ASPECTS OF DEFENCE PROCUREMENT AND INDUSTRIAL
1. The UK defence industry is distinct from other
industry sectors on two main grounds. Government is its single
biggest customer, and access to its technologies provides a vital
element of our defence capability, in terms of security of supplies
and support for weapons systems deployed in operations. There
are also significant industrial factors making the defence industry
one of the UK's most important sectors. It is responsible for
the employment of 400,000 people in 11,000 companies, 10% of the
UK's industrial manufacturing workforce.
The industry exports 30% of its output, and in 1997 won 23% of
the world defence export market.
In terms of added value, UK defence industries are said to convert
£1 worth of raw materials into £10 of product.
2. The previous Defence and Trade and Industry Committees
examined Aspects of Defence Procurement and Industrial Policy
in 1995, prompted by
a number of concerns but principally by the increasingly dominant
position of US defence manufacturers in a shrinking global market.
The essentials of the problem were:
- with the end of the Cold War defence budgets
in many countries had been falling, including budgets for procuring
defence equipment and defence research and development. The impact
of this had been amplified by inflation for successive generations
of equipment continuing to outstrip general price inflation;
- faced with shrinking domestic markets, US manufacturerswith
pressure from the US governmenthad reduced capacity and
increased efficiency and competitiveness through an extensive
series of mergers, and had begun to adopt more aggressive export
- the combined effect of these developments had
been to make US defence equipment relatively less expensive for
Defence departments in other countries, who were increasingly
faced with the dilemma of having to choose between buying US systems
for financial imperatives, or domestic products to protect strategically
important technologies and for 'industrial' reasons;
- increasing concern in the UK about its ability
to continue to supply certain key strategically important products.
3. As then, the solutions for the UK and other countries
in Europe now require measures on a number of fronts, to improve
the economic picture in the face of competitive pressure from
US firms. This involves tackling both the demand and supply sides
of the market equation, which are inextricably linked.
On the demand side:
- The Government could assess equipment bids from
UK manufacturers on the basis of what might be the most cost-effective
purchasing in the long term, recognising that if UK firms
do not win orders they might go out of business, and with less
competition subsequently prices may be higher in the longer term.
- MoD and defence departments of other countries
could harmonise more closely their requirements for defence
equipment, in terms of the performance capabilities they seek,
so that countries might collaborate more on specific equipment
projects. In this way production runs would be longer, with the
greater economies of scale producing downward pressure on unit
On the supply side:
- Governments could help dismantle obstacles
preventing firms linking-up across national boundaries
to rationalise their operations and secure economies of scalethe
lower prices might then be passed on to customer defence departments.
- UK and other European governments could take
steps to secure open markets for their defence manufacturers,
allowing larger quantities to be produced for both export and
domestic markets, and thus reducing the average price of each
item of equipment.
4. The trends highlighted in our predecessor Committees'
1995 report have continued, adding further to the urgency needed
in tackling the unfavourable position described in paragraph 2.
In particular, mergers in the US have continued, producing industrial
'giants' (Figure 1). In December 1997 the governments of the UK,
France and Germany called for restructuring plans from their aerospace
and defence electronics industries, signalling a more determined
drive to reorganise the defence industries in Europe to compete
on more favourable terms with the US.
Figure 1: The largest defence manufacturers, 1996.
The 10 largest:
* Lockheed Martin and Northrop Grumman are currently seeking to merge.
Of the 100 largest firms:
44 are US
11 are French
9 are UK
9 are Japanese
7 are German
Source: Defense News
5. This is an opportune moment, therefore, for the
Committees to return to these issues. Jointly, we took oral evidence
from MoD and DTI Ministers (Lord Gilbert and Mr John Battle MP),
and industry representativesincluding the Defence Manufacturers
Association (DMA) and the Society of British Aerospace Companies
(SBAC) and written evidence from many quartersfrom
industry, academics, trade associations, embassy officials and
others. The Defence Committee had discussions with representatives
of NATO and the WEU (including the Director of the Western European
Armaments Organisation) on a visit to Brussels in January. We
wish to thank all those who provided evidence.
1 HC Deb, 3 December 1997, c284; Defence Industry debate Back
by Head of Defence Export Services at 1998 DESO Symposium, 3 March
Reports from the Defence and Trade and Industry Committees, Session
1995-96, Aspects of Defence Procurement and Industrial Policy
HC 61/62 Back
Hartley of the University of York notes that the real unit cost
of combat aircraft has risen by 10% a year since 1945, so that
cost doubles every 7 years, Ev p 59 Back
said that progress on one side was unlikely without progress also
on the other (Ev p 63) Back
Statement, 9 December 1997 (MoD Press Notice 208/97) Back