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PARIS (Feb. 21, 2003) --- BAE Systems’ erratic behavior in recent months raises serious questions about the company’s future, which were not dissipated by the Feb. 19 announcement of a settlement with Britain’s Ministry of Defence over two troubled development programs, the Astute attack submarine and the Nimrod maritime patrol aircraft.
While the agreement with MoD apparently pleased investors -- BAE shares gained 10% on Feb. 19 -- a closer reading of those parts of the deal that have been made public raises new questions. It certainly implies that the company is not very good at doing the very job it sees as its core competence: systems engineering.
On Nimrod, BAE says that the cost overruns stemmed from “delays in design causing an increasing concurrency between design, development, and production in the program.†On Astute, the problems “stemmed principally from moving the design of the submarine to a fully electronic CAD (Computer Aided Design) design basis.â€
In both cases, BAE’s expertise is at issue. And it is a very costly issue indeed.
On Nimrod, the total cost overrun adds up to 1,070 million, which seems a tad excessive to upgrade 18 aircraft. On Astute, the overrun totals £680 million, which BAE and the MoD say were caused by “the difficulties of moving to computer-aided design.†But CAD has been around in the aerospace industry for a decade or two, and so it is something of a mystery why BAE, which bills itself ad nauseam as being “dedicated to making the intelligent connections needed to deliver innovative solutions†should find using it so costly.
A more vexing aspect of the Astute agreement is that BAE has to bring in General Dynamics’ Electric Boat Division “in order to maintain progress on the program†and “take advantage of lessons GD learned in computer-aided design on major US submarine programs.†This element of the deal not a vote of confidence by MoD; it also directly questions BAE’s ability to design a modern submarine.
During a Feb. 20 news conference, BAE Chairman Richard Evans admitted some board responsibility for the project management issues. “Of course there is an element of blame...Sure, when you look back on things now we should never have taken those contracts,†he said. As well he should, because management issues are the main, if not the only, reason for the company’s disappointing performance.
Management issues, in fact, go a long way towards explaining why MoD finally decided to award the design of the Royal Navy’s Future Aircraft Carrier to France’s Thales rather than to BAE, which retains the overall project lead. The contract negotiations between the two companies promise to be entertaining, but Thales is unlikely to leave BAE more than a razor-thin margin on this contract.
But dicey performance on two programs, however costly, is not the only worrying aspect of BAE’s recent performance.
The terms of its recent exit from the space business also fell well short of expectations. In July 2002, BAE had agreed to sell its 25% percent stake in satellite maker Astrium for 168 million euros in cash, and was to keep its 51% percent share in Paradigm, a joint venture company down-selected by MoD for a £2 billion, 15-year contract to provide satellite services.
Six months later, on Jan. 30, BAE ended up giving away its Astrium share and its controlling stake in Paradigm to EADS. Not only will it receive no payment in return but, even worse, it also promised to pay EADS 55 million euros in cash in the event that Paradigm does not finally sign the MoD contract.
Space industry analysts continue to wonder why BAE walked away from Astrium and Paradigm without any cash, but one possible explanation is that either MoD or the banks that will finance satellite contract decided that BAE’s continuing presence would be more of a liability than an asset.
BAE also took an exceptional charge of £250 million in 2001 to pull out of the regional jet business and wind up the RJ and RJX programs.
In addition to these financially questionable deals, BAE also was involved in several high-profile disputes with MoD, which remains its most important customer despite the company’s claim that it makes more money in the United States than in the UK.
The most recent dispute, nicely timed in the immediate lead-up to MoD’s decision on the new aircraft carriers, was a very public argument with UK Defence Secretary Geoff Hoon who had told some American journalists BAE was no longer a British company. This spat could not be blamed on former chief executive John Weston, who left the company in March 2002 under unexplained circumstances, as was the previous run-in with MoD.
That highly-publicized argument began when BAE, then competing with Vosper Thornycroft to build the Royal Navy’s new Type 45 destroyers, virtually demanded that MoD drop the competition and award it the entire contract.
In the event, BAE was forced to share the program with VT. Weston’s replacement, Mike Turner, in turn complained, also in public, that MoD’s fixed-price contracts were unfair, and that competition should take second place to the real objective: keeping key procurement contracts in Britain.
Perhaps as a result of its attempts to publicly browbeat MoD into giving it more business, or perhaps because of the management deficiencies revealed by the agreement on Astute and Nimrod, BAE has been sidelined on the Watchkeeper UAV development, has lost the carrier design contract, and has had to pull out of the space business.
Announcing the deal on Astute and Nimrod, BAE Chief Executive Mike Turner said he looks forward “to building on our positive relationship with the MoD.â€
Even assuming that relationship is indeed a positive one, and that it can be repaired, BAE still has a long way to go to restore its credibility as a “systems company.â€
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