Memorandum from Mr Tony Edwards
I believe that Lord Drayson and his team should be
congratulated for producing a report of considerable clarity in
such a short space of time. However, the Defence Industrial Strategy
raises a number of important questions which must be addressed,
not least by UK industry. This also applies to SMEs—whose
future has not yet been addressed in DIS—as well as the
larger companies.
It is my impression that the Defence Industrial Strategy
implies that the Government sees the future of the UK defence
industry primarily as a provider of sophisticated through-life
support systems and services for platforms that will increasingly
be designed, engineered and manufactured overseas.
Perhaps one could point to shipbuilding as an exception
to this proposition. But even here the prospect is for just one
last round of orders for this globally less competitive industry.
As for land systems, when BAESystems acquired Alvis/Vickers (which
had run out of orders) effectively they bought a capable and successful
Swedish armoured vehicle manufacturer with its headquarters located
in Newcastle! Ironically, the most globally competitive sector
of the UK Defence Industry (Aerospace) has already heard "last
orders" with Eurofighter/Typhoon/JSF/Hawks. The only ray
of hope in terms of manufacturing is the UAV demonstrator programme.
The MoD's position is eminently understandable, given
the budgetary constraint of £30 billion per annum and the
demands of an expeditionary foreign policy. Tight defence budgets
are not, of course, just a UK phenomenon. The same challenge faces
all European countries and when it is considered that the United
States spends twice as much on defence as Europe on half the number
of troops, the gulf becomes starkly apparent.
But what implications does this new era have for
UK-owned and UK headquartered defence companies? There is only
so much support services business to go round and in any case,
the business that will be on offer won't necessarily fit their
capabilities. What is there to keep their focus and centre of
gravity in the UK when there are no more opportunities to prime?
We can see what has happened already. Valuable UK-owned
defence and aerospace companies have already sold themselves to
foreign companies with longer term perspectives and/or foreign
government resources behind them. Lucas Aerospace has gone to
Goodrich via Varity and TRW; Messier-Dowty is now part of French
government-owned SAFRAN. Racal is part of Thales; Claverham is
part of United Technologies; QinetiQ/Dera is jointly controlled
by Carlyle Group of the US; BAE Airbus is part of EADS. Shorts
is part of Bombardier; Westland Helicopters is part of partially
government-owned Finmeccanica.
The few remaining British companies, BAESystems,
Rolls-Royce, Smiths Aerospace, Cobham, Meggitt and Ultra could
well conclude that their best option will be to either sell themselves
to the highest bidder (most likely French, Italian or American)while
their value is at a maximum, or move their headquarters to a more
supportive location (eg BAESystems and Rolls-Royce to the US).
Although relatively highly valued in the UK their market valuations
are low by global measures.
Would this matter if it did happen? I believe it
would. UK MoD has few enough "British" defence levers
to pull as it is. And Britain's last British-owned engineering-based
globally competitive manufacturing industry will disappear forever,
with unfavourable consequences for the country's training, employment
and balance of payments.
Further, UK industry will be waiting to see just
how tangible the move away from "value for money comes only
from competition" will be. How workable is this, given the
ever accelerating globalisation of the defence industry—with
the associated cost efficiencies it brings? Would it be cynical
to suggest that apart from some window dressing to accommodate
Britain's "champions", the procurement process will
continue pretty much as before?
So, by way of the Defence Industrial Strategy, the
future state of the UK Defence Industry is becoming clear. The
more important parts of the industry will be owned by foreign
defence prime contractors. They will serve two purposes for their
foreign owners:
(a) support of their equipment in use by
the UK armed forces;
(b) "pull through" in a marketing
sense of more foreign designed, engineered and manufactured equipment.
Of course it's not industry alone that must
meet the challenge of the Defence Industrial Strategy. The history
of defence procurement in this country is at best somewhat chequered.
The onus is on MoD to accept the reality of their situation; to
stop factoring in programme delays (FRES, Air Tanker, CVF) to
save money today at the expense of tomorrow, or worse still sacrificing
today's capability (Ships, Sea Harriers, Jaguars) to protect tomorrow's
dreams and to come to terms with the fact that their wish list
is substantially bigger than their available budget. Let the reality
displayed by the Defence Industrial Strategy be reflected in our
procurement community too.
These are my views, based on more than four decades
of experience in the defence and aerospace industry gained in
the United States, Canada, Scandinavia and the UK.
26 January 2006
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