Examination of Witnesses (Questions 20
MONDAY 20 MAY 2002
20. The Shipbuilding Forum established in 1998
set targets for increased competitiveness. This broad based group
comprised of representatives from across the industry and was
the very first time that all the parties crucial to the future
of the industry had sat down together at the same table. How competitive
is the UK shipbuilding industry? What more could be done to improve
competitiveness and revitalise the industry?
(Mr Culley) Only a few years ago the United Kingdom
built 0.25 per cent of the global market; that was its global
market share. A couple of years ago that was 1 per cent. So we
are fighting over 1 per cent of the total global market share
of shipbuilding. In terms of competitiveness, yes, we have strengths.
The University of Newcastle provided a report very recently which
showed that the UK yards had lower wage costs than was experienced
elsewhere in Europe and they reckoned the shipworkers in the UK
had excellent skills, however poor exchange rates, poor levels
of investment and a poor track record of collaboration between
the yardsand I refer again to my experience in Germanymitigated
this. Also productivity figures showed that the UK yards are at
a disadvantage to European and Korean yards, and in the UK yards
typically have to make up a 7 per cent price differential to match
European competitors. An important lesson we learned from the
German visit built on similar conclusions from the Shipbuilding
Forum visit and the Shipbuilders and Shiprepairers Association
visit to the Netherlands. That lesson was the lesson of collaboration
to compete. Both the Dutch and the German yards had examples of
mechanisms designed to help bring the yards together so the available
capacity could be used effectively to secure orders and the costs
could be cut. In Holland, they have a central steel cutting centre
and in Germany, as I mentioned earlier, they have this maritime
industries co-ordinator. That is not to say there are not similar
things beginning to occur in the UK. We believe the Shipbuilding
Forum is an important step forward in bringing the industry players
together, and it has been a success in so doing. Your second question,
21. What more could be done to revitalise the
(Mr Culley) I think I may have covered some of that.
(Dr Crawford) Could I make a general point? There
is an absolute correlation in the developed economies, and it
may also stretch into the developing world economies, between
the levels of capital investment and skill intensity. The more
you invest in capital, the more you invest in the workforce, there
is an unsurprising by-product, and this is true in almost every
industry, and it is that you become more productive and competitive.
It is not exclusive, there are other issues such as the exchange
rate, but industries which are high in capital intensity and high
in skill investment tend to be less vulnerable to market movements,
including currency fluctuations and so on. Indeed it is the direct
experience of the United Kingdom that manufacturing industries
which are highest in productivity gain and highest in international
competitiveness unsurprisingly score highest in investment factors.
I guess the short answer is, the more you invest, whether directly
by the private sector or by Government, the more likely it is
you will be internationally competitive, whether you are making
computers or building ships.
22. Do you believe that one of the reasons why
there is a poor performance of the industry in the UK in comparison
to European countries and Asian countries is that our Government
has not invested in the industry and did not meet the challenge?
European countries and Asian countries are investing huge sums
of money in the industry and there are hidden subsidies, and that
is the reason why our share of the market is so low.
(Dr Crawford) I defer to my colleagues who are more
expert in the history of this. I think a recent report by Steve
suggests that over time, over the decades of decline, there have
been significant levels of under-investment with the not surprising
end-result. I can only repeat what I have just said, it is the
case in all manufacturing sectors, with some exceptions which
are quite unique, that the more you invest in people and the more
you invest in machinery, the more competitive you become.
(Mr Inch) I think certainly the gist of our submission
in advance of the meeting is that there has been under-investment
in product and processes, under-investment in the workforce in
the shipyards, there has been a procurement environment which
has made life difficult for the yards because it is very much
feast and famine as time passes, and I think the UK industry has
missed a lot of the shipping markets which other nations have
successfully exploited. There are a lot of niches in the commercial
market which Britain has simply missed out on.
(Mr Culley) To address the question which Mr Sarwar
raised in respect of hidden or illegal subsidies, the European
Union has put considerable effort into investigating malpractice,
and I must say I understand they are currently frustrated and
are proposing a complaint to the World Trade Organisation in respect
of practices in Korea. This is predicated on the notion that it
is difficult to determine that the Koreans can build ships, as
they do, where the prices are unsustainable without subsidy. The
Korean Government appear to be offering support through debt restructuring,
but I am no expert in these matters and would not want to get
into that. However, there do seem to be three problems if we are
to address the question of subsidies. The first is that the EU
itself is considering re-introducing subsidies for European yards,
and my understanding is that the UK Government at present are
opposed to this, feeling that subsidies will not work. If they
did, Europe would merely be emulating the Korean shipyards. Secondly,
there are existing European examples of subsidy. I mentioned a
moment ago the £200 million invested in Wismar in East Germany
to make that yard viable and modern. Although that was done legally
within Europe under the re-unification process, it nevertheless
could give a very strong counter-argument to the Koreans. Finally,
I quote a very senior European official on subsidies to shipyards,
and his view was many of these are anecdotal and unproven.
23. You were talking about the productivity
of the workforce earlier, would you say that productivity on the
Clyde is due to the fact we have not invested in the tools and
plant required there, and if in fact we had a level playing field
productivity would be, if nothing else, on a par with other countries?
(Mr Culley) I guess that is almost self-evident if
we do not have that kind of investment. I mentioned earlier about
the practice I saw in Hamburg of two men cutting huge bodies of
steel with a computer and a laser, and if that kind of facility
and resource and training was available to the yards here you
would expect to see similar levels of productivity.
(Dr Crawford) There is no evidence anywhere that I
have seen in British manufacturing where our productivity levels
are lower when subjected to the same level of capital investment
24. Can I talk about subsidies. Korea is a pet
hate of mine, which I have raised on many occasions on the floor
of the House. There have been other subsidies given to other yards
in other countries, and some of them have been hidden very well
using EU money. Of course when you look at it, it does not look
like a subsidy, but it subsidises the yards rather than the orders.
Did you have a look at this and see whether we could use similar
(Mr Culley) We did not have a look at this because
our main task was to make sure we could ensure, as far as we could,
we could work with others, the unions, and BAE SYSTEMS themselves,
to make sure there was a robust future for shipbuilding on the
Clyde. Like, I guess, many around these tables we have all heard
allegations of illegal payments being made to other EU countries,
but I repeat the earlier comment I made from a very senior European
Union official who was responsible for this, that many of these
are anecdotal and unproven.
25. Do you think there should be an investigation
(Mr Culley) I would bow to your greater experience
in these matters, Mr Robertson.
26. Much of the debate over many years and indeed
today has focused on acquiring orders for domestic defence purposes.
What are the prospects, both immediately and following on from
the £75 million investment in the next 10 years, for export
orders? What is the international environment like over that kind
(Mr Inch) The Scotstoun Yard has shown it can be a
successful exporter of any high quality ships because it has done
work for the Brunei Government and Malaysia. The problem with
exports is that export orders take a very long time to come to
fruition, the lead time from starting discussions to placing orders
may be years in several cases, and it is not simply a case of
quoting a price, there is a whole complex financial position attached
to these things. You asked earlier about the robustness of the
strategy, I think it has to be said that there are risks in the
strategy, and one of the risks is that export orders are part
of the strategy, so it is important that the yard gets support
during the length of time it takes to develop and move from discussion
to the order book. There are other issues there like the level
of sophistication of the ships which the export markets might
want. Ron said in one of his earlier responses that quite often
the countries which might want to export ships do not want the
sophisticated level of equipment we have to offer because (a)
because it is expensive to maintain and (b) it is expensive to
buy in the first place. So there may be issues about designing
down ships to meet particular markets, and that is perhaps an
issue which BAE SYSTEMS should be asked about.
(Mr Culley) The export of naval ships is a fundamental
element of this strategy and for the strategy to be successful.
One of our jobs is to keep an eye on that strategy, to make sure
the investment programme is going along and everything that has
been intimated by BAE SYSTEMS is actually taking place, and one
of these is that there should be an order won for one export order
per annum. I have signed a confidentiality agreement and so will
not be able to go into any detail, but I can say I have looked
at the approach which BAE SYSTEMS are taking to exporting. As
Steve has said, the gestation period in hunting down and winning
these orders can take several years, but I was genuinely impressed
by the thoroughness which BAE placed on addressing these matters.
It has to be seen now whether it is going to be successful.
27. Following up on the point which both of
you have made, the long gestation period for export orders, has
there been an inclination, as the industry has gone through some
very difficult times, to focus on domestic defence orders because
they are easier and shorter-term to acquire when actually the
longer-term interest might have been to pursue export orders?
(Mr Culley) The strategy calls for both. It is very
important that if the Government or the MoD had not ordered or
made available six Type 45s, we would be in crisis. There is no
question about that. The fact of the matter is, they did. It has
been won by BAE SYSTEMS, they have been built on the Clyde, and
if we manage to secureand I use the royal "we"a
further export order per annum, we will fulfil the strategy.
28. Just following up on what you were saying,
the Ministry of Defence and the DTI have both made clear that
the yards cannot look only to defence orders for the future. I
wonder if you have given any thought to commercial shipbuilding
and to what extent it is possible for Clyde shipyards to compete
for commercial shipbuilding orders and how interested is BAE in
competing for these orders, and are there any Government incentives
for doing so? Can I ask you to address whether the three yard
strategy you talked about earlier is appropriate to the building
of large commercial ships?
(Mr Culley) The Task Force did not look much at the
issue of commercial shipbuilding because the yards on the Clyde
are now mainly naval yards, although we were impressed by the
work which has been undertaken successfully by Fergusons in Port
Glasgow in this regard. Commercial activity is not a Govan issue,
it is a UK issue. Korea and Japan now dominate the bulk carrier
and container markets, and the UK has not invested in the yards
over a period where the foreign yards have reaped the benefits.
Nor have the UK yards secured niche markets such as cruise ships,
which France and the United States dominate. As an example, the
order book for UK yards for 2001 I understand was 31 commercial
ships where the Dutch alone had 248. So commercial shipbuilding
has not played much of a part in considerations on the Clyde.
29. Are you telling us there is little opportunity
for the Clyde yards to extend into the commercial area? How secure
a future is it based purely on defence orders?
(Mr Culley) I think to a considerable extent the future
as we know it just now will be on defence orders and will be on
export orders. The ability of all yards to win orders against
the Korean yards on commercial shipbuilding is at the minute I
would have thought fanciful.
(Dr Crawford) Scottish Enterprise is going to ask
Scottish Enterprise Glasgow on behalf of the Scottish Enterprise
network to lead a cluster analysis on shipbuilding. Included in
that request will be to take a deep-seated look at the opportunities
now and in the future for a whole variety of commercial shipbuilding,
recognising very strongly the health warning Ron Culley attached
to his comments. At a dinner with some university principals last
week a leading Scottish businessman of a successful manufacturing
firm expressed the view that, for example, there is a growing
opportunity for an established presence in what is called the
super yacht market at least at the level of technology support;
his own company supplies very expensive audio systems. Ron is
absolutely right to put in the very strong caveat that we will
look at that as Scottish Enterprise Glasgow for the future.
(Mr Inch) I can answer Mr Weir's question with a quote
from the Shipyards Task Force which I think makes it quite clear.
It says, "However, given BAE SYSTEMS current business strategy
the success of this nationally important business is thoroughly
dependent on the continued success of winning warship design and
build contracts." So the strategy is fundamentally based
on this being a defence shipyard. What the Task Force did discuss,
however, is whether it gave them stability to start fishing for
further work, and I think a successful business strategy would
be, depend on your core business and then go out and find your
subsidiaries, so to speak.
30. Given that, and given that any naval force,
whether it be the UK or an independent Scotland, has a finite
demand for warships of any kind, what you are really saying is
that the long-term future of these yards depends on export orders.
(Mr Culley) Two answers to that, Madam Chairman. One,
is, yes, this strategy, which is what we are commenting on today,
does depend on export orders, but if I may paraphrase Steve from
a moment ago, when this investment is seen within the yards and
as the stability beds in, then, as my colleague, Robert Crawford,
announced, we will address these matters through the cluster evaluations
of the shipbuilding industry. It may be that in the longer term
we would look at this but at the moment this strategy is predicated
almost entirely on building warships, building for the naval market
and for export.
31. I have now looked at page 44
which you mentioned earlier, and it is even more vague as I read
it. I do not see anything in here about investment for export
work or anything which mentions the shortfall in jobs. Correct
me if I am wrong, but it is 1,200 jobs which are guaranteed on
the Clyde on the Type 45 Destroyers, and that leaves a shortfall
of some 1,000-plus workers it has to have work for. The ALSLs
will take up a lot of that slack, but where are they going to
find work to keep these people employed at the level they have
at the moment, or the level they have at the moment minus the
400 who are still outstanding for redundancy?
(Mr Culley) My understanding is that
BAE SYSTEMS are of the view that this 2,000 base that they hold
to is adequate to build the Type 45s which will work their way
through the pipeline plus one additional export ship per annum.
32. Do they know where these export ships are
(Mr Culley) No, and as I mentioned earlier, there
is quite genuinely a very sophisticated approach to seeking out
work worldwide in this regard. They have a good track record in
building these ships but, as Steve mentioned earlier, they are
very expensive, very sophisticated and it is currently only the
Brunei Navy and Malaysia which can afford them, or has been able
to afford them. We have not seen the investment which is referred
to on page 44 yet but one of the tasks of the Task Force will
be to make sure that is monitored.
33. Has the investment shown any kind of flexibility,
so that they could use the investment for making export ships?
(Mr Culley) As I mentioned earlier, a proportion of
the £75 millionI do not have the notes in front of
mewas vague or indeterminate and that would render the
sum flexible for the purposes you have just mentioned.
(Mr Inch) I think it is worth commenting in terms
of exports that BAE SYSTEMS has set up a separate export shipbuilding
division within it, which has about 20 people working on identifying
potential markets, forming relationships with potential collaborative
partners. So they do seem to be taking this very seriously.
(Mr Culley) One of the other tasks of that unit is
to find ways of making the systems less sophisticated and therefore
less expensive, so we can compete with the Germans. The Germans
have a much more modular approach to this and one of the things
the unit is going to do is look closely at how they do this.
34. That strategy which you have just described,
Mr Culley, is there not an in-built constraint there in terms
of somebody who wants a very short timescale for a delivery in
terms of the numbers you have spoken about?
(Mr Culley) If a warship was ordered by a foreign
navy at short notice?
35. Yes, in terms of delivery at short notice.
Are you not constrained by these numbers?
(Mr Culley) I guess they would be, almost by definition.
The task would be to redeploy staff and recruit more staff to
fulfil that order.
36. You have mentioned the potential value of
collaborative ways of working which are used by other EU states
in particular, has the Task Force Report led to any revised practices
within the UK shipbuilding industry being discussed? Would any
of these have beneficial consequences for Clydeside?
(Mr Culley) I understand the Task Force Report has
been discussed at the Shipbuilders Forum. I further understand
the DTI will report back to the June meeting of the Task Force
on what progress has been made but I am not aware of the details
of that just now.
37. Is the skill base in Clyde shipyards appropriate?
Are training or re-training opportunities sufficient? The Task
Force expressed some concern about skill shortages and pointed
out that 20 per cent of the Clydeside workforce was over 56 years
of age. What efforts are being made to encourage young people
into the shipbuilding industry?
(Mr Culley) The Task Force share your concerns, Mr
Sarwar, that 20 per cent of the workforce is over 56 years old.
There has been a comprehensive training needs analysis undertaken
and it is accepted that certain occupations are at risk. One of
the things that BAE SYSTEMS are actively seeking to negotiate
and have been negotiating within the trade unions over the piece
is flexibility agreements to avoid the hire-and-fire approach
which Steve mentioned a bit earlier when they can secure improvements
in productivity. That will come about as a consequence of investment
in plant and also investment in people, and that is something
BAE SYSTEMS actually have a good reputation for.
38. Can I ask you about training. They are setting
up, I believe, modern apprenticeships. What happens a lot of the
time with modern apprenticeships, they do the apprenticeship and
at the end of it they are without a job. What kind of safeguards
are we putting in place to ensure that not only do these modern
apprentices get jobs at the end but we can attract the right kind
of calibre of person into the industry, which we hope will be
sustained for a long time?
(Mr Culley) I stand to be corrected here but my recollection
was that BAE SYSTEMS in announcing redundancies intimated that
they would not make redundant anyone undertaking a modern apprenticeship,
and that they would retain them for a further period of one year.
I can say that if you compare the industry in the UK with its
counterpart in Germany, there does seem to me in Germany to be
a comprehensive approach taken to persuading young people to join
the yards. I do not know the answer to this but I would hazard
a guess that the average age of the workforce or 20 per cent of
the workforce in Germany is not 56 years old. It seems to be far
younger than that. We do have to have a very close look at the
image of the yards. A few weeks ago I was asked to step in for
the Minister for Enterprise, Transport and Lifelong Learning and
to speak at a conference in Liverpool on shipbuilding, and the
poster for that was commented upon by all, and that conference
was attended by shipyard workers from Tyne, from Barrow, from
Birkenhead, from all over the UK. The poster was of a more experienced
man who was covered in grime with a bonnet to one side of his
head, and it frankly made the shipyards look like they were antiquated.
In Germany that would have been someone in an open neck shirt
carrying a laptop.
39. Did you discuss with the company how to
attract people and give the industry the kind of face-over that
is required to make it look like a forward-thinking company and
attract some of the top graduates and some of the best school
(Mr Culley) The fact of the matter is, Mr Robertson,
we do have some of the top graduates, we do have these people,
it is whether there is sufficient investment to do this increasingly
for the future. If you step into the design shop of either yard
in Scotstoun or indeed Barrow, it is very impressive high-tech,
green plants in the corner, a very modern atmosphere there with
the highest technical specifications available. In Barrow I was
able to don what appeared to be a crash helmet with a viser which
was virtual reality, and the computer image which was on the monitor
in front of me when I put that device on permitted me to walk
around inside a warship in my mind, as it were. So the technologies
are there. The issue is whether or not we can actually draw that
to the attention of the potential workers of the future.
4 Clyde Shipyards Task force Report, January 2002. Back