Memorandum submitted by BAE Systems
SUMMARY
— The UK defence and security industry
in general and BAE Systems as the largest company within it make
a significant contribution to the UK's export earnings. That export
success brings benefits in terms of employment of highly skilled
people, investment in research and development and the sustainability
of an extended supply chain of SMEs.
— By virtue of the nature of the defence
and security market, the active and practical support of the British
Government is indispensable for continuing success in a highly
competitive global market.
— While the revised arrangements put in
place in 2008 to co-ordinate government support for defence
and security exports appear to be working effectively, it is imperative
that, over time, the Ministry of Defence continues to play a leading
role in supporting defence exporters.
— This includes factoring in export potential
in the design and selection of equipments and systems to meet
the requirements of the UK armed forces and recognising the value
of the "in use with the UK armed forces" label in winning
exports for UK products and services.
— The Export Credits Guarantee Department
also has a key role to play and specific support in a number of
key areas would assist all exporters.
— As the nature of the defence and security
market evolves in response to global events and trends, UK companies
in the sector will need the continuing support of government to
ensure that market opportunities can be seized and competitive
advantage can be properly deployed to the benefit of nation and
the industry.
BAE Systems as an exporter
1. BAE Systems is the UK's largest defence
and security company and its most successful exporter of defence
and security equipment, services and systems. It is the largest
European defence and security company and the third largest globally.
BAE Systems is also one of the UK's major engineering and technology
companies and employs some 32,800 people in the UK of which
some 18,000 are in scientific, technical and engineering
roles.
2. The benefit from the company's export
success flows through to BAE System's extensive supply chain of
some 9,000 companies, many of them SMEs. Overall the company
directly or indirectly sustains over 100,000 jobs in the
UK.
3. In 2008 BAE Systems undertook research
and development across the Group valued at £1,044 million
of which £211 million was funded internally. Much of
this work is carried out in partnership with universities and
SMEs. The company also invests significantly in people. Our ability
to continue to make these investments is in no small measure built
upon the company's success in the export market.
4. Against this background and in making
this response to the Committee's questions:
— What should be done to sustain and increase
Britain's export strengths; and
— Is there more that Government or UKTI
could do to support exporters, to identify key sectors or reprioritise
markets
our focus will be primarily on the defence and
security sector which, we believe, is in a strong position to
be able to contribute to recovery from the current economic crisis
through increased export success.
Nature of the defence and security export market
5. The first major characteristic of the
defence export market in which BAE Systems operates is that its
sole customers are overseas governments, government departments
and government agencies. The second major characteristic is that
a company's ability to pursue export opportunities is—rightly—subject
to the controls exercised by the UK government under export controls
legislation. The combination of these two factors not only makes
the defence sector unique as part of the UK's exporting industry
but also means that active government support is essential to
the sector's success in the export market.
6. That success not only brings economic
benefit to the UK in terms of export earnings and employment but
it also plays an important part in the fabric of the political,
defence and security relationship with the countries to which
the UK is prepared to provide defence and security equipment and
systems. It is that aspect of the UK defence and security industry's
export profile that is of predominant interest to the Foreign
and Commonwealth Office (FCO) and the Ministry of Defence (MOD)
but there are also direct benefits to the MOD's equipment acquisition
programme through economies of scale from extended production
runs, spread overheads and the commercial exploitation levy.
7. When an overseas government selects a
UK company to meet its requirements for significant elements of
its national defence and security capability, it invariably regards
such an acquisition as forming part of the defence and security
relationship with the United Kingdom and not just as part of the
trading relationship. Especially in the case of major capability
acquisition programmes, therefore, visible and tangible evidence
of HMG's support for the company concerned and its proposed technical
solution are often key discriminators in the overseas government's
decision making process. That support may variously involve Ministers,
including at Cabinet level and, on occasions, the Prime Minister,
as well as senior members of the Armed Forces and senior officials.
8. In 2008 lead responsibility for
co-ordinating government support to UK defence and security exporters
transferred from the Ministry of Defence to UK Trade and Industry
within DBERR. This manifested itself in the creation within UKTI
of the Defence & Security Organisation (DSO) which subsumed
many of the export support functions previously carried out in
the MOD's Defence Export Services Organisation (DESO). There was
concern at the time this change was announced that the transfer
of lead responsibility for co-ordinating support for defence exports
from the MOD might lead to a lessening of the MOD's commitment
to supporting defence exports. To date our experience is that
that has not been the case and that the MOD continues both to
fulfil its detailed obligations under the Service Level Agreement
between UKTI and the MOD and to demonstrate real interest at senior
levels in the Department in supporting UK defence exporters. Nevertheless
it is still early in the life of the new organisation and there
remains a concern that, over time and particularly as the pressure
on the MOD's resources continues to increase, the formal separation
of the defence and security export lead responsibility from the
Department may result in gradual diminution of tangible MOD involvement
in providing support for exporters. We therefore believe it is
important that the MOD's role in support of defence exports continues
to be stated explicitly and demonstrated in practice.
9. Another area in which the MOD can make
a major contribution to the UK's future defence export success
is by making exportability a more significant consideration in
the specification, design and manufacture of equipment and systems
ordered for the UK armed forces. This was recognised in the 2005 Defence
Industrial Strategy which also identified a range of key capabilities
that needed to be maintained in the UK to meet sovereign capability
requirements. So exportability has for some time been a factor
that should be taken into consideration in reaching decisions
about how best to meet UK national requirements but, in practice
it is difficult to point to equipments that have come into UK
service in the last decade at least where considerations of the
potential for exports has been a meaningful factor.
10. In the past UK defence products such
as the Leander class frigate, the Combat Vehicle Reconnaissance
(Tank) (CVR(T)) and the Hawk jet trainer have not only provided
the British armed forces with the platforms they needed but they
were also successful exports from the UK. The UK's armed forces
must clearly have equipment that fully meets their own operational
needs but, within that envelope, we believe it would be advantageous
both to the UK's defence exporters and to government to give increased
priority to developing solutions that have the potential for adaptation
to capable and cost-competitive products for the export market.
Programmes such as the Future Surface Combatant (FSC), Future
Rapid Effects System (FRES) and future unmanned aerial systems
(UAS) offer real potential for such an export-oriented approach.
And a significant selling point in the export market is the ability
to point to the fact that the equipment or service being offered
is in service with the UK armed forces
11. The Export Credits Guarantee Department
(ECGD) also has a key role to play in supporting all UK exporters.
The significance of the role is brought into sharp focus during
periods of recession. BAE Systems would welcome active and competitive
support from ECGD in the following key areas:
— instances where export customer short
term budgets are coming under increasing pressure, which in turn
is translating into requests for the offer of medium term export
credit proposals, the ability of ECGD to effectively provide buyer
and supplier credit support to financing banks, under terms and
conditions which are competitive with other Export Credit Agencies,
thus ensuring that a level playing field is maintained for UK
exporters.
— the withdrawal of short term credit insurance
cover by commercial insurers in certain markets has created a
need for ECGD to provide targeted sovereign and corporate credit
insurance cover to address a commercial market failure under its
retained short term business remit.
— the development of a contract bond support
product, something that BAE Systems along with a number of other
UK exporters has long championed, which would significantly reduce
the level to which the exporter's available cash and credit lines
are impacted by the need to provide export contract bonds
The future defence and security export market
12. Although direct exports will continue
to be an important element of the UK's defence export portfolio
and existing mechanisms to provide government support to traditional
exporter will continue to be important, the defence and security
export market is also adapting to new challenges as importing
nations look to develop their indigenous industrial capabilities,
both to meet their own sovereign requirements and to contribute
to domestic economic growth through exports. This includes expectations
placed on exporters to transfer and share technology and manufacturing
know-how. In order to satisfy these aspirations from customer
governments companies in the defence and security sector are exploring
a range of difference business models including sub-contract arrangements,
joint-ventures, equity investments and establishing own-company
operations in target markets. Thus the traditional concept of
"exporting" as it applies in the defence and security
sector is evolving and the nature of the support provided by government
needs to respond accordingly.
13. But the key characteristics of defence
exporting set out earlier will continue to apply and government
will still have an important part to play in providing to support
to those exporters engaging in these evolving business approaches.
Through close co-operation between industry and UKTI, and through
them with other government departments—particularly the
MOD, it will be important for UK exporters to be able to put together
the kind of business arrangements that, coupled with compliant
and competitive offerings, will persuade overseas governments
to select a UK solution.
14. In some cases the size and nature of
a programme being discussed with a potential overseas government
customer may be such that the most appropriate vehicle would be
a government-to-government arrangement with the industry participant(s)
taking a sub-contract role. Such circumstances are recognised
in the terms of the transfer from MOD to UKTI of lead responsibility
for providing support to defence exporters and provide for the
MOD to take the lead role on behalf of the British government.
We believe it is essential that this mechanism should remain available
for the very limited occasions on which it might be appropriate
and that the lead role in such an eventuality should indeed rest
with the MOD which has the necessary programme management capacity
to be able to oversee government-to-government programmes.
15. Another area in which government assistance
may be needed in the future is in continuing to argue for "level
playing fields" on which UK defence and security exporters
can compete in the global market. The UK operates probably the
most open defence market place in the world and actively encourages
fair and open competition. Industry support this—indeed
it is to some extent because of this policy that UK defence and
security exporters are so successful in world markets—and
wishes to see equally open access to other national markets. There
are encouraging signs, for example in the European Defence Procurement
Directive that the barriers that currently exist in some countries
to allowing fair and open competition maybe lowered. However,
there are still protectionist instincts that are likely to be
reinforced in response to the current global economic crisis and
which have the potential to deny market opportunities to UK defence
and security exporters. We therefore look to the government to
do all it can to encourage the application of fair and open access
to markets around the world.
16. Indeed we believe that government and
the defence and security industry share a common interest in actively
encouraging and facilitating cross-border co-operation a both
government and industry levels. This must of course be in accordance
with the requirements of the government's export controls policies
and the relevant statutes but, within that environment, there
is real potential for UK industry to be even more successful in
world markets. One element of this facilitation is to ensure that
the mechanisms for controlling exports of defence equipment are
effective in terms of both safeguarding sensitive material and
promoting efficient co-operation between nations and their industries.
17. The prime example of this working in
practice is the US-UK Defence Trade Co-operation Treaty signed
in 2007 and which now awaits ratification by the UK Congress
to bring it into effect. The Treaty will introduce a streamlined
process for organisations authorised to make use of its provisions
to share information bilaterally while at the same time ensuring
that appropriate controls are maintained. The EU is also looking
to introduce simplified cross-border transfer arrangements and,
in response to the increasingly globalised nature of the defence
and security sector, government will have an important part to
play in putting in place the processes and procedures that will
allow UK exporters to take advantage of the opportunities created.
20 April 2009
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