10 May 2006
1. Introduction
Vernon, thank you for that introduction, and for the invitation to speak to this distinguished gathering this evening. It is a great honour for the UK, for my company BAE Systems, and for me personally to be given this opportunity to share some thoughts with you.
As a British citizen and as Chief Executive of BAE Systems, I always enjoy reminding my American friends of our role in your history and culture. You will recall that your National Anthem includes the line‘…and the rocket’s red glare’. Well, I am proud to say that those were our rockets – manufactured by Royal Ordnance, now part of BAE Systems.
2. BAE Systems
When I joined Hawker Siddeley Aviation, one of the original components of what is now BAE Systems, in 1966 as an undergraduate commercial apprentice it was a relatively small but very successful and innovative British aircraft company, with a great pedigree of aircraft – names such as:
The Comet airliner – the first jet airliner in commercial service, and with many more years of military service yet to come as the airframe for Nimrod patrol aircraft.
The Harrier vertical take-off and landing jet – in service with the US Marine Corps as the AV8B as well as with the Royal Air Force.
The Hawk trainer – the most successful jet trainer in the world – in service with 19 customers, including the US Navy as the T-45.
But the days in which small aviation companies could be globally successful were passing, and the UK industry, like in the US, went through a huge consolidation process. Including, in our case, the merger in 1999 of British Aerospace and GEC Marconi Electronic Systems to form the basis of what is now BAE Systems.
In the US in 1999, we had some 18,000 people across 25 States, with a turnover of about $2Bn a year – including the then recently acquired Tracor corporation.
That was just a start for our presence in the US. Since then, we have acquired more than a dozen further properties – including Sanders, Lockheed Martin Control Systems, DigitalNet - and, last year, United Defense.
Today, BAE Systems is a global enterprise:
- Sales of nearly $30 billion a year.
- Operations across 5 continents.
- Customers in 130 countries.
- A significant presence in defence systems in the air, land and sea domains.
- Employing some 100,000 people world-wide.
- And, very importantly, we operate, and are recognised as a domestic defence supplier, in 6 home markets – the US, UK, Sweden, South Africa, Saudi Arabia and Australia.
These home markets are ones in which we have substantial operations and continue to make significant investments – for example we are currently investing some $1Bn in Saudi Arabia, buying into and growing the capability of local companies, and in upgrading secure compounds for our 5,000 employees in the Kingdom.
Underpinning this global presence is our core strategy of being the premier transatlantic defence and aerospace company.
In the US we now have a business that turns over some $10 billion a year, employing 38,000 people in 36 States. We are involved in key programmes for the Department of Defense, where we now rank as the 7th largest contractor, and for the Intelligence and other federal agencies.
I will describe later some of the conditions under which we, as a UK headquartered company, are able to operate in the most highly sensitive areas of US national security, with an impeccable security record.
3. Airbus
In order to focus on our core Aeropace and Defence strategy, we have recently announced our intention to sell our 20% shareholding in Airbus to the existing 80% shareholder – EADS.
For Airbus, as for other non-American enterprises operating in the US, there are ever present concerns about the impact of potential protectionist sentiments.
At present there is much discussion taking place in Congress with regard to the Committee on Foreign Investment in the United States (CIFIUS), especially after Dubai Ports, about whether their review process needs to be revised.
Foreign direct investment accounts for over 5 million jobs in the United States, with a payroll of over $300 billion. The UK alone has total assets valued at over $250 billion, resulting in over 1 million jobs for Americans. Obviously foreign direct investment helps to bolster the economy of this country. Likewise, US companies like to invest abroad, and they do so in trillions rather than millions or billions of dollars.
Notions of "us" versus "them" have limited applicability in a global economy.
Although we are headquartered in London, almost 50% of our shareholders are American, 26% of our revenues come from sales in the US, and almost 40% of our 100,000 employees are in the US. When we invest in the US, we create jobs, we enhance performance, and we invest in R&D and the future. Open markets help us all. Close collaboration at the industrial base level can be especially valuable among coalition peacemaking and peacekeeping partners, leading, among other benefits, to enhanced interoperability for their Armed Forces.
While processes can always be improved, it is essential that any changes in the CFIUS process are aimed at ensuring a robust review of the relatively small number of transactions that could seriously affect US national security, and not deterring the overwhelming majority of transactions, which would actually enhance the security of this country. I remain cautiously optimistic that that is what Congress ultimately will do.
4. Defence & Security Matters
I would now like to address some of the present considerations with regard to the core of BAE Systems’ transatlantic business – defence and security.
We, Americans and Brits, share common values in the all-important field of defence and security – the first priority of Government. We share values of liberty, free-speech, democracy, economic freedom, free trade – despite the DP World blip! We recognise that sometimes we have to fight for those values, and, when we do so, we often fight together. That is why the US and the UK have, over many years, established ways of sharing the most sensitive intelligence information.
Our societies also value public education, healthcare and other social welfare considerations. These social expenditures mean that defence and security spending is always under pressure – perhaps more so in the UK than in the US. And very much so in the rest of Europe, where I fear social security is more highly rated than national security.
So it is essential that we address our defence needs with efficiency and effectiveness. We in BAE Systems are determined to continue to contribute to this challenge in both the US and the UK.
5. US
Here in the US, now our biggest home market, BAE Systems has been warmly welcomed by the DoD as an investor in the US defence industrial base. I believe we are seen as an effective owner of key capabilities and we have a successful track record of:
- Growing the business organically, as well as by acquisition.
- Of investing in our businesses, with increased funding for research and development.
- Of creating new jobs – more than 2,000 last year.
- And, most importantly, performing for our customers.
Our businesses in the US operate at some of the highest levels of security sensitivity. As I mentioned earlier, we conduct business with many parts of the intelligence community, and support the DoD in some of its most sensitive and classified programmes.
From electronic warfare to imagery exploitation, we are a leader in the market. We are allowed to operate in the most sensitive areas of national security under the terms of a Special Security Agreement – SSA. This provides for the US business to be run in the US under US law and led by US citizens. The British members of the corporate leadership, me included, get to see the financial results; but many areas of technology, product and programme are not visible to us.
The SSA and US management are in turn supervised by a BAE Systems Inc Board of Directors, made up of a number of very distinguished members of the US establishment – people like Ken Minihan, Tony Zinni, and Lee Hamilton
The SSA effectively allows us to operate in the US as an American company, providing the highest levels of assurance and integrity in some of the most sensitive fields of national security provision.
Through this arrangement, the US gets a powerful mix:
- an external investor with a strong access to the global capital market for future investment.
- a globally experienced management team that can bring the best experience, business processes and intellectual capital to the security challenges of the US.
- Access to products and technologies developed for the UK market, based on our operational and industrial experience there.
And, I really want to reiterate that our record of keeping US secrets secret is immaculate.
I should also be clear that BAE Systems’ transatlantic strategy and performance is not dependent on a break-through on technology sharing between the US and UK – the business is doing very well, and will continue to do well, as it is today.
There are cynics here that say that the only reason the UK argues for US technology access is so that it can use it on other programmes or can sell it to other nations such as the Chinese, or, even worse, the French! Anyone who really thinks the UK or BAE Systems would jeopardise their transatlantic strategy in such a way is very mistaken.
I took the opportunity of stressing to Secretary Rice, when she visited our JSF facility in the North West of England a few weeks ago, that any US technology released to UK industry on JSF or other programmes, would only be used for the specific purpose for which it was released. It will not be used on other programmes without first obtaining a separate agreement – nor would it be shared with other nations.
6. UK
In the UK we are the main defence prime contractor – involved in all the major programmes for military aircraft, nuclear submarines, surface warships and armoured vehicles.
In December last year, the UK Government published a Defence Industrial Strategy, mapping out a future for the defence industrial base in the UK – something the industry had been seeking for many years.
This Strategy seeks to address the best way of meeting the needs of the UK Armed Forces – not just for the initial acquisition phase of new equipment, but throughout the entire product life-cycle.
It addresses the need to maintain and grow the highest level of intellectual capital within the UK defence industrial base, and to ensure that, when systems have to be procured from elsewhere, for example from the US, access to the technology is secured so that the UK can deliver ‘Appropriate Sovereignty’ to its Armed Forces throughout the systems’ in-service life cycle.
Like the US Armed Forces, Britain’s Armed Forces must have the best technology available to conduct their missions worldwide. Unlike the US, the UK cannot afford to develop and sustain all the technologies that its Armed Forces need to continue with their peace-making and peace-keeping responsibilities. But the UK Government is equally clear that when it does purchase from overseas it must have sufficient access to non-UK developed technologies, to ensure that equipment in UK service can be optimised within the overall British military doctrine and environment, and that it can be supported and upgraded through life.
That is exactly what the US expects when it buys from abroad – for example on the new US101 Presidential helicopter – a point made by Ken Kreig, the Pentagon acquisition chief, in London just two weeks ago. The UK government is just looking for the same level of sovereignty.
The UK Government is clear that it has no objection to non-British defence companies entering the UK market. But the Defence Industrial Strategy sets out that it requires UK based suppliers to create or sustain high level intellectual capital within the UK industrial base – not those who just bolt the outside of boxes together in the UK. Nothing in the Strategy alters the fact that the UK remains the most open and competitive defence market of any of the world’s sophisticated defence-minded nations.
The Strategy, which was developed in close consultation with the UK’s Defence Industry, is good news for BAE Systems and for other companies that choose to invest seriously in the UK. It gives us a basis on which we can plan a long-term, profitable and innovative defence business in the UK – something that has not been easy in recent years. The Strategy is also good news for the UK economy and, most importantly, the UK Armed Forces.
7. US-UK Considerations
So – what is missing?
The UK is the oldest ally of the US. Not just because of a shared history, a shared language and very similar political and legal systems. The UK and the US are allies because, as I said earlier, they see the world in the same way. That means that our two countries share a vision of the threats to our way of life and have a similar, robust, approach to dealing with them.
When I spoke at a defence conference here in Washington a year ago, I described managing BAE Systems in the US and in the UK as operating across two parallel universes. More importantly the Armed Forces of our two countries are in danger of operating in two parallel universes.
The evolution of ever more sophisticated systems and network centric warfare capability, means that if the US and the UK are to continue to operate together around the world in order to defeat terrorists and any others who want to destroy our way of life, then it is vital that the two Armed Forces are also able to continue to seamlessly share intelligence and fight together. I do not believe that this can be done just by US based companies making the systems and the British Armed Forces simply buying them.
The UK is a proud nation and insists that its Armed Forces retain their independence. But this is not just national pride. The UK has different ways of operating. For instance, it cannot afford to copy exactly the US doctrine of overwhelming scale and firepower. And, as well as operating alongside the US, UK forces undertake a range of operations independently where the US may not chose to be engaged, or may chose to concentrate on different roles. UK operations in Sierra Leone and different operations in Afghanistan are examples. That means that UK based industry has to have sufficient domain knowledge to ensure that the equipment of the UK Armed Forces can be supported, modified and sustained independently.
Those are fundamental reasons why we support and seek a high level of technology sharing between the two nations. Something that is currently proving extremely difficult to achieve.
Without technology sharing, BAE Systems, as a large and very capable US-UK defence and security company on both sides of the Atlantic, cannot optimise the industrial and technological strength we have in the two countries. The same applies to several large US corporations.
I know that we are duplicating research between the two parts of our company in the US and the UK.
I know that there are projects in the US that would benefit from UK expertise – and vice versa.
I know that being allowed to put the best brains and experience in the two parts of the company together would deliver better outcomes. Exactly the same applies to major US corporations, including Lockheed Martin, General Dynamics and Raytheon. But the security requirements, regulations, and the concerns of Congress, militate against working across this divide.
From the American perspective, US Forces need the best capabilities in the world to face the challenges of today’s security environment and the US role as the world’s policeman – a role you have taken over from my own country – please make a better job of it than we did!
I am extremely proud, that time after time, BAE Systems in the UK has provided that needed edge of excellence. I mentioned the Harrier/AV8B and Hawk/T-45 earlier. More recent examples include:
- the M777 Light Weight 155mm howitzer, now entering service with the US Army and Marine Corps – a world leading system for expeditionary warfare. In fact, the Canadians have undertaken an emergency procurement of a battery of M777’s for service in Afghanistan.
- On the Joint Strike Fighter, we brought to the programme our long experience of Vertical Take off and Landing. And, of fundamental importance to JSF, the manufacturing technology, actually developed on the Eurofighter Typhoon programme, that delivers the very high tolerance machining needed to reduce the cost of providing the aircraft with its Stealth capability.
Furthermore, our world-wide customers receive real value for money from the products and services we deliver. By way of comparison:
- The UK’s new class of attack submarine (Astute) will cost approximately 40% less than a Virginia Class boat;
- The Typhoon aircraft, (a weapon system that attracted very favourable comment from the then USAF Chief General Jumper when he flew it) has been developed for less than a third of the development costs of F-22 or JSF; and,
- The Nimrod MRA4 aircraft is hugely capable and compares favourably with the Multimission Maritime Aircraft - MMA. The production run will be 1/10th of the scale of that for MMA but the unit prices are comparable.
The issue raised by those in the US who are opposed to technology sharing is – why should we give the crown jewels of US defence technology to anyone – even to our closest Allies in the UK – especially when billions of US taxpayers’ money have been invested in developing it? As it happens, and as I’ve mentioned, the UK has transferred a number of very significant military technologies to US industry. Those technologies were also funded by the UK taxpayer. But the UK government allowed the transfer of them to the US because it is its closest ally and because, in good faith, the two countries entered a joint project to create a new weapons system – the Joint Strike Fighter.
The UK remains committed to a strong defence capability – to acting as peace-makers, alongside the US – not just as peace-keepers coming along after the main event. Time and again, the UK and the US really have stood shoulder to shoulder in facing peace and security challenges around the world.
But to go on doing this – to go on being a capable partner of choice for expeditionary warfare - the UK Armed Forces rightly need the best kit, and they need to be fully interoperable with the US Forces. The UK needs to have the ability to optimise the performance of equipment it has within its operational doctrine and with existing systems, to be able to upgrade and modify it to meet urgent operation requirements, and to fit its own weapons, missiles, protection systems and communications.
If the US cannot find a way to share US systems technology for the Brits to do those things, then, speaking more as an individual British citizen, rather than CEO of BAE Systems, I am concerned about the consequences. I believe that British Ministers will face two unpalatable choices – EITHER they will be unable to send UK Armed Forces into peace-making operations because they lack the required capability – OR they will have to look somewhere other than the US to try and find alternative sources for capable equipment solutions – their duty of care to the men and women they send into danger will mean they will have no option. And if that means that they end up with worse or more expensive equipment than would otherwise be available, that would again compromise their ability to stand shoulder-to-shoulder with the US in the most dangerous and politically difficult operations.
Also, failure to maintain sufficient high level defence capabilities in the UK would undoubtedly impact on UK economic wealth, employment and the level of support for defence expenditure.
Just to underline how this is seen by British Ministers, I refer to some comments by the UK’s Minister for Defence Procurement, Lord Drayson, when, just a few weeks ago, he gave testimony about the Joint Strike Fighter programme to the Senate Armed Services Committee. He made clear that operational sovereignty - the ability to integrate, upgrade, operate and sustain the aircraft as the UK sees fit, and without recourse to others, - is of paramount importance to the UK Government as a customer for the JSF.
My suggestion to you tonight, is that it is pretty lonely being the world’s only super-power – the UK knows, it’s been there, albeit many years ago now.
It is in America’s interests that Britain is able to continue its support, in the interests of security, freedom and democracy around the world. Operating together as a Force for Good in the world – incidentally, that is now the mission statement of the UK Ministry of Defence.
Being isolated, even when doing the right thing for the future benefit of world peace and security, is not a good place to be. To have a politically and militarily strong ally alongside is a great advantage. Especially an ally who recognises that it is sometimes necessary to go to war to secure peace and security. As Winston Churchill said – ‘There is only one thing worse than having allies – and that is not having allies’.
8. Conclusion
In conclusion, the people in BAE Systems – here in the US and in the UK – fundamentally believe that DEFENCE MATTERS. And we are very proud of our role in supporting the Armed Forces of both nations.
Our two nations must continue to work together as a Force for Good in the world.
