Examination of Witnesses (Questions 20-39)
SOCIETY OF
BRITISH AEROSPACE
COMPANIES
14 DECEMBER 2004
Q20 Mr Clapham: On the capability issue,
of course, research and development is crucial. Can I just take
you in your executive summary to paragraph 4 where you say "Levels
of Government investment in aerospace R&D compare unfavourably
with those in the US and Europe. The UK aerospace industry continues
to invest heavily in R&D and is second only to pharmaceuticals
in its R&D intensity. Government targets for increasing R&D
cannot be met by industry alone." Given that statement, is
there evidence to show, for example, that levels of R&D investment
by governments in other countries are high?
Dr Howes: Yes. Again, one has
to revert to the data that one has and the last comparative data
we had was in 1998 where the US Government was investing £620
million in civil aerospace compared to £120 million in Germany,
£50 million in France and just £20 million in the UK.
That was the figure in 1998 and, obviously, since that point in
time from a UK perspective we have seen quite a further reduction
of Government DTI funding into civil aerospace, and in fact on
the MoD side, air-applied research has fallen from £250 million
to £185 million over the last six years; so one would suspect
that that gap has probably worsened over the last few years.
Q21 Mr Clapham: Has this issue been raised
with Government and, if it has been raised with Government, what
has been the response, for example, at DTI?
Dr Howes: It was certainly raised
as a result of the Aerospace Innovation and Growth Team recommendations
where, of course, the importance of getting the right balance
of investment in the R&D process from science right through
the technology demonstrators and into exportable products is critical.
At the time when the AeIGT reported, DTI investment was in the
area of £20 million a year through a particular programme
of research that was focused for civil aerospace, and it was suggested
that to actually meet the right targets for sustainable aviation
for the industry, looking forward to keep the industry competitive
in its number two position, this should really be rising to a
total of £70 million a year. There is a technology strategy
that has been articulated that supports that figure and demonstrates
what markets and why that funding profile is the right one, and
of course that would be matched with industry. As a result of
developing that technology strategy we have been working very
closely with our colleagues in DTI and increasingly in the regions,
the devolved administrations, to actually set out an appropriate
funding capture plan for that, because of course Government policy
has changed. Lord Sainsbury has been tasked with the job of trying
to look across Government, MoD, the DTI and into the regions to
actually try and find the right funding profile to fund the right
R&D that will secure that future.
Q22 Mr Clapham: Given the profile, is
it possible to say what proportion of investment in the UK aerospace
industry is from the Government and the private sector, and how
does that proportion again compare with our competitors?
Mr Green: It is important first
of all to focus on the fact that we are talking about R&T,
so it is research and technology as opposed to product development,
where of course the numbers are much, much bigger and the proportion
spent by industry relative to Government is much bigger. If we
take the R&T spend, the total spend by the time we completed
the report was £355 million, of which industry itself funded
£150 million with the balance coming from Government, both
the UK Government and the EU. The proposal that was identified
in the AeIGT report was to increase that total spend, as Sally
said, to a total of £405 million but, more importantly, focus
the spend much more on industry-based research and technology
and less on Government-based research and technology. In particular
that recommendation was made within the Ministry of Defence where
they spend a total of £165 million a year on research and
technology and today only £40 million of that is spent with
industry, so the recommendation is not that the amount should
increase but that the proportion spent with industry should increase
to whatever we may feel it should increase to, £92 million
of the £165 million.
Q23 Mr Clapham: Is headway being made
to encourage the industry to invest more in technology?
Dr Howes: I think industry is
anyway. An SBAC survey that we did in 2003 showed that industry
investment had increased by 18% on the previous year to a level
of £2.1 billion, and if you look across the top 10 R&D
investors we have three of our major companies in there—BAe
Systems on three, Airbus ranked seventh and Rolls-Royce at 10.
So I feel that the industry investment is actually rising significantly
anyway.
Q24 Mr Clapham: We see a different scene
in America of course with the subsidy to Boeing; is there a suggestion
that you would like to have the same kind of subsidies that Boeing
gets?
Mr Smith: If you look at where
we are in the UK, there are a couple of issues that are really
important to us. We have done our survey on R&T, we know what
we want to do and what anybody else wants to do really is down
to them and in some respects having what we have got we feel is
much better because it is cohesive. For the first time everybody
has coalesced around a set of research areas and a set of areas
where we are actually going to demonstrate the technology acquisition.
That is a huge step forward for us which means that resources
can be far better used around that plan, so what we would rather
focus on is having that plan properly supported and delivered
and executed rather than looking at what other people get, quite
frankly. The other point is on the defence side. A substantial
part of R&D is on the defence side and we do feel that turning
defence industrial policy into defence industrial strategy for
the UK is another important part of trying to ensure that the
UK industry gets a real part of the D side, the development side,
on these programmes. What I would say to you therefore is that
we feel that in some respects our destinies are in our own hands.
Industry has undertaken to increase R&T funding and we have
a good technology strategy in terms of how we want to deliver
it. The challenge is around execution, you know, getting on and
actually doing it for the benefit of the UK in the future.
Q25 Chairman: Before we leave this issue,
the sources of public funding that you get, some of it would obviously
come from the DTI and the figures you quoted for 1998 do not really
take account of the emergence of regional development agencies.
There is often a worry that with a rough and ready per capita
allocation of funding across the RDAs there are some areas that
might not be treated as fairly as they ought to be—I use
the word fairly in a non-pejorative sense—and as far as
the demand in the region is concerned, whether it is the South
West and the Bristol area or the North West, are you happy that
the money which hitherto came from the DTI and now comes through
the RDAs is coming through in sufficient amounts to support the
industry in the way that it was before? There is a sense in which
some people say that the people at the centre have forgotten that
different regions have different requirements and that some industries
have got a lot more of the money than other regions which do not
have such industries. So one might be under-resourced and the
other might be—I would not say over-resourced, but they
might get a bigger share than they require.
Mr Smith: It is an issue. You
find us in a time of transition really; I mean, as we mentioned
earlier the CARAD funding has disappeared and the devolvement
of funding to the regions is taking time to actually fill that
gap. Some of the RDAs currently do not have a remit to invest
in aerospace technology so the challenge of turning national strategy
into regional implementation is something at the moment that we
are still working our way through. I have to say the RDAs are
supportive of that and we have people there who are involved in
what it is that we are actually doing, but we are not there yet,
we do not have those processes in place. It is lagging behind
and one of the concerns that we do have is having the impetus
behind making sure that that resource does find its way into the
aerospace industry through the regions.
Q26 Chairman: To put it very simply,
let us take the North West and the South West as two of the biggest
potential consumers of resource; are you confident that the regional
development agencies have the resource to meet what has been a
recognised demand for Government support, or if the money is coming,
is it coming at the expense of other activities that the RDAs
in these areas could legitimately expect to have to fulfil as
well?
Dr Howes: I think it is true to
say that the RDAs dealing with innovation and investment in technology
is a new piece for all of them and it is at the moment quite difficult
to see how the budgets will all be connected together at the right
level, at the right time. The way we are tackling that together
with DTI and colleagues in the region is to drive it from the
National Aerospace Technology Strategy, which is the right way
to do it. As Kevin said, there is a plan, there is a justifiable
and defendable investment that needs to be made, but we have to
go through quite a sophisticated process with DTI and into the
regions to match the funding availability there. It is true to
say that because innovation is a new remit for the RDAs it is
not clear what funds might be available to support that or how
they are going to connect together with other regions to make
sure that the outcome is right for the industry as well as being
right for economic development in that region. As I say, there
is a process and there are teams actually working this through
from the right end of the microscope which, if you like, is from
the perspective of the National Aerospace Technology Panel, but
it is unproven at the moment.
Mr Green: One other thing that
I might add to that, if I could, and that is that the dilemma
that we all face when we are talking about research and technology
funding is two-fold. The first is the sheer length of time between
the investment in the technology and the economic return on that
investment; that makes it difficult for individual companies and
it makes it difficult for regional development agencies that tend
to be more focused on the short term rather than the long term.
The second is that there needs to be—because it is a matter
of choosing which are the technologies that are going to make
a difference in the long term—a coherent plan that all parties
are signed up to. To some extent that funding therefore needs
to be in some way ring-fenced, and we are concerned that the focus
that we previously had with the CARAD funding has now devolved
into more general technology themes, and there needs therefore
to be a framework against which those technology themes can be
brought back together and focused on the aerospace industry.
Q27 Chairman: Would you say that as a
consequence of that you have lost money and you have lost opportunity,
or have you been able in the traditional British fashion to muddle
through?
Mr Green: I would say that at
the moment we are still struggling through, but we are already
seeing some concern about the length of time it is taking and
the number of individual decision-making bodies that are engaged
in arriving at an agreed way forward. Some of that is good because
the challenge of any technical plan is a good thing to do, but
some of it is not so good if it is delaying the process and meanwhile,
as Kevin indicated earlier on, our competitors are certainly making
investments.
Q28 Mr Hoyle: Obviously you are beginning
to get some experience of the RDAs and presumably Rolls-Royce
look at the East Midlands and the whole map, but how does it compare
to, say, the Welsh Assembly? They have had a bit of a struggle
trying to get Cardiff to understand about North Wales, but I think
once they overcame that they actually saw the money coming in.
I just wondered, you have a Welsh Assembly that seems to have
a little more money than what the RDAs have, do you think that
is an easier route and do you think the RDAs are failing because
it is diluted and you cannot join it up?
Mr Green: Why not let Sally tell
you what we are doing in Scotland, which is probably another way
of explaining an answer to that.
Dr Howes: Yes, in Scotland there
is quite a significant aerospace industry and the Scottish Parliament
has actually defined aerospace and in fact defence as the priority
market for them. We are actually opening an SBAC Scottish office
specifically to help member companies with aerospace development
etc but also to help them align communications themes into the
Scottish Government and into the Parliament, and to try and help
align those with the communications messages coming in here, so
that again we can take a view on a regional policy and regional
business imperatives there and connect it into the national view.
We are dealing very much with an international industry here and
another example would perhaps be to look at some of the manufacturing
improvements that go on. There is a huge amount of Government
money going into the Manufacturing Advisory Service and that goes
out—it is supported an awful lot by the regions—into
companies to help them within their firm on business improvement.
One of the paradigm shifts that has come out of the AeIGT is to
look across the supply chain, not just within the firm; that goes
across regions and that is another driver for looking for those
regional connections and making sure that what is happening regionally
is following the national strategy in line with the business objectives.
So from a number of perspectives getting this co-ordination is
actually quite important and we are trying to take that on through
the trade organisation and get it a bit closer behind.
Q29 Mr Hoyle: So you are getting the
cheques?
Dr Howes: Our member companies
are certainly supportive of us creating this initiative.
Q30 Mr Hoyle: The bottom line is if you
are not getting the money through it is failing, but you are saying
to us that the money is coming through but maybe not as quick
as it did in the past.
Dr Howes: Yes.
Mr Smith: There is a difference
between the things that the RDAs have traditionally been mandated
to do, which we would say are going pretty well—things like
skills initiatives and those sorts of things—and we have
good relationships there, and the things that they are in the
process of being mandated to do which is in the innovation and
technology area. In that area, Lindsay, we are concerned about
our ability to make progress and if there is one message to take
away from us it is that you are right, Martin, this is an issue
for us, the pace at which we can actually deploy national strategy
through the devolved process around this R&T activity is of
concern for us. We have not got a flag up the mast, the white
flag is not flying, but it is something that we are concerned
about and that we will be working extremely hard on, and any support
in that would be much appreciated.
Q31 Chairman: You have given us a couple
of paragraphs on it but maybe you could help us a wee bit more
and be a bit less coy and tell us which development agencies are
not worth a light at doing the business. We know that there are
such things as regional variations and silent pain evokes no response;
if you want to be more frank in stating what is going wrong then
we are not here to defend development agencies, we are not here
to defend the status quo. Many of us have supported development
agencies but we find it rather embarrassing that they have such
a cack-handed way of actually setting about doing the job that
for so long so many of them have wanted to do, and it is often
at the expense of people like yourselves who have had established
patterns of support, which are cast to the four winds, and have
a rather difficult task to keep up with things because you are
not getting the resource stream that you had assumed you would
be getting because these people just do not know what they are
up to in a number of instances. Some of them seem to have come
in out of the rain, there is no other reason for them being there,
so it would be useful if you felt it appropriate to send us a
note about any of the sticky areas.
Mr Smith: Okay, thank you.
Q32 Richard Burden: In 2.3.3 of your
submission you state that "the private return on investment
and R&D in the aerospace sector is also low—in spite
of strong growth, an increasing share of world markets, and high
levels and growth rates of productivity." Can I just for
the record establish there whether you are talking about it is
just in the nature of the industry that the returns are low, or
are we talking about a rate of return over particular time frames?
Mr Green: Perhaps I can start
while my colleagues are preparing their own response. Part of
it is what we said before, the length of time it takes for an
aerospace project to move from research through to market is quite
long and, in consequence, when you do the discounted return on
that investment it is not as attractive as putting the investment
into near return technology. Also, it is implicit in the other
part of the paragraph that we as the industry fully understand
that it is the lifeblood of the industry to be pushing that technology
barrier forward at all times, and the growth that we are presently
enjoying in the commercial aero engine sector is very definitely
driven off the investments that we made in technology 10, 15,
20 years ago. So getting that economic fact of comparison relative
to shorter timescale industries into a balance is important. That
is connected, not surprisingly, to the point the Chairman was
making a second ago, which is that we have to find a way in the
new structure for promoting research and technology and innovation
in this country for enabling all stakeholders to have a view of
the strategic importance of long term investment in R&T. There
is a bit of a challenge there because, by its very nature, not
all investment in R&T will be successful, some will wither
and die because it turns out not to be something that actually
is exploitable in the market. The message we are trying to convey
here is that if it is left solely to the capital markets to raise
the funds for research and technology, it is unlikely that we
will have the level of intensity that we need in this country
to remain world class competitive because with R&T funding
in other countries, one way or another, the cost to the private
investor is reduced—and we talked about the subsidies that
Boeing may enjoy and we see the launch investment type opportunities
in this country and others. So that engagement with the long term
availability of R&T funding is critical, and that I think
is the message that we are trying to convey.
Dr Howes: I have nothing to add
to that.
Q33 Richard Burden: It is important to
establish that because, playing devil's advocate here, there may
be some who would say—it is not a view I hold myself—that
if returns from investment are so low from the private sector,
why should the Government step in with more public money? You
have been talking about the long term there and I would just like
to get your sense of what the future is for that. The work of
the Innovation and Growth Team is looking at the immediate challenges
facing the industry and how we build for the future, how we consolidate
for the future and how we exploit opportunities for the future.
Looking towards that future, what do you think the future shape
of financial support for the Government should be, looking ahead?
Are you looking to a time where you think the aerospace industry
may not need Government support, or are you looking at a time
where that will actually be a permanent feature of it but the
nature and shape of it may not be as it is now?
Mr Smith: My feeling about it
is that if you look at the industry in the UK, around half of
our revenue comes from the defence market, half of that from exports
and half of it from the UK market. I do feel, if we go back to
the capability point, being able to translate defence industrial
policy to defence industrial strategy is a really important point
for the industry in the UK, and for industries to know that they
have a strategic long term future, which allows investment decisions
to be taken much more effectively than would otherwise be in my
view. Having clarity for the industry, therefore, is an important
point. Secondly, what I would say is that if you look at the industry
in the UK and you look at the AeIGT report it does not talk at
all about how traditional UK companies are the biggest and the
best in the world, what it talks about is having an economy in
the UK in the aerospace sector that is the most attractive in
the world for investment in aerospace. That requires the development
of capability, and my feeling is that on top of company choice
and competitive markets in terms of development of that capability,
some view from Government and something across the top from Government
so you actually understand the capability of this industry, how
it has been developed and the skills and technology is extremely
important. Capital is globally mobile in the aerospace industry
now and companies that invest globally look to invest in the best
markets for the use of that capital. I feel that the long term
needs of the aerospace industry in the UK outwith UK companies
would be for some Government overview and support to make sure
that the capabilities in these areas continue to be developed
so that the UK economy can compete outwith the companies that
actually operate in that economy.
Q34 Richard Burden: To an extent I understand
your view about the need for Government to stay engaged strategically
on this and to work with the industry to look at where it is going
and how Britain can stay internationally competitive, but what
I was really looking at was in terms of the financial aspects
of that, the Government support aspects of it, and the kind of
things that you have been saying in terms of what is needed now
and the kind of shape of things that you think are going to be
pretty much permanently in place, or do you think the nature of
that support will change in the future? If it is the latter, without
wanting to stargaze too much, maybe you need to be preparing for
some of those changes.
Mr Smith: In terms of what we
actually produced in the AeIGT report it was a reasonably clear
route forward in terms of what was required to allow us to support
the capabilities where we believe them to compete globally, and
the capabilities where we believe we can actually secure a competitive
advantage globally. What I would say is that from where I sit
today I think we have a plan that defines within it the parameters
for financial support within the UK aerospace industry, and if
we could execute on that plan then I think that would be a huge
start in being able to answer the longer term questions for the
industry.
Mr Green: Could I just add to
that to make the point that as the AeIGT report itself pointed
out, we are not talking about any one stream, we are talking about
complete capability, and companies making long term investment
decisions, of course they look at the funding support, but that
is not the only thing they are looking at, they are looking at
the availability of skills, the quality of people, the degrees
to which there are clusters of capabilities locally in the areas
in which they want to operate and so on and so forth. The reality
of our business is that because it is intrinsically a very high
value adding business and therefore generates social value over
and above the immediate economic return, overseas governments
are increasingly turning their attention to this sector as a means
by which they can drive the economic efficiency of their industrial
base forward. So whether the UK Government likes it or does not
like does not matter, they are part of this competitive global
equation that we are talking about. Therefore, the engagement
with Government, I repeat, across the totality of the spectrum
is really important; if it was just putting funding in and unlocking
royalties that would not solve the problem. It is really important
to take this balanced picture and that, I think, is the strength
of the AeIGT report. Last time I gave evidence here we were able
to talk about the fact that, uniquely in putting together the
team of people to respond to the challenge of putting the AeIGT
report together, we had leaders of companies that were based in
the UK but had their ownership overseas, we had a broad number
of academic institutions, some of which had global activity as
well and we had, as Kevin said, strong support from the trade
unions and we had engagement with the wider support base including
the financial institutions. The picture that emerged, as Kevin
said when we started this, was that today, largely as a result
of previous investment decisions across the whole spectrum we
have been talking about, the UK aerospace industry is one of the
world's leading capabilities. If we make the right decisions over
the next 10 or 20 years there is no reason at all why that should
not prevail into the future, but it will involve Government, industry,
academia, the institutions, the trade unions, all those stakeholders
working together to create this vision going forward so that it
does indeed remain a place where people want to invest to conduct
this kind of activity.
Q35 Sir Robert Smith: In that climate
how do you find the R&T tax credits, do they play a part of
that incentive and how or have they altered investment behaviour?
Mr Green: They are certainly welcome,
as you would expect me to say, but it is probably too early to
say they have demonstrably changed investment behaviour, but what
I can tell you for certain is that the way in which we do our
own internal analyses about R&T investment, certainly the
R&T credits have changed the economic evaluation and makes
it more attractive. So it is a good thing and of course we would
like more—we always would—and it is certainly helping,
I think, to encourage investment in this long term activity. Inevitably,
in the second year of the scheme it is too early to say exactly
how well it is working but we are encouraged by the approach so
far.
Q36 Chairman: The litmus test is surely
whether the Treasury had to be dragged screaming into the room
to accept this, and their view always was that the good companies
would have spent the money anyway so the taxpayer does not really
need to shell out. Have you seen a step change within your membership
which would tend to contradict the rather cynical Treasury view?
Dr Howes: I really do not think
we have managed to gather enough data. We were actually looking
at this yesterday to see what information we had but it still
is early days, that is the issue. We are keeping an eye on it
and we would be happy to report in on this.
Chairman: I think it would be safe to
say that the short termism which was a characteristic of some
aspects of Treasury thinking might well come to bear on this,
so get your information quickly to prove the case if you can.
A lot of us who supported it would be very grateful if you could
because we are not sure how long it would last. Maybe I am being
unduly cynical.
Q37 Mr Clapham: From your submission
at 2.2 it looks very impressive, you are saying that the UK aerospace
industry has shown rates of productivity improvements of 4.2%,
2.3%. Does the availability of Government aid help, for example,
in increasing that productivity? Earlier you were talking about
our capability and presumably Government aid actually helps greater
cohesion with regards to that capability across the industry.
Mr Smith: I do not think government
aid is significant in terms of what we are looking at here in
terms of productivity. What is really important is skilled people
who are attracted to working in manufacturing industries in the
UK, and within companies the continued development of those people.
The encouragement in training is hugely important. Our ability
to work more productively with our workforce, to attract high
skilled people into industry which requires high skilled people,
people who are able to operate with high technology, new capital
investment, new techniques, are the things that are really impacting
on productivity. My focus on that from government would be very
much in skills, training and supporting generally the workforce
to be able to operate in that sort of environment.
Mr Green: When we are talking
about training, it is really important to recognise we are talking
about lifetime training, continuous, professional development,
upskilling and in some cases reskilling. As the technologies move,
the demands on people working in those technologies change. We
have had a great deal of success in this country in recognising
that competition is not between management and organised labour
but between UK industry and other industries. In comparison to
some of our competitors, we are light years ahead. I share the
view that that is one of the reasons why the UK is closing the
gap.
Q38 Mr Clapham: A little earlier you
mentioned the trade unions. How important are the trade unions
in the productivity issue? Are the trade unions supportive of
inputs and investment into technology and do you find that they
are an important aspect of this?
Mr Smith: Very much so. I know
some of our friends from trade unions are here. We have rock and
roll times in our relationship but putting that to one side there
is absolute cohesion in terms of the need to improve the performance
of our industry. That will allow us to secure more business and
jobs. That is a really healthy approach. There is also a strong
recognition of the need to skill and develop people. The aerospace
industry is fortunate because our products are always moving ahead
technologically and technology is important. Those fundamental
things are there and are really important to us and extremely
valuable. We will continue to rock and roll from time to time
but it is a very healthy relationship that is focused on the right
things. The trade unions have been involved in the work on the
AeIGT and the SBAC in helping us to look at how we develop skills
for people who operate in our companies.
Dr Howes: In a lot of the SME
companies that I visit, you should not underestimate the role
that the trade unions can play in giving the management the confidence
to take on quite a lot of change in their business which leads
to productivity improvements. Because they are going across different
companies, that confidence build is important at the SME level.
Q39 Mr Clapham: In terms of the capability,
is it possible to say what aid the UK Government makes available
to subsidiaries of foreign companies that are here that you have
a connection with? Does that aid that the UK Government gives
to those companies help to increase productivity and competitiveness?
Dr Howes: I believe it does. The
last time we measured all of this, overseas aid to companies was
about 40 per cent of the UK aerospace revenue and that is about
45,000 employees. A lot of those companies are obviously helping
to give the broader UK-based industry access to markets. Developing
them as an integrated part of the economy is quite essential to
going forward.
Mr Green: We spent some time looking
at what we mean by the UK aerospace industry in that context.
We came to the conclusion that the UK aerospace industry had much
more to do with the level of commitment to the future capability
and the development of intellectual property in this country than
about who owns the shares. Some of the companies that we call
British, when you look at their share register, are not very British
in terms of their level of investment and country of origin, where
their investments come from. We do not even collect the data in
the way you ask the question because we focus on that concept:
are these companies increasing the total capability in this country?
Are they participating in the kind of things that we are talking
about in terms of the lean manufacturing initiatives? Broadly
speaking, we have some very good examples where the foreign owned
entity is doing better in the UK now under foreign ownership than
it was when it was under British ownership. The important thing
is are they engaged in the development of the overall capability
in this country; have we route to market; have we intellectual
property being generated and shared in this country.
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