21 Jul 2010
Thank you for the opportunity to respond on behalf of industry.
A strategic review of Britain's defence and security would be challenging enough at the best of times. When it is also trying to help the Government to address the largest fiscal deficit the country has faced in living memory, and fight a war in Afghanistan, it is clear that exceptional times are upon us.
What I would like to talk about this morning is the industry view of the SDSR, how we want to work with Government in carrying it out - and what outcomes we would hope to see at the end of it.
I am talking in my capacity as Chairman of the Defence Industries Council. But I hope you will also permit me a few observations from my day job as CEO of BAE Systems.
I want to talk about the need, more than ever, for the Government and industry to act as partners through these difficult times.
First in the establishment of a new Defence Industrial Strategy, which we believe is essential to help the Government deliver on its pledge to put the Uk's national security first.
Second, in how the industry can also help drive the government's agenda of cost reduction, efficiency and new ways of working.
Third, in how a partnership can deliver long term success for the UK in the export market which, in turn, will support the UK's Manufacturing Sector and place in the world.
Finally, I want to talk about why this industry is so important to the national agenda for growth, and for a more balanced economy, and how that should be recognised and valued as part of the national interest.
Let me begin by saying that the defence industry has been a supporter of the need for a strategic defence and security review for some time.
To state the obvious, the world has changed massively since the SDR of 1998.
That must make it right for the Government to make a new assessment of the political and strategic background against which it is operating.
And it is also time to make fresh judgements about how best to meet the different security challenges that we face - not just now - but also over the next 20-30 years.
The second reason for a review is the imbalance between the programme and available budget.
This led to sub-optimal decisions being made which were adding to cost and timescales of individual programmes, and compounding the long term pressure on the budget.
As Professor Malcolm Chalmers from RUSI said recently, the most effective efficiency measure the Government could take would be to ensure an affordable programme
For Industry, the starting point of the review is the Government's clearly stated commitment that its first duty is to safeguard the UK's national security.
Delivering a balanced defence and security capability is central to that commitment and the UK's defence industry is at the heart of delivering that capability and, in turn, to enabling the Government to fulfil its commitment.
The requirement, duty and commitment to deliver for the armed forces is front and centre in all of our thinking and the way we operate.
This is reflected in the extent to which we deliver and integrate the defence systems used by the armed forces.
And, increasingly, it is reflected in the way industry supports the armed forces delivering support to equipment and infrastructure, and the range of services - right up to the front line - that maintain their fighting capability.
The capability of industry has been put to the test in the past decade given the tempo of operations in which the UK has been engaged.
And it has risen to the challenge.
Industry has supported our troops in the theatres in which they have operated. And it has delivered time and time again on a raft of Urgent Operational Requirements.
All of that has required organisation, innovation and agility to meet new and challenging requirements in very short order.
The capability underpinning all of this is alive in industry because of government investment and the investment of companies operating in the UK.
It has been matured as a result of the careful development and sustainment of skills and technology.
It has depended on long term investment in R&T. And it has depended on investment in facilities and management processes which makes the UK defence industry, world class.
I would defy anyone to go to the BAE Systems site at Salmesbury, - where we are constructing the largest machine shop in Europe - and not be persuaded that this was at the leading edge of manufacturing technology.
Equally the roll out last week of the Taranis Unmanned Combat Air Vehicle - the rather scary looking thing which faced you on the front page of the Financial Times last week - showed the world class technology in this country. Again, it results from the investment - including a lot of companies money - which has been made in the past few years.
The key lesson from this, in my view, is that sustaining that capability in industry - which, in turn, sustains military capability and which makes a central contribution to the national security of the UK - requires a clear, coherent strategy.
And that is why industry believes passionately that a new Defence Industrial Strategy is vital.
We all know that the size and shape of the armed forces will not be the same at the end of this Review. The Secretary of State has made that clear.
But, for commitment to the UK's national security in any meaningful sense, the Government will need a strategy for the sustainment of a sovereign capability, whatever its decisions about particular force structures.
And it will have to ensure that it has the resources in its national industry to deliver the capability it requires to meet the defence and security challenges.
There has been a great deal of talk about sovereignty in defence operations. So let me give a bit of flesh to this, from an industry viewpoint.
Against the background I have painted, I think the Government needs to be able to support, modify and upgrade the equipment and systems it has in service. I think it needs to be able to integrate those systems with all the others it is using. And I think it has to be able to exploit fully the performance of the systems it has.
Underpinning all of this is the need to ensure UK requirements can be met when there are urgent operational requirements. And the UK needs to know that it has a security of supply, at the most testing of operational times - when the lives of the men and women of the armed forces are exposed in conflict.
Now some people say that all of this can be assured by off the shelf purchases from whatever source.. I say that is misguided.
I say that it requires ready access to British scientific skills and British design and development engineers.
I say that it requires a real understanding - residing in the UK - of the design intent of the systems.
And I say that it means having unrestricted access to the facilities and infrastructure which underpin all of this.
These skills and capabilities cannot be switched on and off overnight. They need to be nurtured and sustained.
This is essential, not just to the Primes, but also for the huge number of SME's in the supply chain. In fact, it is even more important in their case, because they do not have the financial strength and capacity to weather stop-start approaches to capability acquisition.
Now, of course, the issue of affordability arises here, and the Government will have to determine what resources are available to defence and what capabilities can be sustained within this framework.
But my first key point is that the Government needs a policy framework - a new DIS - which makes clear what capabilities it wants to sustain in the UK in future, and has a plan for delivering that capability in support of the armed forces, including a long term commitment to R&T.
That is the right way to deliver military capability, working together with industry. It is also the basis on which shareholders and investors will have confidence that there is long term sustainable business in the British defence industry.
Having mentioned resources, let me now turn to the second element of the Government's agenda on which industry can work together with the new team - that of saving money.
The Government has made it clear that the reduction of the deficit is at the core of its approach during this Parliament.
We do not yet know the outcome of the Comprehensive Spending Review and what it means for the MOD or security budgets. But we do know that cost restraint will be important.
As the Secretary of State has made clear on a number of occasions recently, this cannot be achieved by incremental measures - it requires a new approach to the delivery of capability across the board.
Industry understands this and supports the need to deliver better for less.
In order to stay competitive, we have constantly had to find new ways of doing business; ways of managing operations more effectively; and ways of using technology to improve performance and service.
Industry also recognises that such an ambitious programme will require us to work together to develop innovative ideas and new business and commercial models.
We already have numerous examples where outsourcing and long term partnering within MoD and other government departments have delivered savings, as well as profound changes in service delivery.
We want to work with Government to build on this - to consider more radically than we have so far the boundary between Government and industry in this space. And to break some of the shackles that have prevented the joined up, enterprise approach to capability delivery in the past.
So my second key message is that we believe that the defence industry can help the Government deliver many of the cost reductions it needs in the SDSR. It requires a further development in the partnered approach to delivering the capabilities the armed forces need. And it requires us all to break through some of the barriers to efficient working, which has dogged the past.
The bottom line is that we have to find new ways to deliver a joined up, enterprise approach to delivering defence capability - that means across MOD and industry.
What I have said so far has been focussed on the delivery of capability to the UK armed forces. I now want to turn to what the industry can do in the international market, with the joined up support and partnership of the British Government.
We have been hugely encouraged by the approach that the new Administration has taken in its early days, to make clear its support for responsible defence exports.
From discussions with Ministers, it is clear that they see the extent to which the industry can help drive growth in these difficult times, an issue I will return to in a moment.
But I also believe they take the view that exports have the potential to cement the UK's relationship with key allies and partners around the world, including the emerging economic powerhouses like India and Brazil. And that exports represent an important element in the Government's approach to Defence Diplomacy.
Furthermore, I think they are keenly aware of the extent to which UK success in the defence export market has the ability to benefit the UK's armed forces too - the real win-win here in the context of the SDSR.
If we succeed in the export market, overheads reduce and the cost of ownership reduces as well. There may well, in future, be scope for co-operative developments in systems. In areas such as the management of obsolescence, the UK will clearly benefit if other friendly nations have the same equipment in service. And, of course, interoperability with the UK's friends will also be made easier.
So, to extend the concept of partnership, I believe that we have top level political support for responsible defence exports. That needs to be backed by a partnership with MOD and the armed forces in the provision of training and support overseas. And it needs to be backed by competitive commercial support from ECGD.
Finally, the partnership needs a more joined up process of ensuring we have equipment in service which has real potential to deliver exports. We need the same level of success across all areas that we have achieved historically in the air sector.
I believe that the UK MOD can lay the foundation for future export success, in its own acquisition process. This has been a holy grail, but it is more achievable today than ever, with techniques of modular design and the incremental insertion of technology.
So, let me finally come back to the last element of our Government/industry partnership agenda - how to value and sustain the economic benefit of the UK defence industry.
There has been a great deal of discussion over the past 12-18 months of how the UK needs to have a more balanced economy - one which drives high value added, high technology, advanced manufacturing.
And one which is less dependent on the financial sector.
Well it would be difficult to imagine a better fit for this than the one we have in the defence industry.
This industry invests heavily in research and technology. It makes some of the most complex equipments and systems known. It creates highly skilled jobs in many of the most economically disadvantaged regions of the UK.
It trains youngsters in apprenticeships and graduate trainee schemes.
In my own company, we employ 1,000 apprentices and 400 graduate trainees at any one time. They are experiencing and benefitting from opportunities that they couldn't otherwise have dreamed of.
Yet, despite all of this, some people talk about the industry in a way that I find difficult to accept.
Now, I understand that there will always be some who will object to the existence of the defence industry. And we must respect that genuinely held objection.
But if you start from the premise, as I do, and as I believe the vast majority of the British population does, that the UK has a duty to defend itself, then it must be the case that it should have an industry that helps deliver that capability.
I believe that the industry needs to be valued and celebrated for the contribution it makes to the UK economy.
Just as importantly, I believe that Government decision making in acquisition needs more formally to assess the overall national interest of the economic benefit it brings.
That is difficult in the current environment when the MOD - absolutely understandably - is looking at its narrow defence interest. But I do think it is achievable if joined up Government is in place.
I don't mean simply in relation to jobs, although none of us should ever forget the importance that has to the 300,000 whose livelihoods depend on the industry.
I mean the national interest in terms of the maintenance of the UK's skills and technology base, export revenues and the extent to which it helps grow the UK's GDP.
Be in no doubt, all of the nations with which we compete factor these things into their decisions. My argument is that the UK should do so too if it is serious about maintaining the UK's place in the pecking order of powerful economies.
So my final suggestion is that the Government joins with us in finding a better way of determining the value of the defence industry in this country and making sure that this is properly factored into the evolution of the Defence Industrial Strategy and future acquisition decisions.
So let me sum up by saying that, while I can understand the concern and nervousness of some, I believe that the SDSR is both timely, and that it represents an opportunity for the British defence industry to ensure that it can see a long term sustainable, profitable business here in the UK.
That requires a real partnership between Government and industry.
It requires a common agreement of what needs to be sustained in long term industrial capability through a new Defence Industrial Strategy.
It requires a defence enterprise view about how capabilities can be delivered in future, breaking down some of the barriers and taboos of the past.
It requires a joined up partnership in pursuit of defence exports - extending from political and practical support to existing prospects, to new ways of ensuring exportability is genuinely factored into acquisition decisions.
And it requires a fresh way of ensuring that the value of the defence industry is properly recognised, and that the national interest in maintaining the contribution it makes is formally taken into account in future Government decision making.
I think this is a national agenda on which we, the industry, and Government, can work together. First and foremost to ensure the best capability for the armed forces. But also to help the UK sustain its economic position in the world. Along with civil aerospace and the pharma sector, the UK defence industry is a real success story. I hope that we can all make sure that this continues to be the case.
