic
UOR's should be noted as a learning point. £500 million was
spent quickly and effectively with no complaints that industry
was profiteering or cutting comers that would endanger the capabilities
being procured.
In such circumstances the great value of genuine
partnerships is demonstrated.
We would be happy to provide any information
that would be helpful to your deliberations.
David Bowles
Managing Director
April 2004
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