Examination of Witnesses (Questions 180
- 199)
WEDNESDAY 11 FEBRUARY 2004
BAE SYSTEMS AND
AIRBUS UK
Q180 Mr Evans: It sounds as though
we should join the dollar.
Mr Fleet: We should be happy if
we could join one currency. One way of stimulating the economy
is to have a weak currency, because it theoretically makes imports
dearer and exports cheaper and makes you more effective. We did
that enough in the UK when we used to have $4 to £1 and you
can only do that for a certain length of time before your currency
is worthless. That is the principal thing which will drive the
success of Airbus, not for 2004 or 2005, possibly 2006, because
we hedge, we buy ahead at a set rate and know what our exchange
rate will be, but as we get further and if there is a continued
weakness of the dollar compared with the rest of the currencies,
the euro in particular, it will cause us a problem.
Q181 Mr Caton: I think you have already
answered this in the reply to Mr Evans. Basically this hedging
means that the sterling/euro issue is not a huge factor for BAE
generally.
Mr Scopes: It does not cause a
major alteration to our behaviour. As Brian has mentioned, it
does mean that we have a certain amount of busy work with hedging
and the City, but it does not significantly alter our behaviour
as a company because of our geographical spread.
Mr Fleet: The mark was the strongest
currency in Europe and Germany was able to give up the mark. The
French are no less French than they were five years ago; they
are even more so today yet they gave up the franc. What you pay
yourself is irrelevant, it is your ability to pay yourself which
is important.
Q182 Mrs Williams: We have been told
that there are around 40 small- and medium-sized defence contractors
in Wales. How best can the UK Government support and encourage
those companies to grow?
Mr Scopes: As far as our operations
are concerned, something over 60% of our turnover flows out of
BAE Systems into suppliers and sub-contractors and a great part
of that is into the small- and medium-sized enterprises. As a
company we put a great deal of effort into sustaining our supplier
base, to improving their processes, ensuring they know where we
are up to and we regard that as the best thing we can do to sustain
the SME base. Where we do have those clusters of excellence which
I talked about earlier on, such as the North West, they also benefit
from being in an area of excellence in military aerospace, as
that one is. As far as the government intervention is concerned,
BAE Systems are probably not the best people ask for advice on
that. We operate as a rather large company, not as an SME and
our behaviour is not that of an SME. Our flow down to the SME
community is in itself an important aspect of sustaining their
capability.
Mr Fleet: I cannot speak about
defence because we are in commercial aerospace and we do not allow
missiles or rockets on our Airbus. I can talk about what we do
to try to support the local community and Welsh companies. I am
a great believer in supporting your local community. The reason
I am a great believer is that is where I live, that is where my
children live, and I like my children to go to nice schools, have
good housing and a good infrastructure. You do that if you create
wealth in your area. I actively support whenever possible buying
locally. Of course I also have a corporate governance responsibility
to make sure that by doing so I do not disadvantage the company
and drive us into bankruptcy. To have a smaller share of a thriving
market is better than having a 100% share of nothing. During the
construction phase we spent more than £1 billion over the
last eight years and
700 million in the last two; we had over 1,000 contractors
on site and we greatly encouraged those contractors as much as
possible to come from the local community. We used a lot of the
local building suppliers and services. As long as they provide
equal value for money I encourage our procurement organisation
to source locally as opposed to anywhere else, but they still
have to demonstrate value for money. There are no free dinners,
but wherever possible we do support it. There are lots of Welsh
companies in commercial aerospace which are benefiting from us
and from the A380.
The Committee suspended from 3.45pm to
4.07 pm for a division in the House
Q183 Mrs Williams: To what extent
do those companies rely on strategic partnerships with the major
defence contractors?
Mr Scopes: In the defence sector,
one of the characteristics we try to develop in our relationship
with our suppliers is a long-term relationship. It does not do
us or them any good if we keep chopping and changing. What we
are trying to develop is a partnership based on value for money.
It has to be good value. Their health in the end is dependent
on our health and in the defence sector in the UK our health is
very significantly dependent on our relationship with the national
government, the UK Government and its procurement processes and
how we proceed under that. They are very dependent on that chain
being successful.
Mr Fleet: If it were not for the
prime, Airbus, a lot of them would not be there. They rely on
the major prime and a prime such as us only manufactures 20 to
25% of the total cost. That is what we typically do in-house and
we sub-contract, outsource or offset 75 to 80%. We do look for
local suppliers, because it is easier to visit local suppliers
than it is to go half way round the world if there is a problem.
We do need value for money, though we do then give them opportunities
to break into other markets. Once they are one of our suppliers
and they are accredited and given Airbus approval—and I
am Chairman of the North Wales Aerospace Companies' Forum and
I support them and get them accredited and I send in my quality
people to help them get that accreditation—they still have
to get the work themselves. I do not give it to them on a plate,
but at least I show them the approval process they need to go
through, the quality systems they need to set up, what they need
to do. Then they receive the approval and go on the bidding list.
Once they are on the bidding list, then they bid against the rest
of the supply base. I cannot give them the work, but I can enable
them to bid for that work. Once they are successful with us it
is like a badge of honour. They can use that badge then to say
they supply Airbus. A lot of them supply us, they supply Boeing
and lots of the commercial aerospace companies, so it is a great
help that the prime is next to them, it is great help that the
prime will help them go through their approval process and allow
them to get their approvals.
Q184 Mrs Williams: Would it be helpful,
if we have not received it already, to have details about the
North Wales services group which Mr Fleet has just mentioned?
It does affect other companies within North Wales.
Mr Fleet: Aerospace Wales Forum.
I will provide the list of all the companies involved in that
for you later (not printed).
Q185 Chairman: That would be very
useful. In fact we are thinking of visiting North Wales shortly
and perhaps we shall come to see your site.
Mr Fleet: I would strongly recommend
you do.
Q186 Chairman: As you know, I have
visited it, but I am sure it has moved on since then. We may be
able to talk to your forum as well, which would be very useful
indeed.
Mr Fleet: What you find in the
UK is that we are trying to generate a knowledge economy. If you
have a knowledge economy, you have to invest: you invest in research,
you invest in technology. Airbus at a global level today, at a
company level, has nearly £20 billion revenue and we invest
10 to 12% of our turnover every year in R&D, R&T and capex.
That is a huge amount. The reason Airbus invests in the UK is
because the UK is considered a knowledge economy. If the UK Government,
DTI, the Treasury, stop that being a knowledge economy, in the
years to come they threaten it, then aerospace will look to go
to other knowledge economies which can develop the products of
the future. One way you can strongly help us is by encouraging
and backing the DTI to get that message out across government,
that if they want to be a knowledge economy, they have to invest.
The day you stop investing is the day you die "on the vine".
You have to invest in research and technology, you have to invest
in those industries if you are going to create the wealth, the
employment, the prosperity in five, 10, 20 years' time. That is
a strong message. If we are still investing 10 to 12% and the
nation is investing 0% we will go to a nation which is investing
5%, 2%, whatever it is, generating that knowledge economy, the
R&T which enables us to sell this, not that.
Q187 Albert Owen: You have touched
on many of the subjects I wanted to ask about the supply companies
in your locality. What do you call a locality and what percentage
of your suppliers are working within that radius which you call
local? Do you have to go beyond that or are you happy with the
supply companies you have within this Forum which you mentioned?
I am aware of the great investment you have made in the locality.
What I really want to know is whether all the supply companies
come from within the radius of the North West?
Mr Fleet: Within the total UK
base we have between 400 and 500 what we would call first tier
and second tier suppliers, but we do buy globally from around
the world. We buy from Australia, we buy from China, we buy from
Japan, we buy from Singapore, we buy from North America, we buy
from Europe, we buy around the world because we are building the
best product in the world and we will get the best suppliers in
the world. We do try to support local suppliers because it is
easier to get to local ones than flying to Japan. Because we are
in a competitive marketplace I cannot give my competitor a 1%
start, 10% start, so we will buy in the global economy. We do
encourage our local suppliers, we do provide assistance, we provide
lead manufacturing techniques, a process we adopted many years
ago, we show them: we show them how to do master classes, how
to get smarter, how to remove waste, how to do variants, but sometimes
you can transmit and they do not receive.
Q188 Albert Owen: That is at the
higher end and the high quality part. What about on the other
side, with regard to catering? Do you have a corporate policy
that you buy from certain companies who distribute throughout
the United Kingdom or when you talk about local do you go to the
local suppliers and in that way do you help your local economy?
Mr Fleet: We try to go to local
suppliers in that case and if they are offering a cost which is
above everyone else, we give them lots of encouragement to come
into line with what should be provided.
Q189 Albert Owen: How much say do
you have? How do you manage that? You obviously have the constraint
of a corporate plan for the United Kingdom, but how much say do
you have as a local company in the local area to buy locally?
Mr Fleet: We have a procurement
function located in both sites, so all the services needed to
operate big sites such as ours are called in locally and they
put them through the same sausage machine as anyone else and they
use one bid against another bid to make sure we get value for
money. Hopefully the local company wins, but if it fails to listen
to logic and reason and fails to recognise that, we have a corporate
governance responsibility to make sure we get best value for money
and I would say that in the majority of cases we do encourage
them to come up with an acceptable proposal.
Q190 Mr Evans: How much of your sourcing
of either products or services is in exchange for a country or
an airline in a country buying Airbus? Singapore has been mentioned.
Mr Fleet: It is an increasing
percentage. It is a growing industry, air travel is growing—forget
the blip we are going through at the moment—typically in
the West around 4% per annum, typically in the Far East around
8% per annum. In China the agreement between us and Boeing is
that they will buy 1,200 to 1,400 aircraft in the next 20 years.
It is the type of industry where every high tech economy, every
knowledge economy wants to get involved, so they will insist on
offset or co-operation. If you do not give it to them, you do
not get the work. You need to ensure that you give them enough
to attract the work and if they have 4% of the aircraft and we
can gain 96% of the aircraft that is still excellent business.
There is always that drive and always that push, especially on
large contracts, especially when people are ordering 50 to 100
aircraft, so we can get involved in the manufacturing process
and they can earn some value because they want to generate some
wealth, some income, some employment for their people from buying
that product. Whoever has the payment, the cheque, the money,
will always be able to encourage some employment. What we will
not do elsewhere though are the key technologies, the crown jewels
we have in Airbus UK in manufacturing, in design and engineering.
We will retain them for the UK because they are the crown jewels
of the future. The lower tech, which 100,000 facilities around
the world can make, those are the types of parts we talk about
as opposed to the crown jewels.
Q191 Mr Evans: Is that the same for
BAE?
Mr Scopes: We are seeing increasing
pressure on major exports to provide offset into those economies.
Where we can we will try to steer it into areas which are not
at the core of our business, so indirect offset rather than direct
offset on the key products. We will aim to make sure that we do
it on an economically efficient basis as far as possible. In some
cases you can pick up suppliers in these markets which eventually
strengthen our supplier base internationally, but the key issue
is that we keep the intellectual capital of the products, the
design, the R&D which have gone into those products, the knowledge
base they are centred on.
Mr Fleet: If you understand your
markets, if you understand the growth areas around the world which
will be expanding, if you understand what your manufacturing and
industrial strategy is, you can lead it. Failing companies tend
to be dragged by it; it happens to them and they are dragged kicking
and screaming into doing things. We try to be ahead, we look at
the economies which are growing, we look at the regions which
are growing, the countries, we plan that and we start working
out well ahead what we will do, etcetera. If you lead it, you
have better chance of keeping control. If you are dragged by it,
it is controlling you.
Q192 Mr Caton: You have spoken very
eloquently about the knowledge economy and about the need for
investment in research and development and research and technology.
Could I ask both of you to take that a little bit further and
briefly describe your R&D and R&T profile in the UK?
Mr Fleet: I have already mentioned
that Airbus last year, in 2003, invested
1.7 billion in R&T and capex, which is 10 to
12% of our turnover. In the Broughton facility in North-East Wales,
it has been in excess of £1 billion for the last eight years,
so that is more than £125 million per annum being invested
in that. We had very high expenditure in 2002-03 with the launch
of what people call the A380, the super jumbo, and the opening
of the west facility. The west facility was in excess of £350
million and is a real state of the art manufacturing process.
Even as we move forward my capex expenditure—not in R&T
but in machines, tools, equipment—this year is
175 million in Airbus UK and next year around
260 million. Huge amounts are being invested to continue
driving the process. Productivity is a never-ending game. The
world is always getting smarter. Machine tools which operate at
the speeds of ten years ago are obsolete. We are constantly upgrading
that to make sure we are at the front end, the high value added
end all the time. We are constantly investing in our manufacturing
processes and because we do that we have to invest in our people.
If our products are changing, our processes are changing and we
do not invest in our people, we do not have the top team. There
are always huge investments in upskilling and regrading and constantly
updating our people as well as our products.
Mr Scopes: I go back to our 2002
figures for BAE Systems. We spent and channelled about £1.2
billion of R&D money during that year. It put us about the
third highest channeler of R&D into the UK economy after GlaxoSmithKline
and Astra-Zeneca, the two major pharmaceutical companies. We are
a very, very significant channeler of R&D into the economy
and we get a good level of productivity for that investment that
we put in. Some of these comparisons have been well illustrated
by this study I mentioned earlier by Oxford Economic Forecasting.
I should like to emphasise the importance not just of financial
investment in R&D but of educational investment to get the
right relationships, the right people, so that you can carry out
that work properly. BAE Systems invests a lot of time and effort
into a major schools network which is primarily about encouraging
engineering in schools. It also has significant relationships
with major universities around the country. Only very recently
we have invested in a systems engineering integration centre at
Loughborough University, we have helped set up a professor of
support engineering at Cambridge University, we have academic
links with about 50 institutions, including some ongoing work
with Swansea University in particular. Creating that right environment
with the right people, the right knowledge base, within which
you can then conduct your R&D efficiently, is equally important.
Q193 Mr Caton: Do you do any research
and development in this country for production elsewhere?
Mr Scopes: On the defence side
I would say not enormously, no. The exports from the UK on the
defence side are primarily driven by developments and products
that we do for the UK domestic customer. If you look at some of
the traditional success stories, whether it is Hawk or Tornado
on the aerospace side, those are developments originally undertaken
for the UK customer, which are then available for export around
the world. So I think it would be unusual. We do invest company
monies in research and technology and development in our other
main manufacturing and operational centres. In the United States,
where we have over 20,000 and we are one of the top 10 uppliers
of defence products in the United States, we obviously have a
significant R&D effort which goes on there as well.
Q194 Dr Francis: You talked earlier
about the importance of skills. Could you describe to us the ideal
occupational structure of R&D in the UK and what qualifications
are needed for those people?
Mr Fleet: I will tell you my view
of what is not correct in the UK today and say this as a Learning
& Skills Chairman, previous Chairman of a TEC and governor
of a school as well as a Senior Vice-President for Manufacturing
UK. Today's system drives the school to push people to university;
to go a one-stop, one-route way of training and developing people,
upskilling them, through universities. Vocational qualifications
such as people joining Airbus UK and going through a craft apprenticeship,
NVQ level 3, HNC, HND, followed by MSc etcetera is not recognised
by the current system. Whoever pays the piper calls the tune.
If I am a headmaster and my school budget is set by the number
of people I send to university and my wages are also set by the
number of people I encourage to go to university and I ignore
another way of doing it through vocational studies, that is what
I will do. Whoever pays the piper calls the tune. We offer fantastic
training, but we find schools are pushing the more talented people
to university and therefore we have less access to them until
they come to us as direct graduate entries. That is a flawed system.
A one-stop shop does not offer all that. If industry will pick
up people, pay for their training for three to five years, get
them proper vocational studies and degrees, the schools should
be equally recognised and rewarded for that route for training
people. My belief is that today's education system is skewed against
industry. I am sure if that were addressed we could get some really
good, talented people coming to join us rather than going to read
history or geography.
Q195 Dr Francis: I hear what you
are saying but that is a critique and I respect the critique,
although we could have a debate elsewhere about all of that; after
all, the vast majority of degrees in this country are vocational
degrees anyway. Putting that to one side for the moment, what
is your ideal profile? What would you say is necessary for a successful
R&D profile in this country for manufacturing? Who are the
people you need in R&D generally?
Mr Fleet: We need strong links
with the universities. Universities in the past have carried out
applied research for the sake of research and research for the
sake of research has a benefit but it does not benefit the economy.
When I sit down with my R&T team, my engineers and we are
looking at all the R&T projects, I demand at least 30% are
taken to development. If you are doing R&T for the sake of
R&T it is going to create no wealth, we are not going to be
able to exploit that wealth, we are not going to be able to fit
it on a future wing and therefore an aircraft. We sit down and
make sure that the R&T will at least give us 30% which we
will be able to take on to development and fit into the programmes.
The links with academia are getting better but are nowhere near
as advanced as those in Germany or the US. We have a long way
to catch up before we can link them together, so that they are
not just looking for funds from us, but looking at key programmes
which we are each going to sponsor year after year to create ideas
which we can then make into product which we can sell around the
rest of the world. Today there is not a strong enough connection
between academia and industry working for a common goal and the
common goal is not just research for research's sake but research
we can sell and make money on.
Q196 Dr Francis: Mr Scopes, could
you answer the question? I hear what you are trying to say, but
you are not answering the question, so could you have a stab at
it, Mr Scopes? Can you describe to me the people who are working
in R&D and what their qualifications are and how we can change
it if you do not have the right profile?
Mr Scopes: We certainly have a
significant number of engineering graduates involved in our R&D.
Q197 Dr Francis: What sort of proportion
are they?
Mr Scopes: I would have to come
back to you with a written answer on that. I would endorse what
Brian is saying. It does need a mix of people. It is not just
the high quality engineering graduate or post-graduate, it is
also people coming through what we are now describing as foundation
degrees, which we are a great supporter of as a company. It is
also a significant number of high quality apprentices and again
as a company we are a real supporter of a modern-day apprenticeship
scheme and one of the highest take-ups of apprentices in the country.
It is a mixture of those skills. I also endorse what Brian says
about the links with the academic institutions. There are some
real examples of excellence there in which their academic approach,
linked with our output oriented approach, engineering approach,
actually achieve world class excellence; some of our links, for
example with Loughborough University or UMIST, would fall into
that category. We have to drive more in that direction. It picks
up exactly one of the issues pointed up by the innovation report
issued by the DTI just before Christmas that there is good research
and technology in the country across the board, but there is too
often a failure to translate that into product which we can make
and sell and make money out of.
Mr Fleet: My apologies. I did
not pick up where you were trying to take us. I can now hopefully
answer that to your satisfaction. Of the 12,000 people we employ
in Airbus UK 20% are basically graduates and above. That is both
in design engineering, manufacturing engineering and quality engineering
services; greater than 20%. I do not have the actual numbers but
it is greater than 20%.
Q198 Dr Francis: We will not belabour
that. I heard what you said at the beginning, but the two answers
seem to be contradictory. At one level you value the relationship
with universities and you want to strengthen it. You are also
saying that the profile of the R&D people is not necessarily
all graduates and post-graduates but there are different levels
and different skills. Are these workers generally better paid
and better qualified than the norm?
Mr Fleet: Our pay is in the upper
quartile and we can do that, as I said before, because of the
smartness of the process.
Q199 Mrs Williams: I should be interested
to know, as we are the Welsh Affairs Select Committee, what contacts
and strong links you have with the University of Wales in Bangor.
Mr Scopes: None from our point
of view. The particular links I am aware of are with the University
of Swansea.
Mr Fleet: I would have to ask
our training schools about what we have with Bangor. The principal
universities we deal with and with which we have had a long relationship
are Cranfield and Warwick because they are aerospace related,
they have been in that industry for a long time. We have strong
links also with Bristol, Bath and Southampton supporting our Filton
site. We also have growing interfaces and work with Nottingham,
Loughborough, Salford and UMIST. We have had a long relationship
with the likes of Cranfield and Warwick and they do a lot of the
MSc training for my people.
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