An industry losing jobs, skills and orders to low-wage economies; or finely honed, technology-rich and with big ambitions. Which is the real UK aerospace industry?
The UK aerospace industry has been going through some deep structural changes that go beyond the traumas of the post-11 September downturn. When BAE Systems announced in 2001 that it was axing the RJX regional jet programme and, two years later, British Airways its Concorde fleet, the symbolism was immense. Traditionalists lamented that, while the French and Germans called Airbus their own, the former industrial powerhouse behind many of the most famous names in aviation no longer had an aviation sector to speak of.
Others detected a more deeply seated and worrying trend further down the supply chain. While the UK's primes* and first-tier suppliers had been steadily extending their global "footprint" with acquisition sprees in the USA and beyond, smaller suppliers below them were at risk of being frozen out. In the 1990s, companies such as Cobham, GKN, Meggitt and Smiths Aerospace had been transforming into often risk-sharing systems integrators with access, through US subsidiaries, to lucrative Department of Defense contracts. But without the funds to develop proprietary new technology, many of the small and medium enterprises (SME) that had traditionally supplied them with build-to-print components and materials faced being jilted for cheaper Asian and eastern European competitors and being bypassed in the aerospace revolution.
The danger was recognised in a report last year from the Aerospace Innovation and Growth Team, a group representing government, industry, trade unions, finance institutions and academia. Its chairman and former BAE chairman Sir Dick Evans, pulled no punches in warning: "Failure to face up to the new demands of the market would damage Britain's competitive edge and a thriving UK aerospace industry could face severe and rapid decline." What was needed was a new mindset throughout industry coupled with an influx of research and development spending by government and manufacturers alike.
In many ways, the UK's aerospace industry is - thanks, arguably, to a hands-off government policy and the UK's benign relationship with the USA - leaner, more competitive and, at the top level, more globally based than its continental rivals. Its structure is very different from that of neighbours France, Germany and Italy.
Private hands
A long-term partner in Airbus with French, German and Spanish industry, BAE did not become part of EADS in 2000. However, the Airbus element of BAE - the wing factory in Broughton, north Wales, and the plant in Bristol - became part of the integrated Airbus company a year later.
Unlike France, Italy and Spain, the UK's aerospace and defence industry is almost entirely in private hands. The Thatcher government of the 1980s championed privatisation and subsequent Conservative and Labour governments have continued this trend. The last major state-owned enterprise, the commercial research arm of the Defence Evaluation and Research Agency, was spun off as Qinetiq two years ago, with US group Carlyle now the main investor. Even the UK's air traffic services and many support operations to the military are provided by private companies.
The country's open defence procurement regime has meant its main players have been able to rely less and less on "shoo-in" government contracts and have had to aggressively pursue export markets and overseas acquisitions. Rather than being "encouraged" to buy from domestic suppliers, its primes and tier ones have had the freedom to shop around for best value and to build global supply chains.
There are 12 British businesses in the Flight International/Roland Berger Top 100 ranking of aerospace companies by turnover**. Apart from BAE, Rolls-Royce and the four tier one companies mentioned earlier, these are industrial products manufacturer Dunlop Standard; precision engineering firms Doncasters and Senior Aerospace; electronics specialist Ultra Electronics; components and consumables distributor UMECO and aircraft seating maker Britax International.
Just outside the Top 100 are about 50 international, long-established, niche businesses, most of them family owned. These include conversions and modifications specialist Marshall Aerospace and ejector seat specialist Martin-Baker. Below them are 3,000 SMEs.
Foreign-owned or -controlled enterprises make up a large proportion of the industrial footprint. Most prominent is EADS, which, apart from Airbus, has several EADS Space facilities as well as missile house MBDA, which it co-owns with BAE and Italy's Finmeccanica. French companies Thales (formed after the takeover of the UK's Racal Electronics by the then Thomson-CSF in 2000) and Messier-Dowty are also among the major players. Bombardier's Shorts plant in Belfast, Northern Ireland, employs 5,600 people. The UK's only helicopter manufacturer, Westland in Yeovil, is being sold by owner GKN to Agusta, its partner in the AgustaWestland joint venture. And although Boeing has no manufacturing facilities of its own, it claims to support 30,000 jobs at more than 200 suppliers through its programmes and to be a net exporter from the UK aerospace industry.
The US company is investing heavily in research and development programmes at three universities: Cambridge, Cranfield and Sheffield, which this month will formally open its Advanced Manufacturing Research Centre, funded by Boeing to the tune of $3.5 million over 10 years. "We have identified a source of aerospace skills and high-tech development in this country to a quite amazing degree," says Boeing's UK president Sir Michael Jenkins.
Industry clusters
The industry is clustered in a number of areas - around London and along the south coast of England and the M4 corridor to Bristol and south Wales; the north-west of England around Manchester, home to Airbus, BAE and a host of small manufacturing companies; Northern Ireland, dominated by Shorts but also home to several high-tech companies; and the central belt of Scotland, which has a prominent defence and electronics sector.
During Farnborough, the Society of British Aerospace Companies (SBAC) will release a survey of its members showing that, rather than declining, the UK's aerospace industry is recovering strongly from the crisis that followed the terrorist attacks on the USA. Final figures have to be confirmed, but they will show employment and revenues nudging up by about 5% during 2003 to 117,000 and £17.5 billion ($31.9 billion), respectively.
Anecdotal evidence points to this positive trend continuing in 2004 with medium-term prospects also looking good, says SBAC analyst Keith Hayward. UK companies have picked up substantial defence orders and have 22% of the value of the development work on the Lockheed Martin F-35 Joint Strike Fighter. "This puts us in pole position to win significant workshare," he says. However, the civil business looks less secure. "We are seeing green shoots but, though the downturn appears to have run its course, oil prices mean the recovery is fragile," says Hayward. "UK companies are solidly on board both the [Airbus] A380 and the [Boeing] 7E7, but there are still a lot of flaky airline customers out there and the sector probably needs a shake-out."
The most pleasing result from the survey, says Hayward, is that R&D spending in 2003 was up by 18% over the previous year, with most of that coming directly from companies themselves. Smiths Aerospace, for instance, says it has doubled to 8% the proportion of turnover it spends on R&D, mainly in the area of systems integration - a "reinvestment of profits into the future", says chief executive John Ferrie.
Even SMEs ploughed back an average of about £250,000, says Hayward. This comes as industry hopes are raised that the government will announce at Farnborough a trebling of the funds it puts into civil aerospace R&D. In recent years, the government has matched R&D funds to the tune of £20 million a year. The money is channelled through the Department of Trade and Industry's (DTI) Aeronautics Research Programme (ARP), which has identified the areas it believes need improvement for the UK to remain technologically competitive. These include aerodynamics and propulsion systems; advanced and smart materials and structures; advanced electric drives and distribution; and adaptive, autonomous control systems. In May, the ARP recommended to government which companies and universities should take part in various funded programmes.
Defence side
On the defence side, the Ministry of Defence announced plans under its 1998 Strategic Defence Review to establish a so-called Towers of Excellence framework in six key areas of technology development: guided weapons, electro-optic sensors, synthetic environments, radar, underwater sensors and commercial off-the-shelf and human/machine interface issues.
The industry is cautiously optimistic that the government will match its commitment to aerospace R&D with hard cash. "We're encouraged by the noises, but we want to be encouraged by the actions," says Colin Green, president of Rolls-Royce's defence aerospace division and current SBAC president. "We need technology demonstration programmes. It's our lifeblood." Green insists such funding is not state subsidy, but a "financially enabling mechanism" to enable UK companies to develop next-generation technologies. "The capital markets won't take that degree of risk."
GKN, which axed half its workforce of 1,400 at its Cowes plant after 2001, has been appealing for government funding to help it build a composite research centre next to the factory, where it makes nacelles. It says although it was keen to slim down its production to concentrate on its core competences, it is determined to stay a leader in developing technologies such as resin film infusion and automatic tape laying.
In future, first-tier suppliers such as GKN will be expected to devote considerable resources into the early stages of programmes, says Graham Chisnall, group director of sales, marketing and engineering. "We invested a lot of money in the A380," he says. "I can't see an opportunity in future where investment of some sort isn't required. You've got to bring a technology the other guy doesn't have." His colleague, European sales and marketing director Frank Bamford, adds: "You can't compete on manufacturing with China on $15 an hour. The technology discriminator is all you can bring to the party."
Chisnall urges the DTI not to forget about first-tier suppliers when allocating funds for R&D. "It's no longer sufficient just to think about the primes," he says. "You can't just look after Airbus, BAE and Rolls-Royce and think you're looking after aerospace in the UK."
*For consistency, throughout this survey we have defined as a "prime" an airframer or "system of systems" integrator who sells to the end customer - an airline or defence ministry. Engine makers are also classed as primes. "First-tier suppliers" are companies that sell complete systems - landing gear, nacelles, wings or cockpits - direct to primes. Second-tier suppliers supply the first tier, and so on down the supply chain. Second-tier suppliers may, of course, become first-tier suppliers and vice versa, depending on their position in a particular supply arrangement.
**Based on the 2002 listing. The latest 2003 survey is in our 10-16 August issue.
MURDO MORRISON / LONDON
ADDITIONAL REPORTING BY ROB COPPINGER AND CRAIG HOYLE
Source: Flight International
