WEDNESDAY 2 DECEMBER 1998

MR JOHN WESTON and MR TREVOR TRUMAN

  600.  Can I just ask you a very short question? Some companies complain that when they work closely with universities the graduates that they put there for three or four years then go and join other companies. Do you have a loyalty factor built in there?
  (Mr Weston) No, we do not, because I think we have always taken the view, certainly since I have been in the company, that if people decide they would rather be elsewhere then having them contracted to stay is a bad apple in the barrel that you are better without. No, we do not, we rely on trying to provide them with a challenging career and in an environment to work in which they are happy to stay. I think at the moment our attrition rate amongst our engineering population is less than two-thirds of the engineering industry average. We just take a chance on that.

  601.  I will come back to blue skies later. My final question on this section is arising out of Jacqui Lait's. You are working with Saab, with DASA and possibly Aerospatiale, depending on the French Government's view; where is the innovation and the technological advance and the break-through going to be captured in that? Obviously we are looking at them from the British point of view.
  (Mr Weston) I think we have got two different sets of examples there. Within the Airbus partnership we have already quite a high degree of specialisation by virtue of the partnership agreement. We do the wings and the French design the cockpit and help to put together the systems and the Germans do the fuselage barrels and the Spanish do the tail services. There is already quite a degree of specialisation so when we are looking at future research we try and make sure that we are tailoring it to our part of the aeroplane. That is not always true of all of our partners. The German Government has for some time been funding advanced wing research in Daimler Benz and every time we get into an aeroplane we have to repeat again that we actually get the wing and because we have got the most practical experience out of it we generally win those competitions. Within the military sector of the business what we try and do is to make sure that we maintain our capability across the spectrum of skills that we need doing some things on some programmes and other things on others. So if we are not doing something on Eurofighter we will try and make sure we are doing that on JSF with Lockey or we are doing it on Harrier with Boeing or we are doing it on one of our own aeroplanes. Those are the sorts of areas where we will actually get some savings when we actually move to the consolidation of the industry.

  602.  You buy in a lot of your technology from smaller companies. What do you feel are the advantages and disadvantages of dealing with small companies in your technology supply chains? For instance, do you take a stake in the companies to ensure that you get what you want?
  (Mr Weston) No. I think we are very happy to work in a partnership fashion with our suppliers although we have got a long way to go yet before we develop those relationships to the point where we can get the maximum out of them. Again, that has not necessarily been the traditional way of operating in the industry. I think we get most out of those relationships where we can establish a trusting relationship, where we begin to forget about building big walls around the technology to try and protect it and accept it being open and sharing it across the organisational boundary, and we actually end up getting a better result. One of our awards this year right at the manufacturing end of this was a joint award with one of our suppliers for a just-in-time system for working with composite materials which I would have thought was impossible because of the special storage arrangements. We have developed on the back of that a completely different relationship with the supplier than one we have ever had before and one which is very much to both our advantages, even though we accept that in the learning they have got out of that, that can actually go and make them a better supplier to some of the other aerospace manufacturers that they deliver to, but I think we are beginning to get much more in the frame of mind that if we can get that benefit today and significantly in front of the others, that is still very much worthwhile doing and if we do not share the novelty of the learning and the experience, then we do not get the benefit.
  (Mr Truman) If I may add a point, there is a particular opportunity with small enterprises, I think, for larger companies to make sure that they understand what the business drivers are rather than going purchasing bits and pieces, but to have a dialogue in the partnership that John speaks of which allows a better understanding of the opportunities. My experience with small companies has been that that is what they want more than anything else because they are very willing to have a jolly good go at using new technology and new processes to do a better job and the more they understand what the parameters of that are, then the better it will be for us and their other customers.

  603.  Do you do anything specific to encourage SMEs to foster a more innovative culture and to invest more in R&D?
  (Mr Weston) The preferred supplier schemes that we operate are designed to get at the fact that if we are operating on 30 to 35 per cent of the value chain which makes up our products, we can be as innovative and as efficient and as creative as we like and unless we are actually getting the benefit out of the supply portions, then the leverage we have got is limited. The preferred supplier schemes are designed again to move from arm's length relationships to ones where we try and get much closer to organisations which are trying to do the same sort of thing that we are in terms of management, culture and innovation and the sort of things that we have assessed the suppliers on in those schemes are their management processes where we really get involved with them to a much greater degree than again would have been traditional, so it is that sort of technique that we are relying on to try and make some progress in that area.

  604.  Finally, do you use intermediates, independent research and technology organisations? Are they useful to a large outfit like yours?
  (Mr Truman) We do use them not to a very great degree, but on the same basis that where we can see the particular case in which they are helpful, whether it be an intermediate or a university either here or abroad, we will go where we can get the benefit, yes, but it is not a big factor in science.
  (Mr Weston) One of the remits of the virtual university is to be a window on the world of what is going on out there in areas of interest to us, the other two being our own research centre in Sourby and as part of the deal by which we acquired the Siemens Plessey defence interests, we have retained access to Siemens' research centre at the Roke Manor which is particularly useful to us because it is in key technologies in the communications and processing disciplines.

  Mr Taylor: I would be very grateful if perhaps you could provide the Committee with some updates on the British Aerospace virtual university because it is something I have watched very closely. I think Motorola also have a scheme. The word "university" worries some of us, but, nevertheless, I think what you are trying to do is very interesting and it would be a good guide for the Committee.

  605.  There have been a number of government-funded programmes designed to encourage the aerospace companies to work together and the CARAD programme is such a programme. What has British Aerospace gained, if anything, from its involvement in this particular programme?
  (Mr Truman) We have been active in CARAD over a number of years. We have had and do have now a number of programmes running under CARAD. We think it has been a very important programme. We have been disappointed over the years to see the enormous pressure that CARAD is under because we do think it is an important programme and it allows us, as you know, to collaborate with other companies and with the Defence Research Agency and others.

  606.  Having said that, what would be the disadvantage to your industry if it just disappeared altogether?
  (Mr Truman) Well, it is another change in the climate in which we work. John Weston has mentioned the differences in comparison to other nations. We have to work in our industry in a global setting and within that certainly in a European setting and these differences in the way that the different nations address these issues just makes it another step harder if we are at the low end of the bracket.
  (Mr Weston) Can I just add to that that I think this is an absolutely fundamental point. We can work as hard as we like in terms of getting an excellent science and technology base, very efficient industry and very efficient companies, but we also need a competitive investment climate and if we look at the increasing trend towards internationalism in companies, then it does not matter how efficient the facilities and people are in the UK if other countries are actually offering greater assistance in the R&D phase, and that is where a lot of the work actually is going to end up, and I think there is quite a lot of evidence around that the UK is uncompetitive in that respect at the moment with most of our other European countries, the US, Canada and Japan.

  607.  So if you did not have CARAD, you would want something similar in its place?
  (Mr Weston) I think CARAD is relatively small sums of money and I do not think we should focus just on CARAD. I think the thing to focus on is the whole investment climate around this and not just where investment is coming from on one particular line item of funding, but how the whole scenario works which includes all the defence R&D funding things as well. I think if anybody did do an in-depth study of that internationally, there would be some quite startling conclusions about where the UK stands relative to our major competitors.

  608.  You have encroached on to the next question I was going to ask you which is concerning the funds, such as LINK, CASE and the Teaching Company Scheme. I just wanted to have your observations about that, but I guess you have answered that question. However, I would like to press you further and ask: do you think it is absolutely vital that we have these programmes? Is it essential to have funding programmes or is it essential to demonstrate a commitment and not necessarily have money to back it? In other words, there is not a lot of money on the table, so is money a secondary issue and what is needed is something other than that?
  (Mr Weston) Well, no, I do not think money is a secondary issue in the end analysis because if you look at some of the sums that some of these other countries are investing, they are huge and they are not sums which industry could match. I think if we are talking about the odd £20 million here and there, it is not unreasonable for the Government to say, "Well, can industry not find the odd £20 million?", and the answer is, "Yes, certainly industry can find the odd £20 million if it thinks it is important enough", but it is the odd billion here and there that is what actually does the damage and some of the investment assistance that is available in some of these other countries is on a completely different scale from that which is available in the UK. That is a fact of life on which we actually plan our business and where activity goes for the future is something which has an impact on the marketplace.
  (Mr Truman) I think if we look at two aspects of that, if we compare the US with the whole of Europe on this area of government engagement, I think the ratio is something like three times or thereabouts compared with the whole of Europe. Well, we are a bit of Europe, but we are still competing in the same industry. We also have said over the years that a very important stage of the work that we do is not doing even better at the science base—we absolutely agree we have got a very strong science base here—but there is that very important link between the science base and turning that into competitive performance in the marketplace where we are competing with these other countries, and we have proposed over the years a number of substantial collaborative partnerships between the Government and multiple industries, but with not much success.

  Mr Taylor: I would just follow that. When I was in the DTI I remember there being quite a lot of blood on the carpet about a collaborative venture with the SBAC and the Ministry of Defence and the DTI. Has anything developed since my departure?

  609.  I must say it has got a lot better.
  (Mr Truman) I must be careful with my reply.

  610.  It was a neutral question.
  (Mr Truman) It will be a neutral answer then. The situation is about the same, that we have only in respect of some programmes with the Ministry of Defence got those collaborations up and running in any very effective and significant way. The larger programmes have not been successfully launched.

  611.  Again, as I am a new boy on the Committee I am allowed to do these things and get overruled later but I would quite like a note on that, please, because it was an extremely sensitive issue only 18 months ago. Can I just move you on to the basic research point. The Government does fund the Engineering and Physical Sciences Research Council, a lot of work goes into peer review, etc., but to what extent do you think this helps you in the aerospace industry and in British Aerospace in particular?
  (Mr Truman) I think it does. We have been pleased to see that in recent years the EPSRC has within itself and its processes directed attention to more focus, more focus on the later stages of work rather than the very early scientific end. We have been particularly active in an EPSRC programme called the Innovative Manufacturing Initiative. We have been partners in 21 of those projects since 1994 and we think that has been a good programme and we have been pleased to support and participate in that, of course, with our own funding and the majority of funding is industrial funding but there is some EPSRC funding. We have worked with the CASE awards and we have got an allocation of ten studentships as was mentioned just now. We think that the trend is towards more focus on creating real benefit where we can use it in a competitive situation and we welcome that.

  612.  So you are saying that the EPSRC and perhaps other Councils are becoming responsive to British Aerospace's interests?
  (Mr Truman) I think they are not only listening to industry in setting up processes to listen in a structured way but are taking notice and progressively reshaping programmes and we welcome that.

  613.  That was a very careful reply. What is your view of the EPSRC processes?
  (Mr Truman) I would say that there is still too much emphasis on the science rather than the engineering but we see that balance shifting.
  (Mr Weston) I think we would say in the direct relationship now with the universities around some of the centres of excellence policies where we can actually get a university being very responsive to where we are trying to go and to go out and recruit people specifically for that discipline that is having a much more direct impact than it does through the committee processes but with the processes still being quite important in trying to get an overall picture of what is going on throughout the university system.

  Mr Taylor: We have not got time to go into the—

  Chairman: Mr Taylor, I wonder if you would not mind moving on to Mr Beard now and we will try and get Mr Beard and Dr Gibson in.

  614.  Given that Government's main role in innovation is creating the economic, legislative and social climates, what else do you think could be done by the Government to stimulate innovation and greater risk taking in companies like yours, not small or venture capital type companies but bigger companies like your own?
  (Mr Weston) That is a toughie.

  615.  Why do you not pass it to Mr Truman?
  (Mr Weston) I am assuming that if he has got an answer to help me out he will jump in.

  616.  Mr Weston?
  (Mr Weston) I think, as I said earlier, that we are not short in our company and we are not short in the country of people with bright and innovative ideas, the real challenge is creating an environment in which those can come through and can get the right encouragement and support and application. I think that is where the focus needs to be but I have no idea whatsoever as to what the Government can actually do to aid that.
  (Mr Truman) I would just add, if I may, that there is a view of innovation which is perfectly legitimate of inventiveness-led innovation but I think there is another view of innovation which is what I would call challenge-led innovation, creating big challenges in a collaborative way, perhaps as you suggest in partnership with Government, that really set down a gauntlet, as it were, to rise to some big issues. We have been trying to do some of that in the programmes that we have just mentioned. I think that is also a way of stimulating innovation by a really hard challenge.

  617.  Can you see any potential tax changes that would increase the propensity to do R&D and to undertake the risks involved in innovation?
  (Mr Truman) We have commented recently to the Department of Trade & Industry on some tentative ideas on tax breaks for work between industry and academia that is industry-led but is designed to encourage exactly the kind of thought that you had in your mind of just giving a little more incentive and encouragement to those kinds of schemes and linkages.

  618.  That is very much at the ideas generation stage, is it not?
  (Mr Truman) To encourage people to work together. What they work on I think could also be challenge-driven as well as inventiveness-driven.

  619.  Are there any instances around the world that you have come across where the tax regime for helping R&D is valuable in your view?
  (Mr Weston) I do not think that I have actually noticed any that have caught my attention. I think we are really looking for an innovative climate and we are looking for freedom and deregulation.