Examination of Witnesses (Questions 120-139)
QINETIQ GROUP
PLC
11 JANUARY 2005
Q120 Mr Clapham: Do you feel that Government
is really aware of the challenge that there is there? Is there
more that they could be doing?
Sir John Chisholm: I believe there
is more that they could be doing. Clearly by investing a greater
proportion of its resources in that transfer from basic science
into manufacturable product by changing the balance in that direction
would be a good thing.
Q121 Richard Burden: You say in your
evidence that in the past the role of bridging the innovation
gap was something that the government research establishments
were pretty effective in co-ordinating and carrying out, and then
you say that much of that applied research has disappeared. That
confused me a bit because you were one of those research establishments.
Can QinetiQ not take that kind of role now?
Sir John Chisholm: I think the
point we are making is in times past the balance of funds was
rather different. If you just look at how much money was spent
in the 1980s, say, or the 1970s, because most of the technology
which is now going through in today's manufacturing had its origin
in that period of time, if you look at the 1980s and the balance
of what was going through government research laboratories compared
to what was going through universities at that time, for instance,
it would be very different from what it is today.
Q122 Richard Burden: In order to bridge
the gap now you have indicated a modest amount of extra funding
would be needed in certain areas, but are you suggesting recreating
those research establishments?
Sir John Chisholm: No, I am not.
I think there is no advantage at all in going backwards because
there was a lot wrong with that era as well. I was just making
a point there about the balance of investment. I believe that
a better understanding of where we position ourselves in the world,
that is the concentration, enables us to be more efficient now.
Also, better co-ordination within industry enables us to be more
efficient now. If we could get together on how best to balance
the programme as between many, many small projects focused upon
individual pieces of innovation compared to selecting some of
that innovation to be taking it through to a point where it is
closer to being something that you can manufacture and sell competitively,
that is the sort of change that we would advocate.
Q123 Mr Hoyle: Obviously we have had
witnesses before us who have been telling us that they have to
outsource their R&D and it is interesting that you also said
about the innovation gap. Do you think international competitors
are taking advantage of that gap that has been created or do you
feel that it is being done for financial savings? Is there a genuine
gap there or do you think it is done for financial purposes? What
do you think the reason is?
Sir John Chisholm: Just to position
my answer in relation to your question: it is undoubtedly true
that in the United States, for instance, there is a great availability
of funding to take technology further downstream and, therefore,
companies like mine certainly offer technology into the United
States for that process. We have to meet the requirements of our
shareholders and we will go wherever we need to go in order to
exploit the technology that we have got. To a degree, that plays
to the concern that you express there, that where there is an
international competition for the ability to develop technology
the most supportive environment tends to win out, that is true.
Q124 Mr Hoyle: Do you think there is
more going out than coming in?
Sir John Chisholm: I am talking
specifically about the aerospace industry here.
Q125 Mr Hoyle: So am I. I am talking
purely about aerospace. Do you think there is more coming into
the UK than there is going out?
Sir John Chisholm: I am not aware
of a lot of technology coming into the UK.
Q126 Mr Hoyle: So you think there is
a lot more going out?
Sir John Chisholm: There is a
lot more going out than coming in, yes.
Q127 Mr Hoyle: Do you think it is purely
for financial reasons?
Sir John Chisholm: It is very
much driven by the market structure. We have got much more opportunity
in the United States: it is a bigger economy and there is more
funding available.
Q128 Mr Hoyle: Who are the main players
for going abroad in R&D for aerospace?
Sir John Chisholm: I do not think
I am well focused on giving you a very long list but virtually
everybody who is involved in the aerospace industry in the United
Kingdom has units in the United States, we amongst others.
Q129 Chairman: We have heard a lot about
partnership between academia and the aerospace industry. People
have been saying to us that partnerships between these two groups
should be made to stimulate innovation and obtain access to best
technology and research. I suppose in some ways to be against
that would be to be against apple pie and what have you, but to
what extent do you actually do anything about this? Do you have
much in the way of partnerships with academia and, if so, in what
areas?
Sir John Chisholm: We have some
partnerships with academia, arguably too many because we are trying
to do exactly what I have been talking about this afternoon, which
is to concentrate a focus. At the moment we have relationships
with some 90 research institutions in the United Kingdom and we
are trying to focus that better through a programme which we are
about to announce.
Q130 Chairman: What about the small companies
that are engaged in research work, sometimes spin-offs from academia
themselves, sometimes spin-offs from bigger companies doing rather
more specialised work? Are they too small to be of consideration
to a big player like yourself?
Sir John Chisholm: They play a
useful role in the transfer of technology. It is one of the mechanisms
by which basic technology gets transferred, typically through
funding through venture capitalists which creates a viable entity,
that entity grows and eventually gets absorbed into something
bigger. That is just one of the conventional mechanisms for that
and we, like other players in the field, have relationships of
various sorts. We have some spin-offs of our own and we do business
and have partnerships with spin-offs from other people.
Q131 Chairman: Do you think the Government
does enough to act as a catalyst or a facilitator in this area
or do you think they stand in the wings and leave it to players
like yourself?
Sir John Chisholm: I think the
Government is trying to be active in this field. The Government
has done some rather useful things. The more it can do in terms
of encouraging venture capital, which is one of the lubrications
of this, the better and the more it can do in encouraging angel
capital, which is another route, is a good thing. The most important
thing it could do, however, is to encourage early adopters of
technology because that is what you really need in early stage
technology; you need customers who are early adopters. For the
Government itself, as a potential early adopter, one of the most
important roles it can play is through its own purchasing being
an active early adopter of early stage technology.
Q132 Sir Robert Smith: In trying to encourage
the Government to be an early adopter, how do you then get round
the current philosophy that it should also get good value for
money as the customer for the taxpayer in what it is adopting?
Do early adopters not take a risk?
Sir John Chisholm: A very good
point, Sir Robert, a very good point, and I would say that this
Committee has got a very important role to play in that in providing
a counterweight to the Public Accounts Committee in its scrutiny
of what departments are doing. The Government has a responsibility
in relation to the broad picture of benefit to the economy, not
simply the narrow picture of not wasting money. If you are taking
a degree of risk in your purchasing, some of those purchases are
not going to work but overall you are going to do a good job for
the economy. If you only concentrate on the few that fail and
you do not concentrate on encouraging the purchasers to take risk
then you will end up with a very pedestrian purchasing programme.
Chairman: People on the PAC are only
there because they found the DTI Select Committee too exciting!
Q133 Sir Robert Smith: On the issue that
you have been raising about this being an industry with a long
timespan before something becomes commercially attractive and
the need, therefore, of possibly an extra £50 million and
so on, is there anything in the private markets or the capital
markets that is a barrier to the private sector investor getting
more interested in some of these long-term potential returns?
Sir John Chisholm: The chief problem
is the length of time for return and the uncertainty as to who
will actually benefit from it when you set off. That is the basic
economic failure because that is unpredictable at the start. It
is hard to get private sector capital in because they do not know
what to invest in, and that is why the Government, who will benefit
when the nation benefits, has an inevitable role in stimulating
this process and funding. Obviously as you get towards the end
private capital can pick up but in this transfer process, because
of the length of it, the Government has a crucial role to play.
Q134 Sir Robert Smith: Finally on that
issue, as the markets become so much more global can the Government
actually lock that benefit into the UK economy? In biotechnology
we looked at a lot of German investment to really build up the
biotech skills base in all sorts of innovations and all sorts
of start-ups but then they had not got the capital market to take
it further, so the Americans got skilled labour and innovative
ideas paid for by the Germans. Is there a way of seeing a lock-in
at the end of that 15 years if the Government has taken the risk?
Sir John Chisholm: I would argue
that is one of the reasons why Government should look kindly upon
aerospace because you need industrial architecture to be successful
in aerospace and, because of that long timeframe, for other nations
to get into it they have got to invest over a long period of time
to build up an equivalent architecture to that which we have already
got. We could ruin ours, but if we invest sensibly we can keep
it going and, therefore, give ourselves a very high chance of
the benefit coming to the UK.
Q135 Sir Robert Smith: One other issue
is access to other overseas markets and other people have raised
the issue of access to markets. As a company, have you experienced
any barriers to trade that you have come up against in reaching
other markets?
Sir John Chisholm: In relation
to QinetiQ's own business, it is not a significant problem because
we are in the development of early stage technology and then the
handover of that to other companies who will go into the manufacture
and development of it.
Q136 Sir Robert Smith: So people want
you, they do not really want to keep you out?
Sir John Chisholm: They want us.
There is a legitimate question for you to ask, if I may put it
that way, which is since the US has such a vibrant market, does
the technology then get locked in the US, and the answer is, of
course, yes, but that is a concern for the nation.
Q137 Chairman: You made the point that
there is a role for venture capital. One of the things that we
discovered, which was not in the field of research but we encountered,
was that in the biotech industry, for example, which has equally
long lead times, 15 years to get through the last of the clinical
tests, in the US in particular the capital markets, the venture
capitalists, will come in and go out at various stages, so when
a project, as it were, has developed a certain distance and a
value has been added to it, people will sell off their share and
someone else will buy it and come in. Do you envisage our financial
markets becoming sufficiently sophisticated, as it were, to have
players who will come in and go out of the investment cycle in
this way?
Sir John Chisholm: We do, although
on a much smaller scale than the United States. We do indeed have
such a structure of the private equity market in the UK. Can I
just describe the difference between the biotech market and the
physics-based market? The key thing with the biotech market is
you get so much of the value added in the invention. If you have
got an efficacious compound then you know that if you can get
it through the FDA process you have got something that is really
going to make money. In the physics-based business you have got
a long way to go before you get to that stage and, therefore,
getting the early stage capital in is much more difficult. We
did half a dozen spin-offs when we first started this process
of technology exploitation—this was in my DERA days—and
the only one thus far for QinetiQ to have cashed out of was the
one pharmaceutical product we had and was the one that was furthest
from revenue. The reason for that is exactly as you have articulated,
that because it is a proven efficacious product the private capital
is prepared to come in years before revenues because they know
that when it does get to revenues there will be profits.
Q138 Mr Clapham: You make the point in
your submission that, together with another aerospace company,
you put forward a programme that was acknowledged to be of some
strategic importance only to find that it was turned down because
fault was found in the detail of your submission. Could you tell
us a little bit more about that and perhaps say a little bit about
the fault in the detail of the submission?
Sir John Chisholm: The project
we were relating to there was something called Active and it was
a joint proposal with Airbus and Short's and Rolls-Royce and others
for the validation of new routes to manufacture composite structures.
Doubtless we could be told that there were all sorts of failures
in the way that the proposal was articulated that is always true
when someone turns you down but it is also noticeable that out
of the many awards in this call there was only one major programme,
and this was a major programme. That has led us to surmise, just
looking at the statistics, that major programmes which have the
characteristic that I am talking about of investing in the taking
through of technology into a manufacturable product are less favoured
than those programmes which are essentially focused on the very
early stage of creating new innovative science. As a company,
we have been pretty successful in calls so we have no cause for
complaint about the process of selection of bids to fund because
we feel quite happy that we have done quite well. The reason for
that is that as a science-based company a lot of our proposals
are inevitably at the earlier stage, so we have done quite well
out of it. The question mark in our submission is whether that
would have been best for the nation as a whole.
Q139 Chairman: Can you tell us what this
project was?
Sir John Chisholm: It was a project
called Active for the validation of new routes to manufacture
composite structures. Previously we invested in technologies for
composite structures and this was about taking that technology
in composite structures and testing it out in a manufacturing
environment.
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