House of Commons - Defence

Select Committee on Defence Seventh Report

3 How the Defence Industry needs to change

18. The DIS states that industry will have to reshape itself in order to improve productivity and to adjust to lower production levels once the current major equipment projects had been completed. Industry will also need to retain the specialist skills and systems engineering capabilities required to manage military capability on a through life basis; and will need to adjust to sustain the capabilities the UK needs once the current production peaks are passed.[32]

19. We asked how industry would reshape in response to the DIS, and whether it was prepared to reshape. Sir John Rose, Chairman of the DIC, considered it impossible to predict how industry would reshape, but thought that industry would respond to its customer.[33] Dr Sally Howes, Secretary of the DIC, told us that "when you speak to companies further down the supply chain, the DIS is seen as a good opportunity for industry to transform and to prosper as long as it is able to invest".[34] Lord Drayson considered the re-shaping to be a ten-year process to ensure alignment between the defence industry's capabilities and the UK's capabilities in terms of security and defence priorities.[35]

The UK as an attractive market

20. The DIS considers that the "UK offers unique attractions to business" for those companies who are prepared to invest and undertake business here.[36] Mr Mike Turner, Chief Executive of BAE Systems, believed that industry and business will "go where the market is".[37] BAE Systems could see, as a result of the DIS, the possibility of a sustainable profitable future for the business in the UK. Mr Turner considered that "there is a strong market in the UK which was not there previously"[38] and that the DIS had encouraged "BAE Systems to remain and to invest in the United Kingdom".[39] Mr Turner acknowledged that his company had considered merging with one of the large US defence companies to gain access to the US market, but a merger with a US defence company was "far less likely now".[40]

21. In early April 2006, BAE Systems confirmed that it was in discussions to sell its 20 per cent stake in European aircraft maker Airbus. Mr Turner said that BAE Systems wished to focus on its core defence business which was growing rapidly in the US. He stated that "we believe that now is the time for us to divest our Airbus shareholding to allow us to concentrate on our core transatlantic defence and aerospace strategy".[41] The MoD is procuring 25 A400M transport aircraft as part of a collaborative programme involving seven European nations. Airbus Military Sociedad Limitada is the contractor for the aircraft.[42]

22. We were concerned by reports that some defence companies were considering moving out of the defence sector and, if this were the case, whether the MoD would get the reshaping of the defence industry which it needed for the future. Lord Drayson did not think that companies would leave the defence market.[43]

23. We welcome the clarity that the Defence Industrial Strategy has provided to industry about future defence requirements, which should help to make the UK an attractive market to defence companies. However, we note that BAE Systems is considering selling its stake in Airbus, which makes us uncertain of where it leaves their commitment to the UK. Given the possible impact on UK jobs, and the fact that the MoD is procuring A400M transport aircraft from Airbus' military arm, we shall keep a close eye on this matter as it develops.

The key changes required

24. Some of the changes required by the DIS will be difficult. Lord Drayson acknowledged that "the pain comes from that change, but change is always painful".[44] Perhaps the greatest change that industry will have to adjust to is putting less focus on the design and development of new platforms and more of a focus on the insertion of upgrades and new capabilities, and through-life maintenance of existing platforms.[45] The Minister acknowledged that "that is, for some companies, a change of culture in terms of their type of business and that is difficult for them to do".[46] He considered that there was evidence that industry was responding to the DIS and he expected industry to "get on with it in 2006".[47]

25. Sir John Rose thought that the move to supporting and upgrading equipment might be very positive.[48] Mr Turner said it was a recognition of what the reality was and considered that it was a good thing to see the focus on through-life support and upgrades. He told us that "the fact that the primes in the UK can now see a long-term future in that regard is not only a benefit for the primes but for the route to market for the SMEs which is far clearer and more specific than it has been in the past".[49] The defence industry has accepted that future work will focus on the insertion of upgrades and new capabilities and through-life maintenance of existing platforms, rather than new platforms.

Impact on different sectors

26. The DIS provides an analysis of the various defence industrial sectors and cross-cutting capabilities. The sectors include: maritime; armoured fighting vehicles; fixed-wing aircraft; helicopters, general munitions and complex weapons.[50] We focused on three sectors where there were likely to be substantial changes and challenges: maritime; fixed-wing aircraft; and complex weapons.

27. Lord Drayson has acknowledged that there will be job increases in some sectors, and decreases in other sectors, but he said that the aim is to manage this in a "smart" way. In the naval shipbuilding and complex weapons sectors there would be a process of managed decline.[51] The Defence Industrial Strategy will lead to job increases and job decreases in different sectors of the defence industry. We look to the Government to assist, where appropriate, those sectors where job decreases are likely.

MARITIME SECTOR

28. Section B2 of the DIS considers the maritime sector and the strategic capabilities which need to be retained onshore.[52] It states that:

29. In his Statement to the House on 15 December 2005, the Secretary of State for Defence said that the Government was investing in the biggest naval shipbuilding programme that the Royal Navy had seen for two generations. However, he considered that the industry was currently fragmented with different companies and facilities undertaking submarine building, surface ship building and support.[54] The current levels of work in naval shipbuilding would not last forever and in about ten years it would not be affordable to sustain excess industrial capacity in the longer term. Plans were needed to keep the required key skills onshore in the UK. For submarines, the Government was committed to maintaining the ability in the UK to design, manufacture and support through life all aspects of this capability. He said that the UK also needed to sustain the ability to design and integrate complex surface ships and to support and maintain them through life. The UK might look:

30. We examined the shipbuilding strategy for the Future Carrier programme in our report on the Future Carrier and Joint Combat Aircraft Programmes, published in December 2005.[56] We concluded that the Future Carrier programme was vital to the future of the UK's military shipbuilding industry, but were concerned that delays to the programme were likely to put pressure on the UK naval shipbuilding capacity. We looked to MoD to identify ways to manage the potential peaks in demand for naval shipbuilding programmes over the next ten years or so. We expected the Maritime Industrial Strategy to set out how the peaks and troughs, seen in the UK naval shipbuilding industry in the past, would be managed in the future.[57]

31. The Minister considered that the naval shipbuilding sector was one where jobs were likely to increase, but that it was important not to create an unsustainable level of employment.[58] Mr Chris Cundy, Commercial Director of the VT Group, thought that there would be an increase in employment, particularly at the blue collar level, over the next three years. There were "abnormal workloads" within the industry at the moment because of programmes such as the Future Carrier and the Type 45 destroyer.[59]

32. The Minister thought that there were "many years" to plan for the future changes in naval shipbuilding, and that it was important "to make sure that we are getting real efficiency into the industry".[60] Some shipyards were considered to be world-class, but others were not so efficient. He emphasised the need for best practice to be spread, particularly as the focus was now towards the high value-added end of the shipbuilding industry. 2006 was a very important year because there were some important milestones on some of the key shipbuilding projects, in particular the Future Carrier programme. The Carrier programme was to be one of the ways to encourage the required changes.[61]

33. There are signs that the restructuring may have started. There have been press reports suggesting that BAE Systems and the VT Group might be bidding for Babcock International; that BAE Systems might take Babcock's dockyard interests, including Rosyth naval dockyard where the Future Carriers are likely to be assembled, and the submarine maintenance and repair base at Faslane. It has also been reported that the VT Group might sell its shipbuilding business to BAE Systems and that it might take over Babcock's support services business. If such a deal went through, BAE Systems would be the dominant naval shipbuilder in the UK, adding the VT Group and Babcock naval businesses to its existing yards on the Clyde and at Barrow-in-Furness.[62] We shall take a keen interest in any developments in the restructuring of the dockyards.

34. The Minister wanted to see the "Maritime Industrial Strategies" implemented in 2006.[63] Mr Cundy told us the VT Group company have had extensive discussions with the MoD on the Maritime Industrial Strategy and considered that the maritime industry was "probably as far as advanced of any in terms of the strategy".[64] He believed that "we need to size the industry for the long-term capacity needed for warships, and commercial ships if we can be competitive".[65] We look to the MoD to ensure that the Maritime Industrial Strategies are produced, and the strategies implemented, to the planned timetable.

FIXED-WING AIRCRAFT SECTOR

35. Section B4 of the DIS considers the fixed-wing sector, a sector which includes fast jets, air transport, air refuelling, maritime patrol, airborne surveillance, uninhabited aerial vehicles and aerospace sub-systems.[66] In his Statement to the House on 15 December 2005, the Secretary of State for Defence said that, for fixed-wing aircraft, the RAF was in the middle of a substantial re-equipment programme, which included the introduction of Typhoon. The Joint Strike Fighter was expected to enter service in the next decade. Both of these aircraft were expected to remain in service for at least thirty years, and the MoD's current plans did not envisage the UK needing to design and build a future generation of "manned fast jet aircraft beyond the current projects".[67]

36. The Secretary of State said that the UK needed to retain the high-end aerospace engineering and design capability required to support, operate and upgrade Typhoon and the Joint Strike Fighter through life. As the focus shifted from designing and building new manned aircraft towards supporting them through life, industry would have to make that challenging transformation.[68]

37. We asked the Chief Executive of BAE Systems how his company would retain designers and engineers in the future, given the changes outlined in the DIS in relation to fast-jet aircraft. Mr Turner said that:

there are many, many years of further development for Typhoon and work for our engineers and for our shop floor in the years ahead. Joint Strike Fighter has a long, long way to go.

He was "sure there will be delays" on the Joint Strike Fighter, but that his company would want to play a role in supporting and upgrading that aircraft and also have the same role in relation to Typhoon, Hawk, and Nimrod aircraft. He considered that his company had a significant future to look forward to.[69]

38. The Secretary of State told the House that this was an exciting time for the aerospace industry. He said that the MoD would be investing in:

Lord Drayson told us that in relation to UAVs, there had been some good examples of smart thinking in terms of research and that this was an area the MoD was building on.[71] The DTI was funding a UAV project on the commercial side, but would be pleased to see "spillovers from that civil project into the defence side".[72] Mr Graeme Ferrero, Managing Director, Defence Technology, QinetiQ, said that the MoD's funding of the experimental UAV programme was welcome as a way of keeping skills in place "during the gap in new fast jet design".[73]

39. However, we have also heard from industry that the UK is still not spending enough on UAVs, compared to other countries. The Royal Aeronautical Society told us that it was imperative that the DIS proposals for "UAV and UCAV technology demonstration are fully implemented" as an onshore UK capability would be essential to facilitate UK participation in international programmes.[74]

40. In the fixed-wing sector, future work on Typhoon and Joint Strike Fighter will provide work for engineers for some time to come, and there will be an increasing focus on Unmanned Aerial Vehicles.

COMPLEX WEAPONS SECTOR

41. Section B7 of the DIS considers the complex weapons sector.[75] Complex weapons are defined as "strategic and tactical weapons reliant upon guidance systems to achieve precision effects. Tactical complex weapons fall largely into five categories: Air-to-Air; Air Defence; Air to Surface; Anti-Ship / Submarine (including torpedoes); and Surface to Surface".[76]

42. The DIS states that complex weapons provide UK Armed Forces with battle-winning precision effects. The UK has made significant investment in the upgrade and development of complex weapons: the investment in 2006 will be just over £1 billion, but will reduce by some forty per cent over the next five years following the delivery of Storm Shadow and Brimstone weapons. Apart from the Meteor programme, there is little significant planned design and development work beyond the next two years. The DIS acknowledges that this will present a substantial challenge to industry and MoD plans to work with the onshore industry to assess whether it is possible to achieve a sustainable industry that meets the UK's requirements. The DIS notes that there is potential for industrial rationalisation and consolidation.[77]

43. In its submission to the Committee, MBDA Missile Systems considers that the challenge is to implement the Strategy in time to avoid seeing the UK's complex weapons system industrial capability going into decline. The complex weapons sector requires greater clarity compared with other industries.[78] Mr Guy Griffiths, Chief Executive Officer of MBDA, told us that the forty per cent reduction in investment in complex weapons systems was not a great surprise to the company given the degree of rearmament that had taken place within the UK Armed Forces, but:

The Minister told us that job decreases were likely in the area of complex weapons, but that the important skills could be used in areas where there was growing demand.[80]

44. We note that substantial job decreases are likely to be seen in the complex weapons sector as the MoD's investment in such weapons is to be substantially reduced. We look to the MoD to work closely with this sector so that this important capability and the current skills are not lost.

32 Cm 6697, Foreword Back

33 Q 235 Back

34 Ibid Back

35 Q 283 Back

36 Cm 6697, Foreword Back

37 Q 235 [Mr Turner] Back

38 Ibid Back

39 Q 237 Back

40 Ibid Back

41 BBC website, "BAE confirms possible Airbus sale", 7 April 2006 Back

42 National Audit Office, Major Projects Report 2005, HC 595-II, Session 2005-2006, page 1 Back

43 Q 284 Back