Backing Britain

By Craig Hoyle, Helen Massy-Beresford & Murdo Morrison in London

Late last month, at a ceremony in a hangar at AgustaWestland’s Yeovil factory to mark a deal for 70 Future Lynx helicopters, UK defence procurement minister Lord Paul Drayson signed the first strategic partnering arrangement (SPA) between the Ministry of Defence and one of its key suppliers. SPAs commit the government and the contractor to work together to supply equipment in a key sector and are a major plank of the Defence Industrial Strategy (DIS) published late last year. Drayson, a former businessman, was a key architect of the DIS which, for the first time, spells out in detail how the government plans to work with industry to commission and support defence equipment for a generation and beyond.

The SPAs, and even the fact that the UK feels the need for a “defence industrial strategy” at all, may seem at odds with a procurement policy that is famously the most open of any major military power. The government is at pains to point out that the DIS is not about replacing competition and taxpayer value with open-ended “partnerships” and monopoly suppliers. This is despite the fact that many believe the speed at which the document was drawn up was at least partly to convince BAE Systems that it had a long-term future in the UK defence market. BAE – due to receive the second SPA for armoured fighting vehicles – has long hinted that it might leave the UK altogether if the MoD continues to rely on contests in a shrinking defence market.

The government insists the DIS is about ensuring Britain retains a long-term industrial capability in crucial areas by giving businesses the guarantees they need to make long-term spending decisions. “In return for the MoD giving greater clarity, it requires industry to invest in innovative solutions” to providing the armed forces with the aircraft, technology and weapons they need, says Drayson. The document itself states that what is important is not whether the MoD’s main suppliers are UK-owned companies, but “operational sovereignty” – the guarantee that equipment can be delivered, upgraded and supported on-shore throughout its service life.

DIS also marks the formal passing of the era of big one-off platform procurement funded on a cost-plus basis, a process which has been on its deathbed since the Cold War and meant aircraft and other equipment were handed over (sometimes years late) to armed forces which then assumed responsibility for its upkeep. A flurry of programmes entering service over the next few years – such as the Eurofighter Typhoon, Airbus Military A400M and Lockheed Martin F-35 – are arguably the last big aircraft platforms that will be commissioned for a generation. Instead, the DIS puts the emphasis on sectors – fixed-wing aircraft, helicopters, land systems, missiles, ships, weapons and so on – and identifies the sort of capabilities and military effect the UK is likely to need in these areas in the decades ahead. Future procurement will be much more about supporting capability than building hardware.

New realities

Defence companies based in the UK recognise these new realities and are fully behind the new strategy, says Sally Howes, chief executive of the Society of British Aerospace Companies. “The DIS was done in consultation with industry. It faced up to the fact that the market and demand is changing,” she says. “The MoD has to think about what’s important for military effect and operational sovereignty. It’s all about the transition from equipment procurement to through-life capability management, and being able to provide the right response to the right job.”

BAE Systems – arguably the greatest beneficiary of DIS – is understandably enthusiastic after lobbying the MoD for four years to come up with the document. The company has made no secret of the fact that it sees the USA as its biggest potential market and a number of major stateside acquisitions, coupled with the plan to sell its 20% stake in Airbus and the rationalisation of its UK-based Air Systems business, have all led to claims that BAE no longer sees the UK as home. However, DIS allows BAE to understand what capabilities it needs to retain in the country and put its UK operations on a “sustainable footing”, insists group strategic development director Alison Wood. “A healthy UK business is an essential part of a successful BAE as a transatlantic business,” she says. “People confuse our ambition to acquire business in the USA as a way of leaving the country.” Wood says BAE’s immediate challenge is to get the size and capability of its UK operations “right for the future” – it recently said this is likely to mean the closure or substantial downgrading over time of its four aircraft factories in the north of England. The company is also in discussions with the MoD about a partnering arrangement in the armoured fighting vehicle sector, although a bid to rationalise the shipbuilding sector through an arrangement with two other contractors, Babcock and VT Group, has fallen through.

Culture changes

Wood describes the DIS as a “permission slip for the MoD and BAE to sit down and have conversations about the long-term plans for each of the sectors”, enabling both sides to “plan for what is certain”, but she is adamant there is nothing “soft and fluffy” about the negotiations, which she says will be about “tough partnering”. This, she says, will require behavioural and cultural changes from customer and contractor after a long period in which the emphasis was on competition. “Life will have to be different,” she says.

Significantly – given the DIS’s emphasis on effective or operational sovereignty over where a supplier is headquartered – the first recipient of an SPA is Finmeccanica of Italy, which has owned AgustaWestland outright since 2004 after buying out 50% partner GKN’s stake. In fact, the group, which has 9,300 UK employees, has been slowly moving the “centre of gravity” of its aerospace business to the UK since the late 1990s and, after several acquisitions, had already become a “known entity” to the MoD before the AgustaWestland takeover, says Finmeccanica UK chief executive Alberto de Benedictis.

He says the strategy now is to “develop that industrial base and make sure the capabilities we have in the UK are enhanced and developed to meet future MoD requirements”. Although the SPA applies to its rotorcraft business – which makes up half of its UK revenues – Finmeccanica also has substantial onshore interests in other areas of defence technology, such as radar, electronic warfare, thermal imaging and secure communications. “We are investing in these areas, which are seen as important by the MoD,” says de Benedictis. “Our UK skill-set is second to none. The combination of our capabilities means what we have here is very important strategically for the shape of the UK capability required in the future.”

As part of the SPA, AgustaWestland will relocate its defence business from Italy to Yeovil. “We have a lot of capabilities in our Italian business and, now that we have a strong base in the UK, we can bring in those capabilities and make them UK capabilities,” says de Benedictis. A positive side-effect of the move to the UK has been the impact on its US export prospects. “The fact that we’ve become a major UK player has given us a much more favourable view in the USA,” he says. “It gives us a boost through the relations the UK and UK companies have developed. We are interested in developing the export base from the UK to the USA and envisage it evolving quickly – it’s probably the biggest growth area for our UK business in the next year.”

Setting trends

The UK is a trend-setter for others in terms of defence procurement, says de Benedictis. “Its experimental approach to contracting, programme development and requirements pushes the envelope, as we see with the emphasis on through life support in the DIS. Being engaged with the UK MoD means being engaged at the forefront of contracting for availability and capability.”

The DIS, says de Benedictis, is about acknowledging that “there is a good skill-set in the UK and that, if you want to be an important military operator, you cannot rely on bought-in systems. You have to ensure some level of sovereign control, giving you the ability to enhance and change requirements at your own discretion through-life.”

The other big defence player in the UK market is French-owned Thales, which has always made great play of its “multi-domestic” rather than “multinational” approach – it presents itself as a grouping of strong domestic players rather than an entity with lots of overseas subsidiaries. Alex Dorrian, chief executive of Thales UK says the DIS is “completely consistent” with its multi-domestic policy. “We’re here in the UK and IPR [intellectual property rights] are generated here in the UK. We have made substantial UK investment in technology and training. The DIS makes it clearer to everybody that these aspects are important. It is strongly supportive of a clear strategy for systems integration: there will be fewer new platforms going forward and a lot of technology insertion,” he says. “The DIS addresses the fact that it is vital to have capabilities in areas of technology that are crucial to through-life support. We are first and foremost a systems integrator. Nothing in the DIS makes us feel our strategy for dealing with the MoD has fundamentally changed.”

With all the demands on public finance, Dorrian says the UK defence budget is unlikely to grow. “The march of technology and systems complexity, and of getting more for your money, will continue. Thales can capitalise on this with its strong systems capabilities and we feel we can grow our market share within a static budget,” he says. The shift in emphasis from platform to system means, in the future, companies able to integrate technology are more likely to be prime contractors than airframers. “For example, on Watchkeeper, the platform complexity means the risk is best managed by subcontracting the platform [to Elbit Systems],” he says.

Dorrian agrees with Finmeccanica’s de Benedictis that other nations learn from the UK’s pioneering work in new procurement methods, such as private finance initiatives (PFI). “With a strong presence in so many other European countries, Thales could help these markets follow suit. We have more experience in defence PFIs than any of our competitors,” he says. “We have the ability to lever our multi-domestic footprint to help governments to share in the cost of some big programmes.”

EADS, the other main European player in the UK market, believes BAE’s decision to sell its 20% stake in Airbus to EADS will increase its influence with the MoD. Although the civil aircraft division will remain by far the biggest chunk of EADS’s UK footprint – with 1,300 staff between Broughton and Filton – EADS’s other defence and space businesses in the UK will make it the biggest aerospace employer in the UK (although BAE has more employees across other defence sectors). Its UK chief executive Robin Southwell believes that, although the DIS “represents a strategic view that BAE Systems did very well out of – it aligned a lot with their thinking”, the strategy helps set priorities for the whole UK defence industry. “In a practical sense, Lord Drayson does provide direction in that what matters is that we understand where intellectual property resides,” he says.

Given that the UK is a major customer for US platforms and defence technology, the big stateside defence contractors with UK arms have welcomed the DIS. The DIS is a “call to action” for UK industry, which “plays to what we are all about”, says Ian Stopps, chief executive of Lockheed Martin UK (LMUK). One of the main tenets of DIS is defining what it means to be a UK company and recognising the concept of appropriate sovereignty – “what you need to know about the aircraft here in the UK” – alongside operational sovereignty – “being able to fight the fight where you want to fight it”. This is a key question when it comes to the controversial issue of access to technology in the F-35 Joint Strike Fighter, in which the UK is the biggest overseas partner. However, Stopps says LMUK’s role is not as a sales organisation for US-built technology, but as a systems integrator, offering smaller UK firms the opportunity to partner with one of the world’s biggest primes. “Where I think the DIS plays to our strengths is on partnerships,” he says. “In this country, we have over 100 partners. We are positioned here as a systems integrator. The DIS underscores partnering in a different way. It stresses the need for transformation and processes, particularly in the supply chain.”

Need to adapt

Graham Thornton, vice-president business development for Northrop Grumman UK, echoes a common sentiment among major defence companies operating in the UK when he says that his company is not hell-bent on securing only deals that afford prime contractor status. “Northrop will either attempt to behave as a prime where it has the technological expertise, or work with UK industry. We have to recognise that, although we have a pre-eminent position in the USA, we have to adapt,” he says. The US giant’s UK operation acts more as a shopfront than those of firms like Boeing, Lockheed and Raytheon Systems, with just 600 employees spread across various disciplines, including around 50 who support the Royal Air Force’s Boeing E-3D Airborne Early Warning and Control System aircraft at RAF Waddington. Although the DIS will make it easier to set priorities and takes the concept of partnering forward, Thornton says the onus is still on contractors to improve their processes. “It is not a blueprint for how to plan to win business in the UK,” he says.

Another US giant, Raytheon Systems, welcomes the DIS as a “validation” of its strategy to use its UK operation as a “technology conduit for UK technology to and from the USA”, says Dean Mason, Raytheon Systems’ (RSL) executive director for business development and strategy. “This means we can ensure through-life support, upgrades and sovereignty.” Mason’s biggest concern with the strategic partnering concept is that it could end up “propping up” inefficient companies. He highlights the example of complex weapons, where a discussion is continuing over what technologies need to be supported onshore. For the Paveway IV precision-guided bomb programme, now in testing ahead of deliveries to the UK next year, RSL retains design authority and will manage future exports from the UK. It is important, he believes, for the government to continue entrusting such contracts to the best-equipped, UK-based prime, “regardless of parentage”.

With the UK’s Airborne Standoff Radar (ASTOR) project, much of the technology has been drawn directly from RSL’s parent in the USA. However, rather than having aircraft delivered with sensitive technologies secured in black boxes – which UK-based companies cannot access – Mason says that “by the time the aircraft is in service, we can support them ourselves”. RSL hopes to move on from developing ASTOR by exporting the design to other nations and targeting emerging intelligence, surveillance, target acquisition and reconnaissance (ISTAR) and complex weapons requirements in the UK. “Our business is a two-way street,” says Mason. “We also export [from the UK] on the back of DoD programmes.” For example, RSL’s Glenrothes site manufactures guidance electronic units for every AIM-120 AMRAAM air-to-air missile produced by Raytheon in the USA.

General Dynamics UK is the MoD’s third-biggest equipment supplier after BAE and Qinetiq, although like many of its US-owned counterparts, the company manufactures little in the UK and is largely a systems integrator. Managing director Sandy Wilson says the DIS is “a good basis for managing through-life capacity management and for the MoD to look at whether it needs a special partnership or tooth-and-claw competition. I believe the number of things that will need some sort of partnership will increase.” Integrating ISTAR projects into a coherent system is one of the biggest challenges the UK faces, he says. “The ISTAR side is a series of stovepipes.” Ensuring the transfer of data across different systems means a consortia approach to integration is required, he says.

Long-term supply

“The DIS is not an instant fix” to the government’s long battle to reconcile competition and value for money with securing long-term supply, says Wilson. “But it’s the right way to go to maintain an industrial base and manage the level of complexity in equipment and platforms. The challenge is going to be: ‘How does the supplier of through-life manage the supply chain?’”

More than six months after its publication, fears have been expressed that not everyone in the UK “customer community” has fully bought into Drayson’s vision, although last week’s merger of the Defence Logistics Organisation – responsible for the supply of equipment to the armed forces – with the allegedly more sceptical Defence Procurement Agency – which manages the actual procurement of equipment – could help make the transition easier.

Another potential stumbling block to the DIS’s aim of protecting strategically important capabilities onshore could come from Europe, says opposition Conservative defence spokesman Gerald Howarth. He is concerned about proposals by the recently established European Defence Agency (EDA) and European Union high representative for foreign policy Javier Solana to integrate R&D spending among EU nations. “Solana wants 20% of our research budget to spend collectively – so who will own the intellectual property?” he says. He is also worried about the EU’s new code of conduct on defence procurement, which took effect last week. The code introduces “cross-border competition systematically into the European defence equipment market” and is being managed by the EDA. Howarth says obliging signatories to establish open competition in their procurement processes represents a “serious contradiction” to the ideals outlined in the DIS. “What is does is open up the one open market [the UK] to even more competition and will hand over the market to the EU,” he says. “It’s a one-way ratchet.”

Source: Flight International