Memorandum submitted by BAE Systems
INTRODUCTION
The purpose of this paper is to provide the
BAE Systems Military Air Solutions (MAS) response to the Business
and Enterprise Committee inquiry into MotorSport and Aerospace.
MAS provides advanced military air capability by successful delivery
of design, development, manufacture and support contracts with
the UK and overseas customers. MAS has proven capabilities in
prime contracting, systems integration, rapid engineering, manufacturing,
maintenance, repair and upgrade, and military training. As such
it is established as a World leader in the Defence Aerospace industry
and an employer of circa 17,000 people across the UK. BAE Systems
as a whole is a substantial contributor to the UK economy, through
employment, value added (GDP), taxes, investment and R&D spending.
In 2006, BAE Systems directly employed 35,000 people, with a value
added (GDP contribution) of £2.4 billion, exports of £4.1
billion, a contribution to taxes of nearly £500 million and
R&D spending of nearly £900 million.[8]
However, its total economic impact is much greater than this,
as its activities also support other firms' businesses. When these
"indirect and induced" effects are taken into account
its overall effect on the UK economy is significant.[9]
The indirect employment impact of BAE Systems as a whole on the
UK is 46,000 jobs, with every 10 BAE Systems jobs in the North
West supporting 13 jobs indirectly.[10]
The following response focuses on the Defence
Aerospace impact in the key areas identified by the Committee,
including the impact to the wider economy and the effects of the
recession on the industry.
1. The effectiveness of government policies
in supporting these sectors
1.1 The Defence Aerospace sector is heavily
dependent on UK MoD procurement policy as the development of new
products is determined by the home customer requirements and investment.
Export success is also dependent on UK Government support; first
securing home customer orders as endorsement of the product or
service and then on backing specific campaigns. It is not clear
that a policy or process is in place to ensure that all relevant
areas of UK Government and UK Industry are aligned to support
Export Campaigns.
1.2 A clear policy from the UK on its long
term requirements in the Aerospace Sector is needed to support
the long term sustainment of capability. Without specific guidance
and management there is a risk that critical skills, knowledge
and facilities will erode to a point where they are lost. BAE
Systems recognises that the MoD is undertaking an activity to
define a Fixed Wing Sector Strategy (FWSS); however, the extent
to which this will encompass the wider economic and export positions
remains unclear. The publication of a revised industrial strategy
by the MoD would assist industry in defining their investment
strategy and help avoid the loss of such key industrial capabilities.
1.3 BAE Systems viewed the decision to move
Defence & Security Organisation (DSO) out of the MoD into
UK Trade & Investment (UKTI) as flawed, but to date evidence
suggests that it can be made to work. To ensure this continues,
it is essential that the MoD remains closely involved with the
promotion of UK equipment, products and services.
1.4 The open Defence procurement policy
in the UK is not mirrored in other "competitor" nations
(eg US, France, etc) which can put UK industry at a disadvantage.
2. How to maintain the UK's excellence in
academic research in aeronautical and automotive engineering,
and related disciplines, and how to extend relationships between
universities and business still further
2.1 BAE Systems has a long record of working
with Schools and Universities in both the field of R&T (eg
Systems Engineering Innovation Centre at Loughborough) and a range
of Schools programmes (eg BAE Systems Schools Roadshow) and sponsored
University courses.
2.2 In order to sustain these institutions as
vibrant areas of national excellence the Government needs to ensure
that careers in these sectors are seen as attractive propositions.
Setting the environment from an industry and a government perspective
in an aligned manner is key to achieving this. Incentivising the
correct blend of pure and applied research is another fundamental
contributor as this supports the further alignment of government
funds with that of industry in order to create research capable
of exploitation and creating national advantage.
2.3 The growing dependence on overseas postgraduates
for aerospace research challenges our ability to transfer the
knowledge to wealth creating industry in the UK. Government leadership,
providing direction and support, is needed in the Aerospace Sector
to give Industry the confidence and guidance needed to continue
to lead and fund initiatives with Universities and Schools.
2.4 Continued investment in Research and
Technology is also a growing concern for the sector, with the
MoD reported to be making £439 million available for its
science, innovation and technology budget in 2010-11, almost 20%
less than the £544 million set aside for this year. The MoD
has already cut Research and Technology spending, with reductions
of 7% for each of the 2008 and 2009 budgets.
2.5 Whilst BAE Systems appreciates the near
term pressures placed on the MoD, spending reductions are detrimental
to academic research initiatives and risk a decline in the UK's
technology pull through and industrial exploitation. BAE Systems
welcomes the development of Technology Route Maps by the Science
& Technology Community which should help to develop a clearer
view of the allocation and nature of future funding, and help
maximise the level of investment through identification of exploitation
routes.
3. The impact of the recession on Motor Sport
and Aerospace industries
3.1 The long term nature of many Defence
Aerospace programmes has provided an element of stability during
the recession. However, it is likely that national budgetary pressures
caused by the recession will ultimately flow down through further
challenges on the relevant government budgets; with MoD procurement
and R&T funding likely to receive disproportionate cutbacks.
3.2 From a supplier perspective, the status
is mixed. Where suppliers serve multiple sectors, their vulnerability
is driven by the recession impact on those other sectors. For
example, a supplier serving automotive and aerospace sectors will
be more at risk than one wholly dependent on aerospace due to
the dramatic downturn in automotive demand. Due to the complexity
of the products that the sector provides it is often a capital
intensive industry both in terms of finances and R&D. To date
we have seen a tightening in the availability of funding both
from government and through the capital markets which has in a
number of cases had a considerable impact on the supply chain.
3.3 The above means that BAE Systems has,
in particular with SMEs, had to take action to more closely monitor
the financial health of our supply chain and associated risk.
Whilst there has been a slight increase in the number of "risk"
suppliers identified, there has not—to date—been any
sudden and dramatic increase in suppliers suffering financial
difficulties. We are, however, being more proactive in mitigating/managing
the financial vulnerabilities in our supply chain.
3.4 Commentators widely predict that the
pending general election will result in a number of cuts in public
spending to help reduce the deficit in public finances. These
cuts, coupled with a Strategic Defence Review, are expected to
result in a reduction in defence budgets which the Royal United
Services Institute (RUSI) estimates at 10-15% from 2010-16. Any
such reductions would inevitably have a direct impact on BAE Systems
and consequently it's extensive supply chain reliant on their
ongoing contracts.
3.5 When the world emerges from recession,
sectors that are export and R&D intensive will provide the
greatest benefits for the UK economy. When considered together,
the levels of export and R&D intensity exhibited by the defence
industry show the future benefits from supporting the sector during
the recession are relatively larger than for other parts of the
economy.[11]
4. The role of SMEs in the supply chain supporting
these two sectors
4.1 SMEs play an important role across the
complete Aerospace supply chain, providing valuable contribution
in terms of intellect, technologies and products.
4.2 BAE Systems has strong links with a
range of development agencies and trade associations. In the Aerospace
Sector we work closely with North West Aerospace Alliance (NWAA),
whose membership is largely made up of SMEs. MAS along with Airbus
and Rolls Royce have been actively supporting NWAA's supply chain
excellence programme (ASCE) for the past five years. Our most
tangible contribution is the provision of mentors to the ASCE
programme—10 to12 senior managers from MAS who typically
spend one or two days a month helping SMEs to address businesses
issues and develop more competitive businesses. This is a clear
indication of the value which MAS places on SME contribution to
its business.
4.3 BAE Systems MAS' key role in the Aerospace
Sector as a prime contractor and systems integrator results in
a strong reliance on the supply chain. As such there are strong
interdependencies between BAE Systems and a large number of SMEs
for ongoing financial survival in the sector. In 2006 it was estimated
that BAE Systems spent some £3.3 billion on procurement of
equipment, components, raw materials, rent, energy and services
from its suppliers. Distributing BAE Systems' UK procurement spending
across industrial sectors and examining the impact of that spending
on total sales of different industries, suggests that a typical
job in BAE Systems in the UK supports a total of 1.3 jobs elsewhere
in the economy.[12]
5. What barriers are there to further innovation
in these sectors and what can be done to overcome them?
5.1 Innovation is fundamental within the
Aerospace sector and occurs at all levels within the supply chain.
An example where progress is being made in this area is through
the National Defence Industries Council focus on future business
models in the R&D area. This joint MoD-industry work is developing
a framework and guidance to allow a coherent approach to issues
such as IP and joint funding. However, whilst much work has been
carried out there is a considerable way to go in order to ensure
that further innovation in the sector continues.
5.2 In order to maximise value from investment
for all stakeholders the critical driver is the speed with which
innovations can be realised and then exploited. Barriers that
are evident today include:
— A lack of coherence and alignment between
the various funding sources and stakeholders which leads to a
fractured exploitation pipeline.
— A culture in which early engagement between
the customer and the supply base in developing requirements is
discouraged.
— A disproportionate blend of pure and
applied research which can cause novel concepts to fail to find
their way to implementation and leaving them languishing in a
gap between pure research and a level of maturity that allows
them to be exploited into real programmes that is often referred
to as the "valley of death".
— Risk averseness in the buyer community,
bolstered by the level of scrutiny placed on MoD spending.
5.3 Possible approaches to overcome these
barriers include:
— Creating a common R&D framework across
both government and industry is critical in order to best leverage
the funding, both government and industry, available to generate
national value for all stakeholders.
— Encouragement for closer working between
stakeholders across the enterprise to ensure close alignment between
future needs and emerging technologies and a higher pace to the
pull through and exploitation of innovation.
— Overall, recent initiatives such as Capability
Visions are a good step in the right direction but need to be
properly funded to be effective.
6. What steps can be taken to encourage the
application of technology development in both sectors to create
new designs, products and process in other industries?
6.1 No response.
7. How successful existing initiatives such
as the Aerospace Innovation Networks and Aerospace Technology
Validation Programmes have been in transforming new concepts into
marketable technology
7.1 It is difficult to measure the success
of initiatives in the Aerospace Sector due to the long lead times
associated with it. Looking beyond the tangible output of marketable
technology we recognise the success of these projects in terms
of allowing the UK MoD and Industry to maintain a position of
"intelligent customer" in the sector and as an excellent
field for developing people in the industry.
7.2 The DTI's Aerospace Innovation & Growth
Team was very successful in developing a National Aerospace Technology
Strategy and a set of route maps for its deployment. However,
the level of public sector funding and the time taken to deploy
it has been disappointing. An example has been the ASTRAEA programme
that, with funding limitations, had to be split into two halves
and has since struggled to gain its second half funding, risking
the loss of a World leading position for the UK.
22 September 2009
8 The Economic Contribution of BAE Systems to the UK
in 2006. April 2008. Oxford Economics. Back
9
The Economic Contribution of BAE Systems to the UK in 2006. April
2008. Oxford Economics. Back
10
The economic case for investing in the UK defence industry. Final
Report September 2009. Oxford Economics. Back
11
The economic case for investing in the UK defence industry. Final
Report September 2009. Oxford Economics. Back
12
The economic case for investing in the UK defence industry. Final
Report September 2009. Oxford Economics. Back
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