Select Committee on Trade and Industry Minutes of Evidence


Supplementary memorandum submitted by the Society of British Aerospace Companies Ltd

INTRODUCTION

  Success in aerospace stems directly and fundamentally from technology and the national technology base that creates it. Continuous investment in technology acquisition (TA) over a long period builds up the intellectual property (IP) which is embedded in specific products. Acquiring such a body of knowledge, expertise and experience constitutes one of the most formidable barriers to entry to countries and companies seeking a foothold in the global aerospace market. The SBAC contends that the UK's total TA effort (DTI, MoD, EPSRC and industry) is no longer competitive compared to that of our major competitors. While private industry is able to fill some of the gaps, enhanced public support for TA is still necessary to sustain its competitive challenge over the next decade.

TECHNOLOGY AS A STRATEGIC ASSET

  Control over IP represents a strategic asset for a national aerospace industry operating in a global marketplace and vital as a means to pin down increasingly mobile transnational aerospace companies. At its starkest, sales and high quality employment follow the technology. Similarly, control over critical technologies makes a vital contribution to national security enabling the national armed services the ability to specify their own equipment and to support such equipment operationally. In the context of international collaboration, national IP allows the UK to participate at the highest level in joint programmes and to have a strong influence over development and the distribution of work.

THE TECHNOLOGY ACQUISITION PROCESS

  TA must be distinguished from the dedicated research and development (R&D) associated with specific products. There is no clear boundary between pure research leading to TA and some of the applied research conducted in the early stages of programme design and development. However, conceptually they have a different function and are subject to different funding streams. TA is essentially generic, generating a stream of data, knowledge and proven ideas which is available for commercial exploitation often over several generations of products. As such, TA benefits industry generally as much as individual companies. Its benefits and effects cut across the different sectors and tiers of the industry.

  TA is often very long term. UK firms are still benefiting directly from investment in generic technology made in the late 1950s and 1960s. Examples include research into wing aerodynamics conducted by the RAE Farnborough (now part of DERA) which fed into the UK contribution to Airbus. Similar investments were made in aero-engine fundamental technology by both government and industry that underpin the RB211 and Trent families. Comparable histories can be traced in respect of the UK avionics and equipment sectors. The TA process involves a number of public and private agencies—companies, national research establishments, and academia. It also requires sophisticated, complex and expensive research infrastructure such as wind tunnels and test facilities.

  The generic, long-term nature of aerospace TA helps to explain why funding has to be shared between public and private agencies. While private companies do invest in some areas of basic research, the bulk of their investment requirements must be devoted to the launch of individual programmes and the satisfaction of specific customer requirements. Publicly funded aerospace TA, whether located in private industry, academia or national research associations is therefore entirely appropriate. This reflects practice in all of the major aerospace producing states and in other high technology, science-based industries. In economic terms, this represents an aspect of "market failure", where state intervention redresses deficiencies in capital market behaviour to satisfy public welfare goals.

  Investment in TA can be highly leveraged. That is to say for a relatively modest level of funding, large returns can be generated, although in any given instance the outcome may be highly uncertain—another reason why private capital may hesitate to invest in TA. Certainly when compared to the non-recurring costs of a large new civil airliner or aero-engine, or the development of a complex military aircraft, TA is a small part of national R&D investment.

  However, to achieve a world class capability in aerospace, with a critical mass of IP, the sums needed for an adequate TA programme are not trivial. There is also an additional feature of the aerospace innovation cycle that adds to the cost of TA. There is a crucial link to be made between generating basic concepts and commercially useful research. This gap can often be filled by Technology Demonstration (TD). TD aims to reduce the technical and ultimately the financial risk of developing specific products for civil and military customers. TD sometimes, though rarely, entails the development and construction of a complete aircraft, engine or sub-system prototype. More usually, TD involves bench-top equipment and, increasingly, computer simulation. TD often includes the integration of several technology streams, bringing together the work of several agencies, companies and academics.

  The importance of TD was noted by the House of Commons Select Committee on Science and Technology in a recent report. The US government invests heavily in TD generally, and not just for aerospace as a means of reducing the risk of new technology and paving the way for successful commercial exploitation.[1]

UK GOVERNMENT SUPPORT FOR TECHNOLOGY ACQUISITION

  UK public investment in aerospace TA and related TD has fallen significantly over the past decade. The DTI funded Civil Aircraft Research and Demonstration (CARAD) programme has fallen from £104 million in 1972-73 to £21 million in 1998-99 (in 1999 terms) a fall of 80 per cent over the period in real terms. Currently set at some £22 million a year, CARAD's contribution to UK aerospace TA is very modest indeed, certainly when compared with our major competitors (see Attachment). Given the high leverage effect noted above, even at this level of funding CARAD still makes a significant impact on UK aerospace TA. CARAD promotes collaboration in an effective way between the various agencies involved in aerospace TA and give companies opportunities to use such collaborative research to develop the overall business supply chain and suppliers as well as gaining new technology. Without CARAD, the aerospace industry would be seriously disadvantaged when bidding for places on international collaborative projects.


  Although making a useful contribution to UK aerospace TA, CARAD should be seen, as part of a total publicly-funded TA programme. In this respect, there is a serious shortfall in overall spending on UK aerospace TA. This has been exacerbated by a similar decline in the MoD budget for TD and an increasing tendency to buy equipment off the shelf (see Attachment). Aerospace TA is supported in academia through the EPSRC and other Research Council activity. However, there is no clear understanding of the total available nor of its direction. The SBAC contends that without necessarily constraining academic research, the UK Government should ensure that there is a closer match between Research Council funded programmes and UK industry priorities. In order to move forward on this issue, the DTI should be encouraged to undertake a formal audit of UK spending on aerospace TA with international comparisons.

  While the consequences of this deficiency may not yet be apparent in terms of market share and commercial success, failure to replenish the national stock of critical technologies is having a profound and inexorable impact on UK industry competitiveness. UK located companies will begin to lose their competitive edge. Those with the option of investing abroad where the TA climate is more favourable will move core operations abroad. High value manufacturing, employment and business for the national supply chain will follow. The UK will cease also to be an attractive location for inward investment in aerospace.

  There is no absolute answer to the question of how much should be invested in aerospace TA. It should be sufficient to enable UK industry to remain internationally competitive. Nor should any improvement in funding be seen only in terms of additional public expenditure. Following CARAD practice, industry would match increases in public funding.

THE SBAC FORESIGHT ACTION INITIATIVE

  This principle underpinned the SBAC's Foresight Action initiative (See attachment). The proposed Foresight Action programme aimed progressively to redress the shortfall in mainly civil or dual use TA (dual use TA would have both civil and military applications). Foresight Action drew together the interests of several companies and academic researchers and focused on a number of identified TD programmes. Foresight Action envisaged a public-private partnership investment increasing over three years towards a total annual spend of up to £400 million shared equally between industry and government. In the event, only one of the Foresight projects moved forward, the BASTION advanced guided weapons programme part funded by the MoD. Even this is now under threat as MoD support comes to an end.

TECHNOLOGY ACQUISITIONTHE WAY FORWARD

  The report from the Foresight Aerospace and Defence Panel recommended increases in TD investment by both the DTI and the MoD.[2] While these were again quite modest proposals, they reflect a consensus that the UK Government seriously underfunds industry relevant basic and applied research. The clear message from the aerospace industry is that the UK is losing ground against its major competitors and a more favourable TA climate overseas will encourage the migration of core research activities with the implication that high value manufacturing jobs and business for local suppliers will follow. There is already some evidence that UK companies are increasing TA activity overseas. Aerospace TA conducted by UK aerospace-owned companies in the US as a percentage of turnover has increased from 0.6 per cent in 1996 to 4 per cent in 1999 (See Attachment).

  There is no doubting the importance the UK aerospace industry attaches to repayable launch investment for specific projects. But this does not support the generic TA on which the health overall of the industry depends. In the civil aerospace sector, the Treasury is receiving some £100 million net of total public investment in civil programmes, including CARAD and launch investment in Airbus and aero-engines. Recycling some of these returns into a programme of TA and TD activity would go a long way towards redressing the deficiency in UK TA support, with benefits spread across the entire industry.

SUMMARY

  Success in aerospace stems directly and fundamentally from technology and the national technology base that creates it.

  Control over IP represents a strategic asset for a national aerospace industry operating in a global marketplace and vital as a means to pin down increasingly mobile transnational aerospace companies.

  A more favourable TA climate overseas will encourage the migration of core research activities with the implication that high value manufacturing jobs and business for local suppliers will follow.

  The SBAC contends that the UK's total TA effort (DTI, MoD, EPSRC and industry) is no longer competitive compared to that of our major competitors. While private industry is able to fill some of the gaps, enhanced public support for TA is still necessary to sustain its competitive challenge over the next decade

  The generic, long-term nature of aerospace TA helps to explain why funding has to be shared between public and private agencies. While private companies do invest in some areas of basic research, the bulk of their investment requirements must be devoted to the launch of individual programmes and the satisfaction of specific customer requirements.

  The DTI should be encouraged to undertake a formal audit of UK spending on aerospace TA with international comparisons.

  Recycling some of the returns HMG is receiving from past launch investment in a programme of TA and TD activity would go a long way towards redressing the deficiency in UK TA support, with benefits spread across the entire industry.

9 February 2001

RESEARCH, TECHNOLOGY AND DEVELOPMENT (R&D) IN THE UK AEROSPACE INDUSTRY: FACTS AND FIGURES

THE AEROSPACE CYCLE

  Technology is the lifeblood of aerospace. Although there are many difficulties in defining and measuring technology/knowledge creation over time, there are some basic concepts which are relevant to all industries including aerospace. Many aerospace companies generate revenue models which cover 20-40 years and a typical life-cycle will cover conception, marketing, research and development, production, after-sales and disposal. The national aerospace trade association of all European countries (including the SBAC) make use of the following definitions for the knowledge creation process:

AECMA DEFINITIONS OF AEROSPACE R&D AND PRODUCTION

Life-cycle Segment Activities included
Research & Technology
(R&T)
All activities in the fields of studies, research, generic technologies as well as prototyping and demonstrators, representing activities which are not directly attributable to products. They can, thus, be regarded as generic activities and are designed to maintain or expand knowledge and/or the technological basis.
Development (D)Development of a product leading to a series production of that product. It generally also includes acceptance testing and certification.
Research &
Development (R&D)
Sum of all R&T and Development activities (sometimes written in full as R&T,D).
ProductionFrom an industry perspective, production is understood here as turnover generated from sales of products manufactured in series production, from after sales as well as from maintenance and overhaul services. Sales of single units (eg scientific satellite) are not included (they are included under Development). From a government's perspective, industry production for governments is understood as procurement of products manufactured in series production, of after-sales' products as well as of maintenance and overhaul services.
OperationAll activities necessary to operate existing aerospace hardware. Activities related to operations of commercial aircraft by airlines or of military aerospace equipment by the armed forces are usually excluded.


  Source: SBAC, AECMA.

  The OECD provides international analyses of R&D expenditure under the guidance of the Frascati Manual. The Frascati Manual subdivides R&D into three related activities: basic research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view; applied research is also original investigation undertaken in order to acquire new knowledge. It is, however, directed primarily towards a specific practical aim or objective; and experimental development is systematic work drawing on existing knowledge gained from research and practical experience that is directed to producing new materials, products or devices; to installing new processes, systems or services; or to improving substantially those already produced or installed.


  Identifying the boundary between basic and applied aspects of R&D is often difficult and subjective. Many commentators combine the overlapping parts of these two categories into a wider grouping called "strategic research". This is achieved by taking advantage of the definitions contained in the OECD Frascati Manual. This allows for the optional further breakdown of basic research into "pure-basic" and "orientated-basic" and the long-standing UK practice of subdividing applied research into "strategic-applied" and "specific-applied". Strategic research is the sum of orientated-basic and strategic-applied. The wider term "strategic research" described work that has evolved from pure-basic research and where practical applications are likely and feasible but cannot yet be specified, or where the accumulation of underlying technological knowledge will serve many diverse purposes.

WHY CONDUCT R&D?

  The socio-economic objectives for R&D are extremely diverse. Both the OECD and EUROSTAT publish similar objectives for R&D and the global economy. Budget appropriations for R&D are disaggregated into 13 mutually exclusive chapters (aerospace related chapters labelled in bold):

      1.  Exploration and exploitation of the Earth

      2.  Infrastructure and general planning of land-use

      3.  Control and care of the environment

      4.  Protection and improvement of human health

      5.  Production, distribution and rational utilisation of energy

      6.  Agricultural production and technology

      7.  Industrial production and technology

      8.  Social structures and relationships

      9.  Exploration and exploitation of space

    10.  Research financed from general university funds research with very general objectives

    11.  Non-orientated research as in chapter 10 but not financed by general university funds

    12.  Other civil research, all other civil work not included in any of the preceding chapters

    13.  Defence research and development for military purposes.

  Five of the 13 major socio-economic objectives of R&D are aerospace related. In addition, many of the major objectives are sub-divided in categories which contain many further areas of aerospace related items.

UK GOVERNMENT EXPENDITURE ON R&D

  Numerous studies have concluded that total UK R&D spending still lags that of other major industrialised nations. After a fall in total R&D spend during the 1990s, the UK Government has sought to increase both the profile and the levels of R&D spending in the UK (eg Competitiveness White Paper, Foresight Program etc). In 1997, total R&D expenditure in UK amounted to £14.7 billion. The UK Government financed roughly a third of this expenditure (the rest being accounted for by business and overseas sources). As a performer, UK Government carried out roughly 14 per cent of the total R&D spend in 1997. Some of the key points for UK Government financed R&D are:

    —  Total Government funded R&D across all industries in the UK has fallen by 20 per cent in real terms from £5,766 million in 1986-87 to £4,607 million in 1998-99.

    —  Experimental research has fallen by 46 per cent over the 13 year period from £2,974 million to £1,592 million in real terms.


    —  Basic Research (which broadly represents Research and Technology) has increased by 44 per cent over the same period from £569 million to £819 million in real terms.

UK AEROSPACE R&D

  Technology is the lifeblood of aerospace. Without the UK's heavy up-front commitment to the R&D phase of many large-scale projects, such as the Eurofighter and the A380, UK aerospace would not now be at the forefront of the industry's major developments. In order to ascertain the level of the R&D spending in Europe, each member state (including the UK) undertakes an annual aerospace survey via the European Association of Aerospace Industries (AECMA). The following caveats should be noted when interpreting the proceeding results:

    —  There are known differences between aerospace figures from the SBAC and Government sources. The SBAC makes use of both a wider sample of aerospace companies and a wider definition of aerospace than Government based SIC codes. Care should always be taken with cross-sourced data comparisons.

    —  Although the SBAC samples around 200 aerospace companies per annum, obtaining reliable R&D data from smaller companies is often extremely difficult. In cases of non-response, the SBAC estimates R&D spending for larger companies and assumes zero R&D for smaller companies.

  Bearing these in mind, the main points from the SBAC annual survey are as follows (detailed results are presented in Annex A):

    —  Total R&D spend in the UK Aerospace Industry totalled £1.8 billion in 1999 (implying a 10.3 per cent intensity ratio of turnover), of which £242 million was spent on R&T alone (1.9 per cent intensity ratio).

    —  Total R&D has increased by 19 per cent in real terms from £1.5 billion in 1996 to £1.8 billion in 1999.

    —  However, the proportion of this solely related to R&T has fallen by 35 per cent in real terms from £351 million in 1996 to £242 million in 1999.


    —  The UK Aerospace Industry owns substantial overseas assets and in 1999 these companies generated £4.3 billion in turnover and employed over 38,000 people.

    —  Although total R&D amongst these overseas business units has remained fairly constant between 1996 and 1999 at around 5-6 per cent of turnover, total R&T has increased from 1 per cent of turnover to 4 per cent of turnover.

    —  The majority of this incremental increase in R&T has occurred in UK-owned aerospace business units based in the United States.

GOVERNMENT FUNDED AEROSPACE R&D

  Government funding of aerospace R&D can arrive to industry directly or indirectly via other bodies (UK Government funded aerospace R&D initiatives are listed in Annex B). Essentially, there are three main R&D funding sources in the UK for the Aerospace Industry:

    —  Ministry of Defence (MoD)

    —  Department of Trade and Industry (DTI), including the Office of Science and Technology (OST)

    —  Engineering and Physical Sciences Research Council (EPSRC)

  Within each of these organisations there are separate R&D budgets to support various types of R&D activity (the potential beneficiary of R&D funding must determine which of the budget sources applies to their particular R&D opportunity). The UK Government also indirectly supports the UK Aerospace Industry via the European Union (EU). The EU Framework 5 programme, started in 1998, continues to provide focused European support for R&D, with considerable funds now allocated to SME and IT/e-business R&D ventures. Framework 6 in due to commence in 2002. Some of the key results for Government financing of UK aerospace related R&D are:

    —  Although direct Government financed UK Aerospace R&D has increased from £579 million to £653 million between 1996 and 1999, as a proportion of total R&D it has fallen from 38 per cent in 1996 to 36 per cent in 1999.

    —  The Civil Aircraft Research and Technology Demonstration (CARAD) Programme supports pre-competitive research and technology demonstration (R&TD) to enhance civil industrial competitiveness. The five-year phase of the current CARAD III programme ends in March 2001.

    —  Total CARAD funding has fallen from £104 million in 1972-73 to £21 million in 1998-99 (in 1999 terms)—a fall of 80 per cent over the period in real terms.


    —  In 1989-99 the Ministry of Defence (MoD) received £2.3 billion via Government for total research and development.

    —  Although it is not known how much of this expenditure ultimately ends with the aerospace industry, the largest beneficiary of the MoD expenditure for R&D (approx. £1 billion per annum) is the Defence Evaluation and Research Agency (DERA).


    —  Total MoD Government funded R&D has fallen by 33 per cent in real terms from £3,140 million in 1986-87 to £2,096 million in 1998-99.

    —  Total research expenditures increased by 4 per cent and development expenditures decreased by 42 per cent over the time period.


1   House of Commons Science and Technology Committee, Second Report, Engineering and Physical Sciences Based Innovation, Session 1999-2000, HC 195. Back

2   Office of Science and Technology, Action for Future Air Systems, Technology Foresight, Defence and Aerospace Panel, December 2000. Back


 
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