This note is supplementary to the evidence given to the Committee by Mr John Weston and Mr Trevor Truman 2 December 1998.

RESEARCH & DEVELOPMENT EXPENDITURE:

  The questions concerned the amount of Research and Development conducted by the Company, the percentage that this represented in relation to sales and the amount of this funded by the Company.

  1.  Some brief definitions are necessary: within the Company we allocate our costs as follows:

(a)  Research: Technical work in support of a future capability which is not specific to a product.

(b)  Development: Technical work that is specific to a product and needs to be done to realise the product performance.

These costs can be either:

(i)  Company funded (Research or/and Development) work is a part of the cost of the operations and will impact the profitability of the Company . . . or . . .


(ii)  Customer Funded work (Research and/or Development) is funded under contract with our customer and is not therefore a burden on company profitability.

  2.  As reported earlier to the Committee we do not target particular percentages of R&D work. Each business and each project is assessed for the work that will be needed to bring projects to fruition and to create new capabilities. These are reviewed and assessed within Company procedures and form part of the business planning process. Within this process there is scope for adjustment. Areas of potential synergy and duplication are examined and opportunities are taken for collaborative work between businesses and between BAe and other parties where it will be beneficial to do so.

  3.  When considering the level of R&D support to the total sales of our business we must bear in mind the nature of the customers' requirements. The costs of developing a project such as Typhoon are such that no nation, let alone a single company, can afford to finance them. On major defence projects our customers identify the cost of R&D (especially development) and pay for it separately, this also allows the customer to specify the exact capabilities of the product. All development, whether paid for by the customer or the company, is relevant to the total sales of the company. (It is on these grounds that we disagree with the view taken by the DTI R&D Scoreboard which looks to include only Company funded R&D—we think that if all the sales are relevant then all of the associated R&D must be included).

  4.  British Aerospace is a diverse business: much of what we do is by way of being a Prime Contractor—taking responsibility for supplying products and services whether or not we ourselves design or make the whole content. Some of our business has no need for us to conduct R&D—examples are some types of consultancy services, aircraft leasing, maintenance resources, factoring and others. We estimate that such businesses accounted for about £2 billion of our turnover in 1997 which was, in total, £8.5 billion.

  5.  In the area of business where R&D is relevant much of the R&D is conducted by our suppliers who can typically account for about 65 per cent of our sales in relevant areas. Some of this effort by suppliers is, of course, influenced by R&D work done in BAe.

  6.  Although we do not routinely account for our businesses in this way we estimate that, taking these issues together, the BAe sales which are directly or indirectly impacted by BAe R&D would be of the order of 50 per cent of total sales. By this measure our combined R&D activity approaching £500 million represents a little over 11 per cent of the related sales and is one measure of R&D intensity.

  7.  The Committee also wanted to understand how much Research was conducted by the Company. This is, of course, contained within the total for R&D and was, in 1997, £84 million nearly all of which was funded by the Company. This represents 1 per cent of gross sales for the Company but around 2 per cent of the narrower field of work to which the research applies.

  8.  Another measure of the level of R&D intensity of a company could be the percentage of staff employed who are devoted to product regeneration and improvement. By this measure British Aerospace employs about 25 per cent of its effort on these tasks in the relevant businesses.

  9.  The notes above have been confined to the arena of product regeneration and improvement. This is by no means the only area in which the Company invests in its own future with its own funds. We have major programmes of organisational and cultural change, of increasing the ability of our workforce through training, of generating new approaches to manufacturing management and by innovation across all areas of the Company's operations.

THE BRITISH AEROSPACE VIRTUAL UNIVERSITY

  10.  British Aerospace, in establishing its Virtual University, has underlined that education, training, research, technology and development of its people is at the core of its strategy for growth and international development. Announced in May 1997, the British Aerospace Virtual University is a business strategy built upon strategic partnerships with academe and enterprise. This connection of two normally separate cultures will link business needs to learning and research and will enable both the company and universities to benefit. The strongest motivation lies in preparing our people for the challenges and market evolution which lie ahead as the aerospace and defence sector consolidates and adopts a global business position. This sector still employs well over a million people world-wide and plays a vital role in the knowledge-driven economy, in innovation, and in engineering excellence.

  11.  The Virtual University has adopted an academic framework and has faculties for Learning, the International Business School, the Faculty of Engineering and Manufacturing Technology, the Benchmarking and Best Practice Centre, and the Sowerby Research Centre. These are supported by a company-wide infrastructure to support continued learning for all employees and, in the longer term, to offer services to the supplier chain, the customers, and the company's international partners. The Virtual University is based on partnership and collaboration with traditional universities, not on competition with them. Programmes will be delivered to our employees by partner institutions. Examples of initiatives of the Virtual University are outlined below.

  12.  The network of Learning Resource Centres across the company offers access to the company-wide "Learning and Development Guide" on Intranet, which guides employees through the programmes available, offers an assessment of learning styles and guidance on job profiles and career progression. Procedures are in place to link "learning" to the progression of careers or reward and recognition within the different workplaces, and measures of how effective such learning might be. We believe that these measures will contribute to our ability to allow the most talented people to realise their potential within the Company.

  13.  The Virtual University and our Sowerby Research Centre in 1998 founded, in collaboration with Rolls Royce, and the Universities of Cambridge, Southampton and Sheffield, an interdisciplinary University Technology Partnership. The five-year research project on Design and Manufacturing reflects the importance of design on every aspect from concept to the ultimate delivery of high performance and cost effective processes, systems or products.

  14.  British Aerospace has sponsored a Systems Engineering course at Loughborough University. Two classes have now graduated, 30 graduates in 1997 and 40 graduates in 1998 graduating from this jointly designed and developed Masters degree course. The majority returned to the company including seven former aircraft apprentices who have had the opportunity to develop their potential into more important roles on major systems integration projects in UK and Europe. This MEng course is open to other students and other companies, even though British Aerospace sponsored all the original development costs and supported the University's own expertise with equipment and lecturers.

  15.  In January 1999, the first cohort of the new Open University and Lancaster University Management Certificate began to study management for the 21st century in a co-designed programme that also includes some of the executive behavioural skills and team work that are central in a modern global organisation. Some 5,000 employees will undertake this programme over the coming years, and other companies and international partners have already shown interest in this innovative educational product.

BRITISH AEROSPACE SPENDING WITH UNIVERSITIES

  16.  Within the £485 million overall R&D spend reported by BAe for 1997, the Company spent £5 million with universities on technical and scientific work of which about £2.9 million was on research. The total expenditure on the technical, research, education, and personal development and learning activities with the Universities would be approximately £10 to £11 million per annum.

  17.  Over 50 per cent of this total investment is with six universities as major strategic partners in engineering and R&D. BAe invests over £25,000 per annum at each of 32 academic institutions from more than 70 with which we have sustained relationships.

  18.  BAe offers access to special R&D facilities to the external research community, such as wind tunnels, and supports 10 CASE industrial studentships per year, co-ordinated by the Sowerby Research Centre with the collaborating University. We are eligible for six DARPS (defence and aerospace research partnerships) in the EPSRC competition launched recently (arising from Foresight) out of the 10 initially submitted.

18 February 1999