MR KEN MACIVER, MR JONATHAN WOOD, MR PETER BUDD AND MR DAVID MARSHALL

MONDAY 4 FEBRUARY 2002

  20. I have to push you a little further, you are drawing a comparison with France and the USA, and you acknowledge that there is long gap between us and the Americans, surely you have a figure? You would like to see the figure increased, you must have a figure in your mind that you would like, whether it is the French level or higher than the French level, where we can help you to do what you would like to see? It is important for this Committee to know what that figure is.
  (Mr Maciver) I think you need to broaden it a little bit. That is the focus on the direct support for civil research. I am not trying to duck the question, what I am saying is that where money is spent today—and there is very substantial provision for science and technology—much of that money could be linked better to programmes which will have an industrial benefit in the long term. It is very difficult to give a specific figure. Clearly I would love to quote to you the US figure and believe that it was possible, but that is not realistic, and nor do I expect the problem to be resolved overnight. We would certainly like to see some progression. I spoke personally to the French equivalent of the SBAC two weeks ago and they were utterly astonished to find out we were worse off than they were. They thought they were in a very sorry situation and yet they are spending twice as much as we do. It is very difficult to put a figure on it, the better way to develop it is to look at how that money would be spent, what kind of demonstrator programmes there are for the future and try to build up a common strategy.

  21. Do we get value-for-money from the money that the government is putting in? Would you say that when you link the money for R&T with the turnover that our equity is far superior than the French and Germans? Do we need to use that as a better measure of success rather than allocating for R&T at such a base level?
  (Mr Maciver) The government and the national economy have benefited enormously from the investment of 20 or 30 years ago in aerospace. The industry creates substantial value. It has a positive trade balance and it takes the economy in the right direction of creating more high value jobs, it is very much in the area of value creation. I think the industry will stand comparison with anyone on that. I would argue that as an investment in our future economy it is very beneficial and the figures, which we can go into, speak for themselves in many ways.
  (Mr Marshall) If I could just add something to that. I think the crunch also comes for companies who can undertake that work somewhere else. If they believe that it is in their industrial interests to have a technology or pursue it and they cannot pursue it to the full extent possible in this country that they might have been able to, say, 15 or 20 years ago, when the levels of funding were much higher, and then they choose to go somewhere else, all the consequences Mr Maciver spoke about then follow. It is an issue of choice in a sense for making this a competitive environment in which to carry on work.

  22. I know you say in your submission that people go abroad but how many people have gone abroad?
  (Mr Maciver) I think it is very, very easy to do this. Certainly most of the major companies like my own and those in the middle area (less so for the smaller companies) where much of the technology exists today, they will have operations certainly in North America and in some cases, as in my own, in France, and it is very, very easy to shift the focus of your long-term research and technology investment from one country to another. It would not impact on production or employment in the first five or ten years but beyond that, and this is a long-term industry, there is no doubt it would impact because it is very clear that if you develop the technology in one country that is where you will end up building the product. It is not fanciful at all, it would be remarkably easy to do. I think there are a number of practical examples of that today which, I am glad to say, so far have not resulted in any major shift but the threat is real.

  23. Finally, Mr Maciver, you have said that you want to see greater coherence in R&T funding as between the civil and defence programmes. Have you had any response from the Government on this?
  (Mr Marshall) I think we alluded in our evidence that we wrote to the Secretary of State in September—I think the letter was dated 11 September, which was unfortunate I suppose—really setting out the case. What we are waiting to see, because we knew that we were putting it into a time when government would be considering its next round of spending, particularly the three year look, is to see now how that turns out. Frankly, that is where we are. Are we going to be regarded as one of the priorities or not? We might take some comfort from the Secretary of State's recent speech on manufacturing, which certainly did pick out aerospace as a key sector and picked out some of the messages we were talking about, but did not put sums of money down. That is where our plea sits and we are waiting, essentially, on the budget round.

  24. Presumably there is a fine line between governments providing funds for research and technology and subsidising the industries directly? Do you feel that other governments subsidise in different ways than this country does in a way that disadvantages you as industries in this country? Is that an issue that you think is relevant?
  (Mr Maciver) It is difficult to answer because the biggest example is the United States which would claim that defence spending was defence spending, but there is no question at all that there has been an enormous spin-off into the civil sector. Whether you call that a subsidy, I think they would disagree with that term, but does it help? Of course it does. A case in point, a very direct one, is the US plan to replace the air refuelling tanker fleet. That would be a very direct benefit to the US industry at a time when civil production is down. Just as in any other industry, direct subsidy is something that is watched very closely in the European Union and would be subject to the normal rules. It is certainly not what we are looking for and it is not what we are talking about. The biggest example of what you say is the huge US defence sector which undoubtedly has a benefit directly and indirectly to US industry in total.

  25. From your point of view, it is a question of British industry not getting enough money from government rather than other countries getting too much money from government in a round about way?
  (Mr Maciver) Yes. If I may perhaps suggest a change of wording. We are not looking for money to spend; we are looking for a greater partnership. Historically all governments spend money in the aircraft industry on research. There is very little spent here. We are spending ourselves for the most part at a very high level and the various reports, I cannot quote the precise one published recently, show that this is one of the very few industries, together with pharmaceuticals, that compares favourably in terms of our own investment with international competition. It is not a question of supporting our investment; it is a question, I would suggest, of partnering it.

  26. Are you also saying the key in some ways to that if we follow the US is to pump money into military projects?
  (Mr Maciver) Not necessarily at all. There should be much greater harmony on technology between the defence expenditures and civil, but the most disadvantaged sector today, and the most mobile sector, is the civil sector. Much of the technology we discussed earlier on in the context of the A400M was developed in partnership with government many years ago. That is an example of what happens in this industry.

  27. Are you saying in a way that the lead time between investment and the out-turn is such that it is very difficult from the figures you have given us to make a comparison because you are showing a big drop? You are showing in your figures on page 8 how much more is spent in other countries, and yet clearly from a simple reading of those figures we get a lot more return for our investment because we are so much more successful here than those other countries in turning that money into productive capacity. Have you got figures you can give us at some point of the history—because I think that would be more interesting—of what you think is the lead time to get back your investment?
  (Mr Marshall) The key is not only the numbers but what it was invested in. You can see the point we were just making. When investment was high and we were creating the technology 15 to 20 years ago in certain areas, we are now seeing that in production. So the return on that investment is not in the year you spend it, it is a long way into the future.

  28. How did they pick them or were there other ones we have not seen benefit from?
  (Mr Marshall) We were spending at a much higher level so there were probably technologies that were not used. There is no doubt there is a degree of discipline that comes to bear if money is not freely available, but I think our track record is good in this industry in coming up with innovation. What we are trying to do is to get that innovation into products we are making here and not somebody making it somewhere else.
  (Mr Maciver) And properly spent, which is a concern generally. We have a good record of bringing the technology into production. In other words, if it is done the right way we will see tangible benefits. Without quantifying it—and we can do that—there is no question at all we were spending heavily and constructively 15 or 20 years ago on technology in a way and in total that we are not doing today. A very rough rule of thumb is that you would have to be demonstrating the technology ten years ahead of the programme and then perhaps the programme would start—the timescales get shorter and shorter—five years ahead of production. These are the sort of timescales. These programmes all pay back. They all generate profits and value to the economy.

  29. You are coming up with a figure for extra money. You are saying that if the money that is being spent out there on academia could be spent in a more focused way. Are you arguing that academia needs to be doing more of the industry's development research for it, that the current pot that goes into academic research should be more focused on development research?
  (Mr Maciver) I do not think it is doing the work for us. We carry the burden of the development and we carry a significant part of the burden on long-term technology. It is bringing that level up in total to a competitive level that will see the industry continue into the future. You could argue that if all other governments did not support that technology it makes no difference, but that is not the case.
  (Mr Marshall) It is also focusing it. It does not seem to us to be valuable to have too many universities, if you like, concentrating in one area of technology as opposed to creating some focus and critical mass. At the moment we have a system which appears to achieve more of that than the focus and we think we can help with that if we achieve it.

  30. But even further down the line academia is the only place where speculative fundamental research can be undertaken. Rutherford went around saying his research was useless and he delighted in the pursuit of the useless, but many others since then, for good or ill, have benefited from what he found out.
  (Mr Maciver) There will always be that. And that we do not know until we see it. Let me give you an example which might be helpful. Aircraft are moving away from hydraulic systems and becoming more electric. These areas are ones where a number of companies in Britain could claim they were world leaders. We continue to invest in those areas but there is no specific programme or co-ordinated programme on electrical systems on aircraft today. In Germany, by comparison, which has not been a player in this field, they have a complete flying laboratory working on actuation systems. If they take that business based on our technology, it can only come from one place. It is unlikely to be taken from the United States; it is likely to be us. That is not looking at your Rutherford example but something slightly more immediate where there is a high degree of activity in an economy which sees it as a direct competitor of the United Kingdom for the aircraft business.

  31. How do you see that decision being taken to get that?
  (Mr Maciver) It has to be taken as partners. That is very much the purpose of our submission to the DTI. All of that has to be allied eventually with defence spending on technology. We have made not necessarily the only ones or necessarily the right ones, but we have made very specific proposals as to where money can be spent in a constructive way for the long term.

   (Mr Marshall) I think you have to decide the grounds on which you are going to stand, I think is what we are saying. There are certain technologies and areas of the aircraft we are particularly successful in which begin to form the high ground. That will be the starting point for where you want to go. It would not be everywhere but on that high ground.

  32. Just quickly on the R&D monies or R&T monies, depending how you describe it. Obviously we are still a world leader. Do you genuinely believe that if the Government does not come up with more money for research that we really will be in trouble and we will lose our world advantage that we have got at the moment? Secondly, do you believe that there is better technology transfer between defence and civil that we are not using at the moment?
  (Mr Maciver) The answer to the first part, and you may talk on the last part David, is that yes there is a threat. Clearly the individual companies will assist it as much as possible, but if we do not have a clear will to have an aircraft industry and a strategy at the technology end which will take us there then there is a threat. We will not get everything right, but we must get enough of it right and we must spend enough jointly between government and industry to ensure that we are there for the future. You also raise the very important issue of the linkages between civil and military. David?
  (Mr Marshall) We would like it to improve. We would like it to get back in some senses to where it has been in the past. There has been a breakdown, frankly, in the transfer of civil and military technology, particularly in the last five or six years, and with the change of the Defence Research Establishment into a company that is going to be in the private sector, I think there must be a concern about whether we are going to create a capability as we have done in the past with the research establishments that work very well and produce some of the technology that we were just talking about. I think that is one thing where we do not know yet because we do not know how some of these new organisations are going to work out, but it is certainly critical to our plea that the money the Government does spend, whether it is in defence or civil or universities, we can make a whole picture of and not, as we do at the moment, allow them just to happen and hope that they join up at the end, and often they do not.
  (Mr Maciver) Let me give you an indication of where we are. If you asked us or anyone else in total how much is spent and where is it spent, we could not answer that.

  33. Mr Marshall, you said something very interesting early on to Sir Robert Smith's question about money being spent too thinly across universities and academia. That is the first time I heard that said in this context. I have always believed, and ministers have been saying, that the money is focussed very well in the aerospace technology and you are saying quite the opposite to that. I wonder if you can elaborate on that, how many universities? Could you shed some more light on this? I have not heard this said before, because this is one very focussed industry where research money has been allocated through the university institutions?
  (Mr Marshall) As ever it is rather a mixed picture. There are some parts of the industry/university relationship that have been developed and worked very well. One company, Rolls-Royce, has what it calls university technology centres. It decided that there are a set of technologies it wants to pursue with universities, it chooses a university and develops a partnership with them over a long period. Some of them are now 10 years old. That has caused that focussing to happen. What I am referring to is that our observation has been that absent that kind of process it does not happen everywhere in our industry or in others. The system tends to allow a university if it feels it should operate in some sphere to simply do so, apply for research grants, which may be granted. I am not saying at an individual level they may not have a good idea, but what that leads to is fairly small packages of work being done all over the United Kingdom. We now have a very wide spread of universities. I can certainly seek to illustrate that to you with some more numbers in a written reply. That is what I am referring to. We would like to see more of the Rolls-Royce example, not only does it focus the university but it focuses the industry too on some specific key technologies. Also, which would help here, is this point we have made about linking some of the technology spend to tangible demonstration of the technology, demonstration programmes, which are very long term. While some money will be spent on things that are a long way from coming to fruition some of it will be closer to home, within a 20 year period, let us say.

  34. I am just trying to get clear in my head what you are saying about how the system is not working. Perhaps we can explore the example you mentioned about the electric aircraft demonstrator issue. In appendix 1 to Annex B of your submission you talk about what support there has been round, if you like, the development of the electric aircraft, but then properly make the point there, which you made today, Britain has not gone as far as creating an electric aircraft demonstrator. Can you take me through what has stopped that happening? There has been a process of discussion, that there are the right people sitting in the same room at the right time but nobody said, that is what we need. Is it that you floated it with some bit of government and you were told, "Look, that will cost too much, do not go down that road", or is it that somebody is saying, "No, you are wrong, that is not what we need as far as the development of electric aircraft is concerned". I am trying to work out where the blockages are in the system that prevent things like that happening.

  (Mr Maciver) My perception—Mr Marshall may have a longer history of it—is there is simply not that discussion on how much money and how it is spent. In other words, it is not a question of anyone really taking a view of what the priorities are and looking at the coordinated effort between the defence expenditure, the academic research, the needs of the industry and bringing it to some form of tangible conclusion. By comparison the very, very close relationships which existed in the past between the government research establishments and the industry, there is no parallel that I am aware of today.

  35. What will it need to allow that discussion to take place? What needs to happen? In a sense, what is to stop you picking up the phone and saying, "Look, Patricia, there is a big gap here, there is not the formula for doing it in, let us establish it".
  (Mr Marshall) In your analogy she also has to pick up the phone to Mr Hoon and say to his department, "Will you spend money in parallel with me?" At the moment there is no mechanism to do that. There is no mechanism for aerospace that there can be a joint programme in this way between the DTI and the MoD. Then you said, why does this particular one not happen? If you look at the total amount of funding that the DTI have been able to make available for civil aircraft—the £20 million a year we mention here—it would not reach, spread thinly as it is, enough to make this a critical programme.
  (Mr Maciver) There are two things that need to happen, one is, not on all of it, but on at least some of the science and technology spend there has to be a greater focus on areas where there is common agreement that these are technologies for the future in aerospace. That does not exist today. We do not claim we have the sole font of knowledge on what these should be but we have made, to the best of our ability, practical suggestions. Likewise there has to be, as has just been said, a similar focus jointly with the defence project because it is difficult to see how we can sustain aerospace technology with a complete separation between defence and civil, because whatever we do the funds will be stretched to remain competitive with international competition in this area. There is room for an agreement on the critical technologies for the future between industry and whatever funds the DTI might have to spend on industry, at present quite a small amount, the science and technology budgets and the relevant research and technology budgets in the Ministry of Defence. That is really what has to happen. There has to be a greater focus and possibly greater spending at least if we are to use such monies and we do spend much more effectively than we have in recent years.

  36. Before we move on to the export issue I am in a wee bit of difficulty here, it seems that everything that you have a bright idea about should be on the agenda. Maybe you are the people who do not have enough focus. You have 16 projects here, significantly without any time scale or without any budget, I am talking about Appendix 1 to Annex B, for discussion with government. Do you think not that is a wee bit of a big agenda for discussion? You are going to spend more time talking about it than you are going to get any money out of them. You say the government should be focussed but—God Almighty!—you have 16 different items down here.
  (Mr Maciver) This is a complex industry and covers a wide span of technology.

  37. You cannot necessarily expect to be world leaders in everything, why should we necessarily reinvent the wheel with a Union Jack round it every time somebody in Britain has a marginally brighter idea than somebody else, where there might well be a bigger critical mass in another country?
  (Mr Maciver) You may have a point about precisely what the number ought to be, I cannot claim I have a single answer to that.

  38. You do suffer from incrementalism here!
  (Mr Maciver) Not really. The technologies we mentioned here we pulled that together by taking the people in the industry, people that lead the technology for our individual companies, and these are all areas where we believe we are in a potentially good technical position, where we have genuine capability. If we continue to spend at the right rate we believe these are the technologies of future aircraft and we believe British industry, with the right level of expenditure, will participate in these technologies. It is, very clearly, for debate, and it is not a simple debate because some of these are difficult technologies and in some cases, you are quite right, we might have to come to the conclusion this is one not really worth pursuing, this is a mainstream activity and this one we will pursue. What we have tried to do is to give examples of what we are talking about here. As I say, they are not easy subjects, they are difficult technologies and that is why the whole question of research is so important.
  (Mr Marshall) I would also say they are all topics which the industry believes—the industry that we have at the moment—are important to it in the future. If they cannot be pursued here because we cannot afford it or we do not want to take this mass then they are going to be pursued somewhere else. I do not think they will disappear in importance because we crossed them off the list is what, I suppose, I mean.
  (Mr Maciver) It is also true to say that one of the strengths of the industry is we have been able to maintain capability across a range of the industry—we are not a niche player. For the industry to flourish it is very important we do not become a niche player. This is one industry where we have genuine capability across the board in this country.

  39. Do you think you could provide us with information from these 16 items for areas, give us some idea of the ball park figures that you think would be necessary to develop them and the time span over which the developments should go? If you say, for example, this would be sensitive because it would be commercial, there is sensitivity attached to it, then we would treat it with the appropriate degree of respect. What I am concerned about is that you have presented us with what is to all intents and purposes a wish list. I think we want to get prices, we want to get time scales and we want to get a wee bit of weighting on this. My inclination is that you will have to wait a lot longer than the time since September 10 on your letter. They would say, "God Almighty, they are looking for this lot". I can understand that you have a broad range of activities but it is quite an intimidating wish list. It might be helpful to get a time span and a wee bit of priority.
  (Mr Maciver) I think we can do that. When you say time span, some indication of when you would see this product in service or the critical points in its development? The reality is, this is the sort of thing that is entailed in staying in this industry, but we will clarify that.