Examination of Witnesses (Questions 120-131)
ROLLS-ROYCE
GROUP
21 FEBRUARY 2008
Q120 Chairman: For the sake of clarity,
when you say "we" there, you mean UK PLC?
Sir John Rose: Yes, the UK has
been at the forefront of understanding the importance of the issue.
I do not think we have been at the forefront of the industrial
response. Gideon Rachman wrote an article in the FT recently
suggesting that the US ought to do more, and actually I wrote
a letter to him, saying, "Look, actually they are doing more
than anybody else financially in trying to develop the responses
to climate change". They are doing it for two reasons, one
is climate change and the other is energy security. We are not
yet very active in the UK in the industrial responses to climate
change other than to buy in technologies from other countries,
so I think there is an opportunity to do things that are based
on competencies that exist in the UK. All particular requirements
we satisfy in the UK perhaps more than in other countries, so
we would be right to focus on tidal, for instance, because the
UK is one of half a dozen places where there is a real opportunity
to use tidal streams to generate electricity and we do have some
of the competencies to respond to that. I think that there are
a number of things that we could do to build on the capabilities
that we have with companies like Rolls-Royce or Ove Arup or Halcrow,
a whole range of companies which really do have the technical
expertise to realise some of these industrial solutions which
are going to be big and complex, really difficult, and the truth
is that it is going to need a mixture of government, large companies
with significant capability and innovative SMEs because many of
the skills will only exist in the large companies. The SMEs may
be very innovative, but they will have a limited ability to deliver
because these will be challenging programmes financially and technically.
As I said, on the fuel cells, we started the technology work in
the 1980s and we have well over 200 engineers working on it at
the moment with a whole range of skills from being able to deal
with clean-room ceramic processes through chemical engineers,
through nuclear physicists, through aerodynamicists and aerothermal
engineers and so on. That range of skills simply does not exist
in a smaller company that has not been able to pull those through
on other projects, and we do have the ability to understand the
risks and costs of industrialisation which is where many of these
opportunities fail. For us, it is pretty challenging, but there
are real opportunities, I think, if we focus on a number of areas
that are relevant to answering the questions about climate change,
for us to develop our high-value-added manufacturing around industrial
solutions to climate change.
Q121 Mr Bailey: Can I just take you
back. Earlier, you pointed to a number of examples in Canada,
the US and Germany in the aerospace industry where government
and industry had got together to focus on potential innovative
opportunities. Do you think there is a need for something comparable
to take place in this country over the climate change agenda?
Sir John Rose: Absolutely.
Q122 Chairman: Before you answer that,
I would just ask my supplementary. You said that you were behind
compared with the US. We have some very big and very successful
international companies which could respond, so why are we behind
the curve, coming off the back of Adrian's question?
Sir John Rose: The question was:
is the Government behind the curve? The answer is yes. We are
trying to seek access to those funding streams in those countries
which are ahead of the curve, but, just to read my letter to Gideon
Rachman, " ... the US Department of Energy established the
advanced research agency, ARPA-E", and the remit of ARPA-E
was "to rapidly develop `transformational clean energy technologies'
and it has a budget of $4.98 billion over five years. Elsewhere,
the US Hydrogen Fuel Initiative has funding of around $1 billion
over six years, while the state of California alone is spending
$2.9 billion over ten years to support just solar projects."
So the scale of funding is significant and, interestingly, one
of the points I made in the letter is that we led Europe in alternative
and renewable energies in the 1970s. We do not now.
Mr Blundell: If I can just add
a brief coda to Sir John's description of ARPA, there are two
aspects to those US programmes which I think are important which
I very much hope that the Committee would look at in the course
of their inquiry. If you look at ARPA-E, which is the energy programme,
the practice in the US is to appoint entrepreneurial managers
to actually run those programmes for defined periods of time and
they cannot stay for more than four to six years. The reason for
that is that they want this programme to be run in an aggressive
and fast manner. The second issue comes back to something Sir
John was saying earlier, that 50% of the ARPA-E budget is devoted
to demonstrator programmes. These are programmes designed to pull
technology and science through into products that can be marketed
successfully in the marketplace, and I think there is a lesson
there for the UK which I very much hope the Government will follow.
Sir John Rose: Absolutely, and
I think that is entirely consistent with the message that we have
put to DBERR and to the MoD, that historically we have done more
on demonstrators and demonstrators are really, really important
in establishing whether technologies are going to be viable. Even
when you have established they are viable, there is still a lot
of time and cost associated with realising their potential in
the market, and these long-cycle businesses do benefit significantly
from early-stage involvement from government, as an enabler.
Q123 Mr Bailey: Rolls-Royce has a
history of working closely with universities through the university
technology centres, and that is obviously current products or
past products. How has your relationship changed in the last ten
years and, just picking up the theme we have developed over climate
change technology, do you think there is a potential for the same
linkages with universities in this particular area of developing
technology?
Sir John Rose: To answer the second
part first, yes, there is. The objective of what we call our `university
technology centres' is to work on problems and opportunities,
so it is not just on current products, it is also on what will
be the areas of future value, and we try and align ourselves with
universities that are world-class in particular areas of technology.
We work with Genoa, for instance, on fuel cells and we have a
university technology centre there, and we are working with Nanyang
in Singapore on the manufacturing techniques particularly associated
with fuel cell production, so we have a whole range of university
technology centres which are a really important part of our activity.
I think they started in the early 1990s and we have 29 today,
I think, 20 of which are in the UK and, of the last nine, eight
were outside the UK and one was in the UK. That is not a reflection
on the UK; it is just that we have found opportunities to work
with universities globally in Germany, the US, Singapore and elsewhere
where there are particular areas of expertise which are relevant
to us, so I think it is a very, very important mechanism. It allows
us to work with academia and effectively there are specialists
who want to remain in the academic world whom we can get access
to, it allows us to see research students and postdoctoral students
at work and they can see us and they can choose whether they join
us or not, and it leverages our money and their money into areas
which we think have commercial applicability or are going to solve
particular problems that are specific, so I think it is a really
good mechanism. There have been some challenges recently with
the costing mechanisms which have possibly made it slightly less
attractive in the UK than it was and it is called, I think, `full
economic costing' which is a requirement that the Treasury has
put on the universities. We think it is really a very important
mechanism for us and it is a very helpful way of aligning the
university activity with the market.
Q124 Mr Weir: Rolls-Royce, I understand,
has benefited by around £22 million since the introduction
of the R&D tax credit. Can you tell us, has the tax credit
made any difference to your investment plans and is it an effective
policy tool in promoting innovation?
Sir John Rose: It is a helpful
part of the armoury for the UK because it incentivises those who
spend on R&D to continue to do so in the UK, so I think it
has been a benefit. By definition, what it is doing is allowing
the company to make the priority decision about where it spends
its money because it is in a sense non-judgmental, so I think
it is a good mechanism. My point on R&D support in the UK
is not that individual mechanisms are always good or bad, but
the quantum relative to other jurisdictions is less and, even
though we have seen a modest increase in the last few years, relative
to the sorts of benefits that are provided to our competitors,
it is very, very modest.
Q125 Mr Weir: But how does it compare
to the similar mechanisms in the other markets in which you operate,
in quantum terms?
Sir John Rose: Hugely significantly
different. Net of repayments under launch investment, we receive
almost no net benefit in the UK on R&T, single-digit millions,
when we are talking about hundreds of millions to individual companies
in the US, so the difference is very significant. What they will
have is an array of mechanisms, so in the US you will have a range
of mechanisms from the DARPA and ARPA-E, Department of Energy,
DoD and so on and you will get tax credits and you will get incentives
associated with defence expenditure, so there is a portfolio of
mechanisms, some of which are like a tax credit, in a sense non-judgmental
about what you are spending your money on, but saying, "You're
spending money on R&T; it qualifies. It is a qualifying sort
of R&T and, therefore, you will be a beneficiary", and
some of it will be funding where companies need to bid against
a specification that is defined by the DoE or DARPA or whoever
and they will compete for access to that funding.
Q126 Mr Weir: You mentioned DARPA
which previously Mr Blundell also mentioned. Do you think the
UK would benefit from the existence of an organisation such as
DARPA?
Sir John Rose: I think we would
benefit from having a view about the sorts of technology sets
we would like to have available in the UK. Whether DARPA is the
right mechanism or not, I do not know, there are many different
alternatives, but it is certainly one of them. What distinguishes
most of the countries that we deal with is that they will have
national programmes of activity of one sort or another, so in
India they have nuclear programmes, defence programmes and aerospace
programmes which are nationally driven, but against which they
will get private industry to invest. You will have seen announcements
recently that Tata, for instance, is collaborating now with a
number of non-Indian companies to develop technologies which they
believe are relevant to the aspirations of the Indian Government,
and they were being encouraged to do that by the Indian Government
and there will be funding available to enable them to develop
capability.
Q127 Mr Weir: But is the important
point of that the strategic vision, if you like, or the funding
that goes with it? What is the attraction for a company like yours?
Sir John Rose: Well, it is clearly
both. We have our own strategic vision. The interest for us is
where it aligns with the Government's and, where the Government
is clear, it is easier for us to work out that alignment so that
we know exactly what it is that Singapore, Germany or the US are
looking for and we can decide whether it is in our commercial
best interests or not and we will put our money behind it if it
is. The lack of that clarity means that it is really quite difficult
for us to work out whether we can align because essentially we
are having to persuade an institution that does not have a view
of our view, and that is not as easy and it is very time-consuming.
As I illustrated, the difference in timescale between ADVENT and
EEFI was tenfold and that is very hard work for us. It takes a
lot of people a lot of time to try and work out when we are aligned
and it would be better if we did not have to go through that process.
Now, some steps were made in the Defence Industrial Strategy and
the Defence Technology Strategy in trying to get a greater alignment
or to make possible a greater alignment between what industry
did and what the customer wanted so that there was a greater transparency
and that is a helpful process.
Q128 Mr Weir: But in a sense, does
it not put innovation on its head in that the Government or DARPA
or whoever are saying what they want rather than a company coming
up with new innovative ideas?
Sir John Rose: I think that people
have to come up with new innovative ideas to meet the criteria
that the Government is setting. We will be innovating in our response
on ADVENT, but they can define the outcomes they want. They are
not saying, "This is the solution we want". The solution
will be up to us and, by the way, they will be running two alternatives.
GE is working with us or not with us, but they were a joint winner
as they chose two companies, us and GE, and we will end up with
different solutions almost certainly to the question that is being
posed, but we believe that we will get value more broadly from
the technologies that are developed in response to that request
that we will be able to use elsewhere, and that is our judgment.
You are sort of making, I think, a `picking winners' point which
has been one of the things that has informed the unwillingness
to have a strategy historically. I think the way you insure yourself
against picking winners is by making sure that companies co-invest
because we are not going to waste our money on things that we
do not think are useful; it is not in our best interests or our
shareholders' or employees' best interests. When we treat the
30% or the 50% of the funding we put in as 100%, we still need
to get a return on it and there was this perception that, if it
was 50-50 funding, we would somehow think it was free. Well, it
is not, it is just less and we take it very seriously, so the
way to insure yourself against the `picking winners' criticism
is to have the companies competing put their own money against
your priorities and, if they do not want to do it, it probably
tells you something about your priorities.
Chairman: We are just about there, Sir
John. I am very concerned that Mr Terrett has said nothing on
this section, but we have a couple of quick last questions.
Mr Hoyle: On Bootle!
Chairman: Mr Hoyle promises a
brief supplementary question and I have one last question which
is a brief question again and you might like to think in a moment
when I ask this question whether there is anything else you would
like to have said which you have not had a chance to say during
the session.
Q129 Mr Hoyle: Sir John, we have
touched on the job losses at Bootle, but the one thing I did not
ask you which is very important is that there are further job
losses within the supply chain, and you may not have that detail
with you, but would it be possible to let the Committee know what
audit you have done and what effect that will have on the supply
chain to Bootle? I would not expect you to have the answer now,
but, if it could be sent to the Committee, that would be very
useful. I think the final worry I have is that Liverpool is the
City of Culture, but not manufacturing.
Sir John Rose: In terms of the
supply chain, remember that Bootle is essentially an assembler
and, therefore, there will be parts of the supply chain which
will continue to supply wherever the product is assembled and
there will be small areas of activity where local supply is important
which will be affected, so we will give you what we think is the
likely impact. As I have said, I think the shape of what we have
today is the function of the decision environment that has existed
for a long time and I have said to successive governments that
the industry, PLCs, need to make the decisions in the environment
they find themselves in, but we also have an obligation to make
clear the competitive positives and negatives that we find as
a global company, and we have very good insights into the way
that other countries think and what we have tried to do with successive
governments is lay out what we think the differences are. I am
encouraged that there are some signs, really meaningful signs,
of movement and I am by no means pessimistic. I think we retain
some really important capabilities in the UK, but pace is really
vital because decisions get taken all the time and these decisions
have generational impact, so, once you have made the decision,
it is not easily reversible. However, we happen to have some really
important assets and what we have got to do is work out how we
collectively build on them.
Q130 Chairman: Mr Terrett is not
seeming to contribute, so I will ask my final question and thank
you for what you have said today; it has been a very interesting
and a very informative session and you have said some very important
things. We will be going to the States later on this year and
seeing DARPA and talking about the work they do, so there might
be further information you want to give us on these issues at
any stage that we can embrace. I think the question that my friend
Roger Berry would have asked if he had been here, but sadly he
is trying to save post offices in Bristol today, is that you have
been a typical industrialist and you have come here and probably
you privately want the Chancellor to reduce corporate tax rates
at the next Budget, you have complained about road tax, and yet
you have asked for more and more cash from the Government to solve
your problems. Is that a consistent policy and do you really need
these large sums of government money to compete in the global
environment?
Sir John Rose: I think the answer
to your question is embedded in everything I have said today.
Firstly, I do not know whether I come here as a typical industrialist.
Secondly, we actually have not talked about more and more money
at all. What we have talked about is, firstly, meeting commitments
that have already been established, ie, the R&D as a proportion
of GDP that was a commitment among the EU nations where we still
have some way to go, and the second area that I talked about is
prioritisation of how that money is spent. We actually spend quite
a lot of money today, but I think that we can do better in the
way we allocate it. I think the third thing I have talked about
is pace and the fourth thing I have talked about is competitiveness.
The issue for me is that, as a global company, we have access
to other national programmes and, therefore, the competitiveness
issue is stark and, for me, does the UK want to engage in that
activity? If it wants to be in high value-added manufacturing,
it has to understand the competitive environment in exactly the
same way as a company has to understand the competitive environment.
You can choose not to play, but then you cannot expect to rebuild
high value-added manufacturing because the rational company will
go to those places where the environment is more conducive to
what they are trying to do. We are in a globalised world and we
cannot make choices based on history, we can only make choices
based on facts.
Mr Terrett: In the last five years
we have received £128 million of R&T from the UK and
in the same period we received £155 million of R&T from
other countries. In the last five years, we have spent £1.3
billion on capital and over £1 billion of that was spent
in the UK. Those two things long-term seem inconsistent.
Q131 Chairman: That is very helpful.
Sir John, I suspect your statement just then concludes the evidence
you would like to give, but is there anything else you would like
to add or anything else as a quick summary of what you have been
saying to us in the last hour and a half or so?
Sir John Rose: I think there is
one area where we have not spent a lot of time, though we did
talk about it, which is the impact, the sort of demand-side of
education, and I do think that we underestimate the positive benefits
associated with having a robust industrial activity that is well
spread geographically, and I think I illustrated it a little bit
in the statistics about Derby and the points I was making about
apprentices. Simply, the interaction that we have with schools
and universities, not just as a recruiter, but actually just as
a participant, whether it is through our UTCs or through the roles
that we have with the school governors or things we do with schools,
the provision of graduates to teach and so on and so forth, I
think that is underestimated and in terms of having a mixed economy
with a richer infrastructure has a profound impact. The statistics
on Derby are really powerful if you make comparisons with other
towns where you do not have as broad a mix in the economy and
it flows right the way through, so I think there are some strong
reasons why we should desire to have a more balanced economy in
the same way as, if you were a company, you would want to have
a broader portfolio of activities because that insulates you against
changes in demand and taste. In the speech, I said, "If you're
going to be a one-trick pony, you had better hang in there. You
have the risks and you have got to rely on people continuing to
enjoy the trade", and it is a balance point. Actually, we,
as a high value-added engineering company, demand actually the
same sorts of academic output as high-value-added financial services,
so, if we were strong in both, we would be much better off as
a country.
Chairman: Well, I think that is a very
good note on which to conclude. Can I emphasise that, if there
is anything further you or your colleagues wish to say to us in
writing or in further meetings, we would like to hear from you
again, but we are extremely grateful to you for a very interesting
session. Thank you very much indeed.
|
