Examination of Witnesses (Questions 220-239)
MR WARRICK MALCOLM, MR ANDY LEATHER, MR JOHN COLES AND MR HANS PUNG
11 MARCH 2008
Q220 David Mundell: What about the competition from within the United Kingdom for the location of the aerospace businesses in particular?
Mr Malcolm: Anecdotally, when you speak to the companies certainly they do get a lot of competition, a lot of quoting from other sectors. Aerospace Wales, for example, gets a lot of recognition for the work they do trying to attract inward investment to Wales, and it is a very competitive market; and each of the regions is trying to develop its own USP, if you like, and at the moment in Scotland it is our R & T and our skills that is the crucial thing to define us and separate us from the competition.
Q221 Mr Walker: Just very briefly, I have the SBAC evidence here and one of the things that interests us is the fact that many of these jobs in the aerospace and defence sector pay quite high wages and in your evidence it says the 16,000 people in the industry earn on average 34% more than the Scottish average wage; what is the Scottish average wage and how much are they earning on average?
Mr Malcolm: If you give me a moment to find out the figure.
Mr Walker: So that we can quantify exactly how much these jobs are paying on average. You can send a note if you want.
Chairman: Yes, you can send us a note.
Q222 Mr Wallace: Just following on, I notice your breakdown over Scottish figures but when it comes to exports Scottish defence is £2.2 billion in 2007; 66% of the UK defence business is domestic growing to the United States, 23%, 24% on a growing trend. How much of those Scottish business now have a higher proportion of export so that Raytheon are doing all their work for the United States or Europe, or 80% and are therefore more independent as defence contractors from an MoD budget than they used to be in the past?
Mr Malcolm: If you look at the latest results in our survey it suggests that aerospace is exporting 69% of sales, which is £682 million, with defence exporting 44% to the value of £306 million; and naval exported 59%.
Q223 Mr Wallace: In Scotland?
Mr Malcolm: Yes. Sales were £362 million, so the sector is exporting significant amounts; there is no doubt about that. But I think we would all say that the MoD contracts remain crucial to the continuation of the sector and its success.
Q224 Mr Wallace: What about the growing electronic sector? How much of that is exporting? I am sure we do not export a great deal of naval but we probably export an awful lot of radar, Thales do rays, which are clearly of interest to the United States.
Mr Malcolm: If you look at the defence figure of 44% that would be predominantly the electronics side.
Mr Coles: In recent times they have exported ships from Scotland but very little is actually exported from Scotland at this point in time. There are opportunities, of course, as we have talked earlier, building on the programme you can actually develop something, but as of today this is just a little dip in this particular time there are not actually any at this point in time, although there is a lot of discussion going on with other overseas governments.
Q225 Mr Wallace: Scotland's growth in the defence sector at the moment owes a lot to the United States and third countries, is that right?
Mr Coles: Aerospace, I would say. The growth is, if you like in the character as a big peak.
Mr Pung: I think it is also probably fair to say that for companies like Babcock Marine, they have been able to diversify some of their product ranges and actually where they were predominantly in naval ship build and ship repair they are now doing work in the modular construction industry—Heathrow Terminal 5, hospital ward modularisation. So it would not be export work in the traditional sense but it certainly is work that would have been traditionally done in a naval ship repair yard and now they are doing it in the wider construction industry, in Scotland but also in other parts of the UK; and I suspect wider, but I do not know.
Q226 Mr Davidson: Could I just pick up a point relating to definitions because in the SBAC submission we have aerospace 43%, defence 30% and naval 27%. Clearly naval is also defence and presumably some of the aerospace is also defence and since we are specifically looking at employment and skills for defence in Scotland could you clarify some of that for us? Secondly, I want to be clear about the extent to which the defence work actually makes the rest of it, so to speak, possible? Picking up your point about Babcock, Babcock, as I understand it, would not be able to fabrication for Terminal 5 if they did not have a core workload which flows from defence. I just want to be clear about whether or not pulling defence away or anything happening to defence would bring all that down or whether or not it is sufficiently stable and secure to carry on, none the less.
Mr Malcolm: My understanding in terms of the definitions from our survey is that aerospace should exclude defence work, and the reason we separate naval out is because in contrast to SBAC UK SBAC Scotland includes naval because it is such a significant employer in Scotland. So aerospace is entirely separate—unless somebody has incorrectly filled in the form; that should be freestanding aerospace, and then you have defence and naval separate.
Q227 Mr Davidson: The extent to which everything is dependent upon the core of defence, would that not apply at all to the aerospace sector? It would apply presumably entirely virtually to naval and entirely to defence.
Mr Coles: Babcock, because of the reduction over the last few years in some of their work, have diversified into these areas quite well—Terminal 5 is a good example and there are others—using their core skills and their core workforce to actually diversify in competition. So they have done extremely well in that area using their core skills which they have in the wider UK market, not just in Scotland.
Q228 Mr Davidson: I understand that, but what I am not clear about is where in this category of 43, 30 and 27, for example, would Babcock's work on Terminal 5 be, or as a company in a single sector as it was spread over two sectors?
Mr Malcolm: I think if you look at the example of BAE Systems regional aircraft their sales will be partly in aerospace and some of it will be defence, and they are saying, for example, that they will be doing work on the CBF programme. They are using it, as my colleague said, with the key skills to try to manage some of the peaks and troughs of this work. Certainly they would say yes, that they do need some of the MoD work and the defence work to help manage that in the natural cycle of the business.
Q229 Mr Davidson: Is it fair for us to assume that if the defence work was lost, was pulled that the whole edifice would come crashing down?
Mr Malcolm: It would present significant challenges for the sector, there is no doubt about that. I do not know if I would go as far as to say that the whole edifice would come crumbling down, but it would be extremely difficult for the sector, yes.
Mr Pung: I think the same would be very true in the naval sector, so if MoD orders were absented from those yards that are currently performing them I think they would find it very difficult going forward, and I think that some of your previous witnesses testified to that fact. I would concur with their testimony.
Q230 Chairman: SBAC's submission states that, "The aircraft carriers offer Scotland a `once in a generation' opportunity to secure and develop its skills base." Could you tell us what will be the future of the shipbuilding industry post the aircraft carrier?
Mr Malcolm: I think previous witnesses have stated the case for their individual companies pretty clearly saying that there is some concern that the future aircraft carrier will secure jobs and will not grow and will not present many more new job opportunities, and it is post-carrier that is the concern for the yards in the Clyde and securing some work for that period is what is important for them at the moment.
Q231 Chairman: When we were lobbying for the ship building industry and MoD orders for the government shipyard and the Scotland shipyard we were told repeatedly by BAE Systems and other industries that if we escaped from the MoD that will help us to pull the investment from abroad and orders. Do you think it will be sustainable after the MoD orders are gone? You will be looking for the long-term future of the shipbuilding industry in Scotland.
Mr Coles: Can I give a view on that? Clearly the carrier programme presents a very peaking demand to build these very large ships, across the UK but also in Scotland. You would not want to maintain that capability and skill-set for ever; you would want to have a lower level, if you see what I mean, from the peak demand to sustain a capability in the future to support the warship and to meet the Navy needs, and you have to decide that level of skill sets in terms of people, numbers of people in future years, so that you can maintain that because without that you cannot produce anything. So I think you have this peak and you have a levelling off—I am sure that Mr Pung can advise you what that is—to sustain the capability in the out years to post-carrier, and it is key that that skill set is maintained because without that you have difficulty producing this.
Mr Pung: Another thing to say is that as you build up the skills that are necessary to reach this peak in demand that the aircraft carrier programme presents, should those people exit the industry—and we know that there is quite a free flow of skills between the shipbuilding industry and other industries such as automotive, oil and gas and aerospace—you will have had the opportunity to train a solid set of skills, particularly around the technical skill base, that then can move into other areas of the economy and continue to contribute. So it is not that the skills and the jobs that are generated by the aircraft carrier are only giving benefit to the Royal Navy or Royal Navy programmes, but as those skills are used to support the aircraft carrier programme once that programme finishes some of those skills should also be able to move into the general economy. But I would also agree with John Coles that it is absolutely critical to maintain a skill base within the naval industry to be able to carry out those programmes going forward.
Q232 Mr Carmichael: I would like to explore with you just what happens with these people because the analogy we have heard used is that the post-carrier period for the industry in Scotland is falling off a cliff—a high level of employment but after that there is nothing. In terms of partnership working you guys in your submission quite fairly point out a significant number of issues to be addressed. If you have regard to page 4 of your own submission, 5.2: "We believe skills development is fundamental to the future success of our sector," and you go on to say, "Many school leavers and students do not meet the sector's requirements or expectations. There is too low a number of UK science and engineering graduates who are able and willing to work in the Scottish industry. There are too few qualified teachers in science subjects. There is a shortage of appropriate and key skills which is harming productivity," and the list goes on. It is a pretty bleak picture. I think it is perfectly legitimate for you to make that point and I think it is perfectly fair for you to be saying that this is going to be a significant boost to Scotland's economy, especially in the manufacturing sector, and that the public sector, especially educational skills and training, have to up their game. But is it not really incumbent on you to be saying that there is the other side of that bargain which involves you having some longer term commitment post-carrier?
Mr Coles: I think that is the intention—I am sure you will speak to the Ministry of Defence about that—for a longer term relationship to sustain this capability post-carrier, in terms of all the skill sets—the manufacturing, design, installation commission and testing. If you do not have that set you cannot produce it long-term, and I am sure the intention is to maintain that capability post-carrier at an agreed level.
Q233 Mr Carmichael: So what are your members doing in that regard, then?
Mr Coles: We are making sure that the skill base that the UK intellectual base needs is recognised by committees such as this, so it can actually plan and influence maintaining that skill set in the longer term, to get new graduates in, to get new people interested in the industry so that it is sustainable and it has that capability. That is the job of UKNEST, to influence those decision-makers to do that so that capability is maintained in the industry.
Mr Leather: From an SBAC perspective we have taken on board the recommendations of Leach and are trying to develop the tools such that we create a demand signal for schools, as opposed to what we have at the moment, which is a supply signal, and people taking that up. So we are rolling out tools and piloting them at the moment so that companies can actually start determining what schools they need for the future to ensure that we get a demand signal out there as opposed to what we have at present.
Q234 Mr Carmichael: It is all great that Scotland invests in the development of its skills sector and all the rest of it—good stuff. You have a highly qualified, trained, experienced workforce, but if the work goes they will follow. Where is the long term interest for Scotland plc in the Scottish public sector, especially the educational and skills sector in keeping their side of the bargain if all you are going to say is, "Some of you can go and work in the offshore oil and gas industry, which is in decline anyway, but there might be a better opportunity in aerospace and that is it, you are on your own." What long-term commitment are you able to give?
Mr Coles: The long-term commitment comes from the centre of government, does it not, which bits it is going to actually fund long-term? And you would have to get that from the Ministry of Defence, which bit it is going to sustain to maintain the national capability—I am talking about particularly in the naval sector. Without it you have a difficulty maintaining the required skills set to build, operate and maintain such complex vessels.
Q235 Mr Carmichael: So you see the future of your sector just being to build for British capability?
Mr Coles: And exports as well—it is the whole sector. You have to have these fundamental core skills in design and manufacturing and if you do not have that you are not going to produce it, and you have to sustain it; you cannot just let it wilt on the vine you have to sustain it, and if you do not do that you have lost it, you have lost it nationally and internationally for ever, and it is a long time to recover. So you cannot just let it wither on the vine; it has to be active, proactive encouragement to do it across the sector, otherwise you lose it.
Mr Leather: Scotland has been very successful in attracting new aerospace companies into the region, so there is clearly a skill base already there that is attracting people, or an environment, and I think that it is a collaboration that is required in terms of retaining that environment to encourage people to come and invest in Scotland; and, yes, industry has a role to play in that, but, equally, so has the public sector, and I think it has to be working together. From that you can then develop the skill set, you can develop competitiveness because people do have choices now, particularly in the aerospace sector where globalisation and consolidation is the name of the game—industry does have a lot of choices. So we have to fight very hard for the UK and Scotland.
Mr Pung: I think there are probably two points to add as well from the naval sector. Firstly, the current skill base, particularly around professional engineers in the UK in general—and I think it can be generalised to Scotland—is that that workforce is aging, about half of that workforce is over the age of 45. So there is a requirement to train new blood in these particular core skills, and certainly some survey work that we have undertaken at RAND has suggested that it takes somewhere between four to seven, four to eight years to train some of these skills to a level where people are at a higher working proficiency. So if you have a programme such as the aircraft carrier programme or some of the other big capital programmes that are going on in the country it gives an opportunity to train that next generation so that they are able then to sustain those skills going forward.
Mr Leather: Again, just picking up on aerospace and relative to the carriers would be this recognition of trying to retain a competitive environment. We have launched through our members something called the SC21—the Supply Chain 21 programme—which is endeavouring to ensure that we retain a globally competitive UK supply chain. That programme is in its implementation phases and not only does that try and raise the level of the UK supply chain, it also creates a short-term demand signal for skills, and when you start doing the relative analysis of companies you find out where their shortages are. Not surprisingly, it is not just that we are short of engineers; it is that it is short of procurement people, it is short of good programme people, it is short of leadership. So there are a number of initiatives underway, which hopefully we can build on to maintain and help maintain that environment to make Scotland and the UK a place where people want to invest.
Q236 Mr Wallace: We have talked about the MoD makes its mind up over what core capabilities we would like, and it clearly produced a defence industrial strategy, a defence technology strategy and some other strategies. In the light of that and in the light of the fact that there is a lot of focus, maybe perhaps romantic focus on the naval aspect of Scotland, is the defence industrial strategy good for Scotland and where in that strategy do you think it helps project or motivate growth within the Scottish defence aerospace and naval industry? In other words, where would you see the growth in those three sectors within your membership? Is it actually navy or is it going to be aerospace, defence or defence electronics and everything else. And does the defence strategy do enough to make sure that in the naval sector, its core is protected?
Mr Coles: I think the DIS was a brilliant document actually because it laid out a strategy for industry to follow and therefore to actually see what they were going to invest in what was going to be core skills, and that is fairly clear in the documents, so I think what the industry has to maintain, whether it is in Scotland or the UK, is their core skills and the Ministry of Defence indicated what they will be. I think it would be unrealistic, frankly to predict growth in the naval programme in terms of a bigger and larger Navy and you cannot actually see that happening. But on the export side, yes, and the feeder systems through the supply chain into the aerospace systems definitely because it gives the lead. Whether they come from Scotland or the UK or internationally it is difficult to say but what industry is going to be sustained is clear in the DIS and that gives a fairly clear indication of the things that are going to be done; but I think it gives a lead, it does not actually give the clear commitment to the whole programme, if I can use that phrase. But I think it is a good indication of where things are.
Q237 Mr Wallace: But in the sectors that Scotland is strong in, does the DIS do enough to protect the naval core skill set?
Mr Coles: I do not think the DIS was written specifically for Scotland, I think it was written for the UK.
Q238 Mr Wallace: But in your experience, given knowing where some of these programmes and trial directions are going to be, is that going to be good news?
Mr Coles: Given that the concentration of the core skills for certainly large complex warships is in Scotland the answer must be a clear indication, yes, because that is where the skills sectors are.
Q239 Mr Wallace: Does it do enough to support for the future those other sectors, the aerospace and the defence sectors that could probably be a growth export market for Scotland?
Mr Leather: It is a good start but I think there is a lot of work needed to be done, particularly around the defence technology strategy and the defence technology plan, to ensure that we maximise the benefit in terms of the need for the UK MoD and in terms of the international industry. What I mean by that is that it is no secret that the RO8 is a challenge but if there was industry and MoD working together to perhaps relax things around IP to make things more exportable—and there is a lot of work going on in that area—that, I think, would give an environment where perhaps industry would be more readily keen to invest if it had a larger market; if it is just a small MoD market then clearly UK plc is not necessarily keen to invest. If you actually create something whereby the market is larger then that will create investment or help stimulate investment. So it is a good start and there is a lot of good work ongoing to try and build on good starts being made.
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