24 May 2004
1..50 am Wednesday 24th May 2004
Good morning ladies and gentlemen
It is an honour for me to be here today, to speak before such a distinguished audience.
From someone who has over 40 years of experience of supplying warships to navies around the world, I thought that today I would take this opportunity to provide you with an insight into some of the issues that those of us in the UK defence industry face when providing you, the real experts in maritime power projection, with the naval capability that you are looking for into the future. I also hope to correct some common misconceptions that are at the root of some of our difficulties.
Current Situation
As a starting point, I thought it useful to reflect on the current situation with respect to maritime power projection. It would appear that the situation generally is quite positive. Operation Telic, Operations off Afghanistan and Sierra Leone, and the war on terror, all show the effective use of naval capability.
They all emphasise the relevance and appropriateness of applying force from the sea and it is gratifying to know that our products are performing well. For a capability provider in the 21st Century, this is good news.
Going forward, the UK political climate is also positive. Type 45 and Astute are developing with additional units being considered, the Bay Class LSD(A)'s are well advanced, and several major new programmes are planned; including new aircraft carriers, the MARS programme of auxiliaries and the Future Surface Combatant, not to mention programmes such as the casualty treatment ship, and others.
Within the future plans, recognition is also given to the significant force multiplier effects that can be achieved from linking capabilities together in an information rich network enabled environment, where systems become increasingly complex and there is increased emphasis on systems integration.
We have a solid base to build upon and ambitious plans for the future. So is there a problem? Well actually I think there might be.
As a customer, it is right to seek more for less, and expect more innovation and increased efficiency from suppliers. Indeed, in all my dealings with the many systems and equipment suppliers, that is exactly what I expect.
However, we need to recognise that there are practical limitations and in my experience the best-laid plans are those that are built on robust and realistic assumptions.
The affordability challenge
As I look at the Equipment Programme going forward I see an affordability challenge like none I have witnessed before. I am not saying that it is unachievable, but it is a huge challenge and something that will require a clear change in approach if it is to be delivered. The question is - how will we achieve this?
In my view, we can deliver significant benefits through closer working. We will need to listen to each other more, understand each other's issues better, and work more closely together, to optimise demand with supply over both the short and more importantly the longer term.
I'm not just talking about Industry and the DPA, but Industry, the wider Government and the front line also. That is why an opportunity such as this conference is so important.
In trying to calibrate the scale of the problem, it is useful to review past and current performance, to identify the scope for future efficiency gains.
Current Industry performance
If, for example, you believe that current industry performance is poor then the answer is clear. Savings can come from improved efficiency. Crack the whip, reduce costs, drive out inefficiency, do things "faster", "cheaper", "better"…
Does this sound familiar?
But we should bear in mind that the UK naval defence industry has been subject to intense competitive pressures, against a backdrop of reducing demand for several decades. In such a climate, with some contractors going out of business, others being reliant on the next order for survival, there is little scope for waste and inefficiency.
That is certainly the case in my business and I think it would be misguided to assume that there are large savings to be had simply from squeezing suppliers harder, when they are already working on very tight margins.
Not everything in the past has gone well but we need to build on our strengths as well as learn from our mistakes. There have been successes in the not too distant past and I think it is widely accepted that programmes such as the Type 23 Frigates, Trident and Single Role Mine Hunter programmes were all successful.
The Type 23 programme at Scotstoun showed an impressive record of continuous improvement. For example the last Type 23, HMS St Albans, was delivered at the end of 2001 for substantially less labour cost than the first of class, HMS Norfolk. Every Type 23 delivered by Scotstoun was at a lower cost than the previous one and each was delivered on time or early. That isn't a bad track record of performance by anyone's standards.
Elsewhere in the industry, HMS Ocean, for example, is widely acknowledged as having been incredible value for money for something so tailored to the customer's future needs.
Even so, if UK Industry has improved over the years, how does it compare with the best international competition?
The fact of the matter is that international warship building productivity is incredibly difficult to measure objectively. The situation is clouded by secrecy, unseen costs and support mechanisms, low production runs, different facilities, different product mixes and in many cases overseas governments acting as both customer and supplier.
Having said that, there are still general indicators of UK industry competitiveness.
I've seen recent benchmarking studies that indicate that, like for like, UK costs are around two thirds of the cost of equivalent US systems, even when US economies of scale are taken into account.
Looking elsewhere for performance indicators, we also know for example that that UK naval defence industry has been successful in international markets. UK industry is holding it's own against its main international competitors, some of whom receive significant support from their respective national Governments, this is quite an achievement.
It has been suggested that overseas supply for UK naval requirements might offer better value for money for the UK taxpayer. But even ignoring the economic and political benefits that derive from a having strong indigenous supply base, I would question whether that is a route for better value over the long term.
I have heard comments from certain areas that the UK defence industry is not competitive, for example compared with international commercial ship suppliers.
I would agree that these businesses can claim good performance, but the products they produce and the markets they serve are somewhat different.
One of the big differences between the defence industry and its commercial counterpart is the level of integration required. Contrary to some belief, we don't just build steel boxes. Even the services of a cruise ship, significant in quantity perhaps, represent just a fraction of the complexity of a warship.
Warships are principally weapons platforms and the combat system is a critical part of our business. Integration occurs at various levels and in different phases.
System integration as well as physical integration is key to our business, particularly when the procurement and construction programmes are carried out in conjunction with design development.
For this reason, it is important to have connectivity between the design, procurement and manufacturing phases to ensure effective integration and joined up working.
This cannot be ignored.
Going back to the original challenge mentioned earlier. If, as I believe, the UK naval defence industry is already delivering quality products at good value for money, then how can we deliver the affordability challenge?
Partnerships
We have already witnessed the teaming of traditional competitors, BAE Systems Naval Ships and VT working together in the export market and on Type 45 - BAE Systems Naval Ships and Swan Hunter on the LSD(A) contract and the whole of UK Industry coming together to meet the challenges of the CVF programme.
Where historically we have seen competitions, in the future partnerships are the way ahead, harnessing the full range of skills that are available to deliver the capability being demanded in the future.
I think there is now a strong argument that the UK naval industry has become too small for simple competitive tendering to remain the only effective tool for selecting lead contractors. Indeed, in recent years, we have seen some disastrous results from contracts won by unrealistically low headline numbers resulting from the ‘win at all costs’ culture that competition imposes.
I fully embrace the need for industry to demonstrate value for money to the government and the UK taxpayer. By working together with the customer, value for money can be proven in many different ways. These include open book accounting and selected competition at the sub-Prime level. Such a partnership would help produce a workable blend of long-term planning with value-for-money pricing, giving benefits to both the supply and demand sides of the equation.
NEC
There is recognition that an information rich NEC environment will become essential in order to deliver an increased gearing in military effectiveness, and it is to be expected that our systems integration knowledge will come under increasing pressure.
We must develop a deep understanding of the future demands that NEC and interoperability will place on ship systems; interfaces, bandwidth capability and redundancy, to name but a few.
NEC calls for tremendous system integration domain experience, not just of legacy systems, which will still be used for many years to come, but also experience in developing interfaces for integration with the latest off-board systems.
Continuity of work
We should also recognise that performance to date has been achieved against a backdrop of low investment driven by uncertainty and short term planning - with each programme being treated in isolation.
In the Royal Navy, training, professionalism and leadership quality lies at the heart of what the Navy does so well. So too, at the heart of what industry does lies the opportunity for a challenging career and the training that can be offered to high quality people. To achieve that, you need business continuity.
Continuity has been sorely lacking in the recent history of the industry. The effect has been that talent has moved away, recruiting has been limited or non-existent, domain knowledge has been lost and programmes have therefore suffered.
How much better could things be if industry could plan for the long term and properly invest in people and facilities.
As I mentioned earlier, the more successful programmes have continuity of work built into them. In the future, if we can't obtain repeatability from individual classes of ship, surely the next best thing is to ensure coherency between programmes to provide that much needed continuity. The recent DPA reorganisation of the naval IPT's under a single executive director may provide such an opportunity.
Today, UK Industry's ability to continue to deliver is critically poised. Few organisations remain with the necessary skills and core competencies to deliver the capability needed in the future. Those that remain have an ageing workforce.
If you have been reading the recent press, you will have noticed redundancy announcements at VT, and BAE Systems Submarines, warnings of job losses at Swan Hunter, and a lack of work at Rosyth. The situation is going to get worse and it could become disastrous if not managed properly.
There are some critical masses in certain key skill types, particularly naval engineering specialists, where skills can take years to develop. These critical resources do need to be managed carefully if the industry is to be sustainable over the long term.
The UK Procurement programme over the coming decade is significant, particularly with MARS and CVF, yet companies are currently starved of work and the skills may not be available when required. There is an opportunity to address the cycle of "feast and famine" in the procurement process. This would provide continuity of work and allow industry to invest in people and facilities to address the long-term affordability challenge.
The sort of partnerships and programme planning that I am advocating is not revolutionary – it is the approach that has successfully been used in the United States. The US have long recognised that it is essential to both sustain industry capability AND secure long term value for money through a joined-up approach.
Exports
One of the common reactions to suggestions that demand could be managed to suit the supply base is that UK Industry should export instead of relying on the home market. This is an understandable reaction and I would like to take just a few minutes to explore some of the issues surrounding the export market.
The first point to recognise is that, whilst the theoretical market is large, in practice, we are not allowed to export to some countries, others do not demand the high capability products that the UK produces and many countries with developed navies also have an indigenous capability for supplying their own naval requirements.
So in a practical sense, only a very small proportion of the market is accessible and it is really a niche market, consisting of friendly countries that can afford European naval products, but lack an indigenous capability.
As I mentioned earlier, the UK has been relatively successful in accessing that market with orders from Malaysia, Brunei, Qatar, Oman and Greece.
Our facility in Scotstoun for example, has built 5 ships for export over the past decade. Indeed, in 2002 we received a Queens Award for International Trade because of our success in the international warship market.
Exports are a vital component of the overall picture from an industry perspective. In my own Company, the Brunei export order following on from the Type 23 programme, kept our Scotstoun facility going, retaining key skills which are needed for Type 45.
From a UK customer perspective too, we need also to remember that exports have very important benefits and without them, Royal Navy products would undoubtedly be more expensive.
In the international warship market, competition remains largely national, the French, Germans and Brits being major players with Spain, Holland and Italy also having significant aspirations.
Royal Navy endorsement and the support of DESO is vital. However, it is an unfortunate fact of life that the products developed for the Royal Navy are generally not readily exportable - UK products tend to be bigger, more complex and often role specific and therefore do not suit the needs of the overseas customers. Therefore industry needs to generate separate export designs - which adds significantly to the cost and risk.
However, many of the technologies that are used by the UK are exportable and there are opportunities for exports to remain part of the overall success story, if we actively look for coherency between UK and potential export programmes.
Exports are becoming more important than ever, given the likely gaps in UK programmes going forward, especially for the high value engineering resources. Perhaps therefore, importing designs as the UK did with the Bay Class, is not the best way of sustaining the UK design capability.
To conclude therefore…
I believe that there is a need to take a long term view of what capabilities are right for the UK to retain and develop and the Government needs to be fully engaged in that debate with Industry.
Informed by that understanding, there is a need for action to address demand / supply imbalances within the UK naval defence industry, to sustain and develop those skills and capabilities that are critical to the future. Time is not on our side as every week that passes increases the risk of losing key skills that may be required to deliver future programmes.
We do need a partnership approach with key stakeholders, within Govt, the Armed Forces and Industry, to get the best from what remains of the UK industry. Important components include partnering to share key skills; and long term, multi-project planning, to allow appropriate investment in people and facilities.
Exports do have an important part to play, but they are not the panacea and cannot be relied upon to "balance the books".
I hope you will agree I have not been reticent about speaking my mind, but I have not been intentionally provocative. The situation within the UK naval capability scene cries out for leadership, dialogue and plain speaking.
The message I want to leave you with is that we do have a choice. We can build on our hard won experience and create, through foresight, a vibrant industrial capability which understands fully the needs of the Naval service, and has an open and trusting relationship, based on mutual respect.
The alternative, defeatist approach would be to cast aside the expertise and experience we have built up through decades of hard work, on some mis-informed and inaccurate assumptions that UK industry cannot deliver. That would be a national tragedy, especially at a time when there is something of a renaissance in future demand.
I for one am determined that we can and will play our part as a partner in providing the right capability for "A World Class Navy, Ready To Fight and Win"
