Speech

Editorial Intelligence comment conference: the manufacturing economy

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Speech by Peter Luff, Minister for Defence Equipment, Support and Technology.

Introduction

Good afternoon.

As an economist with a passion for engineering I welcome Editorial Intelligence’s initiative in organising today’s event.

It’s a truism but it needs to be said, especially by ministers. The role and contribution of manufacturing in today’s global economy is central to us all.

I know this morning’s session has centred on the producer’s view, the industry perspective, of the manufacturing economy.

On the challenges and opportunities companies face in a globalised and technological age.

The importance of manufacturing

And you’ve also discussed the challenge of inspiring young people to get involved in production and manufacturing.

This is something I feel passionately about.

I simply can’t understand the constant hand wringing in this country about the state of our manufacturing industry.

The gloomy assertions that we don’t and can’t, make anything any more.

Or the endless claims that in any event the whole process of manufacturing somehow ‘doesn’t count’, and is irrelevant to our economy.

It makes my blood boil, because all this unhelpful armchair criticism just doesn’t reflect the facts.

I don’t know if anyone here saw Evan Davies’s excellent TV programme last year on UK manufacturing.

He did a great job in exploding the urban myth that Britain is no longer an industrial nation.

Britain, he correctly argued, could not actually survive without its vital manufacturing industries.

And it is, in fact, still a manufacturing powerhouse with upwards of four million people still making everything from high-tech aircraft to supercars.

These are people employed in a sector which is, in economic terms, twice as big as financial services. In fact, manufacturing accounts for half UK exports.

I’ll be talking later about the role of the defence industry in our manufacturing industries.

What concerns me about this endless talking ourselves down and the gloomy media headlines is that it all becomes something of a self fulfilling prophesy.

And worryingly acts as a disincentive to young people who might otherwise consider working in industry.

This is a real problem. And I see it all the time in the defence industry.

There is a huge demand in this country for well qualified people with the right engineering, scientific and technical skills.

The demand is there, but the people aren’t.

These are subjects which just haven’t been popular options in recent years. And of course there continues to be a noticeable lack of women working in these roles.

One of the reasons behind the recent decision to allow women to serve in Royal Navy submarines is the possibility that we can attract people from the widest pool of talent and skills into the service.

The companies I deal with tell me that these skills shortages are having a direct impact on their growth and productivity.

We’ve got to take steps to reverse this process of decline.

And make sure that being an engineer is an attractive proposition. And that it’s a career choice which carries the same status as being a doctor or a lawyer.

This isn’t just an issue for government or industry. The manufacturing sector matters to our wider economy, to our communities. And to our society.

Of course, nurturing and developing this talent at an early stage is one particularly effective way of developing our skills base.

The MOD runs a range of civilian craft and technician apprenticeships across the country.

And the armed forces as a whole are the largest providers of apprenticeships across the public sector.

BAE Systems, one of today’s sponsors, are particularly successful in this area when it comes to development. They are renowned for their huge pull through of apprenticeships to senior management.

I think we’re all in agreement that developing our skills base is going to be an essential driver of our economy.

People have also been talking this morning about the need for growth. And how innovation is central to this process.

I’m here to talk about the manufacturing economy from the perspective of one of its major customers. The Ministry of Defence.

I’ll be outlining some of the changes we’re making in our approach to buying equipment, in particular our commitment to making the MOD more accessible for SMEs.

And about our determination to become a more intelligent and demanding customer.

The defence industry, a vibrant sector

The defence industry is one of the UK’s most vibrant sectors.

The facts speak for themselves.

It’s an industry currently supporting around 300,000 jobs in this country, many of them in advanced engineering, an area in which this country has such a distinguished tradition and strong track record.

Take aerospace for example, a great example of an R&D intensive, high tech industry with technological spin offs to the rest of the economy.

The UK has the largest aerospace industry in Europe, and the second largest in the world after the USA.

UK aerospace has a turnover of £23 billion. Defence accounts for just over half of that, 52% to be precise.

Overall this country is the second largest defence exporter in the world, with £6 billion of annual sales and a 22% share of the global market.

And, with the fourth biggest defence budget in the world, the Ministry of Defence is, even in these straitened times, a customer with a lot of spending power.

However, as a government department we are also a customer that is accountable to the taxpayer.

Making sure defence has an equipment programme which is balanced and affordable is important.

In an age of both national and defence austerity it’s absolutely vital.

Materiel strategy

It’s no secret that this government inherited a Ministry of Defence with a gaping deficit and an equipment programme in financial freefall.

A programme based on the kind of fantasy budgets that I know many of you here from the corporate sector would find it pretty hard to countenance. Or even imagine.

We’ve been working hard to balance the books.

Hopefully it will not be long before we can announce our plans for PR12, and the equipment plan.

Getting a grip of this gaping deficit and we have, has meant, and will mean, driving forward change.

It calls for a new mindset. And a very different approach.

This means defence has to become a more intelligent and demanding customer.

And that means taking a long hard look at our processes, and the way we do business.

Upping our game when it comes to having the right skills in areas like financial and project management.

And it calls for significant changes in Defence Equipment and Support (DE&S) as it is known, the organisation outside Bristol which heads up our acquisition.

The Materiel strategy, as it’s being called, aims to transform DE&S.

To ensure it has the relationships, structures, management and skills it needs to provide the right equipment to our armed forces. At the right time and at the right cost.

We have looked at a number of options and we have pretty well already ruled out the status quo. I have already said in public that there have been three options judged most appropriate for further consideration: Trading fund, Executive non-departmental body and a Government-owned Contractor-operated organisation.

We already have extensive experience of running Trading funds, for example the Met Office and DSTL and so the DE&S has now begun a soft market testing exercise to obtain further information from the private sector about the other options to help inform our decision-making.

I would just stress here that no decisions have yet been taken on this, although we intend to have a clear idea later this year on the best option to take forward.

White paper

We’ll be changing our processes.

And we’re already changing our approach to acquisition.

It’s necessary for us and it’s essential for industry.

And that’s because the defence industry, any industry in fact, has to be competitive if it’s to thrive in today’s global economy.

We’re making sure this change happens.

Last month we launched our white paper, ‘National Security Through Technology’.

A plan of action for defence which commits us to adopting a new, open procurement approach.

So what does this mean?

Well, pretty much what it says on the tin.

It means we’ll be seeking to fulfill defence requirements through open competition in the domestic and global market.

It means buying off the shelf if that represents the best value for money, which it often will.

There is no reason why a competitive British defence industry shouldn’t win that business. Recent history, for example the Foxhound protected mobility vehicle or the Sea Ceptor missile system, shows it generally does.

I’m also thinking here of a company like Mabey Bridge Company, which is based in South Wales.

Mabey is a world leader when it comes to pre-fabricated bridge systems.

They have won a number of contracts to supply logistic support bridging to our forces in Afghanistan.

And when British Army engineers took on construction of a 140 tonne bridge to connect two Afghan communities in Helmand, the biggest bridge our soldiers have built since World War 2, it was Mabey who won the contract.

And “modified off the shelf”, buying a platform that’s freely available on the British or international market and then integrating it with, say, electronic counter measures or communication equipment here in the UK, ensures vital system skills are maintained in our domestic manufacturing sector.

Open procurement means actively looking for ways to collaborate, preferably bilaterally, with other countries because this will often offer economies of scale, and benefits such as longer production runs.

Countries such as the US, which is our major bilateral partner and where collaboration allows us access to cutting edge research.

And of course France with whom we’re now co-operating on a range of defence programmes.

Together the UK and France account for half of Europe’s defence expenditure.

We led last year’s operations in Libya. And we’re now working to develop a Combined Joint Expeditionary Force.

For both countries collaboration means our money goes further.

It means we can maintain a critical mass of demand for skills and industries we might otherwise lose.

And very importantly, it ensures we can operate our combined forces effectively.

Our open approach can best be summed up by the word ‘pragmatic’.

However, that most certainly does not mean any compromise when it comes to this country’s national security and capability.

Technology at the heart of the equipment programme.

The white paper puts technology at the heart of our equipment programme.

In the world of business, technological advantage, quite properly, means making money and increasing your market share.

For defence it’s now absolutely crucial to our modus operandi, and making sure we have operational advantage over potential adversaries.

We need to invest in technology to be able to meet an increasingly capable and diverse range of threats.

Which is why it was so extraordinarily short sighted of the previous government to more than halve the MOD’s science and technology budget between 1997 to 2010.

I’m determined this process of decline is immediately stopped.

And it has been. The proportion of spending on science and technology is now baselined at its current level of 1.2% of the overall defence budget.

At the moment that’s around £400 million a year.

A commitment to technology and open procurement also means opening up defence to providers with agility, innovation and the ability to exploit new and emerging technologies.

And that means making defence a lot more accessible to SMEs.

Another key principle of the white paper.

SMEs

SMEs are the lifeblood of any successful industry today. And it’s certainly the case in defence.

In fact, when its agility and innovation we’re looking for and that’s certainly been the case in recent years when it comes to getting urgent operational requirements out to our forces in Afghanistan, we have found its these smaller organisations which have proved time and again that they can and will, deliver.

We’re determined to open up more of our business to them.

And we’re already making progress on this.

In fact, SMEs are currently winning 42% of MOD’s equipment contracts.

In financial terms that’s around £1 billion of new business a year.

And many more SMEs are contributing to defence and security programmes as sub contractors.

Opening up our business of course also means that we have to be a lot more accessible.

It means making sure, for example, that there’s an emphasis on open systems factored in to our requirements.

And scope for these smaller companies to offer the kind of modular systems which enhance major weapons and platforms.

Centre for Defence Entertprise, helping SMEs

And making us more accessible of course also means that we need to make sure SMEs know about our requirements and are able to put forward their ideas and make sure they’re properly assessed.

This is where the Centre for Defence Enterprise (CDE), comes in.

Based in Harwell it acts as an entry point for new science and technology providers.

And unlocks the potential of SMEs.

The CDE gives practical help.

By sending out themed calls for proposals on a range of issues, for example and organising ‘one to one’ surgeries providing guidance on how best to pitch an idea to the MOD.

CDE cuts through a lot of the red tape which often seems to engulf an organisation as big as ours. Companies can get advice from the CDE team in Harwell, submit their research proposal online and track its progress.

And that proposal is generally assessed within 25 working days, although it can take as little as 15.

CDE was originally launched as a pilot scheme back in 2008.

It’s now time to take it to the next phase.

And that’s why yesterday I announced an expansion of its role, additional activities which will provide a dedicated focus to SMEs.

Activities such as market place events for SMEs to showcase their projects to defence primes and the venture capital investment community.

Open engagement events to increase awareness of opportunities within the defence industry.

And a with a small dedicated team from CDE and our Defence, Equipment and Support organisation who will now act as mentors.

There will also be additional annual funding of up to £2 million through the Small Business Research Initiative, or SBRI as it’s more commonly known.

This is money which will be directly used to progress successful CDE projects which show the most potential for defence purposes.

Conclusion

It’s our commitment to sourcing these new providers, and opening up our business, which means that I was particularly intrigued to see that the next session will be debating the role of UK brands in the global market place.

Now, of course, the whole issue of branding can be a bit misleading. In the old days there was just one label: ‘Made in’.

Today that same product could probably have a number of different labels to show its provenance.

Such as ‘designed in’; ‘manufactured in’ or ‘developed in’. The global supply chain is a complex one and that’s as true for defence as any other industry.

It could of course be argued that the individual UK armed forces are in themselves a brand.

The British Army. The Royal Navy. The Royal Air Force.

To say these names is to hear their power, as fighting forces and as names that inspire loyalty, affection, respect, trust.

So it’s probably true that if they are using a particular piece of kit then that’s the kind of endorsement a lot of companies are very keen indeed to have.

However, the fact is that defence as a customer has no interest whatsoever in brands. We have no ‘brand awareness’.

It’s just not a factor when we’re deciding what equipment to buy and how to support it.

If a proposal is innovative, sound and good value it makes no difference to us whether it comes from a household name.

Or an up and coming SME. A behemoth or a brash upstart.

We are not dazzled by shiny logos. And we’re not interested in flashy marketing campaigns.

We do not equate familiarity with excellence.

A brand, for us, is no substitute for a hard earned corporate reputation for project management, for example. That reputation could belong to an SME just as much as a Prime.

Believe me, when I visit our forces in Afghanistan the last thing they’re worried about is who made the equipment.

What they want to know is: “Does this work? Will it give me and the people I work with the right support and battle winning capability?

For us the value of manufacturing is about focusing on the end user.

It’s not about ‘who makes the equipment, or piece of kit?’ but rather ‘who will be using it’?

In defence that answer will be, our servicemen and women. People whose lives will very often depend on it.

And, indeed, all of you whose liberty could depend on it too.