Select Committee on Trade and Industry Minutes of Evidence

Memorandum submitted by the Society of British Aerospace Companies Ltd


  With 154,000 people working directly in the industry, the UK has the world's second largest national aerospace industry in terms of employment and the largest in Europe. UK Aerospace enjoys a spread of manufacturing capability unrivalled outside the US. In particular, the UK is especially well represented in the depth and breadth of its equipment sector, where some 70 per cent of the value of a typical aircraft is added. UK Aerospace is a knowledge-intensive industry, accounting for 13 per cent of the UK manufacturing's entire research and development (R&D) spend. Commitment to R&D extends deep into the aerospace supply chain, with over 50 per cent of supplier firms reporting some R&D activity. UK Aerospace is a leading exporter, accounting for 70 per cent of the nation's total exports and enjoying a consistently healthy trade surplus. UK aerospace sales have risen steadily since 1993, with world market share increasing from 9 per cent to 13 per cent. The main area for growth has been in the civil sector, now accounting for over half of UK aerospace sales. In the defence market, the most important customer for many companies is no longer the UK Government.


  As a result of international collaboration and foreign direct investment, UK Aerospace is in the forefront of globalisation. UK companies employ nearly 40,000 outside the UK with a turnover of over £4 billion. Equally, foreign-owned companies located in the UK generated nearly £2.5 billion in turnover supporting over 20,000 jobs. Recent international linkages include the creation of BAE SYSTEMS, of Thomson-Racal (now Thales), Westland-Agusta, Rolls-Royce's acquisition of Allison in the US and conversely TRW's acquisition of Lucas Aerospace in the UK. As a result, the UK Aerospace Industry is now perhaps better described as the Aerospace Industry in the UK.

  A key issue facing the industry is the extent to which the UK is able to command the development and manufacturing high ground in a globalised aerospace industry. In large measure, this is accomplished through control over intellectual property, which is the product of public and private investment in research and development. It is also dependent upon the UK creating a favourable environment for investment generally in the high technology industries.

  The UK currently has control over the bulk of its critical intellectual property. This translates into high level participation in leading programmes in Europe and North America. Again, the equipment sector is especially well-regarded on both sides of the Atlantic for the quality of its technology and its products. Maintaining this level of control and activity will be a critical element in maintaining a world class aerospace industry in the UK.


  The effects of globalisation and the need to remain competitive in a world market—especially as more business is sourced globally through e-commerce market places—is putting particular pressure on the UK-based supply chain. There are currently over 1,500 companies in the UK-based supply chain. However, prime contractors and leading equipment companies world-wide are reducing the number of individual suppliers and are expecting companies to carry higher levels of technical and financial risk. Furthermore, as the global primes become more vertically integrated, companies further down the supply chain may find it more difficult to compete effectively. As a result of these pressures, supplier companies must invest in continuous improvement programmes to upgrade their skills base and manufacturing efficiency.


1.  The competition for location of high technology industry

  International acquisitions and mergers are creating transnational aerospace companies with a global reach and matching commercial strategies. Aerospace companies now have a choice where to locate investment. These firms act as "routes to market" for national supplier companies and make a massive contribution to the overall health of the UK aerospace industry. The UK Government has to accept the fact that it is part of the competitive process. As in other key knowledge-driven industries, government policies and choices will have a decisive impact on the future of UK aerospace. If the UK is to retain and to attract investment in the highest value-added aspects of aerospace, the leading aerospace firms need a favourable business climate.


  UK Government should closely monitor the pace and implications of globalisation on the UK industry.

  In particular, the Government must continue to improve the research base climate for investment in high-technology manufacturing.

2.  Research and technology

  UK Aerospace is a leading-edge, high-tech industry heavily dependent on high levels of research and development. UK Aerospace is living off the results of past investment in technology. This "seed corn" is not being replenished at a rate that will enable the UK to retain its position in world markets. Between 1980 and 1998, aerospace R&D in the UK fell in real terms by 45 per cent compared to a rise of 33 per cent in France and the US, and 196 per cent in Germany. Funding for the Civil Aviation Research and Development programme (CARAD) has fallen by 80 per cent in real terms to £22 million since its inception in 1972. There is an increasing risk that leading companies will focus core research activities in countries with a more supportive regime with a consequent loss of high value manufacturing and business to local supplier companies. Without adequate and properly channelled R&D funding the global aerospace industry will invest its highly mobile capital elsewhere.

  Given the depth and breadth of the UK aerospace equipment sector, the Government must further encourage R&D throughout the supply chain. In this respect, the Government should ensure that the benefits of publicly funded R&D are more widely spread and that the equipment sector has secure access to adequate levels of support.


  The Government should increase the level of support for aerospace research and technology acquisition and ensure that the equipment sector in particular receives adequate support applied directly to industry. Active consideration should be given to schemes designed to recycle some of the returns to the Government, currently around £100 million per year, from past public investment in civil programmes.

  The Government should support the development of large scale demonstrators to allow UK companies better means of carrying out proof of concept research.

  The Ministry of Defence (MOD) should increase the proportion of the defence budget allocated to research.

  Overall priorities within the science budget, and the academic research base in general, should be more carefully matched to the needs of industry to achieve a better return to the economy and as a first step to restoring the historic level of funding.

3.  The risk of hollowing out of the industrial base

  The leading companies are increasingly buying from a global supply chain, demanding ever higher standards of quality at lower cost and from fewer suppliers. This means that UK suppliers must adopt the most advanced production and management systems and accept higher technical and financial risks. There is a danger that the UK aerospace industry base will be hollowed out, losing vital business and employment to foreign suppliers.

  Helped by the DTI, industry is already investing heavily in new techniques, including increasing use of business-to-business e-Commerce, and processes designed to drive down costs and to add value throughout the supply chain. The DTI sponsors a variety of crucial schemes including the Master Class Engineer programme and the Lean Aerospace Initiative, which help to develop lean manufacturing techniques and improve fundamental productivity, and the SCRIA programme, which helps companies improve relationships throughout the supply chain. This highly productive partnership between Government and the industry must be continued and further expanded, particularly in respect of aerospace SMEs and the larger supplier companies facing increased global competition.


  The Government should extend the availability of research and development tax credits to a wider range of supplier companies. In the shorter term, it is essential that action be taken to reduce the cost of investment capital and ensure the availability of highly capable human resources.

  The Government should establish a development fund for the UK Aerospace supply chain which would fund, on a commercial basis, research and development projects, attracting private as well as Government funding.

  The Government should continue to support policies that help small business improve competitiveness, such as the DTI's Competitiveness Challenge.

4.  The Government as customer

  Industry is fully committed to the principles of Smart Acquisition. These have to be driven forward into full implementation and extended to international programmes. The MOD must capture the improvements implied by modern supply chain management concepts. The MOD should also fully accept that its procurement choices and research priorities still have a profound impact on the competitiveness of UK industry. The MOD's increased interest in internationally-sourced, largely off-the-shelf solutions will also have a detrimental effect on the UK's R&D base. In addition, the Defence Evaluation Research Agency (DERA) continues to attract a dominant share of Government R&D funds. To make an efficient use of resources, a close, trusting and mutually beneficial relationship between Industry and DERA is essential. The part privatisation of DERA must be carried out so that this positive relationship is fostered.


  The Government must drive forward the full implementation of Smart Acquisition, with full open consultation with industry.

  Government should ensure that strategic industrial considerations are an integral part of the Smart Acquisition process.

  The Government should ensure that the part-privatisation of DERA does not undermine the mutually beneficial relationship between Industry and retained-DERA, and that New DERA does not retain special status with the MOD which would afford it commercial advantages over the private sector.

  International collaborative programmes should be managed in a way that recognises the political imperatives of each partner whilst attempting to introduce as many elements of Smart Acquisition as is practical.

5.  The importance of export supports

  Government support for exports is vital. The long-term decline in Government expenditure in military aerospace projects, combined with the relatively small domestic market for civil aircraft, has helped make the UK one of the most export-dependent aerospace nations. Loss of UK support, and in particular any weakening of the invaluable service offered by the Exports Credits Guarantee Department (ECGD), could not only lead to lost business but would also send the wrong signals about UK commitment to our European partners. Proposals to change the requirements for ECGD could constrain its ability to offer consistent support for UK exporters.

  Current proposals, which are of particular concern, include:

    —  The setting of arbitrary pre set transaction limits for individual territories. This could lead to large transactions being unable to proceed even in circumstances where the risk and premium income associated with the transaction is otherwise acceptable;

    —  Delaying the provision of a committed offer of support by ECGD until the time of contract or loan agreement signature. Currently commitments are made at the time of submission of a firm proposal by the exporter, subject only to the territory remaining on cover. This is consistent with export customers' requirements to receive firm commercial and financing proposals in advance of the commencement of contract negotiations;

    —  A reduction in the choice and flexibility of the terms applicable to fixed rate CIRR lending which represents a significant deterioration in the terms previously available.


  The UK Government must continue to support export sales through the ECGD and ensure that it continues to take the long-term view necessary to provide consistent support to the industry.

  The Government should ensure that changes to the ECGD's terms of reference will still enable UK exporters to receive the same level of support as that which is available to our overseas competitors.

  The Government should ensure that changes to the supports made available by ECGD to exporters are not made unilaterally without:

    —  Full consultation with ECGD's principal exporter clients, and

    —  The securing by ECGD of agreement to similar changes from other Export Credit Agencies which supports UK exports' competitors and partners.

6.  The Environment

  The aerospace industry is responding to a number of environmental challenges, in particular, emissions and noise control, posed by the rapid expansion of air transport. UK industry is devoting considerable effort and resources to find technological solutions to these problems. While accepting its responsibility to reduce aircraft emissions and to mitigate other environmental effects, aerospace should not be burdened with regulations not applied to its main competitors. This would penalise UK companies without making a significant impact on the environment.


  The Government should consider the industrial implications of environmental regulations such as the Climate Change Levy, and seek the adoption of comprehensive international solutions to the environmental problems posed by air transport.

  Such policies should embrace the aerospace industry, the airlines, airport operators and air traffic management.

  The Government should also direct public research funding in identifying the way forward for sustainable aviation in support of one of the UK's major wealth creators.

7.  Education and training

  A world-class high technology Industry such as UK Aerospace is dependent on a reliable stream of high-quality engineering and science graduates. While industry plays a key role in attracting the highest quality UK graduates in sufficient numbers into industrial careers, the Government needs to do more to increase the quantity and levels of competence of science, engineering and technology graduates. There is also a need to develop more vocational routes to expand the supply of Craft and Technician level personnel. Equally, reskilling the existing workforce is perhaps as important a task as recruiting new blood into the industry.


  The Government should encourage and support Education/Industry liaison programmes which promote engineering at all levels as an attractive career option, and the Aerospace Industry as a desirable environment in which to base such a career.

  The Government should ensure that the skills needs of the UK's industrial base are adequately promoted in the education system. The Government should further encourage the take-up of vocational training and qualifications.

  The Government should consider abolishing the age limit on state funding of modern apprenticeships and develop generally a support mechanism to assist companies in reskilling and upskilling.


  In conclusion, UK Aerospace is by any definition world-class, offering enormous benefits to the UK economy as a whole. However, fundamental pressures for change are being brought to bear which the industry together with Government cannot afford to ignore. The industry's continued prosperity and world-class status requires a strong partnership between Government and industry.

8 January 2001

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