This report details our inquiry into foreign involvement in the defence supply chain, launched following the early stages of the COVID-19 pandemic and intended to scrutinise the vulnerability of the UK’s defence supply chain to undesirable foreign involvement.
We found that, no matter how defined, foreign involvement in defence is widespread, with the UK hosting a broad range of UK-based and international suppliers. This results from the Ministry of Defence’s approach of encouraging inward investment as one of its primary means for delivering value for money, an approach that is matched across Government. We recognise that this approach has brought some benefits to the UK defence industry and the wider economy.
However, we felt it important to recognise that any foreign domiciled company, or subsidiary owned by a foreign domiciled company, will be subject to influence from outside the UK. Whilst the evidence suggested that most investments are from close allies and are to be welcomed, there were a number of investments which were concerning. The Ministry of Defence’s open and country-agnostic approach has meant that the defence supply chain has been open to potentially hostile foreign involvement, with reports of companies being owned and influenced by foreign Governments whose values and behaviours are at odds with our own and who are known to engage in intellectual property theft. Our report lists seven companies operating within UK defence that have been acquired by Chinese companies in recent years. We recommend that the Minister of Defence publish a list of countries it considers friendly and from whom investment should continue. However, all those countries falling outside of this list should be barred from investing in the UK’s defence supply chain, including China and Russia.
This report also explored a number of related issues. In particular, we express concerns following reports that the Ministry of Defence have purchased second-hand Chinese equipment and recommend that the purchase of equipment from China for use by the Armed Forces should not be considered as a viable option. We also express concerns at the relative indifference of the Ministry of Defence in 2018 and 2019 to the possible relocation outside of the UK of General Electric’s Rugby facility and recommend that the Ministry of Defence should prioritise the maintenance of sovereign capability within the UK defence industry.
During our inquiry we also examined the National Security and Investment Bill, concluding that it will offer greater protection to the UK’s economy and therefore has our support. We were content that the ‘Investment Security Unit’ should sit within the Department for Business, Energy and Industrial Strategy and recommend that the Ministry of Defence, alongside other departments and agencies, should proactively feed into all relevant assessment processes. Should the regime be implemented efficiently, we were content that it will have little to no harmful impact on foreign direct investment to the UK defence supply chain, only preventing investment that is undesirable.
We also examined concerns that the COVID-19 pandemic could leave companies operating in the UK defence supply chain vulnerable to foreign bids and therefore assessed the support given by the Ministry of Defence to businesses at this time. We found that the defence industry has remained broadly resilient through this period and that the Ministry of Defence has provided substantial support. Unfortunately, we heard that this support has not always reached its intended beneficiaries or had the intended consequences and call on the Ministry of Defence to improve it communication with small and medium sized businesses. We also found that the commercial aerospace industry remains particularly vulnerable and that there are close links between this industry and the defence supply chain. We therefore recommend that the Ministry of Defence consider what more it can do to support businesses that operate here, particularly small and medium sized enterprises.
Finally, we examined the impact of COVID-19 on the global supply chain, recognising that the defence and security sectors are heavily reliant on global supply chains for raw materials and components. We conclude that global supply chains for defence represent a vulnerability, especially when these supply chains include countries not closely aligned with the UK. The Ministry of Defence should therefore set out how it is proactively supporting efforts from defence businesses to seek domestic alternatives for supply and to shorten supply chains.