Examination of Witnesses (Questions 20-39)
MR GUY
GRIFFITHS, MR
ROGER MEDWELL,
DR DAVID
PRICE AND
MR CHRIS
CUNDY
31 JANUARY 2006
Q20 Mr Jones: Could I just pick you
up in terms of the supply chain. I agree that NLAW is a great
example of how not just small defence companies got involved but
some engineering companies who I know in my constituency who have
never been involved in defence work before. I think the important
thing about the NLAW procurement was the fact that the people
in the supply chain had to compete for it; they did not get stuck
on a tender list to agree an offset. I know NDI played a key role
in that. Do you not think there is a danger that if we do not
stipulate that these supply chains have got to be looked at that
the supply defence contract will go abroad for the work? I give
a great example in the North East of the ALSLs from Swan Hunter's,
where rumour has it that 75% of the work on that supply chain
has come from Holland. Unless we actually stipulate it clearly,
do you think there is a danger that more Swan Hunters could happen
where it looks great in the headlines in that we are providing
a ship built in the North East but the parts of it where the value
is, ie, all the bits and pieces that go in, are being procured
offshore?
Mr Cundy: In terms of shipbuilding
I think the strategy is pretty clear that over the next 10 years
we have got good visibility in terms of programmes. The Type 45
and the Carrier programmes will need the whole of UK industry.
However, within that we need to be competitive. Certainly from
a VT point of view we are keen to compete on overseas and UK programmes.
We need to be competitive within those programmes. All we would
like to do is to be given a fair level playing field in that competition.
Dr Price: The policy is quite
explicit with respect to the research and technology and identified
quite clearly that the SMEs in the lower tiers are a source of
innovation and ways have to be found of involving them early on
in the process. I would say specifically on the point that you
raised that sometimes it is quite difficult to decide what is
the UK industrial interest when you have a UK prime with a supply
chain that is foreign competing against a foreign prime with a
UK supply chain. NLAW, I suspect, was a good example of that.
Therefore it is always very difficult to take specific instances
and make broad generalities, but I would have expected the Industrial
Strategy to have more detail of how, outside of technology, the
supply chain of SMEs might be better thought of in terms of a
policy to maintain industrial practice.
Q21 Mr Jones: I agree with you but
the issue is surely not wanting to go down the route of the American
system where everything has got to be procured in the US. There
is an issue here that we have opened up our markets most widely
in the world, in this sector here, and if we are spending a huge
sum of public money there should at least be some of that filtering
down to the SME and small sector. For example, in the ALSL something
like half a billion pounds has been spent already and rising,
you would have expected some of that to come into the supply chain
of the UK.
Dr Price: It is also true that
if you look at very efficient supply chains, whether it is the
automotive industry or civil aerospace, that one of the key things
of long-term planning is about involving local SMEs in a partnership
going forward, and therefore to some extent best practice would
favour local SMEs with strong technology that is developed over
a period of time. So you would hope that following best practice
that we would see the same thing.
Mr Jones: I do not think we need to hope;
we need to see it written into the structure, that is the problem.
Chairman: John, were you going to ask
about this point or were you going to go slightly to a different
point?
John Smith: On the same subject, Chairman,
it appears to me that not only is the strategy focused on the
primes and not on the supply chains and the smaller companies
but there are certain inherent dangers with some of those large
primes. The one that comes to mind is BAE Systems who quite clearly
now are equally split between the UK and North America in terms
of its interests, and some systems, like land systems, are in
fact driven by North America and not the UK market. Is there not
an inherent danger there that they will not draw on the UK supply
change but will go elsewhere, and quite clearly that could be
applied to other companies? So is this not only a document that
favours big business, it could have been written by BAE Systems
and they would have been quite happy with the outcome? You do
not have to answer the last bit!
Q22 Chairman: I would be nice if
you did.
Mr Griffiths: I think your question
bears down on what we were touching on earlier and that is whilst
industry champions like BAE and a number of the sector chapters
have been identified as the leader or the partner of choice for
the MoD, there is a concern amongst some of the SMEs and some
of the not-so-small companies that their route to access the MoD's
market now is purely channelled through those particular industry
champions, and whilst there may be some logic to that it comes
back to the observation we made earlier that there have to be
policies and safeguards to make sure that that position is not
abused and that a wider aspiration, for example to attract innovation
from some of these other players in the industry who perhaps have
real innovation to offer, is still leveraged. There have to be
those safeguards.
Q23 Mr Havard: This question about
the strategy saying things that maybe industry did not want to
hear; is there something that you want to say to the Government
that it might not want to hear in the sense that when the document
was launched it had all the smiley faces on the inside cover,
and the Secretary of State made the point at the time that the
man from the Treasury was smiling, which is a novelty, and they
were all on there, Trade and Industry, Treasury, it was all joined-up
government, but in my discussions, admittedly not with the current
Secretary of State but previously, the question about what is
the responsibility of the MoD in order to promote awareness and
capacity for SMEs to be involved in these sorts of processes and
how does that fit with the responsibilities of the DTI was a question
where if you are not very careful you get the answer from the
MoD it is the DTI's responsibility and from DTI it is the MoD's
responsibility. It is somebody's responsibility; it is supposed
to be a joined-up responsibility. So what does industry want from
the respective government departments to make that trick happen?
Mr Griffiths: I think there are
a number of points which arise from that. First of all, there
is a question of affordability, I think, and perhaps this bears
on Mr Hancock's comment earlier on that maybe there is not as
much bad news in this document as was heralded when it was first
unveiled. There is a question as we go through the aspirational
statements that are made in each sector as to whether or not when
one adds them all up in spending terms they represent an increase
over and above the level of planned expenditure that has been
advertised to us so far. So I think that question remains unanswered.
Q24 Mr Havard: Does the aggregate
of a set of spasms equal a strategy?
Mr Griffiths: The second point
is if one looks at the document it is stated to be an Industrial
Strategy for defence, not for the wider government, and I think
one of the questions we would ask is are we going to have one
industrial strategy for defence and a second industrial strategy
for the economy as a whole. I think looking at it from a corporate
point of view, we need one.
Q25 Linda Gilroy: Continuing on that
point, the DIS states that the current levels of work for naval
shipbuilding will not last forever and with the Future Carrier
and MARS there are some capacity issues which the Marine Industrial
Strategy is going to tackle, so in about 10 years it would not
be affordable to sustain the sort of capacity we need for that
period. How is a company such as the VT Group, if I can ask Mr
Cundy specifically, preparing for such a future and are we likely
to see mergers of UK naval shipbuilding companies and on what
sort of timescale and with what impact on jobs?
Mr Cundy: That is quite a wide-ranging
question, but if we take the industrial group at the moment, we
have had very extensive discussions with Government and the Ministry
on the Maritime Industry Strategy. If we looked at the sectors
within the report, the maritime industry is probably as far advanced
as any in terms of the strategy there. Looking at the long-term
capabilities we want to protect for the strategic interest, obviously
the design and support of ships long term is a key ability that
we need to retain within the industry. There is a particular challenge
to both industry and the Ministry to produce the carriers within
the next 10 years. There will be an increase in employment, certainly
at a blue collar level, over the next three years as the carriers
come in, but longer term that base—and I think the report
highlights the Type 45 and the Carrier—are abnormal workloads
within the industry. We need to size the industry for the long-term
capacity needed for warships, and commercial ships if we can be
competitive. From a VT point of view, we believe with our investment
in Portsmouth we are as competitive as anyone in the export market
on warship building for the smaller warships. In terms of the
strategy going forward we would see the UK being very competitive
in the warship-building market and there will be lots of opportunities
within the next 10 years for people outside of the core warship
building yards, ourselves and BAE, to be involved.
Q26 Linda Gilroy: Are you saying
you are looking to the export market to sustain something beyond
that immediate period?
Mr Cundy: I think exports will
enable us to retain capability particularly in the design area
where there are peaks and troughs in terms of class of ships.
As we go into support of ships there tends to be a lower design
input. We need a long-term strategy for retaining that design,
and export will be part of that strategy. That said, the export
market tends to be for the smaller perhaps faster ships and that
is a limited market which represents maybe only 10-20% of the
total warship building in the UK.
Q27 Mr Hancock: If I can develop
that a bit further. The Industrial Strategy makes it quite clear
that plans will be needed from your organisations to ensure that
the UK can keep the required key skills. Paul Lester wrote a very
helpful letter to the Committee where he re-emphasised that point.[3]
I quote from his letter which says: "Under the arrangements
outlined in the DIS, the MoD will not be able to retain in-house
all the necessary skills to handle itself the procurement of offshore
investors under the true life capability . . ." etc. He goes
on to say that industry needs to have a greater role in that.
Do you see that as being a prerequisite for a company like yours
that it would only be able to hold those skills if they were given
that sort of commitment?
Mr Cundy: I think that is true.
In terms of the markets that we are looking at, design skills
are obviously key to our business in terms of the export market
and the UK market. In terms of design capability, we should retain
those within the UK. There may be ships which could be built more
efficiently offshore, but if we are looking at supporting those
through life (which needs to be done in the UK) we need to keep
the capability and the input up-front in terms of the design to
manage that programme through life.
Q28 Mr Hancock: The policy itself,
whilst recognising there will be a problem in retaining the skills,
does not really offer any solution to the problem. It passes that
back to you to say you tell us what the solution is. Do you think
what you are going to say in response to that, which is not only
a commitment to build but a through life commitment to maintain
and look after the product, is the only way that industry can
satisfy what government are requiring in the way of retaining
of skills?
Mr Cundy: As a group we believe
that is the most efficient way.
Q29 Mr Hancock: Would your colleagues
share that view?
Mr Griffiths: With one exception—the
export point—which we touched on earlier on. The industrial
model for many of the indigenous UK businesses contrasts with
what one sees with the indigenous US businesses. The US business
model in the defence sector is one where because of the levels
of US defence spend they can build and sustain a business entirely
on domestic order intake which they secure from the government.
In the UK, frankly, in a number of sectors that simply is not
realistic as we look forward and we have to look to secure export
business in order to sustain industrial capability in the UK.
I think one area where we would have looked for stronger emphasis
within the White Paper is on the actions that need to be taken
jointly between MoD, industry and indeed wider government to support
the export ability of British defence product.
Q30 Mr Hancock: Just one final point,
do you think the current thinking in the Defence Procurement Agency
supports that view?
Dr Price: Maritime, if we go back
to it, is a good example. The German maritime industry has made
a great deal of effort to ensure that it has very, very exportable
designs as part of its overall process and, consequently, although
there is a section on defence exports in the Industrial Strategy,
the implication is of dependency. A good example I would give
for my company, Chemring Countermeasures in Salisbury, is that
it is 80% exports but the skill base is maintained for the UK
essentially by our success in exporting, and I would say that
there are a lot of small companies supporting the UK industry
which have that same business model.
Q31 Chairman: So specifically in
answer to Mr Hancock's question?
Dr Price: No, I do not at the
moment see the importance of exports to the maintenance of skill
being within the DPA's policies.
Mr Griffiths: I think it is a
very difficult balance being struck here because on the one hand,
arguably, there should be no compromise in terms of the quality
of military capability that is being delivered industrially
to arm our Servicemen and women. I do not think what we are saying
here is that it should be traded in some way for exportability.
Nonetheless, there are instances probably we could identify where
specifications have been derived in a way that does not render
a product readily exportable in the same way as perhaps one would
see in some other countries.
Chairman: Are you going to change the
subject slightly because Brian Jenkins would like to come in?
Mr Jenkins: I want to go back a little
bit to where I was going to come in earlier on.
Chairman: We will come back to you. Kevan
Jones?
Q32 Mr Jones: Can I ask particularly
on shipbuilding, in the White Paper it states that surface ships
and complex vessels will continue to be built in the UK, but the
MoD might look to outsource some of the "lower-end manufacturing"
offshore. What is your view of what this so-called lower-end manufacturing
is?
Mr Cundy: I think in terms of
lower-end manufacturing we need to go back to what needs to be
done over the next six months to define what the long-term programmes
are within the industry. Obviously with the Carrier and Type 45
there is work for most of the industry in the short term. It needs
to be sized longer term for requirements beyond the year 2015,
that sort of number. Within that you then have the MARS which
is a particular programme which is what I would see as towards
the lower end of the specification. Mike mentioned pooled data
in terms of how we see that happening. What we see is those programmes
being managed in the UK with design capability in the UK for through
life support but with the high end engineering which militarises
the vessels being done in the UK.
Q33 Mr Jones: How does that fit with
the modern way for example, whether it is BAE Systems or anybody
else, of building ships these days where you build them in sections
but you do not just do the fabrication, you do all the work inside
as well? If they are going to be built in Poland or a former East
German yard, how do you ensure that all the expertise that goes
inside is not also done abroad?
Mr Cundy: In terms of giving an
example, we had a contract from the Minister of Defence to build
two survey ships for the Royal Navy. Those were not built in our
yard, they were built to a commercial design in Appledore (but
that could have been overseas) but at the back end of the contract
we were involved with the through life support after the contract
was completed. What we did was the militarisation of those ships
once they came back to Portsmouth.
Q34 Mr Jones: Yes, but is it not
difficult to envisage, especially in some of the larger ships,
that you are going to get a situation whereby you are going to
build the hulls in Poland, float them across and fit them out
because that is going against the way in modern shipyards you
are building ships?
Mr Cundy: In your example of BAE
Systems and ourselves with the Type 45 we are talking about very
complex ships with a lot of outfitting and weapons within the
hull structure itself, so within that programme we are doing 80-90%
of the outfit in Portsmouth before they are moved to Glasgow.
With a more commercial design, it is a tradeoff between how you
build the ship in its entirety, which could be done overseas if
that was the best case, or could be done in the UK, but the level
of outfitting will determine whether you should build the whole
ship in one yard or whether you should do it in modules.
Q35 Mr Jones: My concern about this
is I do think on MARS we will need that work in UK yards to keep
that skills base there. My fear is if you are going to take a
simplistic view, which I think certain people in the MoD are going
to do, that somehow it is easier and cheaper just to build these
in Poland and this is a cheap way of building a ship. It is very
interesting the Germans are not going down that line. Other European
yards are not doing that, other governments are not doing that;
why should we?
Mr Cundy: I think it comes back
to the previous point about sizing the industry over the next
10 years. What we do not want to do is necessarily increase the
capacity within industry to cope with the Type 45 and the Carrier
programme and other ships on top of that. I quite agree with you
that we should be using this programme to make sure we size the
industry over the longer term.
Q36 Mr Jones: Would you not agree
though, Mr Cundy, that if it is done properly and planned out
properly you could ensure there is a long-term future for existing
capacity that is there in UK yards quite a long way into the future,
rather than segmenting it and saying we are going to do this bit
in terms of carriers etc, then at the same time pushing this stuff
abroad? I accept there is an MoD thrust on this. If they start
doing that I think there will a bit of a reaction against it because
what you are driving is feast and famine again, are you not?
Mr Cundy: No, I think what we
are talking about in the Maritime Industry Strategy is a look
over the next six months at the size for the industry, so it is—
Q37 Mr Jones: I will finish on this
point. Is there not a danger that we have this huge feast over
the next few years in terms of the Carrier and other things, and
then we find that because we have put stuff abroad because it
is cheaper or more efficient that we end up with the famine afterwards?
Mr Cundy: I think you then come
back to capability and having the platforms when the Royal Navy
need them and it is the timing of when that happens.
Q38 Mr Havard: I want to ask you
two questions. They both follow on in this sense but one is about
procurement and the other is about post-2015. It says it "might
look to outsource lower-end manufacture". There is a good
old Civil Service "might" stuck in the middle of the
sentence to give the minister a parachute if he needs it! What
it does mean is what you have just been testing, is it not, what
is lower-end manufacturing? It goes back to what my colleague
was saying earlier on about you have a view about what you need
to retain in terms of the through life process here. I was very
interested in the memo that was sent by your Chief Executive who
said in order to do all this you would have to manage on behalf
of the MoD the procurement of ships and the hulls manufactured
offshore. What is meant by the management of the procurement?
Are you going to be defining in the management of the procurement
what the lower-end activity is? What do you mean by manage the
procurement because what happens to the DPA in this process? Are
you going to take them over? Are they going to disappear? Are
you going to drive this process or is the MoD going to drive that
process? How do you see that statement practically working in
these circumstances?
Mr Cundy: Again coming back to
the example I gave on the survey ships, it was a good example
where the MoD had a requirement, and they went out to competition
to have a design which they wanted to procure. We could then procure
that design through a supply chain and in relationship with some
of the SMEs we were able to procure those ships. I think the MoD
because of the complexity of some of the procurement programmes
are not used to managing programmes overseas. We manage shipbuilding
for example in Greece where we are managing the construction of
ships overseas with a team of people on site, so we have overseers
on site to manage that programme.
Mr Havard: So you could cut out the middleman
in terms of the DPA, just abolish it?
Chairman: You said you had two questions.
Q39 Mr Havard: You mentioned this
question about feast and famine and so on post-2015. We have had
some information put to us I forget who by, but essentially the
assertion is that so far as shipbuilding is concerned there is
effectively in the strategy a quite clear message about the replacement
of Trident or certainly the replacement of the submarines, because
the strategy document almost explicitly says that in order to
do some of the things that are necessary in retaining all these
various skills and design capabilities and so on in shipbuilding,
there will be a new generation of submarines post 2015, because
if all you do is simply upgrade existing boats that will not be
sufficient in order to fulfil some of the statements and requirements
that are set out in the strategy. That is a set of assertions
that has been made to us; what is your view of that?
Mr Cundy: I do not think I am
qualified to comment on whether—
3 Note: Not printed. Back
| 
