Examination of Witnesses (Questions 260-274)
SIR JOHN
ROSE, DR
SALLY HOWES
AND MR
MIKE TURNER
CBE
28 FEBRUARY 2006
Q260 Chairman: Mr Turner, when you said
that competition has been disastrous for the defence industry,
would you repeat it as baldly as that or were you referring to
competition from overseas?
Mr Turner: I think that the competition
policy of MoD allowed overseas companies to see an opportunity
in this market to wipe out the prime systems capability of the
UK indigenous defence base. BAE Systems, British Aerospace, did
not need a competition policy to say it needed to be competitive
globally. Look at how many Hawks we have sold overseas, how successful
we have been as a business in exporting. I believe we are the
number one manufacturing exporter from the UK. We only export
because we are competitive. We are competitive in world terms.
Q261 John Smith: Again, we have received
a number of statements from witnesses expressing deep concern
about the future development of BAE Systems being in a position
of the sole monopoly supplier taking on board the views, in terms
of international competition, of a global market. A number of
very strong comments have been made in terms of BAE Systems possibly
developing a strangle-hold on British defence procurement policy
and that this document, the Defence Industrial Strategy—and
this is contained in written submissions to this Committee—conflates
the interests of a single British company with the interests of
this country. What power does a British Government have to retain
your company in this domestic market if you choose to go elsewhere?
It will have no power at all—not at the moment, but this
is a possible future scenario—because it has no other supplier
whatsoever to turn to within the UK domestic market. What are
your views on that?
Mr Turner: BAE Systems (British
Aerospace) for decades has had a monopoly on air systems, but
it has been very good, very healthy for the UK. It has provided
the best aircraft in the world in training and in fighters, and
not only for the UK but for the world air forces, and it has provided
a very healthy income to the United Kingdom. It has been good
for British Aerospace in the past, but it has also been good for
the UK. We have now a very significant position also in land and
naval, and I hope that we can go on in land and naval, as we have
done for the past decade, to be a success for BAE Systems in the
UK. It has been very good news. You are right, the Government
has no real way of stopping BAE Systems leaving these shores,
but I can tell you that with the DIS, backed by John Reid and
Lord Drayson, it is now becoming an attractive place to do business,
which it was not. It was a very unattractive place to do business
in the nineties and the early part of this decade, and it is now
changing, and that is good. It is good for BAE Systems and it
is good for the UK.
Q262 John Smith: One final question.
One of our witnesses, Professor Hartley, suggested that if this
monopoly situation were to develop extensively within the British
defence market, there might be a case for regulating your company
as a utility. Do you have a view on that?
Mr Turner: We are regulated by,
in 1968, the Ferranti affair, with outrageous profits. Then there
was the Laing Report that said that we needed a profit formula
based on the cost of production and capital employed. That is
what we have got. We very much have a regulated profit. I am afraid
it is set at 8% for my company, compared to 15% in the US, but
at 8%, with sensible terms of trade and the DIS, we can see a
return on capital for our shareholders. We could not see that
before. We are regulated.
Q263 Mr Borrow: Can I come on to the
specific area munitions. Under the DIS, BAE Systems have a dominant
role in supplying munitions to MoD. Obviously there is an issue
at the moment around the possible closure of Bridgwater and Chorley
ROF sites. The closure of those sites would lead the MoD to be
dependent upon foreign suppliers for certain munitions because
they would no longer be produced by BAE Systems within the UK.
I want to ask Mr Turner the extent to which that is a problem
for the MoD. The DIS in many ways is seen as a document which
strengthens and supports the defence industries in the UK, but
at the same time we are seeing, or potentially seeing, the closure
of capacity and dependence on overseas suppliers for key parts
of military equipment or, in this case, munitions?
Mr Turner: In fact, we are being
consistent with the DIS, because it is quite clear that the MoD
cannot afford to invest in R&T and procure everything from
the UK defence industrial base. In the case of Chorley and Bridgwater,
indeed, we are closing those sites because it is not economic
for BAE Systems and the UK to keep those sites open, but where
we are investing is in insensitive munitions. The raw materials
(the explosives), when they are supplied (hopefully from a reliable
source), and, indeed, security of supply will be an issue when
we go to new suppliers for those raw materials. Indeed, the investment
we are making in mixing those explosives into insensitive munitions,
it is a world-beating technology that BAE Systems has and it is
what we supply to the UK Armed Forces. That is where the DIS is
focused, and rightly so, at the top end of technology, insensitive
munitions. We cannot afford in this country to keep the supply
of raw materials at an economic level. We cannot afford it.
Q264 Mr Borrow: Would you agree that
there is legitimate concern on behalf of the UK taxpayer and the
UK military that closure of these two facilities could take place
before we have actually nailed down and secured long-term supplies
of alternative munitions?
Mr Turner: We would not do that.
There is no way that we would finish off manufacturing the raw
materials that we currently do without being fairly sure that
we had a secure supply for those materials for the UK Armed Forces.
Q265 Mr Borrow: Are you in a position
to give an undertaking to the Committee this morning that Chorley
and Bridgwater will not close until such time as a secure alternative
supply of those munitions has been sourced to the satisfaction
of the MoD?
Mr Turner: That is part of the
process that we are going through now. Absolutely.
Q266 Mr Hancock: Why is it that the product
that we manufacture currently is not good enough for you to export
to keep the business going in the UK?
Mr Turner: We do not demand sufficient
of it in the UK, so we are below critical mass.
Q267 Mr Hancock: There is not an export
market for it?
Mr Turner: No. We cannot be competitive
at that level of technology, the raw material level.
Q268 Mr Hancock: Why is that? What is
the problem there?
Mr Turner: Because other countries
can do it cheaper and more efficiently in that area than we can.
We invest in BAE Systems in the higher technology.
Q269 Mr Hancock: Is it because of lack
of investment in the past in these plants?
Mr Turner: We have to be selective
where we invest our R&T, and we have selected to invest our
money at the very top end of technology in systems engineering
and systems integration. I think it would be wrong to invest in
the bottom end of technology. That is not the future for this
country.
Chairman: We are moving on to research
and technology.
Q270 Robert Key: Mr Turner, I wonder
if you can tell us roughly how much your company does spend on
R&T.
Mr Turner: We spend about £100
million of our own money on R&T in the UK and about £100
million of our own money in the United States on R&T.
Q271 Robert Key: Sir John, I wonder if
you can tell us roughly now much Rolls Royce spends on R&T?
Sir John Rose: We spend gross
over £600 million every year, net about £250 million,
of our own money. About 20% of our total R&D spend is on research
and technology acquisition, i.e. the raw materials of product
development. About half of that is spent overseas and half in
the UK. We used to spend 100% in the UK.
Q272 Robert Key: Those are very impressive
figures, and I would have expected nothing less from world class
companies, but it is not that amazing compared to the British
Government spend of about £250 million a year on R&T?
This worries me very much indeed: because right through the Defence
Industrial Strategy, on almost every page, there is reference
to the importance of investment in R&T. It says nothing about
increasing the Ministry of Defence budget on R&T. It says
that we have now dropped to 1.9% of our GDP spend on R&T,
it laments the fact that countries like China and India are going
to be increasing massively their R&T but we are not. Were
you as surprised as I was that the Government made no mention
of any increase in R&T spend?
Mr Turner: I am afraid it is all
part of that disastrous policy that I talked about. We had Peter
Levene, in the late eighties, come in and say that we are going
to have a competition and we are going to buy more off-the-shelf
and, as a result of that, we have stopped investing in this country
in defence R&T. This country has had an absolutely tremendous
return from the investment in defence R&T, but I am afraid
it is not a priority for this country any more. There is a very
different attitude in this country to defence and security than
I see in the United States, and that is why it is $73 billion
in the United States next year and a very low figure in the UK.
Sir John Rose: I think you have
got to read the DIS in conjunction with the work of the AEIGT,
which did have, at the end of it, a recommendation that was endorsed
by the MoD, the Treasury and the DTI for an increase in spending.
We have not seen that come through yet, though there is some evidence
that there is some increase. In our case we have seen something
like a 75% decline in real terms over the last 15 years in MoD
investment in R&T. It is part of the point that Mike Turner
made earlier about derisking. Historically the MoD invested in
R&T that was specific to the defence needs and in demonstrator
programmes, which were the mechanism for derisking. We would like
to see a return to that because it is very important for the customer
and for industry to prove technologies before their insertion,
and demonstrator programmes are the key mechanism for doing that.
They have proven to be successful in the past, they were key to
the success of Typhoon, as an example, but those were demonstrator
programmes that were funded in the eighties initially. There is
a recognition within the DIS that there needs to be an increase
in the amount of R&T spending and that there needs to be a
hierarchy that involves the universities, that involves industry
and involves the industry partners and involves the MoD. I would
just make one slight correction. The tree that you talked about
does not have universities, then SMES, then primes. Very little
R&T takes place in SMEs. They participate in some R&T
programmes, but it tends to be driven by the larger companies,
and the universities are a key part of that.
Q273 Robert Key: The DIS talks too about
the importance of looking towards Europe in relations both industrially
but also in terms of research. There is quite a lot of duplication
in research and technology, is there not, across Europe? Would
it be practical for this country to take a lead perhaps in rationalising
that, preventing some of this waste in the same way that you suggested
there has been a lot of waste in the previous models of defence
procurement in the past? Am I right, first of all, in your experience,
that there is duplication across Europe?
Mr Turner: There is duplication.
You have seen that with Rafale, Typhoon and Gripen. I think the
fundamental problem, though, that Europe has got is that it is
just not spending enough on R&T generally. There is duplication,
yes, but when you compare Europe with the appetite for spending
on R&T in the United States, the great concern that we have
for our Armed Forces is how are they going to get the capability
to be able to peace-make and peace-keep alongside the United States?
That is why we have stressed that when we do acquire from the
United States, as we will have to in certain areas because we
clearly cannot afford everything in this country any more, we
need to get the highest level of technology transferred across
to the UK to sustain the capability for the support and upgrade
through life. Yes, there is a case for trying to get Europe to
get the act together, but who is going to move first? Everybody
wants the technology in their country, everybody wants the highest
level of technology jobs in their country and there is a very
limited amount of resource available anyway for doing it. I am
not optimistic about that.
Q274 Mr Crausby: Sir John, the Defence
Industries Council tells us that it is keen to work constructively
with the MoD to ensure an effective implementation of the Defence
Industrial Strategy. How involved is the DIC with the implementation
of the DIS and are you satisfied? Is it clear to industry who
is responsible for implementing the various aspects of the DIS
and in what timescale? The SBAC suggests that ministers are looking
to a two-year period for the implementation. Do you agree with
that? How will industry in the long-term measure the success of
the Defence Industrial Strategy?
Sir John Rose: I think we would
all like to input to that answer. I would start by saying that
I think Sally Howes has covered a lot of the answer in her earlier
comments. We have got the first of our post DIS/NDIC meetings
tomorrow. We will have regular meetings with the MoD, and tomorrow
very much on the agenda we will be trying to work out exactly
how we do monitor the progress, but clearly the big items are
going to be do we see change in the effectiveness of the programmes
that are delivered, do we see changes in the way that MoD procure
and are structured and do we see changes in the way that industry
interfaces with the MoD? There are going to be a lot of a sub-mechanisms,
as Sally mentioned earlier, where we look at different components
both through the DIC mechanisms but also in terms of the individual
company's interface with the MoD.
Dr Howes: I think all of the actions
that were suggested in the DIS are being undertaken one way or
another. We are satisfied that the bases are being covered. It
is very clear that this is going to require some strong leadership
to keep all of this together during the period. As Sir John mentioned,
the NDIC is scheduled to meet four times rather than two, which
is normal, this year, and we have an agreed timetable for check-points
and for looking at the progress of the implementation itself.
I think it is early days, but we see activity under each of the
headings.
Mr Turner: I can tell you what
is happening in BAE Systems on implementation. On air, land and
sea, clearly where they were specifically clear in the DIS on
the future importance of the highest level of systems engineering
and integration in the UK, we have a very senior lead within the
company on air, land and sea in discussions with somebody in MoD,
appointed by MoD, to agree the partnering arrangements, milestones,
in taking the DIS forward. We were fortunate on the land side
that Lord Drayson and I, on the day of the announcement of the
DIS, signed the milestones for taking land systems support and
upgrade forward, and we are now working together on the air side
and on the naval side to put similar partnering arrangements in
place, to set milestones in place, to prove that we can deliver,
as we say we can, against certain milestones. The biggest issue
for us, though, is the cultural one, the relationship over many
decades now between the DPA and industry. That is where there
has got to be the most radical change. We have proved, in partnership
with the DLO, that there are great savings to be made on support
and upgrades by working in partnership to improve the availability
of Nimrod Mk IIs, of Harriers, of Tornados, at reduced cost to
the taxpayer, and we believe that, by working in partnership and
working in a similar way with the DPA, we can deliver savings
to the taxpayer on the initial equipment, but I think that is
a big challenge.
Chairman: That is very helpful evidence.
Thank you all very much indeed for coming this morning.
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