Select Committee on Defence Minutes of Evidence


Examination of Witnesses (Questions 1-19)

MR GUY GRIFFITHS, MR ROGER MEDWELL, DR DAVID PRICE AND MR CHRIS CUNDY

31 JANUARY 2006

  Q1 Chairman: Good morning. Thank you very much indeed for coming to give evidence about the Defence Industrial Strategy. We are starting with the Defence Manufacturers' Association and I wonder if you could begin by introducing yourselves and saying very, very briefly what you do. You are most welcome to the Committee.

  Mr Griffiths: Thank you, Chairman. My name is Guy Griffiths and I am Chief Operating Officer of MBDA Missile Systems and also a Council member of the Defence Manufacturers' Association. DMA, as I am sure you will be aware, is a trade organisation with over 600 defence companies as members, spanning all sectors of the defence industry in the United Kingdom and indeed all tiers of the supply chain. We have chosen four representatives from the DMA today who we hope will provide you with a cross-section of views from various sectors and, as I say, from various tiers within the defence sector to give you perhaps slightly different perspectives on how the DIS has been received.

  Dr Price: Dr David Price, I am the Chief Executive of Chemring Counter Measures, a public limited company in aerospace and defence, with a £300 million market cap. We are a world leader in expendable decoys and essentially operate in energetic material, both directly to the Armed Forces but also to prime contractors, so we operate in both tiers.

  Mr Medwell: Roger Medwell, MD NP Aerospace in Coventry. We are specialists in the manufacture of composites and technical modellings for the NLAW programme, helmets for the British Army, body armour and also composite armoured vehicles such as the Armoured Land Rover (Project Snatch) in Iraq.

  Mr Cundy: Chris Cundy, Commercial Director for VT Group, which is a plc with a turnover of over £800 million, both in the commercial warship building industry and in related support to a number of government agencies.

  Q2  Chairman: Thank you very much. If we can begin with a few generalities. Work on the Defence Industrial Strategy started in August 2005 and the Minister said that "we need something that pulls everything together rapidly". Did you agree with that and why was it necessary to do it all so urgently? Who would like to begin?

  Mr Griffiths: If I may start with that, Chairman. I think, first of all, whilst the timescales that were set for the exercise were extremely ambitious, I would observe that industry nonetheless was very supportive of the expeditious way in which the Minister and his team approached it. Why is that the case? Well, I think in a number of sectors we do see as a matter of some imperative guidance in terms of the UK's acquisition plans as driving some key decisions in terms of industrial rationalisation, restructuring and investment, and certainly talking of some of the sectors—and maybe we will get into some specific sectors later if you wish—some of those decisions are quite urgent. I would also observe, I think, that in these exercises it is sometimes easy to let the best be the enemy of the good, and I think probably in the timescales that were allowed for the exercise we have been able to derive collectively quite a lot of useful input in a very short time. So I think on balance we support it. I think if there is one area where the DMA probably would observe that some quality has been sacrificed in the short timescales allowed for the exercise, it was in the degree of consultation that was afforded not to the big, prime contractors particularly because I think they were heavily engaged in the exercise, but perhaps some of the smaller and medium-sized companies did not feel necessarily they had had their voices heard to the extent that would have been wished if more time had been allowed.

  Q3  Chairman: We will come on to the involvement and reaction of small and medium-sized companies during the course of the morning, but in general do you believe that industry was involved then in the drawing up of the DIS?

  Mr Griffiths: I think, Chairman, I would go further than that and I would observe that the degree of engagement, notwithstanding what I have said about the small and medium-sized companies, was unprecedented. If I speak by way of example as far as my own company was concerned, the Minister personally spent half a day with me and my team rehearsing the issues as they affected our particular sector and really was determined to understand what the technology issues were, what the capability issues were militarily, and I believe I was not alone in terms of that dialogue which was going on with other companies. If I look at the degree of engagement, I genuinely do think that over the course of the last six to eight months the degree of openness and transparency in both directions was unprecedented.

  Q4  Chairman: Do you think that your views were reflected or does industry think that its views were reflected in the overall result?

  Mr Griffiths: I think again it is difficult to generalise because from one sector to another there may be differences of emphasis there, but certainly I think in the context of the DIS document overall the overriding themes which emerged from it are ones which generally do reflect the views being expressed by industry during that consultation process.

  Dr Price: Again it comes back to one of the main themes to which Guy has referred. I think the area where there is the main concern is when you are looking at second and third tier SMEs where the engagement was significantly less and obviously where there is quite a significant degree of capability and innovation for the technology going forward, where it is certainly much more unclear in terms of the degree with which it reflects industry's position.

  Q5  Chairman: What was the cause of that? Why do second and third tier companies feel left out?

  Dr Price: It is not so much left out but more to do with in the time available. It is quite difficult particularly since a lot of second and third tier companies, of course, have their primary relationship with prime contractors. And then when you are looking at a lot of the sector strategies, it is about the way in which the very large primes, whether it is Agusta Westland, MBDA obviously, or British Aerospace in the different sectors, implement their strategy going forward. This is quite an important point from the MoD point of view. A lot of their supply chain, where an industrial strategy would have to flow down in terms of the partnership, is not very well brought out and I suspect—and perhaps you would like to comment, Roger, as a small company—there was comparatively little engagement across what is a very large number of companies.

  Mr Medwell: The review does not really go into how SMEs are going to be involved and what protection they have. Clearly we are going to be interfacing with known primes and we have been doing projects, as opposed to the DPA for instance, and the question for SMEs is will they be treated as fairly with the primes as we are with the MoD. It is obviously a concern because it is going to be quite a new relationship for us on a number of programmes.

  Mr Cundy: I think I would corroborate what my colleagues have said, particularly in our sector which is the maritime sector. With the Maritime Industry Strategy there has been extensive consultation.

  Q6  Chairman: We will come on to the small and medium enterprise issues in more detail in a few minutes. The Secretary of State said that the DIS communicates for the first time to industry and the City those skills, technologies and industrial capabilities that are assessed as being required onshore. Do you think the DIS does that?

  Mr Griffiths: I think it does articulate sector-by-sector what is required. I think there may be one or two gaps which we would want to clarify as an industry during the implementation period going forward. I think, however, it is less clear (and maybe that is understandable given that we are moving into an implementation phase) as to the precise mechanics by which some of those key capabilities will be retained within the affordability limits that we know apply to this sector at the moment.

  Q7  Chairman: What are those gaps?

  Mr Griffiths: They may not be gaps in terms of complete sectors but I think when one actually looks at the composition of the nine or 10 sectors which are referenced in section B of the White Paper, there is no specific reference, as far as we can observe, to such things as guns, logistics vehicles and personal equipment for soldiers. One might expect that some of those perhaps would be encompassed within the generality of some of the sector headings within section B, but I think there is a strength of feeling—and again perhaps this is reflected amongst the SME community in particular—that there are some particular niche military capabilities which those companies judge they have particular expertise and strength to bring to bear which are not referenced within the document.[1] I think clarity is sought as to whether those are encompassed within the sector headings and recognised as particular capabilities.


  Q8 Mr Hancock: Can I ask how you would envisage that they would be able to put that point of view across about those gaps in the various things that you have talked about and how those companies (who might not in any instance be seen as a prime contractor in any of this) would be able to influence that if they have not—to choose Mr Price's words—really played a part in the formation of the policy? How are they going to feel welcome in this new world?

  Mr Medwell: I guess this has to be a top-down process. We have to as SMEs engage with the primes. They have to almost take the position with regard to the SMEs that the MoD are going to be bringing these programmes together, so clearly we know there will be a restructuring of our base depending who will be seen as partner companies.

  Q9  Mr Hancock: That could be very painful for a lot of small companies.

  Mr Medwell: It could be painful.

  Q10  Mr Hancock: You would have nowhere to go when you are being pushed into extinction.

  Mr Medwell: We are interested in what safeguards are going to be put in place for the SMEs. One of my worries is that work could be put overseas without any control. Will there be offsets as there were on the NLAW programme, which I know you were directly involved on?

  Q11  Mr Hancock: Do you not think there is a failure in the policy not to recognise that? When the Secretary of State suggested that some of the change is going to be painful, he goes on to say that no change could be even worse. For medium and small companies they are going to be under a real pressure, are they not, to cut costs because the threat of being able to go overseas by the prime contractor is always going to be there hovering over them. There is a failure in this policy to recognise the importance of these small companies to the British defence industry, is there not?

  Mr Medwell: There is no detail with regard to the SMEs. It has not gone down to that level.

  Q12  Mr Hancock: There is no mention of them really. There is no policy in here which gives them any real say at all. This is a charter for the big boys.

  Dr Price: I think from our point of view one of the issues, looking forward to how the Defence Industrial Strategy is going to be implemented, is the prime contractors' relationship and the industrial strategy with its supply chain will become quite an important element because if the prime contractors do not essentially follow a common industrial strategy with that of the MoD you are going to have huge shadows essentially blocking the light of transparency and coherent strategy going forward.

  Q13  Mr Hancock: How can you control that?

  Dr Price: One of the ways you can do it is through a proper partnership approach. If you look at commercial industry, it goes down through the supply chain, and certainly I know from my previous experience on the maritime sector that a lot of effort has gone, prior to the industrial strategy, into trying to work up how partnerships would start to involve the second and third tier suppliers. That is not specifically identified as a process in the Defence Industrial Strategy.

  Q14  Mr Hancock: But there is nothing in the policy which suggests that the prime contractor will have those responsibilities to make sure.

  Dr Price: Not explicitly.

  Q15  Mr Hancock: That the rest of the industry is in some way protected or engaged even; the choices are all down to them. Once the decision is made to give them the job it is then down to them to deliver in any way they see fit, so this policy does nothing except protect them?

  Dr Price: It is clearly a risk.

  Mr Griffiths: It is a risk and one of the observations in the written evidence submitted by the DMA[2] is that there needs to be some established appropriate safeguards by the MoD, to make sure that those industry champions, the prime contractors who have been identified in this document, are subjected to some measure of control to make sure there is no abuse of that privileged position they have been given.

  Chairman: I am going to bring in Linda Gilroy and then we will come back to you.

  Q16  Linda Gilroy: There was an article in Jane's Defence Weekly in early January which was looking at this issue and one managing director of a small and medium enterprise was quoted as saying: "Bit by bit we are giving up and gravitating towards other sectors, like the oil industry". So the safeguards you are saying which need to be there if we are going to protect or at least give a level playing field to employment through SMEs in this country are important. What sort of safeguards should we be urging should be considered? Do you have any views on that?

  Mr Medwell: We have certainly got to ensure that the supply base in the United Kingdom is given a fair opportunity to bid for the work, and I think if the British taxpayer is paying for it then if price is equal and service is equal the contract should come to a UK company. We have done this on overseas bids. NLAW was a classic where Saab won the contract with 100% offset for the small SMEs, and that has been a fantastic success and supported the SMEs in this country. Whatever happens, I would like that sort of approach to be taken that was so successful with the NLAW programme.

  Mr Cundy: I would just reiterate what my colleagues have said. As a tier one supplier on certain contracts we are a prime contractor in that respect. About half  of a typical shipbuilding contract will be subcontracted and we obviously need to build those relationships to work with companies.

  Q17  Linda Gilroy: Is there a programme of spreading good practice in that of which you are aware?

  Mr Griffiths: There is a Code of Practice for dealing with supply chain relationships of the type that my colleagues have described, which was developed in collaboration between the MoD and UK industry and has now been adopted by the European Defence Agency for application across Europe. I think that Code of Practice does provide a useful framework. I am bound to say within the DMA we have from time to time tested the penetration of that Code of Practice through various tiers in the supply chain, and I have got to say the application of it beyond about tier two has proved to be fairly patchy. I think one of the things we would want to do as an industrial group with the MoD is look collectively at how we might enforce application of that Code of Practice more systematically.

  Q18  Mr Hancock: I think, Mr Medwell, you gave a very good example of where the system can work and that was the Saab contract. How could that be incorporated into a policy which says "here is an example of good practice where all of the work really did remain in the United Kingdom" and this is what your organisation would like to see to be the pattern for the future? Do you not think in this policy there was something missing there not to state those sorts of examples as being what the Government would want to see in the best interests of the nation to continue to be the norm rather than the unique example?

  Mr Medwell: Just taking that as an example, they certainly made everyone aware in the industry in the UK of the opportunities. We then made ourselves acquainted and told them of our capability. We had our capability assessed by Saab and indeed Thales. We got onto the tender list and we were declared the prime for the mouldings element, so they did a "down select". I think that is all we ask, that they do go out to British industry, the SMEs, and give them the opportunity to be aware of the programme and to qualify for the programme.

  Q19  Mr Hancock: Can I just then ask on a point that the Secretary of State made when he suggested that there are things in this policy that industry would not want to hear. I am at a loss to find those in the document. Do any of you foresee anything in there that you are worried about which you thought the Secretary of State was unfair about or that the policy had actually uncovered some sort of mystery failure on your part that had not been addressed in the past? For him to say specifically this should be a "gritty and relevant document" and there will be things in here that the industry will not want to hear, have any of you been made nervous by the reading of this document, that things have been uncovered that you have been up to that had to stop?

  Mr Griffiths: Your question implies some measure of surprise. I would not necessarily cite this example as being one that falls into this category. Certainly in my sector, the complex munitions sector, there is a statement in it which says that if one looks ahead over the course of the next five to 10 years, the level of planned expenditure in this sector shows a reduction of approximately 40% compared to what has preceded it in the last five to 10 years. I am bound to say when we observe the degree of rearmament that has gone on for the British Armed Forces over that period that is not a great surprise for us. Is it a source of some disappointment? Clearly it is; it is not a surprise but nor is it palatable and it does demand some really close work with the MoD to see how that level of funding reduction can be accommodated in a way that does not destroy important industrial capability. So that is one example.


1   Note by Dr David Price: Two good examples are expendable decoys and personal body armour, both of which have played a key role in recent peacekeeping, but are not explicitly mentioned in the strategy document. Back

2   Note: See Ev 91 Back


 
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