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Partners in Defence: “Global Defence Industry  Vision for the Future†|
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(Source: BAE Systems; issued March 5, 2003)
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Transcript of speech by Sir Richard Evans, Chairman, BAE Systems, at the Defence Export Services Organisation (DESO) Symposium at the QE2 Centre in London, March 5, 2003.
Good afternoon, ladies and gentlemen.
Let me begin by saying what a pleasure it is to be here today. My thanks in particular to Alan and DESO for giving me the opportunity to speak on a subject that doubtless occupies the minds of us all a great deal.
Making predictions about the future is not without its risks. Making predictions about the future at times like this is probably verging on foolhardy.
But in the context of what may or may not be unfolding in terms of international relations, there are some serious questions that we, the defense industry, need to ask. Whatever politicians decide to do over the coming weeks and months, there are very likely to be implications for the defense industry. Political alliances, foreign policy and defense policy - all have an acute bearing on the industry. And this is what I want to talk about today.
Firstly, I'll lay out why I think its important to raise these questions now. The defense business is about the long term. It is a fact that the lifetime of our products can span 40, 50 years. Decisions that companies take now potentially lock them into programs and partnerships for years into the future. Defense companies need to have future context for good decisions.
Secondly, I'm going to talk about the business imperative governing all companies - companies will go where their markets take them. Defense companies are no exception inside the political parameters within which they operate. If the geopolitical sands are shifting, defense companies have a responsibility to their shareholders to plot the course that best matches the terrain - to retain the market access they need. And this means understanding how the sands may shift.
And thirdly, if the course companies need to plot does turn out to take them in a new direction, there are some very real consequences for industry and companies alike. In particular, will companies need to view their home markets differently especially in terms of how new technology and product is generated?
I should also say at this point that I will ask a lot of questions to which I'm afraid I don't necessarily have answers. This is because the answers are largely in others' hands.
And so, to my first point.
There are some, I know, who prefer to take a more short-term view of this industry. That's fine. That's their job. However, no-one knows better than the community assembled here that this is fundamentally not the model against which defense operates. Defense is predominantly predicated on the long-term.
Defense products are brought into service following a lengthy period of threat assessment, technology concepts, scenario planning around the battle space of the future and then political consultation, military planning, equipment specification, initial development and ultimately contracting with industry. There follows another long period of further design, development, testing and finally production.
We are, after all, in the business of producing very complex, state of the art, high value equipment - equipment that can take years to come to fruition.
Add in the emergence of new threats, changing requirements and ever advancing technology and you have another layer of complexity. Military equipment can be further changed while its being produced if there are new requirements. And even platforms that have been in service for years are continuously modified with new systems being added to enhance their capability.
I was reading only the other day about the last of the RAF PR9 upgrades being completed in 2001 - only a couple of years ago. We're talking about an aircraft that first flew as the Canberra in May 1949!
Similarly the B-52 which entered service in 1955 is expected to remain in service to 2045 and beyond. Potentially the first aircraft to have been in service for close to 100 years.
And beyond products created for our military at home, there are export customers. From a company perspective, today's products are tomorrow's exports. In Europe in particular, extended product runs resulting from export sales provide the opportunity to recoup on the non-recurrings - bringing benefits to the bottom line for both Exchequer and defense company.
Take Tornado….from MRCA in the 60s to the continuing development and upgrades to meet today's home and overseas users' needs. A product that 40 years after its conception is still delivering benefit to the bottom line. It has seen action in the front line and all indications are it will see it again soon.
I know I'm preaching to the converted but this is a serious point. Defense companies - just like their customers - are in the business of the long term. Decisions companies make invariably lock them into the consequences of those decisions over a very long period of time. It's not that different from the military users of the equipment produced. Ministry decisions on procurement commit users to certain weapon systems for years on end.
Understanding the context - the future context - is crucial for good decision making, not least amongst defense companies. Good decisions are made when companies have a good understanding of the factors that will influence their futures. There is a compelling need to understand this future better as we sit here today.
And this leads me to my second point. The business imperative driving companies and their strategies.
A business is nothing without a market for its capabilities. Like all other commercial entities, defense companies endeavor as much as possible to go where the business takes them. This is only natural. We have seen dramatic consolidation in our industry over the past 20 years - predominantly shaped around where the main markets are. You go where you need to go to get the orders that sustain your technology and product base - your engine room - for the future.
For all of us in industry, this means the US and Europe. As the two largest defense markets in the world, both must feature to a greater or lesser extent in our strategies - the reality being that some markets are more open to some companies than others. And politics dictates this to a very large extent.
I don't intend to dwell on the divergence in terms of spending power that we have seen in these two marketplaces - this ground is well-trodden.
What is important is the dynamic that has already been introduced into industry and government thinking.
As regards companies, there's no getting away from the fact that, with few exceptions, the US looms large in most defense companies' business strategies. European companies - Rolls Royce, GKN, Thales, BAE Systems, MBDA to name but some of them - have all reshaped their strategies to a greater or lesser extent to capitalize on this where they can.
And, we should not forget that the traffic is not all one way. We have also seen the major US companies looking for business in Europe, establishing a presence directly and through partnerships to gain market share in the world's second largest defense market.
Governments on both sides of the Atlantic have also recognized the need to reflect industry aspirations. Because companies naturally gravitate towards markets where they can, they are certainly further down the road of being transnational than their markets. Nevertheless, government initiatives are afoot to help improve the performance of the European defense market and procurement process through the Framework Agreement and OCCAR. Similarly, the US' Letter of Intent initiative, started in 2000, seeks to improve the operation of transatlantic defense business.
My question is, will what we're seeing playing out on the world stage today introduce yet another dynamic into all of this? Is continued 'transnationalism' a realistic future option for defense companies in light of current events? Should we in industry be pushing harder for progress on the Framework Agreement, OCCAR and the Letter of Intent? Or should we be looking at the future differently?
And so to my final point - the future development of technology and product in our home market.
For a long time now, it has been unrealistic for any one country apart from the US to provide for all its national security needs single-handedly. Major platforms and equipment have become too complex, too expensive for most individual countries to be able to produce themselves. While we certainly cannot say defense markets have become transnational, we can say bilateral and multilateral program collaboration has certainly increased.
In Europe over the past 30 years or more, collaborative programs have played and continue to play an important part in generating technology and product in our home market. This has happened when the political will of two or more European governments has aligned to identify a common need that has brought industry together in partnerships of one sort or another to deliver what is needed.
In the 60s and 70s we saw Anglo French collaboration on Jaguar to meet a joint military requirement for a tactical fighter-bomber. Tornado was the result of Anglo, German and Italian collaboration to produce aircraft for several roles, capable of meeting the Warsaw Pact threat. In guided weapons, we have a successful record of collaboration, culminating in the formation of MBDA. There have even been attempts in naval programs.
And this continues even to the present.
MRAV, the new generation multi-role armored vehicle is being produced by a UK, German and French consortium - again, to meet a relatively common military requirement. The EH101 came about through Anglo-Italian co-operation. NH90 and Tiger were developed for common French and German requirements. The A400M will meet military transport requirements for a number of European partners.
I would not say that European collaboration has necessarily always been successful or easy. And, indeed, some would say that political convergence and ongoing pressure on defense budgets should have resulted in far greater European defense collaboration. Equally, it could be said that having better procurement structures in place could have ensured better value from these collaborative programs.
I would say, however, that European collaboration, despite its flaws, has enabled shared R&D spending and development of new products and equipment. It has generated sales for European companies and provided an important element of the technology, product and equipment base for the future. It has given us products that are real competitors in the global context.
Collaborative programs have also brought companies together in a wide variety of ways - loose partnerships, consortia, joint ventures and even mergers. In Europe in particular, we are well accustomed to collaborating on major programs while, as independent companies, continuing to compete with one another elsewhere.
US/European collaboration, on the other hand, has been less fruitful from a European perspective. MEADS springs to mind as one of the few examples of US/European program collaboration. In terms of joint UK/US programs, the picture is mixed. TRACER, for example, on the one hand. But looking forward on a more optimistic note, JSF on the other.
There are three points in particular that I want to draw out from this quick run through defense collaboration in recent years.
One, a reminder that collaborative programs are driven by a 'partnership of requirement' or a 'partnership of needs'. They come about when a partnership of political thinking creates a common purpose. To be more precise, they come about when there is an alignment of foreign and defense policy amongst a handful of nations. This is the essential pre-requisite for the economic, technological and operational benefits that may follow.
Two, collaborative programs in Europe have played and continue to play an important part in generating technology and products in our home market. They have been and still are a key part of the engine room that sustains the future in the home market.
And, three, an incredibly complicated web of industrial partnership has grown up around collaborative programs, large and small. Even with the industry consolidation we've seen, defense companies continue to be inextricably linked through a multitude of project partnerships, consortia and joint ventures. We've all seen the astonishing 'spaghetti diagrams our company analysts produce showing the vast network of who's doing what with whom.
This has all happened in a geopolitical environment that has remained pretty stable for the last 50 years.
In the context of current events, are things going to change? If a consequence of what we are seeing today is a re-alignment around different political axes, what would this mean, for example, for the collaborative programs that have provided so much of our home market's technology and product base? What would it mean for the complex, cross-industry alliances - the product of years of (mostly European) collaboration?
In summary, then. I have asked a lot of questions, I know, but as I said at the beginning, I don't claim to have the answers. And neither would I expect to. I believe there is much to think about here and an industry view is just one part of a very complex issue. I've tried to outline the issues I believe defense companies should be concerned with if they are to continue to deliver sustained value to their shareholders and customers. I would urge us all to start thinking through, if we haven't already done so, the wider implications of what may or may not happen.
Thank you.
-ends-
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