EXECUTIVE SUMMARY

Aerospace is one of Britain's last remaining world class, high-technology manufacturing industries. There is an urgent need to establish a coherent programme of technology acquisition to sustain this success in the future

  1.  Aerospace is one of the most advanced manufacturing industries in the world. As users and developers and suppliers of advanced innovative technologies, aerospace companies are central to the "knowledge economy". Aerospace is a strategically important industry typically exploiting "dual technologies", providing high technology goods and services to a wide range of civil and defence markets. As an employer, the industry demands the highest level of skills and qualifications.

  2.  Aerospace keys directly into the national science base, rapidly converting knowledge into high value goods and services. It is a "multi-sectoral" industry, drawing from and contributing to, inter alia, the aerodynamic, propulsion, materials, mechanical, electronic and software science and technology base. Barriers to entry in aerospace are very high and only two other nations have a comparable range of aerospace capabilities.

  3.  UK aerospace makes a significant contribution to UK wealth creation, with a UK turnover last year of £18.25 billion, of which 60 per cent was exported, with a positive trade balance of £3.8 billion. Aerospace employs over 150,000 directly with a further 300,000 employed indirectly.

  4.  While several other sectors share aerospace's high risk and high capital requirements, the crucial difference lies in the extent to which, globally, aerospace is sustained directly or indirectly by national governments. Although the globalisation process is changing this relationship, national governments are an intrinsic part of the international competitive environment, able decisively to affect corporate investment strategies and the long-term ability of a national aerospace industry to stay globally competitive. As aerospace globalisation accelerates, the key national goal must be to retain as much as possible of the high value business and employment throughout the UK-based supply chain.

  5.  There is fierce competition worldwide to acquire the capability of the large aerospace companies and governments remain one of the key players in this process. Unless UK industry and government jointly define and invest in national intellectual assets of the technology and capabilities essential to the UK, more companies will react to market forces leading more sections of the UK aerospace manufacturing base moving overseas. If national capabilities are lost through failure to close the widening UK Research and Development (R&D) Gap, they will be inordinately expensive to re-build. Once gone, they will effectively be gone forever.

  6.  Compared to it major competitors in the US and Europe, and notwithstanding the welcome UK government assistance through recent repayable Launch Investment for specific product development, public research acquisition and development in the aerospace sector is fragmented and increasingly under-funded. As a result, there is a growing risk that the UK will lose one of its few remaining world-class, high-value design and manufacturing capabilities.

  7.  The following actions are recommended:

(a)  As a first step it is essential for Government, industry and academia to decide jointly on what the UK's technology strategy should be, and here Government needs to provide the leadership and initiative to key high technology industries such as aerospace more directly into the national science base.

(b)  A greater level of public funding and resource needs to be allocated to long-term aerospace research and technology (R&T) acquisition to reduce the UK R&D Gap with peer nations and to restore a competitive environment in the UK. However, a solution to many of the current problems affecting aerospace lies in a better use and redeployment of current resources. Specifically, public funded top-level research in academia could be better focused. There is also scope for better co-ordination of all public R&D activity, civil and military, involving MoD, DTI, EPSRC, industry and Academia.

(c)  A mechanism should be created to ensure that the results of long-term research are converted more rapidly and effectively into commercially viable products. This is best accomplished through a joint Government/industry programme of technology demonstration. This will facilitate a more direct link between the science base and a core wealth-creating sector. It will provide a focus for industry, academia and DTI and MoD research programmes leading to a coherent, integrated approach to R&D. This could in part be funded by an appropriate, volume-based R&D tax credit system.

  Aerospace is one of the most advanced manufacturing industries in the world. As users, developers and suppliers of advanced innovative technologies, aerospace companies are central to the "knowledge economy".

THE IMPORTANCE OF AEROSPACE

  1.  Aerospace is a strategically important industry typically exploiting "dual technologies", keying directly into the national science base which provides high technology goods and services to a wide range of civil and defence markets. As an employer, the industry demands the highest level of skills and qualifications in the manufacturing sector. It is also "multi-sectoral", drawing from, and contributing to, inter alia, the aerodynamic, materials, propulsion, mechanical, electronic, and software science and technology base. Critically, it demands the highest levels of systems integration capabilities, generating benefits and economic returns far beyond its immediate boundaries. The industry has the highest R&D intensity in the engineering sector.

  2.  Worldwide, there are only three countries with the design and development capabilities to produce a complete range of aerospace products and related equipment—the US, the UK and France. Several others have varying degrees of capability in niche or specialised markets. To compete with the US, France and the UK have adopted a collaborative approach to meet the costs and risks associated with the development of the largest civil and military aircraft. The industry is concentrated because of the high economic and technical barriers to entry; for example, the absolute costs of design development and production, the embedded technology and associated experience needed to cope with very complex and long term development cycles, a deep and rich national aerospace infrastructure, including test and research facilities, and skilled experienced manpower. There is also an important marketing and product support dimension, which implies customer confidence in both the product and process.

AEROSPACE AND UK WEALTH CREATION

  3.  In statistical terms, the industry generated last year some £18.25 billion in revenue, of which 60 per cent was exported. Over the last decade, it has made on average and £2.5 billion annual contribution to the UK balance of trade. Last year the contribution was £3.8 billion. According to a recent DTI report on Business Clusters, UK aerospace's export performance revealed it to be one of the most globally competitive sectors in the UK economy. The industry employs directly over 150,000 people, with a further 300,00 employed indirectly; of these some 11 per cent are involved in R&D. In total, the industry spends 10 per cent of its turnover on R&D, of which 40 per cent is funded by companies.

  4.  The benefits of this success are spread widely throughout the UK. There are obvious local concentrations, but as the map shows, there are few regions of the UK that do not have an aerospace presence.

AEROSPACE IS DIFFERENT

  5.  The aerospace industry has several characteristics, which makes it different from other high technology sectors. The development times, levels of technical and financial risk and the lengthy payback times of its products are unusually demanding—particularly the large non-recurring development costs prior to production. These factors alone can deter private investment in the industry despite the fact that projects are inherently profitable. However, the crucial difference lies in the extent to which globally, aerospace is supported directly or indirectly by national governments. Public investment in aerospace research and development, including basic science research, is crucial. Commitments undertaken by defence ministries to both aerospace industry R&D and as a key customer, are, despite falling defence budgets worldwide, a vital part of aerospace business. In the civil context, recent government support for specific product development through repayable Launch Investment was greatly welcome. However, this form of support does not address the widening gap in research and technology acquisition that benefits industry as a whole.

  6.  Although the globalisation process is changing this relationship, national governments are part of the international competitive environment, able decisively to affect corporate investment strategies and the long-term ability of a national aerospace industry to stay globally competitive. Individually, UK companies can increasingly make provision to stay globally competitive by moving to a more attractive location. However, such a trend will steadily reduce the UK's ability to benefit from aerospace wealth creation.

  7.  The Canadian experience is an example of a coherent national strategy for aerospace. Over a decade ago, the Canadian Government selected aerospace as a core wealth-creating sector. Supported by federal and provincial funding, the result has been to raise the Canadian aerospace industry from seventh to fifth-place in world standings. Several leading American and British firms have chosen to locate advanced R&D and manufacturing centres to take advantage of the favourable climate. French and German Governments have adopted comparable strategic approaches to aerospace support. In the US, NASA's charter defines maintaining US aerospace leadership as a core objective. US government support has been evident in both commercial and defence research programmes. Currently, the US is looking to focus its activities on core technologies with a programme of technology demonstrators to give focus to this activity.

  8.  Other governments, particularly many in the Far East, have similarly attempted to fund "catch-up" aerospace programmes. These have had mixed success reflecting the high barriers to entry in aerospace. This, paradoxically, underlines how important it is to maintain the UK aerospace industry. Once national capabilities are lost, they will be prohibitively expensive to re-build.

GLOBALISATION

  9.  Globalisation has come late to aerospace because of the central role played by the state, especially in the defence sector. There is a large degree of intertia in aerospace due to sunk costs and continuing national political curbs on inward investment in defence-sensitive sectors. These restrictions are growing less irksome and the attractions of exploiting a more favourable technological environment will increasingly outweigh the costs of overseas investment. Aerospace markets are becoming more open, aerospace capital is more mobile, supply chains operate on a worldwide basis and, increasingly, the larger aerospace companies are assuming a transnational identity.

  10.  As an early mover in aerospace globalisation, the UK has a global footprint throughout the supply chain and across key sectors. UK-owned aerospace operations abroad earned £5.6 billion in 2000, while foreign firms located in Britain earned over £2.7 billion. Given the right conditions, UK aerospace can build on this bridgehead to increase business throughout the world, either through direct sales or through participation in national and international programmes. Moreover, given current capabilities and productivity, this will be at a very high value-added level.

  11.  On the other hand, companies will invest where the climate is most favourable and investment decisions are driven largely by market and technology access. Employment will follow this investment. The leading aerospace firms which include the UK's extensive aerospace equipment sector, increasingly have a choice of where to invest and where to locate the highest value-added manufacturing. Such firms act as "routes to market" for national supplier companies and make a massive contribution to the overall health of the UK aerospace industry. In many cases, the main customers of the top tier of equipment companies are outside the UK. As a result, the high value-adding input of UK aerospace extends deeply and widely throughout the supply chain. Equally, much of the consequent business (on average 70 per cent is sourced in the UK. As a result, should the UK lose out in the global investment race, there is a serious risk that the UK-based supply chain will be "hollowed out".

  12.  Inevitably, as aerospace globalisation accelerates, the key national goal must be to retain as much of the high value-added business and consequent high-value employment throughout the UK-based supply chain.

TECHNOLOGY IS THE ISSUE

  13.  The UK government has backed the national aerospace industry extensively since 1945, and without this support the industry would not be in the strong position that it currently enjoys. The UK possesses one of the most extensive legacies of investment in aerospace science and technology. As a result, the UK aerospace industry currently has control over the bulk of its critical intellectual property. Public and private investment in new manufacturing and management processes has led to marked improvements in industrial productivity. This success translates into high-level participation in leading programmes in Europe and North America. (See Annex A: An Example of the Technology Legacy).

  14.  The aerospace innovation process is a complex relationship between the application of basic science, applied research and protracted development to turn advanced technological concepts into commercial or defence goods. This process contains a high degree of technical and financial risk. At a national level, there has often been a more comprehensive failure to link innovation in the science base with commercial exploitation. This gap can often be filled by Technology Demonstration. Aerospace Technology Demonstration therefore makes a large contribution to risk reduction in specific programmes, as well as helping to remedy general deficiencies in generic technologies. Moreover, Technology Demonstration helps to focus the efforts of public and private research teams and contributes greatly to the coherence and integration of research activities at a national level. It is no accident that much of the US aerospace research effort centres on Technology Demonstration. A number of such technology demonstrator programmes are proposed for consideration. (See Annex B: Technology Demonstrators).

  15.  It is essential that the UK aerospace industry continues to "own" its intellectual property. This does not mean that companies must be British owned; the key test is that the aerospace industry in the UK is at the centre of high-level research and manufacturing. If the UK is to retain and to attract investment in the highest value-added aspects of aerospace, the leading firms need a favourable business climate, especially in terms of national R&T investment. There is a fierce competition worldwide to acquire the capability that the big aerospace companies represent. Governments play a key role in this competition, defining the terms of trade, investing in the national R&T infrastructure and generally improving the investment climate. Unless UK industry and government jointly define and invest in national intellectual assets of the technology and capabilities essential to the UK, more companies will react to market forces and more sections of the UK manufacturing base will move overseas.

  16.  There is already evidence that leading UK companies are choosing to locate significant elements of new R&D investment overseas to take advantage of potential markets and better investment climates. While this benefits UK aerospace indirectly (supporting products that would not otherwise be developed, with a "flow back" of employment and technology to the UK), in the long term, this will lead to a loss of national capability and national employment.

  17.  Technology is at the heart of other critical challenges—the Environment and Safety. The aerospace industry is under pressure to play its part in reducing the environmental impact of civil aviation as well as improving absolute levels of safety. While much of this activity is a public good, with research conducted at European and global level, there is a link between national research in this field and competitiveness. In other industries, a competitive advantage has been obtained through leadership in the development and exploitation of environmentally friendly products and processes. Together, UK government and industry could do much to meet their obligations and ensure that UK companies are well placed to capture the commercial benefits of "greener" technology and intrinsically safer aircraft. (See Annex C: Greener by Design).

  18.  Compared to its major competitors in the US and Europe, the UK aerospace sector is increasingly underprivileged. The UK lags France, the US and especially Germany in government-funded civil research and technology acquisition. As a result, there is a growing risk that the UK will lose one of its few remaining world-class, high-value manufacturing capabilities. A core element of any public-private partnership to redress the gap between Applied Research and product development should be a programme of Technology Demonstration. (See Annex D: The R&D Gap). Such investment would reduce costs considerably during development, which is by far the most expensive stage.

SUSTAINING THE UK AEROSPACE POSITION

  19.  To address the UK aerospace industry's long-term commercial sustainability problem and the national R&D Gap, a number of fundamental outcomes are needed, namely:

(a)  Notwithstanding the continuing partnership efforts like FORESIGHT, MoD Technology Towers of Excellence and the Civil Aerospace R&T Strategy, it is essential that Government, industry and academia decide jointly on what the UK's technology strategy should be. This should include more unification within government between military and civil disciplines, as is the case already in industry. Government needs to provide the leadership and initiative to key high technology industries such as aerospace more directly into the national science base. The aim would be to create a national agenda to define the core competencies that the UK needs to have in order to maintain or improve upon its current position as a world-class industrial base. Such an exercise could be completed relatively quickly, and the results would provide a much clearer picture of what is needed, in terms of R&T priorities, skills and levels of investment. The results would also enable the Government to channel its available funding and resources in a more informed and focused manner.

(b)  A greater level of public funding and resource needs to be allocated to long-term aerospace research and technology acquisition to restore a competitive environment in the UK. However, a solution to many of the current problems affecting aerospace lies in a better use and redeployment of current resources. Specifically, public funded top-level research in academia could be better focused. There is also scope for better co-ordination of all public R&D activity, civil and military, involving MoD, DTI, EPSRC, industry and Academia.

(c)  A mechanism should be created to ensure that the results of long-term research are converted more rapidly and effectively into commercially viable products. This is best accomplished through a joint Government/industry programme of technology demonstration. This will facilitate a more direct link between the science base and core wealth-creating sector. It will provide a focus for industry, academia and DTI and MoD research programmes leading to a more coherent, integrated approach to R&D.