Exporting out of recession - Business, Innovation and Skills Committee Contents


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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