Examination of Witnesses (Questions 160
- 179)
WEDNESDAY 11 FEBRUARY 2004
BAE SYSTEMS AND
AIRBUS UK
Q160 Mr Caton: As a matter of interest,
where does the 20% of your production which does not go to the
MOD go?
Mr Scopes: I am not quite sure
where you picked up the figure of 20% of our production. About
80% of our turnover is defence orientated for BAE Systems as a
whole and about 20% is commercial aircraft and civil aircraft
related and that includes our 20% interest in Airbus. As well
as our operations in the United Kingdom, we have interests in
a number of operations around Europe, both through joint ventures
and some wholly owned facilities. We have operations in Australia
and we have a very significant presence in the defence market
in North America with about 22,000 people working for us there.
We are globally spread.
Q161 Mr Caton: I have found the reference
in your memorandum. It actually applied to RO Defence Glascoed,
"Approximately 80% of the site's production goes directly
to the MOD".
Mr Scopes: And then a certain
amount will go for export.
Q162 Albert Owen: Just going back
to the answer you gave to my colleague Mr Williams with regard
to your locations in the United Kingdom, some of the analysis
we have says that Wales has the lowest defence spending of any
UK region. Do you have discussions with the MOD as to how that
will affect the economies of different regions? Is that a factor
which you discuss with them?
Mr Scopes: We do in the areas
in which we have a significant presence and interest, whether
that is in the North West or, for example, in Scotland where we
have something over 6,000 employees in our various sites. Then
the regional impact is obviously something which is significant
to us and we have close relationships in those cases with the
regional authorities, with the RDAs and with the Scottish Executive
as far as Scotland is concerned. It is just an historical fact
that, with the exception of the Airbus interest which is now looked
after by Brian and his colleagues, we do not have a significant
presence in Wales. We do not have the same level of interaction
with the local executive and local interests in Wales as we do
elsewhere.
Q163 Chairman: Is the reason you
only have one major manufacturing site, apart from your interest
in Airbus, merely historical?
Mr Scopes: As far as I know. I
do not think we have ever had any anti-Welsh prejudice in any
of our facilities or for that matter in the Ministry of Defence
and many of the properties were originally actually Ministry of
Defence properties.
Q164 Albert Owen: Mr Fleet, you talked
about your significant presence in Wales, indeed 6,000 to 6,500
employees on one site. You also have a presence in a number of
European countries. How does the economic climate in Wales compare
with those countries?
Mr Fleet: The economic climate
in Wales is less a factor for Airbus. Airbus is a major European
company which plays on the global pitch, it plays around the world.
Airbus today has 185 customers all around the world. It is the
world economy which determines the overall Airbus health. It is
the ability of the airlines around the world to go out and purchase
very large expensive capital items that is very important to us.
We look at the world in regions as opposed to in countries, in
Wales or such like. The strength or weakness of the dollar is
of huge concern to us because large commercial aircraft are sold
for dollars and a lot of our costs are in sterling and euros.
The weakness of the dollar is a key concern to us and if that
continues it will obviously be of detriment to Airbus. Boeing
sells in dollars and has its costs in dollars so it already has
a natural hedge there. Where we hedge is in the marketplace, so
it is the world economy which affects us as opposed to the Welsh
economy or the UK economy.
Q165 Albert Owen: You did mention
earlier on the regional assistance you get in different parts
of Europe. What sort of assistance have you had specifically from
the UK Government which is a plus to some of your other European
operations?
Mr Fleet: Each of the European
governments is a supporter of repayable launch investment. The
first programme is on the A320 family which was launched in the
mid-1980s and we received our first RLI. It is not a grant, it
is a loan and it is repaid. Of the monies which were provided
to us by the government, we have paid back more than double. I
do not have the figures, but they are with the DTI if you wish
to see them. Of the money we borrowed on the long-range aircraft,
we have more than paid everything back and the £530 million
for the A380 will all be paid back. Everything we receive is paid
back and more, because it is at a reasonable rate of interest.
It creates wealth and jobs. These jobs are at the very high end
of the food chain, they are high value added jobs. The average
wage at Broughton is 18% greater than the average manufacturing
wage across the whole of the UK, so is at the top end of the food
chain. It is not the labour rate or anything else which determines
why we are so successful, it is the smartness of the product,
the smartness of the process as opposed to the hourly labour rate.
We have had regional launch assistance, we did get support from
the Welsh Assembly; they gave us an infrastructure grant to upgrade
the general infrastructure of £19.5 million a few years ago
but that was £14.6 million to invest in the general infrastructure
of a big site and about £4.9 million on development of people
because we were recruiting in excess of 1,000 people at the time
and part of their six-month training and development was provided
with assistance from the Welsh Assembly and WDA.
Q166 Albert Owen: You mentioned earlier
on that 65% of your workforce comes from within Wales. Is that
the North East of Wales or do you have quite a spread across the
North West of Wales? Is the skills base there for you in Wales
or is it just the movement of people or their mobility? Are the
skills more available to you in some of the north-west regions
of England?
Mr Fleet: The A55 is a fantastic
link for us. The A55 links us to the motorway, links us across
the whole of North Wales. It is a really good link. Forty-three
per cent of that 60-odd per cent comes from Flintshire; virtually
two thirds of that workforce in Wales actually comes from Flintshire.
The other third comes from outside the region, so transportation
links are the key. Skills are a problem. If you look at the skills
we have today and the ones we had 10 years ago, they are completely
different. The manufacturing techniques of 10 years ago are no
longer applicable today. We move on. It is not the speed of the
arm itself, it is the smartness of the process. We have huge investments,
these machines are very complex and all the time we are driving
up the food chain. If you had visited us many years ago you would
have seen ancillary, semi-skilled, a whole range of people and
very few skilled people and technicians and engineers. Today the
whole of that workforce is moving up the skills base. We have
no ancillary or low-skilled people now; everyone has become skilled
and higher skilled. We recruit around 100 apprentices every year;
80 to 100. We also recruit about 100 graduates. For the 100 apprentices
we take we probably have 4,000 or 5,000 applicants and depending
whether they are doing craft or engineering we set certain standards
of literacy and numeracy both at O level and A level and probably
80% of the applicants fail. The reason we set that is because
if we are going to train these people for three, four or five
years and make that investment, by the end of the five years we
will have invested nearly £100,000 in that person. We do
not want them to get to the third or fourth year and then fail.
Q167 Dr Francis: You mentioned upskilling.
Could you describe your relationship with the further education
sector in Wales?
Mr Fleet: We have an excellent
working relationship with Deeside College which goes back many,
many years, since our inception, when we were Vickers Armstrong
and Hawker Siddley. Today we have all the apprentices going through
that facility and all our engineers also go through that facility.
So 370 of our youngsters are being trained there and about 500
of our adults are being trained by them. It is very good because
Deeside liaise with Yale and NEWI; they work together to provide
us with a one-stop shop. I do not have to worry whether that should
go to Yale or that to NEWI, they work it out between them and
they provide us with a service. What we do for them is provide
them every year with a business plan, what our future requirements
are, and we give them a three-year rolling forecast. They then
build that into their plans and by showing that, they are able
to leverage money from industry, they are then able to use that
to leverage down. They have just been nominated as a COVE, a Centre
of Vocational Excellence, for engineering, the only one in Wales
and last year I was pleased to be available when the Queen opened
a new £8 million engineering block. We also make sure that
the courses they design are what we want. We do not sit back and
whinge that the people we get from them are not the people we
want. Steve Thomas is also a Vice-Chairman of Deeside, so we are
in there designing the courses with them to make sure that when
people come out after three years or five years they add value
from day one. We have very close relationships with them, we meet
on a regular basis and we make sure they employ the modern techniques
which we require to run our business. We are of a size to be able
to do that. We also encourage our local suppliers to piggyback
on the back of that and they train their people at a much reduced
rate on the back of Airbus.
Q168 Dr Francis: Given how successful
you are, do you have any problems of retention then? You have
obviously worked very hard at upskilling your workforce. Do you
lose some of that workforce?
Mr Fleet: I would say we probably
lose 1 to 1½%; very, very low attrition. Bereavement and
people retiring are really the only reasons. When you come into
Airbus, you come into a business with a future, you come into
a business where you can see the next five, 10, 15, 20 years.
The A380 programme will not create wealth for me and my children:
it will create wealth for me, my children and my children's children.
We are talking about a long-term future. If you came and saw the
site, you would see that it is one of the most advanced manufacturing
sites, not in Wales, not in the UK, not in Europe, but in the
world.
Q169 Dr Francis: One question which
occurs to me is to do with flexible working and family friendly
hours and ensuring retention of a skilled workforce when there
are changed family circumstances, such as caring responsibilities.
Does that come into the way you think about looking after your
workforce?
Mr Fleet: We do provide them with
facilities. During the summer period when the schools are closed
they can bring their children and leave them in a cre"che-type
facility and they are well looked after. Do we rotate the shift
patterns around that? No, we cannot. When you have 6,200 production
people and you have a plan to meet, people turning up or not turning
up would be impossible when managing a plant. Some of the capital
equipment we run costs £20 million a piece. I call them our
printing presses. We have the most advanced manufacturing equipment
in the world and they are like printing presses: if someone does
not turn up because of schooling or anything else and my printing
presses lie idle, it is difficult enough to sell when you are
making things, it is impossible to sell fresh air. You have to
keep the printing presses printing. If however people do have
problems, we have arranged various shift patterns which suit their
family conditions. If they prefer the morning shift, we can arrange
that, if they prefer the afternoon shift, we can arrange the various
shift patterns to suit them. They can also take holidays as well.
We are a manufacturing facility.
Q170 Dr Francis: You have talked
quite a lot about your relationship with government. In general
terms how would you characterise that relationship at local Welsh
level and UK level? Is it different?
Mr Fleet: It is different. We
have an excellent relationship now with the Assembly. We have
really good support from the WDA. The WDA can see we are the jewel
in the crown. Right next to the facility now is a brand new retail
park and that is there because we are there. They have 7,000 potential
customers who drive in and drive out past them every day. They
wish to expand. We are working with the WDA to create a business
park right next to us because several of our suppliers have said
they would like to relocate if possible because transport and
logistics form about 15% of their total costs. We are trying to
work together to create the magnet effect which Toulouse has created
with their final assembly line. If you visit the town of Toulouse
now and compare it with 30 years ago, what they have created is
unbelievable. We will never be that size and scale but we can
be a leverage and a magnet to try to create the cluster effect.
We are working very closely with the WDA.
Q171 Dr Francis: What about local
government? It seems to me that your main point of contact, your
most regular contact, is with the Welsh Assembly, is that right?
Mr Fleet: We do contact local
government in Flintshire, Flintshire County Council; we do have
an excellent relationship and meet every year. We show them around
the facility, we show them what we do for the local area. We pump
out about £6.5 million within a 30-mile radius on wages,
goods and services, so we are absolutely vital to that economy.
We have an excellent relationship with them. We try to give them
no surprises. We try to show them our medium-term plans and our
long-term plans to make sure we will not get to the eleventh or
twelfth hour and have any late surprises. We fully engage them
in our future plans and projects.
Q172 Dr Francis: I take it from the
way in which you have described that now very clearly, since devolution
there has been quite a considerable improvement in your relationships
with government. Is that the way you would characterise it?
Mr Fleet: It has improved. The
problem I have, as we further devolve power from Westminster and
funding on aeronautics research and they are looking now for new
programmes to replace that, I think they are called aeronautics
research programmes, they are going to start that flowing down
to the RDAs and everything else and it is the law of diminishing
return. I then have to go to each RDA to get a smaller slice and
the investment I have to put into convincing supporters of R&T,
which is vital in our industry, becomes harder and harder and
harder. At least if it is at national level you can see the bigger
picture but as you go down from the national level into regional
and sub-regional level it becomes that much more difficult. On
things such as working relationships, yes, there has. On things
involving the bigger picture for UK Limited and what industries
we are going to have in five or 10 years' time to create the wealth
to pay for our hospitals and everything else, that will get harder.
Q173 Dr Francis: Do you have any
relationship at all with the Wales Office, the old Welsh Office,
which is now Peter Hain's office; he is Secretary of State? Does
he have a role at all in all of this?
Mr Fleet: We still meet Peter
Hain on a regular basis.
Q174 Dr Francis: Is he the main means
of contact between you and Westminster then?
Mr Fleet: We have very strong
contacts with the DTI. The only other thing I wish the DTI would
do is one day get the people in the Treasury to leave the Treasury
and come out into the regions and see what we have created. I
know there are questions about repayable launch investment and
the value it brings the UK economy. As a former statistician,
you give me a certain period and I can prove anything. Actually
come out: seeing is believing. When the Prime Minister came in
July of last year he said it was useful. Seeing is believing.
Get the people from the Treasury to see what we have created from
an industry at zero, which Airbus was 30 years ago, to being 50%
of the world aerospace market and creating an industry for which
anyone would cut off their right arm. Please persuade the Treasury
to come to see what we have created at Airbus. It is fantastic.
Q175 Mr Edwards: Mr Scopes, you say
in your memorandum that you have a limited presence in Wales at
Glascoed, which is in my constituency. Could you say whether this
is just historical? I recall from visits I have made in recent
years that there was even a question-mark around the plant at
Glascoed and thankfully that does appear to have been saved. Could
you give us some assurance that is the case and that there is
a future there? Could you also say how you feel other defence
industries might be attracted to locate in Wales?
Mr Scopes: As with many of our
defence activities, the long-term stability of Glascoed is really
dependent on our primary customer which is the UK Ministry of
Defence. The stability for Glascoed's future came about by achieving
with the Ministry of Defence a long-term partnering agreement
on the supply of key ammunition. That gives us stability with
which we can plan Glascoed's future sensibly and indeed provides
stability on which there is an investment programme into the facilities
at Glascoed over a three- or four-year period, which we are probably
half way through, of well over £10 million. That is a positive
story, but it is driven by achievement of a long-term supply relationship
with the UK MOD customer. As to other defence industries, looking
outside BAE Systems, the fact is that you have managed to secure
a number of interested companies into Wales. I know GD UK, for
example, has invested in a facility in Wales. I would be hard
pressed to tell you exactly where it is, but that is on the back
of securing the Bowman radio contract with the Ministry of Defence
and they have set up a facility in Wales. If it is new business,
then the issues you discussed earlier on about R&T grants,
about investment grants will certainly catch their interest and
influence their decision on where to go, as will the availability
of skilled people.
Q176 Mr Evans: Does the fact that
we are not in the Eurozone affect investment decisions at all?
Mr Scopes: From a BAE Systems
perspective, as I was describing earlier on, we do have considerable
manufacturing interests both in the Eurozone and in the US dollar
zone. It is sufficiently balanced for us as BAE Systems that we
are a self-hedging mechanism. Having a significant part of our
business in the UK outside the Eurozone in defence terms is not
a very significant issue for us. If you pressed the company, the
company probably has a preference that we would be inside the
Eurozone to provide a greater degree of overall stability on currencies,
but it is not a major, pressing issue for BAE Systems.
Mr Fleet: It is probably a more
pressing need for Airbus. In fact when the Prime Minister came
last July and Noel Forgeard gave a speech welcoming him, he did
give him great encouragement to join Eurozone. Mr Blair did say
that he noted Mr Forgeard's comments. It is not an obstacle today,
but it is a hindrance. All the translation of costs from euros
to pounds and vice-versa and looking at what the exchange rate
is and trying to compare that to the business plan, etcetera,
adds cost and adds no value. I also object to paying transaction
charges to anyone in the City of London. I would rather invest
that in my facility.
Q177 Mr Evans: As far as investment
is concerned, certainly for BAE Systems, there are many things
which determine why you invest and where you invest. I hear what
you say about going further up the food chain and I get a little
edgy now and again when I see manufacturing jobs going from this
country to other countries. Can you say exactly what determines
why you decide that is going to happen and in BAE's case you perhaps
set up some manufacturing in Hungary or in Poland rather than
doing it in-house either in the UK or within Wales or wherever?
Mr Scopes: As far as BAE Systems
are concerned, similar considerations would apply to any high
technology manufacturer. We feel that we do have to survive by
keeping as high up the value chain as we can. That is where we
can make a difference and that is where we can make our companies
into high value added companies in this economy, which is the
best way of creating wealth for this economy. As a company we
have commissioned and published yesterday an independent report
by a group called Oxford Economic Forecasting, looking at the
value which BAE Systems brings to the UK economy as a whole. I
suspect some of your colleagues are sending you a summary of that
and in fact I have signed off a letter to you in the last couple
of days. That does show that companies with very high intensity
of research and development, high productivity, bring higher value
added, higher wealth creation to the economy. We have to preserve
that and we do not preserve that by necessarily focusing on the
low value added manufacturing task, we have to keep moving as
high up the food chain as we can. In some cases, in order to remain
competitive, there will be some tasks which it is better for us
to have done in a low-wage economy and in some cases that is a
decision we shall have to make in order to remain in the marketplace.
Q178 Mr Evans: Can the government
do anything to deter you from outsourcing some of those low-value
jobs?
Mr Scopes: It is unlikely in my
view that the government can do enough to change the tide on that.
They might be able to target individual decisions in certain places
and make companies change their mind, but I do not think they
can change a tide in which high technology, advanced manufacturing
companies try to focus their investment at that top end rather
than at the lower end.
Mr Fleet: Even after the events
of 11 September, even after the Iraqi situation, even after SARS,
since I have come back and been running Airbus UK Manufacturing
we have increased the workforce from just over 4,000 when I started
back in 2000 to more than 6,200. We have bucked the trend. I am
not an accountant, I am not an economist, I am an engineer. I
have been an engineer for 30 years; I have always made things
and I have always sold things. By the way, I actually started
at Broughton as an engineering apprentice myself back in 1974,
so I am back home where I started. I have great pride and admiration
for what we do in manufacturing. The manufacturing base is vital
for any modern economy. You only have a service sector if you
create the wealth, then you can move it around. If you do not
create the wealth, you have nothing to move around and you do
not need a service sector to move nothing around. Many years ago
we worked out what manufacturing we could compete with when the
likes of the Eastern bloc came along, the likes of the Far East
came along and in a very few years the powerhouse called China
came along into the world marketplace and competition will get
greater. Unless you sat down and seriously thought out your long-term
strategy, how to create your wealth in the future, you are going
to lose out. We sat down and worked out the high value added,
where there are huge entry barriers in terms of technology, investment,
huge amounts of capex—I said earlier that we have invested
more than £1 billion in our facility—where the cost
of the arm, the hourly rate, is irrelevant really, it is an incidental.
The cost of running both the Filton site and the Broughton site
is about 20% of the cost of the wing; 80% is bought in from around
the world. We make that 20% and that is the key value added. I
can tell you what value added is: value added is quite often talked
about but people do not know what they are talking about. We can
buy a wing skin, a huge billet, 35 metres in length, two or three
metres wide, weighing four or five tonnes and that is going to
be a wing skin on an aircraft. We bring that billet in, we have
some of the most advanced machines in the world, the biggest being
85 metres and 700 tonnes, we go along and add 100 hours of specialised
NC machining and I can then sell that £20,000 for £140,000
by adding 100 hours value to it. That is value added. The cost
of paying the operator is irrelevant; it is the price at which
you sell it. It is not the speed of the arm we are selling, it
is the smartness of the design, the smartness of the manufacturing
process. We have worked out which are the key ones and there are
huge barriers in those processes: you have to invest billions,
you have to have many years of experience in aerospace manufacturing,
because like anything, you need to have that history to develop
the next generation and the next generation. You cannot just come
in and invent Concord, if you have not had 40 years on aircraft
design before that. We worked that out many years ago and that
is why we are successful in a high cost economy, that is why we
can pay 18% above the average manufacturing wage in the UK and
still be successful and still be investing large sums of money.
It is realising that competition is going to get tougher, working
out where we can compete, where we can sell our intellectual property
(IPR) as opposed to the speed of an operator's arm.
Q179 Mr Caton: From your answers
on the Eurozone question, has the recent weakening in sterling
against the euro had any affect on the profitability of your UK
operations, including your Welsh operations, due to cost of imports
or ability to export?
Mr Fleet: It actually helps us
when they compare the UK unit costs with those of my European
counterparts against whom they tend to compare me. They compare
me against the French, the Germans and the Spanish, our four partners,
but our principal problem is the weakness of the dollar. It is
really the weakness of the dollar which is the key. If you think
back two or three years when it was
0.9 to $1, today it is
1.28 to $1.30. We have lost around 35% of the value.
As we have about 50% of our costs in dollars and about 50% in
other currencies, we lose a huge amount of income because of that.
It is not because of the workforce or because of anything else,
it is just because of the weakness of the dollar.
| 
