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WORRIES UK DEFENCE INDUSTRY DOMESTIC MELTDOWN

MORE WORRIES ABOUT UK DEFENCE INDUSTRY DOMESTIC MELTDOWN

May 27 2004. The FT reported that within the space of less than 12 hours on Wednesday, a trio of events encapsulated the British government’s move into the uncharted territory of throwing one of the most sensitive parts of the economy – the defence industry – open to outsiders.

In Rome, Finmeccanica, the Italian aerospace and defence group, announced a £1.06bn ($1.95bn) deal to buy out GKN, its UK partner, from their 50:50 AgustaWestland joint venture. The UK Westland business is the country’s main supplier of helicopters to the armed forces.

Later the same day in Brussels, the European Commission announced that it had cleared an agreed £309m bid by General Dynamics of the US for Alvis, the UK’s only maker of tanks and armoured vehicles. Clearance from the European regulator was largely a formality: the UK government has the final say on the deal, and at the moment shows no signs of demurring.

The significance of both deals was not lost on the crowd of dignitaries at a defence gathering in Whitehall that evening. As Geoff Hoon, the defence secretary, began his speech at a reception to mark the official opening of the UK office of EADS, the Franco-German aerospace and defence contractor, by welcoming it to London, someone in the audience quipped: “Just as well, seeing as our arms industry all seems to be heading the other way.”

Britain’s apparent willingness to countenance the sale of many of the “crown jewels” of its defence industry would be considered heresy in other big weapons-making countries such as the US, Russia, France, Germany and Italy. In the US, with a few notable exceptions, the Pentagon effectively operates a US-only policy when it comes to appointing prime contractors (see below).Britain, on the other hand, has for the past 18 months been trying to set defence procurement policy according to a document called the “defence industrial policy”. This, it says, seeks to balance on the one hand the need to equip its armed forces with advanced weapons and systems and on the other hand an already overstretched defence budget, with the aim of maximising the economic benefits to the UK only truly international defence suppliers have the scale necessary to supply equipment at attractive prices. Efficiency and value-for-money are the watchwords – both relative strangers to the world of defence procurement, where the development of cutting edge technologies often leads to delays and huge cost-overruns.

But while many inside the defence industry approve of the British government’s approach, there are growing concerns about its failure properly to develop and flesh out the “open market” policy in a way that gives clarity to contractors – both domestic and overseas. “I think the important point about the defence industry is that it is now increasingly international and if companies like the one I work for are going to invest in the UK, as my company has very substantially in the last 10 years, then we need to be sure that there are conditions for doing good business here and a joined-up view of what the national priorities are for industrial capability,” John Howe, vice-chairman of Thales UK, said this week when he gave evidence to a committee of British MPs investigating defence procurement.

Some in Britain, meanwhile, believe the government is putting jobs at risk. Bruce George, chairman of the committee of MPs, said the approach was “laisser-faire”. His concern is that in any downturn foreign companies would first look to cut jobs in Britain rather than in their own countries.

The government points out that to qualify to bid for defence programmes a supplier – irrespective of its nationality – must demonstrate that employment, technology and intellectual property rights remain in the UK.

But even Lord Bach, the defence procurement minister who w

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