Select Committee on Trade and Industry Minutes of Evidence


Annex D

THE R&D GAP—THE NUB OF THE UK INDUSTRIAL PROBLEM

  1.  Government support for aerospace R&T has declined significantly over the past 15 years. This resulted primarily from projects becoming more complex and expensive, forcing companies to seek collaborative programmes aimed at sharing the R&T investment and building higher volumes to reduce unit costs. At the same time, the UK adopted open competition as a means of getting better value for money. The effect on UK companies was to require them to take greater risk without a corresponding increase in potential reward, and to cut costs. This had a marked effect on investment, and success in UK aerospace has been maintained only by exploiting the store of previously funded R&T without replenishing it at the same rate. In such a climate, UK companies are now being forced to seek investment opportunities overseas and, experience shows that, when investment draws technology overseas, it also exports the related jobs. Consequently, this is a further threat to UK manufacturing.

  2.  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, shows 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 the fact that it funds only 35 per cent of its R&T, compared to the 55 per cent funded by industries within the EU.

  3.  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.

  4.  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 of 20 per cent, has enabled the industry to make substantial gains, helping it to become the fourth largest aerospace industry in the world.

  5.  Currently, the main sources of UK Government funding for all forms of aerospace RT&D are the MOD (£185 million per annum), the EPSRC (£15 million per annum), CARAD (£20 million per annum) and University Innovation Centres (£1.5 million per annum). This funding, and that which is allocated to all other R&T programmes, is not being used effectively because there is no overall strategic R&T plan to underpin the funding allocation process. It is therefore important for Government to have a thorough understanding of where the future lies in terms of technology and, in conjunction with all sectors of industry, defines the key areas for investment and the amount of investment required to make a real difference.

  6.  There have been many attempts made by Government to deal with the R&T funding issue; unfortunately, these have not been co-ordinated or sufficiently well conceived. For example, Foresight Action was an SBAC response to the Government's Foresight initiative that began with laudable aims, namely, to develop a national programme for aerospace growth through technology demonstration with the objective of preparing UK companies to win places on collaborative programmes. Given the high cost of technology demonstration, it was envisaged that the programme would require up to £200 million per annum, with half of the investment coming from Government. It subsequently became clear that the Government would not provide financial support and Foresight Action was not pursued any further.

  7.  On a more positive note, the MOD Towers of Technology Excellence initiative appears to offer a partial solution to the shortage of R&T funding in defence aerospace. It entails the MOD reviewing its technology investment strategy to link it more closely with that of industry, and jointly selecting and developing key technologies. However, the means of doing this is critical to the success of the initiative. Additionally, the most recent Government initiative—The R&D Tax Credit Scheme—is, potentially, a positive step forward in addressing the problem. However, the Treasury appears to be focused on a system based upon incremental rather than volume-based spend on R&T which would penalise the major aerospace companies in particular. If the aim were to address the lack of R&T investment by bringing Government funding to levels similar to those found in the USA and some European countries, then there would be no doubt that the volume-based approach to R&T tax credits would be adopted. The industry has recommended this approach in its submissions to Government.

  8.  Another partial solution to the R&T problem is exemplified by Rolls-Royce and BAESYSTEMS forging closer links with academia through, respectively, University Technology Centres and a Virtual University. But this is a response to a lack of central co-ordination of academic research and, in any case, these initiatives address close-to-market issues rather than the provision of long-term R&T.


 
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Prepared 13 June 2002