Examination of Witnesses (Questions 40
TUESDAY 23 JANUARY 2001
MR K MACIVER,
MR D MARSHALL,
MR J ROSE,
MR J WESTON
40. You have the good fortune that the answer
to your bid is going to be in the immediate period before the
general election so your lobbying strength is probably stronger
than it has ever been for a substantial increase in this vote.
Can you tell us whether you have put in a bid and if so how much
and what do you hope to achieve if that bid is acceded to?
(Mr Marshall) No, we have not put in a bid per
se. We have put in a case to continue the programme, that
it should not be zero, but in a sense the bid, the amount that
is spent, is a matter not between the SBAC and the DTI but between
the DTI and individual companies who undertake programmes. Many
of those programmes actually continue through time in an industry
where we are on a very long time basis; a programme even of research
is not simply undertaken in a year or a specific time period,
it may be spread over several years. There are essentially commitments
in the existing CARAD programme which will take us forward from
programmes which already exist.
(Mr Maciver) That is a very important point. Small
though it is, it does mean that certain programmes do continue
which might well be squeezed out under the normal commercial pressures.
It does give some stability and continuity because it involves
a commitment by the individual companies to spend as well. It
does give some continuity to R&T programmes because however
committed we are to that, there are always things which get pushed
out at the edge and perhaps should not be. It is helpful in that
regard. It is right to say that it is not for us to make a bid,
it is for us to make the case for continuing support, which we
(Mr Weston) Clearly our lobbying in this area is not
very effective if over the last eight years this has fallen from
£100 million to £20 million. The thing we all ought
to be really worried about is that if we were sitting discussing
this in France or Germany or Italy or Spain or the United States,
then we would be looking at £20 million and asking whether
that really indicates we are serious about this. We have talked
a lot about how important it is for industry to be competitive.
The environment in which we have to operate is not only one in
which we have to match our competitors' levels of pricing, but
also productivity and levels of efficiency, there is also a competitive
environment in terms of the help and assistance which is available
from governments in this respect. By any standard the UK falls
a long way short of what is available in our major competitors'
home markets around the world. If we tie that back to what we
were talking about earlier, the jobs actually follow the technology
and the technology gets put in place where people are prepared
to invest in the technology. It is absolutely a very serious point
when we say that this industry in the UK is living off the investment
we put in in the 1970s and 1980s. At some point we are going to
pay the price for not putting it in in the 1990s and beyond.
41. How much do you think it should be instead
of £20 million? What do you think it should be in order to
enable it to be competitive?
(Mr Weston) We felt it was woefully inadequate at
£100 million. You need a much more considered answer to what
is the right level. The right level is a competitive level. Finding
out what a competitive level is, is quite difficult because the
amount of aid which actually flows through into some of these
industries elsewhere is not always done in an above board and
fully publicly visible method. If you want an answer to that question
I would rather take it away and give you a more considered answer.
42. It is just that time is running out.
(Mr Weston) Having fought hard over a decade to see
it go from £100 million to £20 million I am not sure
that trying to make a really strong case for what this ought to
be is actually at the top of our list of priorities because of
what we think is actually achievable. If we thought there was
some real desire there to restore this to the sort of level we
think we need to be competitive with the other nations around
the world, we would probably be prepared to put quite a lot of
work into it.
(Mr Maciver) It might be helpful to make some more
precise comments in writing on the whole question of R&T in
the industry. It is a very, very complex issues. We can give some
comparisons; that is the ideal thing. We are focusing on CARAD
because it is the area which is doable. Ultimately what we need
to understand between us is whether the level of R&T in our
industry is competitive with what is happening elsewhere. That
is a more complex question but we can give some helpful data as
part of a follow-up to this meeting, if you agree.
43. That would be very helpful. I have to say
to you that we meet a lot of businesses, not often as successful
as yours, and the idea of them going with begging bowls to Government
in 2001 ... One can see the point of it in 1979 but you have been
very lucky to have still been getting handouts as long as you
have been, given that most other businesses do not get any assistance
at all these days.
(Mr Rose) There is an issue of connectivity. We have
to recognise that the inability at the technological lead in this
industry will have a consequence on the success of the industry
in the UK.
44. Surely £20 million is not going to
make that much difference?
(Mr Rose) Twenty million will not make enough difference
and is clearly a lot less than £100 million, but a lot more
45. Surely there is more than one way to skin
the cat. We can talk about the fiscal regime which operates in
this country. There must be other ways in which Government is
pouring out money to you.
(Mr Rose) You are tending to use words which are more
emotive than they need to be.
46. I was trying to help.
(Mr Rose) We are in a global competitive industry.
We have choices. An important point was made earlier in the situation
of Rolls-Royce which is that we have increased our R&T spending
but we have increased it outside the UK. Over time that has an
implication for the location of the decision process and jobs.
(Mr Maciver) Your point is a perfectly reasonable
point to make. The playing field is not as we would have it, the
playing field as it is.
47. It never was.
(Mr Maciver) The fact is that other countries have
deliberately targeted aerospace for very focused research in areas
directly in competition with activities in the United Kingdom,
in some cases new entrants. The level of spending on total development
& technology, by the companies here is at a very high level.
In my own company's case we are spending on total development
and technology some 11 per cent of revenue on this area. We are
spending at a very high level. The fact is that if a specific
technology is targeted and developed in a particular country,
that is where it will be developed through to production. It would
be very much simpler from our point of view if we were entirely
masters of our own destiny. We set out to compete and we win or
lose on our capability. That is not the reality of the situation.
The good point when you look at this challenge is that the industry
is successful, it is not supporting a failing industry as so often
has happened in the United Kingdom. This is supporting a successful
industry with long-term growth and which will in total make a
major contribution to rebalancing the skills base in the United
Kingdom. From an economic and social point of view, I do not think
we have any diffidence in stating this case. If you construed
anything I have said as a threat, that is most certainly not the
intention. This is meant to be a very sober appreciation of the
realities of the world in which we are.
48. May I ask something about R&D tax credits.
Would R&D tax credits for every firm make any difference?
(Mr Marshall) We are engaged in seeking to answer
that for ourselves and possibly make a proposition into the Treasury
for the upcoming budget on that issue, associated particularly
with the smaller companies. One of the points you heard earlier
was that they are being required to spend proportionately more
investment in this area in order to compete in their supply chain.
When we look at our own statistics, we see that the distribution
of company R&D spend does fall off quite dramatically at the
lower end of the supply chain which is traditionally what you
would expect and we are seeing that has to change. We are seeking
a view as to what extent a tax credit would help that.
In some ways, perhaps one could see that it
could. Perhaps Mr Wood would like to answer that from the point
of view of a company in that situation.
(Mr Wood) I would echo Mr Marshall's comments. It
is getting increasingly challenging. The opportunities are definitely
there, but we are being asked to do more and more and told to
undertake more and more in terms of research and development.
Not only that, if you look at the industry, something peculiar
to the industry is that the programmes in which we are involved
are very, very long term. When a small and medium-sized enterprise
takes on a programme, as my own company does and other SMEs, we
are often looking at a payback, in other words we actually look
to generate revenue positively, after eight years; it can be anywhere
between six and ten years at present. Clearly the upfront costs
in research and development costs are the biggest part of that
49. Could you share with us the submission you
make to the Treasury on this?
(Mr Maciver) On the pure technology side the timescales
we are talking about are much longer than that. While some companies
can stand the pain the industry as a whole may not, even if ultimately,
and it jolly well should be, the technology is entirely viable.
It takes a long time to get there, that is the reality of the
50. Is it not the case that the Treasury take
a grim view of applications for tax breaks for research and development
and they tend to argue that they are throwing good money after
bad in so far as the people who do not need it, do not know what
to do with it and the people who do are doing it anyway? Is there
any new way of presenting this in terms of the training of workers
along with the question of R&D? It does seem that you are
singing an old song here and it is one which comes out every year
from British manufacturing. I am not being negative, I am merely
(Mr Maciver) This is a personal view rather than speaking
for the whole industry, but on the question of tax I share some
concerns about that. It may well make a difference with smaller
companies. Much more important than that, there is a very real
risk that because of a lack of focus, it is not particularly directed,
it is not particularly effective. In this whole arena the Government
does spend a great deal on research. We do not even need to be
talking about spending more money. The question is whether it
is focused as far as this industry is concerned in the most effective
way and whether, though it is not a question any of us can wholly
answer today, but we believe the answer is no, it is competitive
with what we see being spent elsewhere. In the case of the United
States the argument is overwhelmingly that it will not be. It
equally applies to areas which have not traditionally been strong
competitors of ours; Germany is a case in point. It is that overall
position which is important and I certainly would not see tax
methods as being the ideal way of dealing with it. That view may
not be shared by my colleagues.
(Mr Wood) One comment which does apply to small and
medium-sized enterprises is that it is not just that we are having
to invest for the long term but our customers are actually coming
to us expecting to have technology on the shelf. If we do not
have technology on the shelf to respond to their requirements,
we simply do not get the opportunity to bid. We do have a fairly
clear idea of the directions in which we should move, but we do
have to start developing technology well ahead of specific programmes
to be able to offer it to our customers. That is putting yet again
great strains, understandably, on companies of our size.
51. I should like to return to this question
of sourcing and the supply chain. Mr Rose has talked this morning
about the situation with Rolls-Royce, that they are looking to
outsource. I do not know whether you are ultimately wanting to
move as far as GE for example. You said something like 90 per
cent of your manufacturing is potentially outsourced. We have
quite a lot of written evidence from organisations and trade unions
who are complaining for example about air brakes being outsourced
in Uzbekistan, work going to Poland, not from Rolls-Royce but
other companies in the aerospace industry. As an organisation
are you able to give us any indication of how much work has been
outsourced into places like Poland and Romania at the expense
of UK jobs?
(Mr Marshall) The answer is no, I cannot.
(Mr Weston) I suspect we are in the dock on this,
so maybe I ought to pick it up. Two comments. Firstly, we do need
in a number of areas in order to secure export orders to put some
work into the countries which are buying the products. That is
part of the marketing of these products, particularly on government
contracts, to be able to demonstrate locally that the entire economic
benefit of the purchase is not flowing overseas. The amount of
work we have put out for that purpose is tiny. I cannot remember
the number off hand but I can supply it to you after the meeting.
For every bit of work we put out we get an awful lot more work
back in and that is how we generate a lot of the very substantial
export business we are actually bringing to this country. The
only other kind of work we have outsourced is that we have to
make sure that we are competitive in the market in which we operate
and that means we cannot afford to do jobs in house where the
cost and overhead structure of our own company makes them uneconomic.
For example, we run very extensive in-house training and development
schemes, we run an in-house virtual university, all these sorts
of things actually add to the overhead burden on the business,
not to mention our investment in some of the very advanced CADCAM
systems or data processing. There are always going to be some
jobs that somebody with five lathes in a garage down the road
can do more cheaply because he has a lower overhead structure
and our job is to try to make sure that the jobs we do in-house
are ones where all our investment actually pays off in terms of
the efficiency with which we can compete. That means over the
last decade we have taken a strategic view of the manufacturing
activities we can do in-house and at a world effective market
price so we are not penalising our ability to sell the end product.
That means we have outsourced a lot of work to the sub-contracting
industry around the UK which operates on a different overhead
base to us. We have had some products which have been in uneconomic
areas of the market. We were very heavily into the regional aircraft
business with turboprops and things; we used to make Jetstreams
at Prestwick. That is a very unhealthy position to be in if you
have jobs which are hanging on bits of work where you are destroying
value and losing money because the end product is not competitive
in the marketplace. What we have done in Prestwick in the last
decade is we have taken all that work out, some of the shorter
term elements of that we have subcontracted into parts of the
world which can do it at the price the market demands. Over time
we have been substituting that with some really high quality work
we can make money on on the Airbus and the Boeing programmes.
That is actually what has been going on. In terms of involvement
in the workforce in what we are doing, unless we can actually
demonstrate we are making those kinds of decisions on a fair and
equitable basis we very rapidly get to the point where we do not
have the support of either the unions or the workforce. It is
entirely understandable in areas of the business where we are
reducing some of our sites and building up at other sites that
under those circumstances the sites where they are seeing reducing
workloads are asking why every available piece of work cannot
be brought back in house. Quite clearly if it is undermining our
ability to sell a product in the overseas market or it is a totally
uneconomic thing to do, that is not going to provide us with long-term
stability round the rest of the world. I shall give you the numbers
of what we actually have out in some of those countries at the
moment. It is tiny as a proportion of our total manufacturing
workload in aerostructures.
(Mr Maciver) What Mr Weston has just gone through
would be fairly typical, not necessarily in the question of offset
trade which you mentioned at the beginning but many of the other
factors will be common to most of us. Certain things will be squeezed
out. My impression, and we shall look further at this, is that
the impact to date is not huge, but there will be a trend and
what we have to do in the interests of the industry and the interests
of the economy generally is make sure that we are securely established
in high technology, high skilled work, where we will be competitive
in the long term. Certain work under economic forces will migrate
in my opinion, whatever we might say or wish today here. While
it is not a big thing today, to have the illusion that employment
can be secure based on uneconomic processes or processes which
very rapidly become uneconomic is not a sensible way to proceed.
While you can support that sort of thing for a limited time, eventually
you cannot. We have seen that sadly in a number of other industries.
What we are doing is trying to plan and look ahead as to how we
reshape the industry where it is not vulnerable to things of that
kind. There may be a trend; I would not want to pretend otherwise.
52. I should like to take up that point because
it is very, very important. I do not know of any contracts or
any orders which have been placed for Eurofighter by Poland. As
tooling is being done for Eurofighter in Poland, could you explain
what contracts we have had with Poland and have you any contracts
from Romania yet as work is being placed there? Offset? We do
not see any returns at all. Normally I can understand the benefits
of offset but we do not see any orders actually coming in.
(Mr Weston) We have sold AS90 howitzers and communication
equipment to Poland. We have offers on the table in Poland at
the moment for both Hawk and Grippen. It is probably the most
important market in central Europe. It is the largest economy
in central Europe. It is one of the new entries into NATO. It
is a very important market for the future. The pattern of that
is getting some of that down in advance to stand us in very good
stead for some of the other contracts which are due to come up
53. I must not have put the question correctly.
Offset on aircraft. How many firm orders are on the table now
for Romania and Poland and is it not true that the Americans are
showing us a clean pair of heels when it comes to the NATO military
(Mr Weston) We have not sold aircraft into Poland
yet; I have just said that we have two offers on the table at
the moment for contracts. The tooling work which has actually
gone to Poland is tooling work which we have outsourced from our
own factories anyway because we can get the tooling done at something
like half the internal rate. Therefore we do maintain an internal
tooling capability which we do need in order to make sure we can
run the factory and deal with issues when our suppliers let us
down. Tooling is not an activity which we can produce competitively
within the overhead structure we have with what we can buy it
in for from elsewhere either in the UK or overseas.
(Mr Weston) I shall have to check what we have sold
in Romania. We have sold military equipment into Romania in the
last few years. It is an area where there is potential for the
55. You will let us know what orders you have
(Mr Weston) I shall give you how much work has gone
out to those sorts of countries and to other countries round the
world where we have sold military equipment, where we have put
offset packages out. It is a tiny proportion of our total aerostructures
manufacturing workload in the UK.
56. You said earlier on that work is being outsourced,
low value work; it is something we accept is inevitable, is going
to happen and probably at an increased pace. The other thing is
that there has been a step change in the industry in terms of
the direction of outsourcing and the impact of outsourcing is
that a lot of UK jobs are at stake. As an industry, in terms of
publicly funded projects, do you not feel that you morally owe
it in a sense to the UK employee to use your very best endeavours
to keep work inhouse in the UK? I am starting to get a bit of
a feel that that is not necessarily the position you are taking
as an industry.
(Mr Rose) I am in danger of repeating what I said
earlier but what we have done by being competitive as an industry
is create jobs. This outsourcing is not necessarily outsourcing
outside the UK. We have created jobs in the UK supply chain but
they had to be the right jobs, doing the right things and doing
them competitively, otherwise we shall not be able to retain our
competitiveness there, we shall not act as a route to market for
that supply chain. There is no change in commitment and one cannot
talk about these as though the industry is not taking a moral
approach. The industry has to be competitive and in order to do
that it has to have the most competitive possible supply chain.
The reality is that as we gain market share as an industry we
have created jobs in the supply chain. Speaking simply for Rolls-Royce,
over the period from 1995 to 2003 we shall have doubled the number
of jobs in the supply chain. That is a good consequence of the
gains we have achieved in terms of market share through competitiveness.
The last thing we want to do is to feel constrained to be uncompetitive,
because over time that will simply cause a decline in the market
share and a loss of jobs. This supply chain will not be as capable
of supporting, for instance, a US supplier of similar equipment
because plenty of capacity exists in North America to support
Pratt & Witney and GE; similarly in other parts of the industry.
They will tend to go for that local supply chain. The same pressures
will exist on them to put work out around the world to sources
of lower cost.
57. Yes, but the increase in jobs in the supply
chain is not a one-sided equation is it? The other side of the
equation is the shedding of directly employed people, for example
within Rolls-Royce. One of the concerns I have is that it is not
just about the supply chain, it is looking at taking chunks of
the business and whole chunks of it going abroad, not just supplying
but it now looks as though you are going to be shifting whole
chunks of activity abroad.
(Mr Rose) Broadly the consequence has been a much
stronger company, more capable of competing in the world and therefore
more capable of sustaining a supply chain. We keep on coming round
to ensuring that we have the competitive environment here both
in terms of the manufacturing infrastructure but also the technology
to ensure that we maximise the opportunity here. If we can be
more successful by being more broadly based, then it is a good
thing. As an example, we set up BMW/Rolls-Royce in 1989 and the
fear at that time was that that would in effect constitute an
export of jobs. What it actually constituted was the creation
of jobs because the work which went into our own facilities as
a result of our ability to invest in new product was at least
as great as it was on any domestically owned product and it would
not have existed at all if we had not been able to enter into
that joint venture and access the funding. We simply would not
have done the programmes. It is always important to balance: the
greater success of the business has created a greater pool of
job opportunity. It does not all accrue to the UK, but more accrues
to the UK than would be the case if you did not do the programmes.
We have a very clear choice: do not do the programme; do not have
(Mr Maciver) In total we are not looking at a mass
exodus of jobs or anything of that kind. There is a rebalancing
and you are right to be concerned because we share long-term concern
and that is the basis, for what we have been concentrating on
very much are the long-term factors for a successful industry
in the United Kingdom. If we operate as we can and should and
it does very much have to be a partnership here, there is no reason
why the industry should not continue to grow and succeed. All
of us have circumstances where there is rebalancing; some things
are less successful, some things are better done elsewhere. There
will always be movement and there will be quite a slow but steady
efflux of lower value jobs. I do not believe that will be an enormous
factor, certainly not over the next few years in the industry.
I may be wrong. Correct me if I am giving a wrong impression here
from a statistical point of view but I do not think I am. It is
right to be concerned but I would not focus on short-term movements.
It is the underlying factors which create health in the industry
because we see today the vulnerability of some other industries
which have lost their technology and decision-making base in the
United Kingdom. What is important is what is as much of a guarantee
as you can get in an uncertain economic world, what are the factors
which will ensure the long-term success and long-term high value
employment in the United Kingdom?
(Mr Weston) May I try to put it in a macro perspective
of what is actually going on? If we look at the industry as a
whole we have essentially got two parts of the civil aircraft
industry where there is significant growth and where in the high
grade aerostructures manufacturing the UK can still be really
competitive. Essentially the channels to market for that activity
are through Airbus and Boeing. We have all been working very hard
to build up a successful Airbus, the A380 where we are talking
about an additional 20,000 jobs in the UK on the back of that.
From the aerostructures manufacturing point of view, the centre
of that activity is at Broughton. We have also been working hard
in our non-Airbus parts of the business to try to get more and
more Boeing work in. Every time the UK buys a Boeing aircraft,
we work hard with Boeing to get additional high grade aerostructures
work in to keep as much of that activity going as possible, so
we have the UK manufacturing base locked into the two channels
to market where we can actually generate economic value and wealth.
On the military side of the business, we do have a declining manufacturing
base because over time we are selling fewer but much more effective
military products. We have built 800 and something Tornados, we
are going to build 620 Eurofighters; Tornado was split between
three nations, Eurofighter is split between four. We can still
generate a very successful export business on top of that and
in order to do that we shall have to give some of that work overseas.
We have been very successful historically in generating the economic
benefit for our customers overseas in non-aerospace manufacturing
related work and the amount of work we have had to give away is
much less than would otherwise have been demanded. We do not have
a huge difference in objective there between politicians, the
unions, the people working for the company or indeed the company
itself because it is in our interest to keep the throughput through
the factories as high as possible because it keeps our costs down
and our overhead base down. The less adjustment in employment
levels we have to make, the more economic that is as well. We
do need to recognise in the defence and military side of the business
that we have a shift away from some of the traditional manufacturing
patterns. They are still very important and a lot of people are
still employed in it but we are not going to need as many as we
had a decade ago. What we desperately need is a lot more people
who are able to do the higher value added engineering, software
and systems skills, where just at the moment, although we are
the largest employer of graduates in the country, we are trying
to recruit something like one in seven or one in eight of every
engineering graduate in the UK who actually goes into industry.
As a result of that we are not able to satisfy all our demand
from the UK and we are recruiting something like 13 to 15 per
cent of our high grade engineering, software and system jobs from
the rest of Europe. They work in the UK and pay tax in the UK.
Those are jobs which would be available to people from British
institutes of higher education and universities if we were producing
more. The company is also dedicated to lifelong learning for those
who work for us. We have open learning centres in all our sites.
We run a virtual university internally. Traditionally we have
put that infrastructure in to be available to all those people
who want to use it. Increasingly we are now beginning to work
with the unions to say if we have this long-term shift going on
and we have this infrastructure in place, how do we pick the best
and the brightest of people who have skills for which we have
a declining requirement and put them through those training and
upskilling schemes to satisfy the areas where we have more demand?
We are now beginning to look in areas where we have to face up
to compulsory redundancies which is always absolutely the last
resort and whether we should be better off spending that money
taking people out of work and putting them through full-time education
in order to get them reskilled. It is not something we are trying
to firefight on 50 jobs in Preston or Romania: it is something
we are trying to take the macro view of and what the real things
are we have to do to get that right for the future. We will generate
more wealth in this country by having lower grade jobs where we
are not competitive done elsewhere and making sure we have enough
people available to do the high skill jobs with a lot more value
added which will generate more wealth for the UK.
58. I have no complaints about the general comments
Mr Weston has made, though I might say in passing, particularly
about BAE, which is a company for which I have great admiration
... I have to say Mr Rose's comments about Rolls-Royce were staggeringly
complacent, given the thousands of jobs which are currently ...
You may frown but I have constituents who would think what I am
about to say is totally moderate and reasonable in the extreme.
There are thousands of jobs currently on the line at Rolls-Royce,
yet we are being told the purpose of this exercise is to ensure
more high value employment in the UK and to create jobs. Mr Rose
talked about creating jobs. Can you tell me how the current job
cuts at Rolls-Royce will end up creating more jobs in the UK?
(Mr Rose) Yes. The way that it will end up creating
more jobs is by allowing us to be competitive, which will allow
us to sell more product. If we cannot be competitive, and it is
important to recognise that in every sector we are in we compete
with some of the largest companies in the world, if you look at
the energy business we compete with Siemens, ABB, Alstom and so
on, and GE in the aerospace business similarly, there will be
no jobs if we cannot sell product at a profit, so that is the
way you ensure jobs in the long term.
59. I understand that but we have had to drag
out of you any recognition of the current job losses that Rolls-Royce
is discussing at the moment. You have not volunteered that information.
Are you saying that the nett effect will be more jobs at the end
of this? Are you saying that you sacrifice 4,000 or 5,000 jobs
now in order that over the next couple of years there will be
6,000 or 7,000? What kind of figures are we talking about? The
impression you have given in your own previous answer was that
this is unambiguously a job creation exercise and I am simply
saying I do feel that is being a little complacent.
(Mr Rose) No, I think what I said earlier was entirely
factual which was that our ability to be competitive and successful
in the market has factually resulted in an increase in the market
share of the company, an increase in the revenue of the company,
an increase in the purchases made on the supply chain and therefore
an increase in jobs.