Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses (Questions 100 - 119)




  100. So the amount you had invested was included in that £75 million?
  (Mr Phillipson) The amount we had planned to invest was included, yes.

Mr Robertson

  101. In the Task Force it says, "Of the estimated £75 million investment shown for the Clyde, the following items have been specified.", and it goes on to list them. In fairness that would show things that are going to be invested in, not that have already been invested in. You are now telling me then, if half of that had already been invested before the Task Force had met, you are now counting them as another good bit of work you have done, but it is not.
  (Mr Kirby) I can submit to the Committee a piece of paper that outlines the £75 million.[4] As I say, pages 43/44 of the document outlines the investment plan by year. This year we have committed to spend I think it is £9.6 million to be precise, and we will spend £9.6 million this year in our Clyde yards.

  (Mr Phillipson) Please understand that this was an investment strategy to support a business strategy. The business strategy was formulated as we went through the year 2000. What we did with the Task Force was to test that strategy and also look at, for example, how we could mitigate the redundancies that resulted from the downsizing. This was not about a deal; this was about delivery of a business strategy that made sense for the shipyards, its work force and our shareholders.

Mr Lyons

  102. Mr Phillipson, the last time we took evidence we heard about German shipbuilding and the use of a co-ordinator. Do you have a view on that, and are there any advantages or disadvantages in having that position in Britain shipbuilding?
  (Mr Phillipson) To be honest, I do not have a clear view, and the reason is it depends on the powers or responsibilities of that individual. I have seen a little bit of the work of these individuals in Germany. I worked in Germany for three years in the aerospace industry, and they also have an aerospace co-ordinator. It can be very helpful but it very much depends on his role and responsibility, and what we can look to that individual for.

  103. But, in terms of German shipbuilding, something comparable in terms of power and responsibilities may have a chance of success in the way the Germans have?
  (Mr Phillipson) It might. I suspect it is a different situation in the UK. If you look at the way the German industry is structured, if you look at, for example, investment opportunities they have had in East Germany because of unification and you look at some of the history of co-operation between their yards and you compare that with the history in the UK of quite severe downsizing in recent years, fierce competition between the yards, we are in a different situation, so the precise German solution I suspect might not be ideal for our situation. I think we could have a situation where there was a stronger representation in Government for the interests of this industry but how we do that and what we do I do not have a clear view about. I doubt whether the precise German model would automatically be the best thing for the UK

Mr Lazarowicz

  104. Broadening the subject beyond BAE itself, can you tell me how competitive you consider the UK shipbuilding industry to be and what more could be done to improve competitiveness? In particular, I know there is a shipbuilding forum which was set up a few years ago. What is your assessment of that forum in helping improve the competitiveness of the industry?
  (Mr Phillipson) I will defer to Simon on the shipbuilding forum because I have not personally attended it but, on the competitive issue generally, firstly it is very difficult to measure competitiveness. We operate in the UK warship market primarily and one of the distinctive features about that market is our defence forces hate coming second. As a result they have fairly demanding requirements and standards; they like warships that win. Those standards are not the same as the standards that other people operate to. If you compare what is required to design and build a UK warship with others, you have not got a like-for-like comparison. Again, it might be interesting to ask the Minister later this morning whether he feels he gets good value for money on the warships he buys. My advice is they do very well. The MoD believes the value for money they get from British industry is excellent and if you compare us with the United States, for example, who do have similarly demanding design standards, and I think we are extremely competitive. Occasionally we get the opportunity for a straight head-for-head comparison for value for money competitiveness. When we do, all the evidence is that we are very competitive, but you have to recognise some differences. For example, because we are a war-shipyard we carry a level of overhead that some commercial yards would not. If you look at the manhours it takes us sometimes to do a job, the manhours can be very competitive with a commercial yard, but because they are having to carry the overheads of the warship business, if we load the manhours completely with those overheads, we are not competitive. That is why for infill-work sometimes we have to not recover all of our overheads to remain competitive, but on a like-for-like comparison there are bits and pieces of evidence that say we are very competitive, but it is difficult to get like-for-like because the UK does demand some quite high standards in its warships—higher than many other nations.

  105. But where we can get a like-for-like comparison, can we get improvements in our competitive position?
  (Mr Phillipson) Yes, and typically they come about through investment. We have an example at the moment which is not Scottish but I will quote it to you nevertheless, on the astute nuclear submarine programme, we have invested in a fair degree of automation around manufacturing the rings of the hull, and we can demonstrate that we have a huge improvement in quality and a 30 per cent reduction in cost in manufacturing the structure of that submarine compared to its predecessors, and it is largely down to some particular pieces of investment we were able to make both in the design of that product and in its manufacture. If you look inside the Type 45 today there are many examples where we are able to design and invest in manufacturing to take cost out of that product. What we have not done in the last few years is invested in some of the R&D that would have made that easier, or the skills development or the facilities development, and one regret I have is that when you come along with a big programme like Type 45 it is a wee bit late to do the R&D. We have had examples where, faced with tight budgets, we have taken the challenge of that budget but, frankly, we did not get the R&D done before we took the challenge and sometimes when you then introduce novel techniques to take cost out they backfire on you a bit, and we have examples where we have introduced very new technology, and it has not gone right and it has cost us a lot to sort the mess out. But in general you have to keep improving competitiveness, you have to keep investing in both design for manufacture and the manufacturing skills and facilities, but finding the money to make those investments is difficult; the UK is not a big investor in R&D in these areas; in fact, on the contrary, in the warship field we traditionally have had many of these skills in the MoD, and until programmes like Astute and Type 45 the design authority for warships was always in the UK MoD; they did their own internal R&D and they basically instructed the industry how to build. That has changed in the last few years, but in two ways: firstly, they pushed the responsibility out to industry but, secondly, they have stopped investing in it and they are having to downsize their own technical skills but there is not an easy means for us to up-skill our facilities and there is not the money available to transfer the R&D and the know-how and the facilities, and we have had some difficulty because of that. Going forward, we have to invest continually in improving our design skills, our manufacturing skills, and our manufacturing facilities because this is a treadmill. You cannot stand still: it is about continuous improvement.
  (Mr Kirby) On the Shipbuilding Forum, it has been running I guess for about three years now. In terms of views, it is a useful exchange of views within the shipbuilding community and interested parties and I think that is what it is: a useful forum for an exchange of views. Whether it could be made more effective I am not sure. It relates partly back to the point of view that you have a shipbuilding co-ordinator and the role of that, to give that some real teeth to achieve. But I think the Forum itself is a useful forum for an exchange of views. It gives people the opportunity to understand what is going on nationally and internationally, but that is about it.

  106. Do you not think it might be a good idea to lift it up from being a platform for the exchange of views to something more, particularly given the discussion we had earlier?
  (Mr Kirby) Exactly what form that would take I am not sure but I would say certainly we would welcome an opportunity to discuss how it could be used more effectively, yes.

Mr Carmichael

  107. Is "useful forum for an exchange of views" a polite way of calling it a "talking shop"?
  (Mr Kirby) You can make your own judgment on that but I think it could be made a more useful forum. It has the right people—or it could have the right people there supported by industry. Certainly we would commit to that and we would be quite happy to engage on discussion on how that could be done. It does bring in the shipbuilding co-ordinator debate and what the role of that person would be, because clearly they would be the focal point of that forum.

  Mr Carmichael: To use another polite euphemism, I hear what you are saying!

Mr Joyce

  108. Mr Phillipson, what you said earlier about Britain's armed forces not wanting to come second is entirely understandable. There are areas of procurement strategy, not necessarily naval, where the Government and the armed services themselves have accepted an element of compromise, where they have chosen to buy off-the-shelf or abroad and have compromised on the design spec that they then lay down to the industry. Is there any scope within shipbuilding or not?
  (Mr Phillipson) Yes, and I am a big enthusiastic fan of smart acquisition when it works well. You may be aware before taking this post I ran the Type 45 programme for its first two years. On that programme, unusually, MoD started off with some clarity about the budget that was available, and they had some very key requirements that could not be compromised but beyond that they were up for compromise, and they were willing to engage with us wholeheartedly, and really effectively, in discussing what the trade-offs were as we went through the design to be able to satisfy the needs of all the user community—and that is complex because there are people writing requirements, people operating the ships, people operating support arrangements, all having an impact, and corralling that group to participate in those trade-off discussions is not easy. But it worked well on 45 and continues to do so, and we have been able to make some pretty massive trade-off decisions, many of which had benefits downstream for the next 20/30/50 years. We have clear through-life benefits because we have adopted a different approach. I do believe at the moment, and my experience at the moment is on the naval side of MoD, there is a real enthusiasm for practical decision making about what is needed, and what is not because it is archaic. There are areas where commercial standards are ahead of military, and we need to drop the military and move to the commercial, but with some care and sometimes there is a danger of not doing enough work really to understand the implications of the change, and that comes back to R&D. It would have been really nice if, over the years, we had spent more money on R&D to say, "Can we apply these commercial standards in the military market?". Regrettably we have not done that yet; I think it is something we need to pay more attention to in the future and, by the way, we also need to do it with a community who can use the R&D. It is no good paying a five man consultancy team to do a report: you really have to take the designers who have to design the warships and have them understand how you can migrate standards. But it is going on; it is the way forward; there are a lot of examples on it that are there now on Type 45 but it still has to be fit for the purpose, and the purpose is still "do not come second".

Mr Weir

  109. Throughout the evidence hearing most witnesses have stressed our need to increase exports, and Scottish Enterprise said that sustainability on the Clyde was dependent on at least one new export order a year. Can I ask you to what extent the longer term future of shipbuilding on the Clyde is dependent on winning at least one new export order a year? What size of export order would you require, since there is obviously a wide spectrum, and is it a realistic target to ask for one a year?
  (Mr Phillipson) You ask the question in a good week, and any of you free on Saturday morning are welcome to come and join us watching the launch of our third OPV for Brunei from the berth in Scotstoun, and it is only a couple of weeks now since we were awarded the Queen's Award for Export Success from export shipbuilding. We can export ships; I think the Malaysian Navy which has two excellent frigates are delighted with their product and very interested in procuring more, and the Bruneian ships are tremendous. We do need a reasonable level of export business as part of the business plan that we have put forward with the Task Force. You can equate it approximately to about a ship a year but it very much depends on the size of the ship. At the moment we are putting through the Bruneian ships; we have three on the river at the moment—or will have on Saturday. They are about the size of ship that probably fits the bill. If we get one or two larger ships they keep us going more years, so it is a very rough measure, and it is about a ship a year. So if we get an order for two or three ships that is fine; that will keep us going a year or two, but we do need a level of export work. We did show the Task Force the workload forecast for the business and you can identify in that the work we know about, the probable work, and the possible work, and in that possible slice there is a fair amount of export. Again, the good news is I can see customers who could give us the work we need for the next few years, and we are in very active discussions, and I do know we have had strong personal support from the MoD at Secretary of State level in recent weeks, so I am optimistic that we should be able to bring some of these orders in but it is a tough market out there. We did present some evidence to the Task Force about how many orders there are out there, and if you look back over the last few years there are not that many. We are in the up-market end: we do not sell floating bath tubs with a pea shooter on the end but serious warships, and much of the market is closed to us because people want to design and build their own products. The open market to us can, however, still potentially deliver the level of business we need, and we are very actively pursuing that.

  110. You say much of the market is closed. Given that we are discussing the fact that the UK wants, quite rightly, to keep its warship manufacturing within the UK and you are finding that other countries are doing exactly the same, you mentioned Brunei ships, do you have any other orders on the books for export at the moment?
  (Mr Phillipson) We do not have any other export orders on the books at the moment. Regarding people wanting their own capability, a number of things go on. The Task Force report, for example, talked about technology transfer. Now, that is important in some markets. There are markets that are completely closed. The United States are not going to buy offshore—"Buy American". France and Germany are similar sorts of markets. There are markets that are closed because of defence policy matters—Taiwan—but that still leaves a fair part of the world that does buy offshore. Some of the nations that are growing their industrial capability want to use purchases as a way of technology transfer and grow their own capabilities. We have not done a huge amount of that in the shipbuilding arena but are prepared to. We have done a lot in the aircraft area where we have taken products and put them into licensed manufacture in other countries and grown their capabilities; we have the skills to do it and regrettably it is part of the business we are in, so we will bid work of that kind. If people want it, what we will typically try to do is say, "We will build the first one or couple and then teach you how to build the rest", and that is part of the business we have to be in. So we will do that where necessary but we do try quite hard to make sure we get a decent slice of it first before we start transferring it across.

  111. So is there a diminishing market? The logic of what you are saying is that there has been a diminishing market for a number of years but that you are transferring technology effectively to other areas for ships.
  (Mr Phillipson) Yes, and that comes back to the point about competitiveness. The demands of the market move on year by year; we have to keep running ahead of the other guys. So as we see more demand from the product what we have to do is invest in where the demand is going and be prepared to release to some of these other nations yesterday's capability in technology. Frankly, for some of them, that is all they can cope with. If you have not built warships, do not try to start on a nuclear submarine or an aircraft carrier because you will not do it. You have to start with something simpler. But it is the nature of these sorts of businesses that, because nations want their own capability, to survive you have to keep ahead of them and be in a position where you can offer something special that they cannot easily reproduce locally.

  112. Are you also trying to get non military work in the export market?
  (Mr Phillipson) Yes. As was explained in the Task Force Report, the strategy is to use commercial work to infill gaps. It is not a market where we believe our skill-set and our facilities can be competitive on the world scale as a profit making business, and I think the history of British shipbuilders over the last few years, and even European shipbuilders, largely confirms that.

Mr Sarwar

  113. To safeguard the long-term future of the shipbuilding on the River Clyde, it is the unanimous view that BAE SYSTEMS has to bring in commercial and export orders. The Government can give you full support—and I am sure the Government is, along with trade unions, the Scottish Executive and everybody, but unfortunately there is a fear among the politicians and trade union members that when it comes to tendering at competitive prices, BAE SYSTEMS so far has not been able to. Is there a realistic chance that in future you will be able to offer competitive prices during tendering for export and commercial orders?
  (Mr Phillipson) Specifically, I can quote you the example of the anchor handler we launched and delivered on budget earlier this year, competitively priced, and very successfully. It was a classic piece of commercial infill and it was a good programme. We will continue to bid for and win programmes of that kind but the strategy we outlined to the Task Force, the strategy which the Task Force confirmed after detailed review as being robust and sound, was that commercial work is infill. We are basically a defence contractor building complex warships; there is a market for our export product; we need to win some of that export market; and that is what we have built our strategy around.

Mr Carmichael

  114. Can I try and pull together some of the threads about commercial shipbuilding that you have already referred to? There is on record Government encouragement for outfits such as yourself to go into commercial shipbuilding. To paraphrase what you are saying this morning, you seem to be saying, "That is not what we do and it is difficult for us to do it". Firstly, you indicated that you have tendered and you have sometimes not been successful in respect of contracts that you feel really you could not have bid for any more cheaply. Could you give me some indication of the percentages we are dealing with here of bids successful against bids made, in very round figures and, to go on from that, what active and material encouragement are you getting from the Government to support the development of commercial shipbuilding on the Clyde? Finally, on subsidies abroad, you were talking about inexplicable failures to win contracts. Are you saying that is because you think that there is some force behind the bid that is successful that is helping them make that bid and, if you have these suspicions, do you ever follow them up?
  (Mr Phillipson) In terms of statistics, I do not have any. It may be we can generate some but I do not have any. On the question of support for commercial work from the Government: I am not sure particularly that I am aware of any. Simon, are you?
  (Mr Kirby) I think we have had occasional instances where we have been put in touch with particular opportunities and that is about as far as it goes and we have explored some of those opportunities that I have been aware of. Whether there has been any other I would not know but that is about the extent of it.

  115. So it is mostly just up to yourselves?
  (Mr Phillipson) In terms of making sense of a piece of business, yes. To give you a different example, one of the areas where some European yards have been extremely successful is the cruise liner industry. In France, Italy, Finland, there are yards churning out very large numbers of cruise liners. The United States had a problem with this because most of the cruise liners seemed to be operating either to Alaska or around the Caribbean, and if you go to Miami you will see half the European product there and the United States' Government and its shipyards thought it was a bit of a problem, so they passed the Jones Act which says that if you want to operate in and out of American ports you have to build your ships in America. We could try that in the UK but we have not got that big a cruise industry anyway and, frankly, the consequences in the United States have not been great. I know of one yard which took an order for two cruise liners, a military yard, which took the order knowing that they were going to lose a fortune on them and they were priced way above European levels. That particular order has now become a casualty of September 11 and various other things, but it is absolutely clear in the United States that, despite very aggressive government intervention, their experience so far of having cruise liners bid for and made by their defence yards has not been good. It has delivered nothing by way of output yet. There is evidence of other programmes in the United States where they force commercial ships into defence yards, and that has been disastrous. I honestly do not believe there is any good evidence that you can take a competent warship builder, with their overhead and cost structure, and apply that to the aggressive commercial market there is out there now because you are competing with eastern European nations, Far Eastern nations, nations which have had masses of subsidies, have a much lower cost base and are not required to deliver profits. It is a jungle out there. The subsidy issue is very difficult. We do not, as a matter of policy, make it our main business in life to find out how other companies finance themselves. That is not our bread and butter. I can tell you that it is not as simple as direct subsidy is. A lot of things go into how you make a price and what are allowable costs. The UK Ministry of Defence has an overhead structure, which they agree with contractors periodically, that says what you are allowed to charge to a programme and what you are not allowed to charge to a programme. I have done a lot of business in the United States. I can tell you that doing business in the United States is much more attractive than doing business in the UK because the two departments of defence have very different approaches to risk and what is an allowable cost. That is not a subsidy; it is just a different charging structure. The UK MoD wishes industry to be the holder of risk. The United States Government will not allow industry to hold development risk. They say development risk has to be held by the government and development is cost plus. Most of our business is first of class development. We are carrying huge risks, often with slim profit margins. In the United States you would not be allowed to carry the risk. You must get all costs plus a margin. That is not a subsidy. This is a difficult area. I believe we can make sense of the business plan we have with export business and UK business and occasional commercial input. What is important for us is that we make sense of our business.

  116. The business for outfits such as yours going into commercial shipbuilding is really a bit of a red herring, is it not?
  (Mr Phillipson) I honestly believe it is. You can look at some of the yards that have tried that in the UK. For example we have Govan in our portfolio, a yard with a commercial background. We have seen Cammell Laird recently trying to break back in and then it failed. This is not an area where I think the UK can easily get back into being a big supplier. We get the odd bits and pieces, yes, mainly on a limited profitability in-fill basis.

Mr Joyce

  117. Following through that assumption that you are essentially a warship builder and that you build essentially for a home market, which is the Ministry of Defence, a large critical mass, the Ministry of Defence clearly wants conversely to purchase products produced at home. What would the effect be on Scottish yards in terms of winning work if the Scotland were not part of the UK?
  (Mr Phillipson) I am really not sure I am qualified to comment on this.

  Chairman: I do not think you are qualified, Mr Phillipson, to answer that.

Mr Duncan

  118. I turn to the evidence about the Task Force report, which is an excellent document in terms of providing a route map through this whole issue. One of the recommendations was that we need to explore the further opportunities for collaborative ways of working through the industry. After the report, have there been any changes and how is that working in practice? What gains could be made and what beneficial consequences could there be for Clydeside in particular?
  (Mr Phillipson) I am enthusiastic about getting better relationships around UK industry. I think that we have to look at how we survive and thrive nationally. This is not a big enough market for us to be at one another's throats, and, in particular, there are some things on the horizon which demand all we have in the UK, and I look at the aircraft carrier in particular. Building two carriers in this country is going to demand the best of what we have got, wherever it is. I have been very pleased on Type 45 that we have been able to establish a really good relationship between the prime contractors, the shipyards and Vosper Thorneycoft as a major subcontractor—and that is working. That will continue to work for a long time to come. We have put those players together and I personally have watched over them the last 18 months or so. These are guys getting on with the job. It is working well. We have a close relationship with Swan Hunter and the ALSLs. They are the lead yard and we support them. We are working very closely and very well with them. I think there are more things of that kind we need to do. The carrier does provide a good opportunity for us to make it happen. Again, I come back to some comments I made earlier this morning about ongoing discussions with MoD on how we approach the carrier programme, not at prime level but at shipyard level. As an industry, we do need to sort out with MoD and the primes how we can work together, how we need to work together, to deliver the design and build those ships in the timescales that everybody wants. So I am enthusiastic. We are beginning to make some progress. However, I would also say that we still have a long way to go, specifically in terms of the Clyde. We see the Clyde as being our centre of excellence for design engineering of surface ships and also to build a first of class. The facilities and the workforce on the Clyde, let us be quite honest, are the best in the UK and the biggest in the UK by a significant margin. If we are going to see more collaboration in the UK, I can only see the skill base we have in the Clyde as being good because I see that as being the centre of gravity, the nucleus, around which we can build those relationships.

Mr Robertson

  119. In the Task Force report it talks about the Government's role and co-operation with various Ministers. Have you had contacts with the Scotland Office in regard to ongoing business?
  (Mr Phillipson) I might ask Simon to answer on a more traditional basis rather than from my recent months in post.
  (Mr Kirby) If you look back over the last 12 months, we have had dialogue with the Scotland Office and the Scottish Executive really around the whole issue of shipbuilding in the UK, where we see the Clyde fitting in. As Mr Phillipson has just described, from a surface ship point of view, that primarily is round Clydeside.

4   See Ev 48. Back

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