Select Committee on Trade and Industry Minutes of Evidence


Memorandum by the Society of British Aerospace Companies (SBAC)

PRODUCTIVITY AND COMPETITIVENESS OF THE UK AEROSPACE INDUSTRY— WINNING THE GLOBAL COMPETITION FOR AEROSPACE

SUMMARY

  The UK Aerospace Industry is world class and has generally reached levels of productivity and competitiveness that have enabled it to win a large share of world aerospace business. The industry is not complacent and is undertaking investment in products and processes which will support future sales and maintain the drive towards improved productivity.

  The events of 11 September and its aftermath are having severe impact on the UK civil aerospace sector. But UK aerospace companies are fundamentally sound with a deep and extensive set of world-class technologies and should whether the current crisis.

  However much effort is put into improving the productivity and efficiency in the aerospace manufacturing system, without an adequate national strategy for Technology Acquisition and other measures to support the UK aerospace technology base, the competitiveness of UK aerospace will inevitably and inexorably decline. Technology Acquisition, and the provision of an adequately funded national strategy to support the aerospace technology base, remains the critical issue for the industry.

  It is essential that the UK aerospace industry continues to "own" its intellectual property. This does not mean that companies must be British owned; the key test is that the aerospace industry in the UK is at the centre of high-level research and manufacturing.

  There is a fierce competition worldwide to acquire the capability that the big aerospace companies represent. Governments play a key role in this competition, defining the terms of trade, investing in the national R&T infrastructure and generally improving the investment climate. Unless UK industry and government jointly define and invest in national intellectual assets of the technology and capabilities essential to the UK, more companies will react to market forces and more sections of the UK manufacturing base will move overseas.

  In order to sustain the UK Aerospace position, the industry needs a level of public funding for technology acquisition and demonstration comparable to that of its major competitors. The SBAC also argues that there could be a more co-ordinated use of existing funding in the defence, civil aerospace and academic sectors.

  The development of an active and coherent defence industry policy will also play a key role in maintaining the attractiveness of the UK as an investment location. This has to be more than just the sum of procurement decisions. It should include strategic investment in technology acquisition, continued reform of the procurement system in partnership with UK industry, and commitment to a strategy that fully and explicitly evaluates the benefits of retaining a strong indigenous capability in procurement decisions.

WINNING THE GLOBAL COMPETITION FOR AEROSPACE

INTRODUCTION

  In January 2001, the Trade and Industry Committee conducted an inquiry into the UK Aerospace Industry. The SBAC drew attention to the problems and challenges facing the industry were then summarised under seven headings; The Competition for Location of High Technology Industry, Research and Technology, The Risk Of Hollowing Out of the Industrial Base, The Government as Customer, The Importance of Transparent Markets, The Environment and Education and Training. The main driver for change was the increasing globalisation of aerospace design, development and production. Moreover, based on the evidence of the patterns of inward and outward direct investment in world aerospace, UK Aerospace is especially sensitive to the globalisation process. [1]

  The events of 11 September 2001 have had a dramatic effect on the short to medium term outlook for the commercial aerospace sector. The SBAC has already submitted a memorandum on the impact to the House of Commons Environment, Transport and the Regions Committee. An updated summary of this evidence is attached below (Attachment A). However, the underlying issues and problems of the UK Aerospace industry exposed by the January 2001 inquiry have not changed. Indeed, the long term survival of large parts of the UK Aerospace Industry and the contribution they make to UK wealth creation will depend in large measure in addressing long term needs, especially in the area of technology acquisition.

THE UK AEROSPACE INDUSTRY

  With 151,000 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 80 per cent of the value of a typical aircraft is added. UK Aerospace is a knowledge-intensive industry, accounting for 9.5 per cent of UK manufacturing's entire 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. Around 11 per cent of the total workforce is involved in R & D. In total, the industry spends 10 per cent of its turnover on R & D, of which 40 per cent is funded by companies. [2]

  In 2000, the UK Aerospace industry generated a domestic turnover of £18.25 billion, of which 60 per cent was exported. Fifty-six per cent of turnover is in the commercial sector and, given the slow growth of defence sales, the civil market was viewed as the most important over the next decade.

  Aerospace is a leading exporter, accounting for 7 per cent of the nation's total exports and enjoying a consistently healthy trade surplus. Over the last 10 years, UK Aerospace made on average a £2.5 billion annual contribution to the UK balance of trade—last year this was £3.8 billion. UK aerospace sales have risen steadily since 1993, with world market share increasing from 9 per cent to 13 per cent. The main areas for growth has been in the civil sector, now accounting for over half of UK aerospace sales. UK companies also employ nearly 47,000 outside the UK with a turnover of over £5.6 billion. Foreign-owned companies located in the UK generated nearly £2.7 billion in turnover supporting over 20,000 jobs.

  The benefits of this success are spread widely throughout the UK. SBAC estimates suggest that there are over 2,000 companies comprising the UK Aerospace Industry. There are obvious local concentrations of aerospace activity in the North West, South West, South East and Midlands, Scotland, Wales and Northern Ireland, but there are few regions of the UK that do not have some aerospace presence.

The Aerospace Supply Chain

  The UK Aerospace industry comprises a number of core companies (systems integrators and Original Equipment Manufacturers) who undertake the bulk of design and development work either independently or part of international consortia. These firms act as "routes to market" to extensive supply chains of smaller firms, including a large number of small and medium sized enterprises (SMEs). Not all of these are defined as aerospace companies, but many are dependent on aerospace business for a significant part of their turnover. An SBAC survey of the supply chains of four leading UK aerospace companies (BAE SYSTEMS military aircraft, Airbus UK, Agusta-Westland, Rolls-Royce) revealed that 82.5 per cent (2,125) of the total number of companies were UK based, responsible for 71.1 per cent of value of contracts allocated in the sample years (1999-2000). While this level does include some large original equipment manufacturers (OEMs), by far the majority of surveyed companies recorded an aerospace turnover of less than £40 million and over half, less than £10 million per annum. [3]

UK Aerospace Productivity and Competitiveness—An Assessment

  In an industry where, in many cases, few direct comparisons can be made between companies or facilities and where political factors often undermine industrial efficiency (especially in international programmes and in the defence sector), there is evidence to support the assertion that in general, UK Aerospace is world class. UK companies have world class technological capabilities in military aircraft systems integration, large commercial aircraft wings, aero-engines and impressive depth in mechanical, electrical equipment and subsystems. UK companies have consistently won business against fierce competition in US civil and military markets. Compared to the US industry, European productivity overall only lags by 5 per cent and as the largest aerospace industry in Europe, the UK will reflect that overall standing. The US lags the European commercial aerostructure industry in "the implementation of new manufacturing technology", especially in the level of automation, capital intensity and modernity of major production centres. [4]The UK, through its membership of the Airbus consortia and with modern specialised aerostructure suppliers, would again reflect the European experience.

  In quantitative terms, UK market share has increased since 1995 from 9 per cent to 13 per cent and the UK has overtaken France in terms of gross industry turnover. An independent report published in 2001 defined aerospace as "globally competitive with an export share nearly double the UK average" and its overall significance only a "little less" than that of financial services, the UK's most globally competitive sector. [5]In the Aviation Week annual survey of "Best-Managed Aerospace Companies, UK firms have been shown to be amongst the world's best. [6]

Aviation Week "Best Managed Companies"

  The Aviation Week Index uses four criteria, including a productivity ranking based on gross profit, cash expense rates and cash generation margins, to create an index of the world's best managed aerospace companies. UK companies have consistently appeared in the top 10 overall ranking for large, medium and small companies. In 2001, BAE SYSTEMS was fourth in the large company category; in the medium category, Smiths was second, Meggitt fourth, and Cobham sixth.

  1999 was an especially good year, when the UK led in all three categories (British Aerospace, Smiths Industries and Umeco). Over a run of five years (1996-2001), BAE SYSTEMS ranked first, Smiths eighth and Cobham tenth overall in their respective categories. BAE SYSTEMS topped the large company productivity ranking for 2001 with a score of 23.4 (median 15.9).

  However, there is anecdotal evidence to suggest that the UK aerospace supply chain, while deep and still the primary (up to 70 per cent) source of UK-based prime contractor and OEM contracts, its overall productivity performance is mixed. The best of these are world class and have invested in modern manufacturing techniques and have made substantial inroads into overseas markets in the face of well protected domestic suppliers. However, this chain is under increasing pressure from globalisation and the general trend on the part of major customers to demand more in terms of price, delivery times and technological content. Reflecting practice in other manufacturing sectors—notably the automobile industry—the leading aerospace companies are rationalising their supplier base. [7]A sharp differentiation is occurring between those who can meet increasingly stringent technical and financial risk requirements to become preferred suppliers with a long-term relationship with key customers, and the rest who will have to compete in global "commodity" market. This trend will be reinforced by the increasing use of e-Business procurement systems. [8]

RAISING PRODUCTIVITY AND INCREASING COMPETITIVENESS

  The UK has one of the most extensive and productive aerospace supplier sectors in the world. Currently around 70 per cent of the work contracted out by the leading UK companies is sourced in the UK. But the UK aerospace supply chain will not be insulated from wider industrial trends. Many of these do not stem immediately from globalisation, but reflect a general search for increased productivity on the part of major customers. UK supplier firms have to deliver more value with lower prices. This is increasing the financial and technical risk for smaller firms as customers want to deal with fewer individual suppliers. The effect is to reduce the apparent number of supplier companies. However, the best will survive—perhaps through forming joint ventures.

  In order to maintain market share and retain leading positions in globally sourced programmes, UK aerospace companies throughout the supply chain have had to invest heavily in modern production and supply chain management techniques. The larger companies will help their core suppliers to achieve the necessary standards. However, the SBAC and the DTI are also working together to improve supply chain efficiency and productivity. This has focused on the Competitiveness Challenge initiative launched by the SBAC in 1995 with the help of the DTI. These are now part of the SBAC's "Best Practice Programme" which now covers over 24 separate schemes in six main areas, Supply Chain Relationships in Action (SCRIA), UK Lean Aerospace Initiative (UKLAI), People Management, Business Winning, E-Business and Knowledge Management.

SBAC Best Practice Programme

  The aim of the Best Practice Programme is to improve the competitiveness of the UK Aerospace Industry with a particular focus on Small and Medium-sized Enterprises (SMEs). The activities conducted under this programme have reached far beyond the Society's member companies. The thrust has been to identify, communicate and implement best practices in companies which are determined to survive and grow. The DTI has provided about 40 per cent of the total launch costs with the balance funded by industry. Many are now wholly industry funded and are part of a long-term strategy to bolster competitiveness and productivity.

  E-Business is one of the newest elements of the Programme. Its primary purpose is to disseminate information regarding E-business opportunities, practices and strategies to the UK Aerospace Industry. In addition, the E-business programme seeks to co-ordinate the E-business strategies of UK aerospace companies to ensure maximum effectiveness and penetration. An industry group was formed during 2001 to address this fast moving topic. Awareness of emerging E-business issues has improved following on from a DTI study of the impact in aerospace. The group has formed alliances with AECMA, the Aerospace Industries Association of America (AIA), DTI, and the UK Council for Electronic Business (UKCeB), amongst others, to share knowledge and information.

  A number of measurable improvements in industry performance may be directly or indirectly attributable to the Best Practice Initiatives and to company investment. . . The average Business Excellence Model (BEM) score for UK aerospace companies has increased by 22 per cent (from 242 to 296). There have been substantial efficiency gains in supply chains, such as cost savings of 60, lead time reductions of 60 per cent and 30 per cent improvements in schedule adherence. In the Lean Aerospace area there have been further improvements, including 200 per cent improvement in stock turns, 250 per cent in delivery schedule achievement, 70 per cent in set up/change over times, and 33 per cent increase in output. Overall, the Lean Aerospace Initiative has generated a 15 per cent improvement in productivity. The number of Masterclasses held in lean production is approaching 200. The majority have been used to implement lean techniques in smaller companies, but prime contractors are also taking advantage of the service provided including companies requesting Masterclasses to support their own in-house lean initiatives.

AEROSPACE AND REGIONAL DEVELOPMENT

  The creation of the English regional Development Agencies (RDA) and continued devolution in Scotland, Wales and Northern Ireland has increased the salience of regional administration in support for manufacturing. The importance of aerospace has been reflected in several RDA economic strategies and all of the key "aerospace" regions are, or are considering, "cluster" approaches to aerospace and other targeted sectors. The SBAC welcomes the trend towards "one-stop-shop" delivery of regional business support and other mechanisms aimed to raise local productivity and competitiveness. This will be of great value to the aerospace supply chain, especially its SME members. In particular, the SBAC would support initiatives to improve access to research support and address skills and training issues.

  However, the aerospace industry would be concerned if the expansion of the regional delivery of business support ignores the existence of "cross boundary" aerospace clusters or erodes the value of national strategies for aerospace. Regional approaches to business support must be co-ordinated with, and complementary to broader policies designed to raise the productivity and competitiveness of nationally organised industries such as aerospace.

THE IMPORTANCE OF TECHNOLOGY ACQUISITION

  However much effort is put into improving the productivity and efficiency in the aerospace manufacturing system, without an adequate national strategy for Technology Acquisition and other measures to support the UK aerospace technology base, the competitiveness of UK aerospace will inevitably and inexorably decline. [9]Technology Acquisition, and the strategies and policies needed to maintain UK aerospace competitiveness, were the subject of an SBAC submission to the Secretary of State for Trade and Industry in September 2001. This submission, together with supporting data is attached below (see Attachment B) Technology Acquisition, and the provision of an adequately funded national strategy to support he aerospace technology base, remains the critical issue for the industry.

  The UK government has backed the national aerospace industry extensively since 1945, and without this support the industry would not be in the strong position that it currently enjoys. The UK possesses one of the most extensive legacies of investment in aerospace science and technology. As a result, the UK aerospace industry currently has control over the bulk of its critical intellectual property. Public and private investment in new manufacturing and management processes has led to marked improvements in industrial productivity. This success translates into high-level participation in leading programmes in Europe and North America.

  The aerospace innovation process is a complex relationship between the application of basic science, applied research and protracted development to turn advanced technological concepts into commercial or defence goods. This process contains a high degree of technical and financial risk. At a national level, there has often been a more comprehensive failure to link innovation in the science base with commercial exploitation. This gap can often be filled by Technology Demonstration. Aerospace Technology Demonstration makes a large contribution to risk reduction in specific programmes, as well as helping to remedy general deficiencies in generic technologies. Moreover, Technology Demonstration helps to focus the efforts of public and private research teams and contributes greatly to the coherence and integration of research activities at a national level. It is no accident that much of the US aerospace research effort centres on Technology Demonstration. A number of such technology demonstrator programmes are proposed for consideration.

  It is essential that the UK aerospace industry continues to "own" its intellectual property. This does not mean that companies must be British owned; the key test is that the aerospace industry in the UK is at the centre of high level research and manufacturing. If the UK is to retain and to attract investment in the highest value-added aspects of aerospace, the leading firms need a favourable business climate, especially in terms of national R&T investment. There is a fierce competition worldwide to acquire the capability that the big aerospace companies represent. Governments play a key role in this competition, defining the terms of trade, investing in the national R&T infrastructure and generally improving the investment climate. Unless UK industry and government jointly define and invest in national intellectual assets of the technology and capabilities essential to the UK, more companies will react to market forces and more sections of the UK manufacturing base will move overseas.

  There is already evidence that leading UK companies are choosing to locate significant elements of new R&D investment overseas to take advantage of potential markets and better investment climates. While this benefits UK aerospace indirectly (supporting products that would not otherwise be developed, with a "flow back" of employment and technology to the UK), in the long term, this will lead to a loss of national capability and national employment.

  Technology is at the heart of other critical challenges—the Environment and Safety. The aerospace industry is under pressure to play its part in reducing the environmental impact of civil aviation as well as improving absolute levels of safety. While much of this activity is a public good, with research conducted at European and global level, there is a link between national research in this field and competitiveness. In other industries, a competitive advantage has been obtained through leadership in the development and exploitation of environmentally friendly products and processes. Together, UK government and industry could do much to meet their obligations and ensure that UK companies are well placed to capture the commercial benefits of "greener" technology and intrinsically safer aircraft.

The UK R&D Gap

  Compared to its major competitors in the US and Europe, the UK aerospace sector is increasingly underprivileged. The UK lags France, the US and especially Germany in government-funded civil research and technology acquisition. UK Government funding that is currently allocated to aerospace R&T activities is not only insufficient, but it is also not being used effectively in order to deliver the best returns. On investment, all of the UK aerospace industry's main competitors are receiving more investment in aerospace R&T from their governments, and the gap is widening. A comparison between the US, Germany, France and the UK, in terms of government funding allocated specifically for civil aerospace RT&D, show that in 1998 the US Government provided £620 million, compared to £120 million in Germany, £50 million in France and only £20 million in the UK. These figures are particularly striking when viewed against aerospace turnover in the countries concerned; for example, US turnover was only four times that in the UK, and the UK has a higher turnover than both France and Germany. The huge advantage that the US aerospace industry enjoys has much to do with fact that if funds on 35 per cent of its R&T, compared to the 55 per cent funded by industries within the EU.

  In terms of spending on long-term (Blue Skies) R&T, US industry works in harmony with NASA and receives the bulk of Government R&T funding. In the UK, the Defence Evaluation and Research Agency (now QinetiQ) did not attempt to build a close relationship with industry and, now that the Agency has been privatised, the relationship will be competitive and most of the available funding will continue to go to QinetiQ for the next few years. It is also important to note that, over the years, the UK aerospace industry received little in the way of technology from the Agency.

  There is sufficient evidence available to suggest that a substantial level of Government funding is vital to the success of the aerospace industry in any developed country. Not only is this evident in the USA, but it is also clear that the Canadian Government's decision to invest in its aerospace industry, through R&D tax credits at a level or 20 per cent, has enabled the industry to make substantial gains, helping it to become the fourth largest aerospace industry in the world.

  As a result, there is a growing risk that the UK will lose one of its few remaining world-class, high-value manufacturing capabilities. A core element of any public-private partnership to redress the gap between Applied Research and product development should be a programme of Technology Demonstration. Such investment would reduce costs considerably during development, which is by far the most expensive stage.

Sustaining the UK Aerospace Position

  To address the UK aerospace industry's long-term commercial sustainability problem and the national R&D Gap, a number of fundamental outcomes are needed, namely:

    (a)  Notwithstanding the continuing partnership efforts like FORESIGHT, MOD Technology Towers of Excellence and the Civil Aerospace R&T Strategy, it is essential that Government, industry and academia decide jointly on what the UK's technology strategy should be. This should include more unification within government between military and civil disciplines, as is the case already in industry. Government needs to provide the leadership and initiative to key high technology industries such as aerospace more directly into the national science base. The aim would be to create a national agenda to define the core competencies that the UK needs to have in order to maintain or improve upon its current position as a world class industrial base. Such an exercise could be completed relatively quickly, and the results would provide a much clearer picture of what in needed, in terms of R&T priorities, skills and levels in investment. The results would also enable the Government to channel its available funding and resources in a more informed and focused manner.

    (b)  A greater level of public funding and resource needs to be allocated to long-term aerospace research and technology acquisition to restore a competitive environment in the UK. However, a solution to many of the current problems affecting aerospace lies in a better use and redeployment of current resources. Specifically, public funded top-level research in academia could be better focused. There is also scope for better co-ordination of all public R&D activity, civil and military, involving MoD, DTI, EPSRC, industry and Academia.

    (c)  A mechanism should be created to ensure that the results of long-term research are converted more rapidly and effectively into commercially viable products. This is best accomplished through a joint Government/industry programme of technology demonstration. This will facilitate a more direct link between the science base and a core wealth-creating sector. It will provide a focus for industry, academia and DTI and MoD research programmes leading to a more coherent, integrated approach to R&D.

MAINTAINING THE UK AEROSPACE INVESTMENT CLIMATE

  The UK Aerospace Industry is part of a global industry where capital is increasingly mobile. While there are still barriers to a fully open market place, especially in the defence sector, the leading aerospace firms have a wide range of options as to where they invest. These decisions are especially sensitive to market and technological opportunities. UK companies may have to invest overseas to access key markets (such as the US defence sector), but the continuing attractiveness of the UK as a base for core operations will be affected by the overall climate for investment in the UK. This, in turn will be shaped by macro economic policy and by policies aimed at high technology industry generally. In this respect, the SBAC welcomes the expansion of support for the national science base and the development of a tax regime which recognises the value of corporate R&D.

  However, the aerospace industry world-wide differs from most other industrial sectors in the degree to which national governments intervene directly or indirectly to support or to protect national suppliers. The affects on UK industry competitiveness and the risk of long term migration of research and high value manufacturing to more attractive overseas locations was discussed at length in the Committee's 2002 report on UK Aerospace. These dangers have increased following the events of 11 September. The US government has introduced several measures designed to protect its aerospace industry. In France and Germany, the threat to employment has been mitigated by social policies designed to maintain capacity.

  In this respect, the development of an active and coherent defence industry policy will play a key role in maintaining the attractiveness of the UK as an investment location. This has to be more than just the sum of procurement decisions. It should include strategic investment in technology acquisition, continued reform of the procurement system in partnership with UK industry, and commitment to a strategy that fully and explicitly evaluates the benefits of retaining a strong indigenous capability in procurement decisions.

  The SBAC is concerned that HMG is still under investing in technology acquisition to underpin future industry competitiveness. In the short term, the SBAC is also concerned that the changes to ECGD status and conditions of operation is having a deleterious effect on UK industry's ability to compete in the civil market. The SBAC would also urge HMG to take the necessary steps to support liquidity in the supply chain through advancing existing orders for military equipment. In short, the SBAC is not convinced that HMG has fully realised the extent of the long term risk to the UK aerospace industry posed by a failure to address the problems of a deteriorating aerospace investment climate.

FINAL OBSERVATION

  The UK Aerospace Industry is world class and has generally reached levels of productivity and competitiveness that have enabled it to win a large share of world aerospace business. However, the industry is not complacent and is undertaking investment in products and processes which will support future sales. Clearly, the current crisis in the civil aerospace market is having an immediate and severe impact on part of UK Aerospace. But the SBAC confidently expects the civil market to recover, albeit slowly over the next two years. UK companies are fundamentally sound with a deep and extensive set of world class technologies and should weather the current crisis.

  However, investment in technology remains the key to recovery and future growth—especially in meeting new demands for aircraft and airport security and increasingly stringent environmental regulation (which remains the most important long term issues for civil aviation). UK firms will continue to invest in new technology, but if UK aerospace is to come through this crisis in a healthy state and to be able to face its longer term consequences, HMG must respond to the UK need for an expanded programme of R&D activity in both the civil and military sectors. Moreover, the civil and military aspects of this programme should be well co-ordinated and directed with the full participation of industry and academia.


1   Trade and Industry Committee, UK Aerospace Industry, House of Commons, Session 2000-01, HC 171-I and II. Back

2   UK Aerospace Facts and Figures-2000, SBAC 2001. Back

3   SBAC, UK Aerospace Supply Chain-Phase 2, SBAC February 2002. Back

4   US International Trade Commission, Competitive Assessment of the US large Civil Aircraft Aerostructures Industry, Publication 3433, June 2001, Washington DC, p 9-2. Back

5   Trends Business Research Business Clusters in the UK-A First Assessment, DTI, February 2001, Vol 1, p 36. Back

6   See, for example, Aviation Week, 4 June 2001, pp 56-74, 10 July 2000, pp 63-84. Back

7   There is a marked overlap between aerospace and automobile supply chains, see, UK Aerospace Supply Chain, op.cit. Back

8   SBAC/AT Kearney, The Impact of Global Aerospace Consolidation on UK Suppliers, 1999. Back

9   See Paul Dowdal, Derek Bradon, Keith Hartley, UK Aerospace Competitiveness-Literature and Research Review, DTI, August 2001, pp 24-6. Back


 
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