27 Mar 2008
SBAC Conference 27th March 2008 - Savoy Place, London.
Meeting the Global Challenge Defence Market speech by: Guy Griffiths, Managing Director, BAE Systems Integrated System Technologies (INSYTE), Chairman of the Defence Manufacturers Association.
I have been asked to address the state of the defence market from a UK perspective as we enter 2008.
How are we, the defence industry, faring? Is the UK defence market a healthy environment in which to operate?
The financial reporting season for the UK defence sector is in full train and, judging by the results published by BAE Systems, Rolls Royce, Cobham and many others, observers might be entitled to conclude that we are doing just fine. At a time when other business sectors, not least the financial sector, appear to be undergoing a period of turmoil, those same observers might be forgiven for concluding that, by comparison, we have little to complain about. But, we should take care not to jump to instant conclusions about the state of the UK defence sector. It is a long term business and we need to take a long term view of its health.
The starting point for those questions about the health of the sector must be to look at the military context in which we are operating.
The UK armed forces continue to support two major campaigns and numerous other commitments around the world.
The specific operational demands which these campaigns impose, and the intensity and durations involved, are driving significant changes in the balance and prioritisation of UK defence spending.
The last year saw a further 300 Urgent Operational Requirements (UORs) introduced, consuming £790m (6%) of the acquisition budget. (This means that, to date, £2.5bn has been spent on nearly 800 UORs).
As in previous years, the performance of MOD and UK industry, working together, in delivering this succession of UORs, has been judged exemplary, not just by MOD itself but by the National Audit Office also. It serves as an illustration of what can be achieved when MOD and industry are working to aligned objectives and clearly defined priorities - a theme I will return to later.
At the same time, the demands being placed by these campaigns on our service men and woman, and their families, has driven calls for increased prioritisation of defence spending on the welfare of our service personnel.
And who would argue that spending in support of the short-term imperatives of current campaigns, and on welfare, should not be prioritised? Not industry. But industry is concerned that this should not divert necessary attention, or investment, away from the task of preparing our nation, and our armed forces, for the contingency of different types of military operation in the future. We do not want to be equipped only to fight today's war!
But the reality is that government expenditure budgets are constrained. The reality is that governments must make choices. Defence and security must compete for resources with health, education, law and order and other important demands.
The fact is that defence is failing to compete for these resources. The UK defence market has seen little real growth in recent years. In comparison, the US market has grown by about 15% since 9/11. China, Russia, India and a number of Middle Eastern States are all committing to significant increases in their levels of investment in defence.
In the light of this reality, though, as far as the UK defence is concerned, we would be well advised to do two things.
1.ensure that we (MOD and industry together) use such resources as are available to us as effectively as we can - so as to deliver as much military capability as we can.
And...
2.... ensure that we (MOD and industry together) present a more convincing case for defence and security having an appropriate share of UK Government expenditure.
The first of these is what the Defence Industrial Strategy (DIS) is all about.
DIS version 1.0, when published in December 2005, represented a crucial breakthrough in that it recognised:
- that industrial capability is a key ingredient in delivering military capability.
- that certain military capabilities are of such importance in the context of national security that they need to be preserved and sustained on a sovereign basis.
- that those industrial capabilities that underpin those sovereign military capabilities need to be preserved and sustained on a sovereign basis also.
Do not underestimate the profound significance of these three principles, or the courage and foresight of Lord Drayson in originating and progressing this thinking as Minister for Defence Equipment and Support ... and it is encouraging to see that his successor, Baroness Taylor, has shown her own determination to continue this work and, particularly, to ensure that DIS version 2.0 is firmly based on the solid foundations of the eventual Planning Round 08 outcome.
Since DIS version 1.0; work has progressed towards putting flesh on the bones of this strategy. If MOD could define transparently which defence industrial capabilities are to be proscribed as "sovereign", then defence spending could be prioritised towards them and, in turn, industrial companies could make their own investment decisions in an informed way.
The publication of the Defence Technology Strategy was a further step along this path, even if it painted a rather broader canvass of sovereignty aspirations than even the most optimistic of budgeting palettes was ever likely to accommodate.
So we await publication on DIS version 2.0 later this year with keen anticipation of the additional clarity in will bring on the selection of those capabilities which are to be prioritised as "sovereign". Industry's plea is that, at a time when budgets are particularly stressed, this selection should be done from the basis of military need, not budgetary expediency. If there is a clear military need for a particular, indigenous industrial capability, then DIS version 2.0 should say so - even if the budget today is judged inadequate to resource it. That very budget inadequacy becomes the next challenge - rightly thrown in the direction of MOD and industry (working together) to address it.
Can we... - through smarter ways of working and contracting which eliminate duplication and waste,
- by taking a longer-term view (a "through life" view) of cost/ performance/ time trade-offs,
- and by encouraging and leveraging innovation and agility through the supply network...
...make a contribution to bridging the affordability gap?
Industry thinks so and, indeed, is investing significantly in organising itself to operate in this "through life" way. Once again, we hope that DIS version 2.0, will create the environment for doing just that. We are working closely with Amyas Morse and his MOD team to help him do so.
Perhaps part of the answer to bridging the affordability gap lies in partnership, not just between MOD and industry, but also internationally.
The UK/US Trade Co-operation Treaty is in the approval process and has the potential, if properly leveraged, to deliver more for less by sharing investment resources bi-nationally.
Similarly, the MOD/ Industry Anglo-French High Level Working Group, of which I am pleased to be a member, has produced a report on the opportunities for UK/ French Defence acquisition co-operation which is being considered this very day by Prime Minister Brown and President Sarkozy at their summit meeting. Again, can co-operation contribute to delivering more for less on a bi- lateral basis?
But, if despite all these national and international efforts, the existing defence budget is still not sufficient to support essential military capability, then what? Is there the political appetite in the UK to increase the defence budget? Where does defence sit today in the UK's list of political priorities? Are there votes in defence?
In the second half of last year, when the announcement was made to re-align the UK's support for defence exports under UKTI, rather than continue to do so via DESO, some of us interpreted this as a signal of a lowering of priority in favour of defence. Since then, in fairness to the UKTI team and, in particular, to the enthusiastic support of Lord Digby Jones at DBERR, there is every sign that strong sponsorship of defence exports will continue from its new home. But even if we are to conclude that the political appetite for defence is waning, is it entirely fair that we blame our politicians or should we, perhaps, look beyond them - to ourselves. If there is a lessening appetite for defence, why is that? Perhaps because there are fewer votes to be won in actively supporting defence? Perhaps because public opinion, infected by the images of "unpopular" conflicts a long way from home and poorly portrayed in the press, and by ill-informed reports of an inherently corrupt defence industry, is becoming less sympathetic towards the cause of defence.
It may well be that our Armed Forces still enjoy respect and admiration throughout the UK for the job they do...and rightly so....but can that be said of the industry which equips them? And even then , was the reported incident few weeks ago of uniformed personnel from RAF Whitton being abused in the streets of Peterborough a very first sign of the tide turning against our service men and women?
If so, and I fear it is, then we, as industry, need to address public opinion.
The Defence Industries Council, supported by SBAC and DMA working in unison, has set this as its top priority. Informing public opinion as to the strategic importance of defence and the defence industry will be a long term and costly task - we recognise this. But, this cost will be dwarfed by the price to be paid if we fail to act
... a price that will extend far beyond the health of the UK defence industry per se to threaten the very security of our Nation. Ends
