The UK Aerospace and Defence Industry - Fulfilling the Potential

30 Nov 2005

Speech by Dick Olver, Chairman, BAE Systems plc to the Royal Aeronautical Society, London, UK

Introduction

Good evening. The topic today is Fulfilling the Potential of the UK Aerospace and Defence Industry. So it is probably helpful if I start by describing what I mean by "potential."

In broad terms, I'm referring to the potential of the industry to help protect the UK, strengthen international security and contribute to the UK's economy and competitiveness.

You are all well aware of the many aerospace firsts that have emanated from the UK's scientists and engineers: the jet engine, the swing wing, the steam catapult, the vertical takeoff - and many more.

You are also aware that - along with pharmaceuticals - our industry is one of the UK's premier manufacturing sectors. The defence industry employs some 350,000 people directly or indirectly. It accounts for around £4bn of UK exports and it is a major contributor to British R&D.

Last week I had the privilege of spending a day at one of our Advanced Technology Centres in Essex. I can't tell you exactly what we're working on, even under Chatham House rules, but suffice to say that advanced technology development is alive and well in the UK.

The UK's defence industry is also relatively efficient. A recent study of major projects by a McKinsey director and a former US Navy officer showed the UK had average cost over-runs of 8% compared to 29% in the US.

But you are also aware that we operate in the most open defence procurement environment in the world. You're familiar with the scale of US investment in defence and the rapid development of China and India in technology. We know that aerospace and defence are attractive markets for newly industrialized countries to develop indigenously.

So, against this backdrop, what do we need to do to improve our competitiveness?

Clearly, the resources devoted to R&D are important and I'm sure many of us would like to see those increased.

However the amount of resource is only one factor in the equation. And as an engineer, I like to build mental models or formulas for how things inter-relate.

In the case of competitiveness, I believe that the outcome depends not only on the resources provided but on what we might call a 'multiplier' - a factor that determines how much impact we get from the resources. How much bang you get for your buck - or in the UK it should probably be how much punch you get for your pound. And this 'Competitiveness Multiplier', as I call it, includes five very important dimensions:

1. People - their talent, skills and education
2. Project Management - a subset of people and skills, but enormously important
3. Reputation - of professions, industries, and firms
4. Collaboration - including international technology sharing
5. And Government Industrial Policy - we're a small nation that punches above our weight in Science & Technology... but are we taking the right steps to ensure we continue to do so?

Let's take a few minutes to explore each of these dimensions in turn, starting with people.

People

If our industry is going to fulfill its potential, we need a good supply of highly skilled, well-motivated, engineers and scientists.

So what's does the picture look like? Well, currently the number of engineering graduates in the UK has stayed flat at around 20,000 for the last decade, despite an overall increase in graduates of 40% over the same period. The number of physics graduates has also been level, at around 2,500. In proportional terms this is a decline, and it isn't competitive in the wider context.

Globally, other countries are producing many more engineers. Accurate numbers are hard to come by, but the best estimates suggest that China had up to 600,000 engineering graduates in 2004, India 350,000 and the US 70,000.

Looking at it another way, a recent Bank of America report looked at the percentage of students studying engineering in various countries. The figure was 6% in the US, 12% in most of Europe, 20% in Singapore and more than 40% in China.

And there are also danger signs for the future.

• A - level entries in maths fell 24% to 50,000 between 2001 and 2004.
• Over the last 20 years, the number of "A" level entries in physics has fallen from around 45,000 to under 30,000.
• In fact, this year the number of students taking A levels in physics was overtaken by those taking media, film and TV studies.
• And physics teachers are an endangered species. A third of physics teachers are over 50 while only a sixth are under 30.

So why aren't we producing more scientists and engineers?

I believe a major reason why it's still tough to attract people into engineering is that engineering does not figure strongly enough in our culture.

• Only around 10% of the House of Lords have a science, engineering or technology background.
• We don't have current data on the number of engineers in Parliament but the last reported figure I could find was that there were 6 or 7 chartered engineers among the 659 MPs. Similarly, in the US, Congress has only 7 scientists - but over 200 lawyers.
• And all nine members of China's Politburo Standing Committee - its senior government members - are engineers. This stark contrast might tell us something...
• In industry, the number of engineering graduates among chief executives of FTSE 100 companies fell from 17 to 12 between 1997 and 2004 whilst numbers of accountants rose from 15 to 20.

So, what can we do about this?

First, we need to communicate the excitement and satisfaction of engineering. Engineers have the highest levels of job satisfaction, according to a recent survey with a 69% average satisfaction rating among 2002 graduates - just above vets.

Then we need to carry on taking a variety of initiatives in schools to get young people interested. There are many good examples already:

• The Royal Aeronautical Society's young membership of around 5000 people promote aerospace careers on road-shows to universities;
• The 10,000 Science and Engineering Ambassadors - professional scientists and engineers go into schools to share their experience and enthusiasm.
• The Royal Academy of Engineering's six year National Engineering Programme is doing the important job of trying to attract people who do not come from traditional engineering backgrounds. There's nothing wrong with white, middle-class males - but we need others as well. The initiative aims to attract 4,000 extra students among women, ethnic minorities, and families with no previous experience of higher education.
• In BAE Systems we have made our contribution through our Education Programme which includes a traveling theatre performance and a practical workshop. I launched the programme earlier this year and since then we have reached 17,000 young people in 135 schools and received some very positive reactions. 56% said afterwards that they would consider a career in engineering.

Of course you could argue that all of these initiatives are not working, given that engineering graduate numbers aren't rising - but I believe the truth is that they are working and that the situation would be even worse without them. The challenge is one of magnifying their impact.

We also need to provide some contemporary role models. When asked to name a famous scientist, young people say Isaac Newton, Albert Einstein or Marie Curie. Engineering needs highly visible heroes, such as the business world has in Richard Branson or Bill Gates. It's time to identify and highlight some 'engineeros.'

As well as graduates we need a good supply of people with vocational qualifications who want to be engineering technicians. That's why we need to support apprenticeships. Indeed BAE Systems is the largest UK employer of apprentices, with over 1000 apprentices in training and annual recruitment of over 300 apprentices a year.

Project Management

Second, let's move onto project management. Our nation, as well as the rest of the industrialized world, has come a long way in the past ten to twenty years in the contracting and management of major projects.

I'd say that we are now coming out of a difficult period in which there was a disconnect between what it was technically possible to build and the level of complexity that clients and suppliers had the collective ability to manage in reality.

Examples of this disconnect abound in the public sector, such as the Channel Tunnel, the Tube's Jubilee Line Extension and Wembley Stadium. In defence, we have suffered from what the National Audit Office (NAO) in May described as a 'conspiracy of optimism' at the approvals stage, in which unrealistic expectations tended to be set and insufficient resource devoted to understanding and mitigating risk. Interestingly the NAO compared this process to the very detailed approval and risk management processes used by Ericsson, BP and Eli Lilly, all with multiple approval gates.

Fortunately, we are getting better on all fronts. Generally in major projects, contracting methods, management tools and processes have improved. Good examples are Heathrow's Terminal 5 and the Eurostar extension to St. Pancras.

In defence, the NAO believe the approvals process is improving and its report last week was basically positive. The message was that "Overall performance has improved but challenges remain."

In BAE Systems and the MoD, we are working to avoid the ever-present temptation to establish cost and schedule targets early in the project lifecycle, before the design requirements are finalized and the major risks retired.

Having established realistic schedule and cost plans in 2003, the Astute and Nimrod programmes are now on track. Typhoon is meeting and exceeding expectations, and the Joint Strike Fighter programme is progressing well - at least on the design and manufacturing front. We have collectively learned our lessons.

In BAE Systems we have developed a comprehensive Project Management training programme that will deliver 6500 training days this year.

We also launched the Systems Engineering Innovation Centre at Loughborough University that is helping a lot with managing complex projects. The SEIC became fully operational during the first half of 2003 and is already host to over 80 industrial and academic researchers , all working on funded projects specific to the field of systems engineering.

Under Mike Turner's leadership we have also adopted new approaches to contracting with one of our biggest customers - the MoD - that are delivering huge benefits. A few examples:

• Nimrod availability has increased by 40% whilst we have driven costs down by 8% across the programme.
• The Tornado support strategy is expected to deliver £380M savings over 5 years
• The combined maintenance & upgrade programme has reduced Tornadoes in the repair loop from 22 to 16.
• The Harrier JUMP programme is delivering £44M savings
• Warrior repair times have been reduced from 107 to 60 days, freeing over 40 vehicles to the Army.

This is not to say that everything is perfect. There have been a lot of lessons learned and if we all do our jobs right we won't need to re-learn the same lessons.

One of the most important lessons to me is structuring contracts to produce real mutual advantage for both buyer and supplier. Hard skills like technical capability, management tools, and processes are all necessary. But you also need the right soft skills - good working relationships and a contract that balances risk and reward.

So we've come a long way in the project management dimension... but we will need to keep improving. The 2012 Olympics will create a unique challenge and opportunity for us. I suspect our experienced engineers and project managers will be in great demand as the Olympic Village is designed and built. We all want the London Olympics to be successful... but without setting back our industry.

Reputation

Another dimension of competitiveness is reputation. You may find this surprising, but I think it's logical. We live in a society where the best people want to be part of a winning team - so they can achieve more. More accomplishment, more satisfaction, more recognition... and often, more money. Put differently, Success begets Success and establishes a virtuous cycle. The converse, sadly, is also true.

If you consider this reality from a broad perspective, we can ask ourselves "what is the reputation of the engineering and science professions?" Is the public view one where Dilbert reigns supreme and engineers are oppressed by clueless senior management? Or is it a view where engineers are well regarded, their contributions are valued, they have high job satisfaction, and they are well paid?

In a survey in 2000, people were asked to associate words with professions. They associated engineers with 'assembly', 'fitter' and 'machinery'. They associated scientists with 'academic', 'research' and 'white coat'. I think that tells us something. And I think there is more work to do here... and we'll come back to this point later.

If you consider reputation from a narrower perspective, we can ask ourselves "what is the reputation of the Aerospace & Defence Industry?" My sense is that the reputation of the industry is rather mixed. From polling we know that the general public supports the need for 'Strong Armed Forces' with 82% in favour. However only 47% of people believe the UK's Armed Forces are well equipped - and only 26% believe the MoD spends the taxpayer's money wisely.

Fortunately, I believe we're in a place where the reality is actually better than the perception. I mentioned the improvements highlighted by the NAO and from my conversations with John Pitt-Brooke, the MoD's Director General of Media and Communication, I know that the Ministry is working to build its reputation. Of course we all understand that good news doesn't attract as many column inches or air time as bad news. And we also know that changing perceptions takes time.

As I said earlier, we can help build our reputations by not shooting ourselves in the foot by agreeing to unrealistic cost and schedule targets early in the project lifecycle and before the design requirements are finalized and the major risks retired.

And from an even narrower perspective, we can ask "what is the reputation of BAE Systems?" Rather than give you my views on this, perhaps you would be so kind as to give me yours later.

I will say that this is a subject that is taken very seriously by Mike Turner and the board. We have established a new Corporate Responsibility committee that, among other things, is monitoring reputational risks.

We have also established a new Centre for Performance Excellence that will help accelerate performance improvements throughout the firm. We understand that ultimately reputations are based on performance... and we're working hard continuously to improve it.

So there are several initiatives in train to tell our story better as a company and as an industry. And I'd be interested in your views on what more we can do.

Collaboration

Another element of competitiveness is collaboration. How well do we contribute to and build upon the contributions of others?

Our amazingly interconnected world is well documented. Thomas Friedman's latest book The World is Flat is particularly revealing about the extent of globalisation. The rise of the internet and global air travel have made it possible for scientists and engineers to accelerate the rate of innovation to levels that would have astounded our parents' generation.

Today, information of all types can traverse the globe in less than a second. People and physical items can be transported from any one place on earth to any other in less than a day.

The advances we've seen in nanotechnology and the Human Genome Project underline what is possible when smart people collaborate effectively.

In the oil & gas industry, where I worked for over 30 years, we have seen similar progress. There, horizontal learning was a major source of advantage. If one day we discovered a new way to drill a well in Alaska, the next day we'd be drilling it the same way in Angola and the day after someone would find a better way in Azerbaijan. We could also move our people around the globe freely, which served to accelerate the collaborative benefits. Contrast this experience with the defence industry.

Now, we all understand that we're not likely to ever replicate that kind of sharing and learning in defence because of the obvious sovereignty and national security issues. But I believe there is a lot of opportunity to improve on the current situation, particularly with regard to the relationship between the US and UK.

The US export control regime prevents the transatlantic partnership fulfilling its potential. Currently it's a real issue for the JSF - a project that uses lots of UK technology - where the UK needs access to US design data and source code if HMG wants to maintain and upgrade the aircraft under sovereign control.

The ITAR rules can also prevent US colleagues sharing technology details that are required for the UK team to make its contribution. To put it simply, we can't provide a solution if we don't know what the problem is. In the past, such solutions have included the BROACH warhead from the UK Storm Shadow missile, and the unique technology we have brought to the M-777 light-weight howitzer, which is now being fielded with the US Marines.

Barriers to technology sharing hurt everyone. They cut the US off from UK innovation, impose costs and erode what should be a special relationship. Worst of all is the possibility that the armed forces end up with less than the best and that interoperability is compromised.

So, what are we doing about this?

I believe the same principle applies here as for contracting. A successful relationship is based on openness, trust and mutual advantage.

Many in the Administrations of both UK and US governments understand this and would like to see the situation changed. But we still need to explain to Congress that this is a situation where the US interest is served more by engineering collaboration than by legal caution. The voice of industry needs to be heard more on this issue - the message needs to reach the public whose views influence the politicians. The biggest risk is to do nothing.

Government Industrial Policy

Finally, competitiveness requires an industrial policy that is conducive to value creation. It needs to be a policy that supports the other drivers, one that fosters technology sharing, promotes world-class contracting, and encourages people into engineering.

And right now all eyes are of course on the forthcoming Defence Industrial Strategy to move us in the right direction.

So, just a few thoughts on this subject...

It is essential for the preservation of UK Sovereignty that on-shore Through Life Prime Systems Integration capability is maintained. This is the capability to specify, design, integrate, and upgrade weapon systems in the UK - even those that are not manufactured in the UK. As part of this, it is also essential that access to technology is acquired as part of international weapon system procurements.

I should also add that while having a robust policy is important, it will only be effective if implementation follows.

The work being undertaken by Lord Drayson and the MoD is commendable. He has set himself an ambitious objective and we all wish him well in getting this right... because it affects all those dimensions I've just described and it is vitally important to the future of the industry in the UK.

Conclusion

So to conclude, let me recap on my somewhat mathematical reasoning. I see competitiveness as the product of the resources provided for investment and a factor that I have called the 'competitiveness multiplier.' And in my view this multiplier consists of five main components:

• world-class project management underpinned by mutual advantage;
• improved collaboration through defence technology sharing;
• a focused defence industrial strategy for the UK;
• improving the reputation of the industry and the engineering profession;
• and above all, the ability to attract talented young people into this industry.

The challenge for all of us is to figure out which of these we can influence and make our own contribution to fulfilling the potential.

There is one thing that we can all do - and this is the thought I will leave you with. We can all try harder to make sure people understand just how exciting this business is. And that means helping young people understand the potential of engineering to change the world.

We've all heard those infamous predictions from people who were in denial about change - the boss of IBM who said there was a world market for maybe five computers, the President of the Royal Society who said - a hundred and ten years ago - that heavier-than-air flying machines were impossible. As early as 10 AD, the Roman governor of Britain, Julius Frontenus, wrote that "Inventions have long since reached their limit."

The truth is - today as ever - that there is a huge amount left to discover. The Joint Strike Fighter may - or may not - be our last manned strike aircraft. Regardless, there will undoubtedly be much challenging and exciting work on UAVs.

In fact, there is exciting work in autonomous vehicles of all sorts... Land, Sea, and Air. Two weeks ago I also saw a glimpse of the future in autonomous land systems... an Armed Reconnaissance Vehicle (a tank) operating under remote control. Are we doing enough to share the excitement with young people?

And what of the technology to defeat terrorism? There is progress being made in systems that protect buildings and civilian aircraft. And there are huge potential advances to be made in technologies to track terrorist or criminal suspects.

Airplanes are now over 100 years old. What is now waiting to be invented that will be 100 years old in twenty-one ten or twenty-one twenty?

As we determine the future of our industry, there is a lot of process and policy to get right. But there is also a lot of magic and excitement in this business and we really need to communicate it - especially to young people. Above all, that is how we will attract new generations of talent and fulfil the potential of this great industry.

Thank you.