Examination of Witnesses (Questions 280-299)
MR WARRICK MALCOLM, MR ANDY LEATHER, MR JOHN COLES AND MR HANS PUNG
11 MARCH 2008
Q280 Mr Carmichael: It seems to me, very much as an outsider looking in, that what we have here is a consequence of the relationship between the MoD and the defence procurement industry as a whole, which basically is predominantly reliant on MoD work. On one view the future carrier programme might just continue that situation and that may be a status quo that is not going to be challenged because we have another opportunity here for another good chunk of time that will see us through to the next crisis, if I can put it like that. What can you do as an industry, and as an industry forum, to break that cycle, to use the opportunities of growing the skills base and all the rest of it that the future carrier programme is going to give you, to develop at the same time an industry which can compete and can enter this market for, for want of a better term, an off the peg product?
Mr Coles: I think that is a question that you will probably have to ask the Ministry of Defence really because that is where it should lie. But let me give you an example. The export ships that Vosper Thornycroft actually produced and sold recently to export contracts were based very much on a contract placed for offshore patrol vessels for the Royal Navy. So you can, if you get the requirement right between the Royal Navy or the Ministry of Defence and the supplier, use that as a basis on which to launch export ships, and certainly the export orders for VT1 were very much on the basis of the concept and the support strategy that was developed for those ships. So working in harmony you can actually do it, but you just need to make sure that the requirement is right. So it can be done.
Q281 Mr Carmichael: So is it your position really that the profile of the ships that the MoD or the Royal Navy are going to be ordering has to change in order to drive this change? Is there not surely a role for the industry itself?
Mr Coles: Yes, there is; of course there is, and I think that that is a question you should actually put to the industry and to the Ministry of Defence about what sorts of influences may or may not be appropriate to increase the opportunities in this sort of market. Certainly for the OPBs that was done, I can assure you; that was a successful programme.
Q282 Mr Davidson: Could I follow up this point about the RAND report and so on, and I think it would be helpful if we had a copy of that.
Mr Pung: I will leave a copy with you.
Q283 Mr Davidson: Excellent, thank you very much. We have often been told that the French and Germans, particularly the French, manage to get all their contracts by bribery and the Spanish by state aid and the rest of it. I think you are saying that it is slightly more complicated than that and, unless I am mistaken, would it be fair to paraphrase that the British have something that they try to sell people, whereas the French, the Germans and the Spanish try to work out what the customer wants rather than just simply, "This is our produce—buy it." As I understand it, in the report there was as suggestion that the British yards should be trying to draw up new designs in line with customer desires and expectations; is there any evidence that that is actually being done?
Mr Pung: I think that there is evidence that that is being done. I think that is something that BAE Systems and VT Shipbuilding could confirm. I would not say that the UK shipyards are offering the customer something that they do not want, but I would more characterise it as some of our European neighbours are able to offer their potential export customers the sorts of ships that they have actually done quite a lot of work on for, for their own governments, whereas the UK shipyards, with the exception of VT and the example that John Coles has just given, they are designing a very complex Type 45 and then they effectively have to start from scratch to develop something that is simpler, smaller and less expensive.
Q284 Mr Davidson: Presumably in many areas the tasks presumably are the same that the British Navy wants, as the French and German, unless we operate at an entirely different level, and is it the case then that the Royal Navy are gold-plating and making its ships unnecessarily complicated that nobody else in the world bar us can operate?
Mr Coles: I think you will have to ask the Ministry of Defence that question.
Q285 Mr Davidson: But you are here, you must have a view on these things.
Mr Coles: We have to look carefully at all the capabilities that are being asked for and assure ourselves that this really, really is necessary. In all these issues it is that the last 90% or last 95% actually really costs you the money. The question is how much of the 80% that is left you have to pay for and is it worth it, and that is a trade off that you have to make during any phase of design. All projects go through that phase and it is an interesting question that you should put to those now charged with that responsibility—how much are you going to pay for the last bit of capability, and is it really worth it? That is true of all projects. In some areas you cannot afford it and in others you might be able to relax it—this trade-off in capability and cost is a crucial area at the front end of the acquisition process and bedevils all projects. But that is a question that I have certainly faced in the past and it is a crucial question, how much you are going to trade off in that early phase because that determines the cost.
Mr Pung: I think you do see effectively the law of diminishing returns coming into play as you are getting the final 10% of your requirement. But I think I probably would say that the ships that are fielded by the Royal Navy—and this is a personal opinion—are probably more capable and asked to do much more than what one would see as the comparable naval ships from other European nations. As way of example I would point to the US Navy's record of export orders, which is almost non-existent, as a similar case where you have ships that tend to be bigger, more complex, more expensive and the difficulties of exporting simple versions. The US solution to that is to sell off their old warships to other countries, something that does happen in the UK but is not of great benefit to UK industry.
Q286 Mr Wallace: Just a slight note of caution, Chair, that we have to view it within the environment of the British strategic requirements and put it in context, that where we may be talking about naval military sales I do not think that Britain wants to ever ape the whole French or Spanish defence industry because that is actually a complete mess in comparison to us. So they may have a competitive edge in a few of their naval shipyards but I would not like to sell French fighter planes at the moment because they are not being sold. So you have to put it in perspective, and we should not forget that Britain made a decision based on interoperability and alliances to very much focus towards our relationship under Geoff Hoon, when he was Secretary of State, and that is one of the reasons why we go for that extra capability, in other words to work alongside the United States, that the French, the Germans and the Spanish do not bother with. I want to ask the question, when you talk about 60% of the European export military market, how many ships are we actually talking about? How many ships have France, Germany and Spain sold in numbers?
Mr Pung: It is in the report; I would have to reference it.
Q287 Mr Wallace: We are not talking dozens and dozens and dozens, are we?
Mr Pung: We are certainly not talking hundreds; we may be talking tens, over a period of time.
Q288 Mr Wallace: It is not like 300 ships will be built in the Clyde tomorrow morning.
Mr Coles: It is handfuls.
Mr Pung: You are absolutely correct, yes.
Q289 Mr Davidson: We managed to get orders from Dubai; why can we not get orders from other people? The anxiety has always been—coming back to the fat and lazy analogy—that the defence shipbuilders just simply wait and the MoD coming along and bailing them out time after time after time. What we have tried to address on BAE Systems in particular is the point that we now have an opportunity when order books will be full, to develop designs and to go for competitive markets, and the skill sets will presumably be there. Is there any evidence that they are actually managing to get their act together in a way that will allow them to make their own way in the world, once the carriers are finished?
Mr Coles: From my knowledge they are certainly trying very hard to actually do that now.
Q290 Mr Davidson: With any degree of success?
Mr Coles: You would have to ask them; I do not know how successful they are in their current search.
Mr Pung: I think the other thing to note is that export orders are notoriously fickle and they take a very long time to come through. I certainly know that there are efforts being made to develop the export market, in particular up on the Clyde, and I know that it is a very focused work on the south coast as well. To the extent that one is able to predict success I think is very difficult.
Q291 Mr Wallace: We do have successful—not new build—ongoing business of our second hand or used models being refitted, and new systems—there was the Upholder class of submarines that went to the Canadians. That slightly undermines some of the efforts of our industry, that where there is a gap in the export market we are doing government-to-government deals with second hand British kit, so why buy new when you can get from us at a discount?
Mr Coles: All the ships that leave the Royal Navy end up in someone else's hands after a small modification.
Q292 Mr Wallace: Even Hermes, I notice, is still going around.
Mr Coles: It is indeed.
Q293 Mr Wallace: With the Indian Navy?
Mr Coles: It was.
Mr Wallace: In a sense we have such a vibrant second hand market, that is slightly—
Mr Davidson: So our role is to be the Arthur Daley of the defence industry.
Mr Wallace: It is just a metal hull; it is what you put in it that counts.
Q294 Chairman: Before you leave that I had better ask one question. Obviously you know that there is an MoD commitment and the British Government commitment with the shipbuilding industry in Scotland and defence industry in Scotland and that is what sometimes worries me, that probably if in six years' time or eight years' time the Conservatives come they will not have the same degree of commitment with Scotland. So what will be the future then in those circumstances?
Mr Coles: I am not a philosopher, Mr Chairman, but pretty difficult, I guess.
Q295 Mr Davidson: Just arising from things that might happen in the future, were we in a new constitutional position where the defence industry is based in Scotland but competing for Royal Navy orders, say, on the same basis as the French—that England was the home market, so to speak—do you envisage that being beneficial, SBAC?
Mr Malcolm: Again, I would decline to say anything to that.
Q296 Mr Wallace: The UK/US Trade Treaty that is in negotiation at the Senate at the moment, was signed by the United Kingdom—one of the best things that your government did—which was supposed to be allowing IP flow between the two, that is a Treaty that would not cover Scotland should Scotland succeed from the United Kingdom. Therefore, do you think that the current Treaty negotiations will benefit your Members in Scotland? Will it give them an extra edge compared to their European counterparts?
Mr Leather: As we currently stand I think it would, but if you are taking the point—and I think you said Scotland succeeding, I think it would be wrong for us to comment. I think a lot depends on what comes out of it.
Q297 Mr Wallace: The UK/US, take the Trade Technology Treaty that should be ratified by the spring, is that a benefit to the defence industry in the United Kingdom?
Mr Leather: Yes, it is.
Q298 Mr Wallace: Therefore, if anybody were to leave the United Kingdom they would not have the same benefit of that Treaty and does it give your members a competitive advantage to those people outside the Treaty? If you are France and you are in a wholly French business doing business with the United States, the biggest export market for you, and you are not covered by this Trade Treaty, are you more or less advantaged than yourselves as a UK industry?
Mr Leather: I would say less advantaged.
Q299 Mr Wallace: So anyone who leaves the United Kingdom would probably be in that situation.
Mr Leather: In a similar situation, yes.
Chairman: Can we move on to defence programmes and Scotland.
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