The defence industrial base: a critical component of military capability

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.

It really is a pleasure to be at RUSI once again and to have the opportunity of discussing such an important issue and at such an appropriate moment.

And, to those from industry, I’m very glad that this event is focusing on you, and your businesses.

Focusing on the challenges, and opportunities, you will be encountering as defence becomes more streamlined. More challenging. And more disciplined.

This is an appropriate moment for several reasons.

The white paper is published, the defence budget is balanced, defence transformation continues apace, we are near reaching conclusions on the future of DE&S and the National Audit Office is considering our equipment plan prior to its publication.

So it’s clearly the right moment to clarify some of the issues affecting defence companies. I also say that because I was somewhat baffled by elements of the pre-conference papers for this event.

There appear to be a number of misunderstandings, which I suspect may be more widely shared.

And I’m aware that some of these misunderstandings could be down to us. Perhaps we in MOD have not been sufficiently clear when it comes to explaining the principles, rationale and implications of the white paper.

Six months on we’re now busy taking the white paper forward. Have we, though, successfully concluded the whole communication process with industry?

I have worked hard, and continue to do so, to make sure that the logic and implications of our white paper are fully understood within the MOD.

Changing a mindset has taken time even within our own organisation, never mind across industry.

And I think I may need to bang the drum a bit louder.

Take SMEs (Small and Medium sized enterprises). I was more than a little surprised when I saw that there was no mention at all of SMEs in those pre-conference papers.

That’s because they are the life blood of any industry and are therefore something I highlight in every speech and meeting. Today will be no exception.

By the way, repeating new truths doesn’t necessarily mean we think all the old ones have all lost their validity.

So if I talk up SMEs and don’t say so much about primes, it’s not because I don’t value both.

It’s because I think we all, the armed forces, MOD, DE&S and the primes, need to value SMEs much more than we have done.

So I welcome today as an opportunity to set the record straight on a number of fronts.

Later on I’ll be exploring the whole ‘off the shelf’ principle, and our commitment to exports. As well as clarifying our stance on sovereign requirements.

First of all, though, I want you from industry to be in no doubt whatsoever that you are a critical component of military capability.

Your people, your products, your services equip, transport, protect, clothe, feed, support our forces.

As the Secretary of State has made clear, the defence of our nation is a team effort. Defence contractors, civilians and the armed forces themselves are the three essential pillars of the whole force concept which delivers modern defence.

And there are hundreds of you, of every size, primes, medium and small, even micro enterprises.

Some of you have a global presence, others are smaller firms based just here in the UK.

Many are involved in a range of activities and would not brand yourselves as defence-centric companies.

A number of you have been involved in the provision of UORs in recent years.

As I speak there are around five thousand contractors out in theatre, supporting our armed forces in Afghanistan.

I’ve had the honour of presenting medals to a number of them whose work has been crucial to our effectiveness there.

Last year industry also did a magnificent job in support of the Libya campaign, and, for the record, there’s a dedicated case study on their contribution to Operation Ellamy on page 24 of the white paper.

In fact I also wrote letters of thanks and appreciation to some twenty companies of all sizes who played a crucial role in Op Ellamy. I could easily have written ten times that number.

Take just one example, Typhoon, and the way industry optimised its capability for that operation. Of course, the excellence of the aircraft played its part too, but it was private sector companies and their staff that kept it flying.

More generally, thanks to your innovation, and strong partnership working with organisations like DSTL, our forces have superb kit.

In fact it is the best they have ever had. And as good as can be found anywhere in the world.

Thank you for your part in that remarkable achievement.

It may be a cliche, but it is true, necessity is the mother of invention. That has certainly been the case in Afghanistan.

And significant parts of that defence innovation, as is so often the case, are being transferred across to the civilian world.

I’m thinking here in particular of the advances in battlefield medicine which are also driving forward changes in the NHS.

So, you are a vital part, all of you, of our defence effort. You make defence happen.

But I have a problem.

It’s this, I don’t actually agree with the title for this conference.

Not because you aren’t a critical component of military capability.

No, it’s the first three words of the conference theme that worry me.

I think it was Voltaire who wrote that the Holy Roman Empire was neither holy, nor Roman, nor an empire.

So it is with the “defence industrial base”, a term that makes my heart sink.

Put simply, it’s not just about defence, because of the increasing overlap with security, a major theme of the white paper.

It’s not just about industry but technology. More about that later.

And it’s not about a narrowly defined base when so many of our key suppliers have supply chains that reach around the world.

For me, the phrase defence industrial base summons up visions of some giant monolith, shielded from the market forces that are always the driver of efficiency.

Faceless, intransigent, and unaccountable.

A powerful symbol of the problems that have faced defence acquisition in the past.

The complete antithesis of the way we intend to run our whole defence equipment and support programme.

Let’s look specifically at that third word: ‘base.’

I have a problem with the very idea that we have, or indeed should have, a ‘defence industrial base’.

Quite frankly, it’s more complicated that that. In fact, I’m not sure it’s even factually correct these days to refer to a ‘defence industry’ as a collective concept. Your diversity is your strength.

The reality, as I said earlier, is that defence equipment and support covers a huge and diverse range of activity, and companies of just about every size, with varying degrees of dependence on the MOD budget. And they are all important.

From primes to start-ups. Providing everything from syringes to submarines.

Their services and products often cover a range of sectors. They certainly don’t want to get pigeon holed.

Technology is driving fundamental change in our supply chain.

And those smaller companies are so often the ones who are proving to be innovative and agile, and sensitive to the customer’s needs in these times of austerity.

They are out there winning international business in today’s tough global environment, and not waiting for the MOD to make up its mind about what it will buy.

That’s why we are looking for greater SME involvement in our procurement strategies.

Not for altruistic reasons, but because we are determined to drive in innovation and responsiveness.

So we will also hardwire this approach into the reformed DE&S and its harder edged relationship with the MOD customer.

Yes, there are defence industries. But as I said earlier, their supply chain spreads around the globe.

And there are industries which contribute to defence but which have their origins, or the majority of their business, in other sectors.

And there are industries that may not yet be on our radar which should be, and which must be encouraged to make their contribution to defence.

We in defence value you highly, but you are not a united industrial base as such.

We’re also striving to increase the proportion of the equipment and support solutions that we buy in open competition. More of that later.

But we do understand the limits on competition in defence acquisition.

Above all on this issue, our security depends on us being able to protect our sovereign requirements for operational advantage and freedom of action. And we will.

Perhaps this is where the misunderstandings between us, between the MOD and industry, most urgently need to be addressed.

These concepts were, after all, an important feature of the white paper.

The old phrase “sovereign capability” trips easily off the tongue. But it can lead to some pretty woolly thinking.

The Defence Industrial Strategy of 2005 listed the capabilities industry had. And then said what government would do to protect them.

This allowed everybody and anybody to claim that their capability was essential and that, implicitly, the MOD would have to fund it.

An approach that proved to be unaffordable, and downright illogical in an age of rapid change.

In contrast, the white paper ‘National security through technology’ does what it says on the tin.

It sets out an approach that starts with what the state needs for its security.

And then it looks at the different ways of achieving it, establishing affordability, what it will acquire, and how it will acquire it.

We are now embedding this approach.

The white paper implementation team is looking now at exactly how best to embed these concepts, and that of exportability, in both Main Building and the front line commands. And how to take account of the views of industry and DE&S.

The process we will follow is much more subtle and nuanced than some commentators seem to have understood.

We will buy equipment using the route most appropriate for that equipment bearing in mind its nature and our need for operational advantage and freedom of action.

We will seek exemptions from EU procurement rules to sustain our technological advantage where we need to.

It is important, however, that you recognise and understand that we’re not going back to producing a long list of specific sovereign capabilities, effectively owned by specific companies, that we will protect.

Technology is changing too fast, and money is too tight, as indeed they both probably always were, to do that.

The future lies in open systems, as we see in the ‘land open systems architecture’ approach.

I recognise this means big change for many larger firms in defence.

But the gains for defence as a whole are real. And I believe greater competitiveness will help the big companies too.

However, be very clear, the skills and resources to deliver operational advantage and freedom of action will be safeguarded when we must do so to protect the nation.

In the white paper we set out the broad circumstances where this will apply.

The real challenge we all face is not new acquisition processes but constrained acquisition budgets here and, indeed around the world.

There will be skills the UK needs to safeguard and with development money for new projects constrained, some of them may be at risk.

We would have faced the challenge of how to deal with in any event, white paper or no white paper.

Having operational advantage and freedom of action in the future depends investment in the future of the right technologies now.

That is why we are constantly assessing what we believe are critical technologies, and why our decision to protect the ‘science and technology’ budget from further cuts is so important.

We recently announced a billion pound investment in the Rolls Royce core production capability at Derby. Here is a clear example of a technology and skill set we know we do need to sustain.

Or the announcement at the end of last year of additional funding for research into next generation of highly capable air systems, a £40 million four year research contract with BAE Systems to explore critical technologies and key systems integration.

There will be other such examples and we will take careful note of the views of industry as we identify and address them.

But it will be for the government to determine how best to sustain the technology, perhaps, for example, by collaboration with one of our most trusted allies rather than by maintaining a single UK source.

Defence is a national business, but it is not an industry of the state.

The state has its defence requirements, and they are being met by an increasingly diverse range of suppliers.

How many of you realise that Hewlett Packard is our fourth biggest supplier?

Or that SMEs now win over 42 per cent of all the contracts we let?

Yes, the overall value of those contracts is lower, at 13 per cent of our spending. But it is a very significant amount given that the sheer scale of many of our programmes mean they are outside the scope of SMEs, at least as prime contractors.

There is, of course, the beguiling argument that spending money on defence will create more jobs for UK PLC.

That, in essence, defence is in some way special in its capacity to generate employment.

This does have an academic term: ‘Military Keynesianism’.

Actually, John Maynard Keynes himself didn’t approve of the concept.

In 1933, Keynes wrote an open letter to President Franklin Roosevelt. In that letter he said,

“… a war has always caused intense industrial activity. In the past orthodox finance has regarded a war as the only legitimate excuse for creating employment by governmental expenditure. You, Mr President, having cast off such fetters, are free to engage in the interests of peace and prosperity the technique which hitherto has only been allowed to serve the purposes of war and destruction.”

So, I agree with Keynes, up to a point. There are many ways to stimulate an economy other than by investing in defence.

We buy defence equipment and support that equipment because we need it to secure our nation.

It is the duty of the MOD to buy what we need to do that and to protect our sovereignty, no more, no less.

Where the consequences of the acquisition decisions we take in the MOD have implications for the responsibilities of other government departments, or vice versa, the white paper established a ministerial committee to address them.

There’s a subset of full blown military Keynesianism that asserts we should always try to buy defence equipment in our own country.

You don’t have to be a “red in tooth and claw” capitalist to believe in capitalism’s principal tenets.

We know that the greatest long-term good is served when competition is allowed to work. That means efficient markets and real wealth creation.

Of course it’s good when British based companies win UK defence contracts.

Often our needs will mean buying British from single sources; 40 percent of our defence equipment and support budget is spent that way.

And much of the remaining 60 per cent is also won by British companies too because you are so good at what you do.

Look through the announcements we have made recently, on Sea Ceptor, Sea Viper, the Core Production Capability, the refit of HMS Vengeance, maintaining Hercules, the Warrior Capability Sustainment Programme, Foxhound, Scout, the list goes on.

Hundreds of highly skilled jobs secured by our acquisition and support decisions.

Of course buying defence equipment creates jobs. But so does investing in the arts, in hospitals, in schools, in roads, in housing.

If I tried to justify defence spending by its potential for job creation, others in government would raise their eyebrows and offer a rather incredulous response along the lines of:

“Oh really? More jobs than funding research in the civil aerospace technology? Or rolling out Broadband across the UK?”

UK defence companies do make an important contribution to our economy. I celebrate that.

But, the only reasons for the MOD to go out of its way to protect their technologies are operational advantage and freedom of action.

Charlie Blakemore of BAE Systems told it like it was when he announced last month the loss of jobs at their munitions factory in Monmouthshire.

He said, and I’m quoting here from the BBC:

“We need to adapt to very challenging market conditions, and further reduce our overheads to drive better value for our customers and increase our competitiveness in the export market.”

His words capture the kind of hard headed realism companies across the spectrum need to adopt if they are to succeed.

There are new opportunities for industry too. Not just in equipment acquisition, but also in support.

And that means a new appreciation and understanding of what support means. And the number of services and capabilities it actually covers.

Particularly as we roll out the ‘Total Support Force’ concept, which will include a sizeable number of contractors doing jobs we always thought were done by people in uniform.

There are real new commercial opportunities here for you. I appreciate the work being done by industry to help us drive this agenda forward to our mutual benefit.

Make no mistake. We do want you to thrive and prosper.

As the white paper clearly spelt out earlier this year, it is in our interests to have successful, and competitive, defence industries.

As you heard from Susanna Mason, this is a government committed to promoting an environment conducive to responsible defence exports.

Her appointment as MOD lead for exports is a tangible sign of our commitment to that.

One of our real challenges in implementing the white paper is driving exportability into our requirement setting process from the very beginning.

But I realise that even a simple term like ‘exportability’ means different things to different people.

To be clear, in this context it does not simply mean “capable of being exported within the constraints of the export licensing regime”.

We are proud of our responsible and tough regime, although I know it could often work more efficiently.

No, fundamentally it means, from the very beginning of a project, making defence equipment that the UK requires attractive to potential overseas customers. That brings benefits to us and to you.

Ensuring this issue is fully addressed as we devolve responsibility to the front line commands is a major white paper implementation task.

And by the way, on the subject of international acquisition policies, I often hear it said that the white paper does not address industrial participation.

That’s simply not the case. I refer you to page 48, paragraph 154 of the white paper for a clear summary of our new policy.

The new approach towards engagement with overseas suppliers aims to encourage these companies to invest in the UK supply chain.

For instance as a prime location to engage in research and development investment and technology transfer.

Crucially, these activities will also underpin the promotion of the UK’s defence and security exports, exploring what assistance can be provided to help UK exporters meet their global offset obligations.

It’s precisely because we want you to succeed, and to deliver our operational advantage and freedom of action into the foreseeable future that I have, for the first time, put a floor under the science budget. To ensure that we as a nation we can remain at the forefront of cutting edge, battle-winning technology.

Our national security depends on that. And that means a lot of opportunities for you.

A number of contractors have told me they consider the white paper to be pragmatic.

Yes, it is.

Much of the policy it articulates is in fact a continuation of what had been the department’s direction of travel for several years.

It’s just that the white paper spells it out in black and white. And provides industry with the clarity, and honesty, you have been asking for.

However, the commitments to science, to exports, and to SMEs are new.

And it is a change from the 2005 Defence Industrial Strategy which this year’s white paper replaces.

I also agree wholeheartedly with John Maynard Keynes when he said, or at least is believed to have said,

“When the facts change, I change my mind. What do you do, sir?”

Well here are some of the facts, the realities, which I believe have changed or become more prominent over the last 7 years:

  • a global network of alliances with whom we intend to cooperate more deeply
  • the international distribution of manufacturing
  • massive civil sector investment in R&D that increasingly spins in to Defence
  • rapidly advancing, often disruptive technology (some increasingly expensive, other parts of which become ever lower-cost)
  • and increasing financial challenge and austerity

And what do these facts, these new realities, mean in practice?

Sometimes they mean working more closely with our allies on acquisition.

On very large programmes like JSF with the US and a wide range of international partners.

On specific much smaller scale programmes such as aspects of counter IED technology with the Germans, as I saw at DVD last week when I met MineWolf Abacot.

Or across a wide portfolio of programmes in the framework of the wide ranging Franco-British agreement. Here we are working on complex weapons, unmanned combat systems, support for A400M, and much more.

And then again, there are occasions when addressing this new world means single source non-competitive contracts to build nuclear powered submarines, to develop unmanned combat air systems, to build complex warships.

Sometimes it means mutual commitment like the one in the complex weapon pipeline arrangements.

The distinction between the old approach and the new one is this.

Our policy will, more often than in the past, lead the government to open up our defence contracts to international competition, just, indeed, as the last government judged it right to do.

Also, don’t forget that, as the EU takes more steps to enforce the ‘Defence Procurement Directive’, more and more European opportunities will open to British companies.

If you are competitive here, you will succeed there.

And recent history shows us that there is absolutely no reason why UK companies should not win MOD business.

Look at Foxhound. An excellent example of an agile and versatile vehicle, a contract competed for and won by British companies, Force Protection Europe and Ricardo, sustaining around 750 highly skilled jobs across the UK. And with huge export potential too.

Similarly, the Warrior Capability and Sustainment Programme, a contract which will create and sustain around 600 British jobs, was won by Lockheed Martin UK in a competitive process.

And it’s also the case that big contracts awarded overseas will also help to open up those international markets to British companies.

The MARS tankers are a case in point.

A number of British companies took part in the international competition, which was quite rightly initiated by the previous government because they recognised, as tankers, they were not “warlike stores”.

However, no British company submitted a final bid for the build contract.

Yes, of course I would have preferred it if there had been a competitive British bid. But in the end there wasn’t any British bid at all.

The build contract has been awarded to Daewoo Shipbuilding and Marine Engineering (DSME) of South Korea, but the ships are designed by a British company, BMT.

And there will be up to £150 million of associated contracts for the MARS project, many of them offering opportunities for SMEs here in the UK.

MARS means UK companies have the chance to show their potential to one of the world’s largest shipyards and for DSME to get first hand experience of the services and products that can be provided cost-effectively from UK companies.

I was in Korea at DSME’s hugely impressive yard on Monday. I heard of the close working relationship developing between DSME and BMT. It looks very likely to lead to further ships, based on the successful MARS design, being developed and sold to third countries.

That means additional opportunities for the British marine engineering industry.

Of equal significance is the potential of opening up the Korean defence market for other UK companies as the strategic relationships created through MARS develop.

An early and encouraging sign is the significant breakthrough into the Korean naval propulsion market made by Rolls Royce. I was delighted to hear that contract announced on Tuesday in Seoul alongside representatives of the company.

I came back from South Korea yesterday and at the airport I met a Royal Navy team going in to discuss naval cooperation.

With many similar challenges and shared understandings, the potential for ever deeper collaboration and partnership is very real.

I do agree with the pre-conference papers that MOD is adopting the ‘tough love’ approach when it comes to our relationship with industry.

And we’re being equally as tough on ourselves.

We have recognised that we’ve got to change, and drive forward a new culture across the MOD.

That means changes ahead at DE&S and in the way we do business. You will be aware of Bernard Gray’s Materiel Strategy and the Defence Transformation agenda.

Work is still underway as decisions are being made and you will hear more about our thinking as soon as we are ready. However, we are determined that the MOD will be a better informed and more demanding customer.

Before I draw all this to a conclusion, I would like, briefly, to reflect on the overarching theme of this conference, “Defence, Industries and Society”.

I think we’d all agree that today the nation, quite rightly, holds our armed forces in very high regard.

With Armed Forces Day on Saturday, we will see this high regard turned into practical support up and down the country. I’m looking forward to events in my own constituency.

The thousands of men, women and children who line the streets up and down the country for homecoming parades show that support and admiration.

The public also recognises, in very tangible ways, the sacrifices the armed forces and their families make. Just look at the success of a charity like Help for Heroes which has raised £100 million in its first four years.

However, we need to recognise that defence spending is in competition with all the other things that taxpayers’ expect the government to spend their money on.

As it happens, there appears to be a greater willingness in the UK to fund defence than in most Western nations.

But the British people have seen the news, they read the newspapers. They know that the MOD has been culpable of gross financial mismanagement and, let’s be frank here, squandering their money.

The last two years of the coalition government have been spent dealing with the horrendous national deficit. But MOD ministers have had this challenge compounded by defence’s own broken finances.

Both were real security risks in their own right. A country cannot be strong unless its finances are strong.

And a government department cannot do its job unless it manages its finances well.

In our case that is best summarised as “It’s only by looking after the bottom line that we can really look after the front line.”

It’s no secret that balancing the MOD’s books has been a tough and time consuming process.

But, we’re there. We’ve balanced the budget. We will be announcing an audited 10 year equipment programme as soon as the National Audit Office completes its work.

As a result we will be spending a lot of taxpayers’ money on equipment and support.

Over ten years that will be £160 billion.

And, in contrast to the unfunded aspirations of the past, this is real money, including around £4 billion of contingency on the committed programme and £8 billion of headroom to fund additional projects from our ‘single integrated priority list’.

Incidentally, that all gives defence companies a lot more certainty than most businesses ever have about their customer’s requirements.

But if this happy state is to endure it will take a lot of discipline from all of us, and especially from the MOD, officials, front line commands and politicians.

The balanced budget, the ‘Yellow Book’ review (something there wasn’t time to talk about today incidentally), the ‘Materiel Strategy’, ‘Defence Transformation’ and the white paper are all essential building blocks of a new more confident, sustainable, effective defence.

This may be the moment of maximum pain. But it’s also the moment when the light at the end of the tunnel may actually be precisely that, and not the light of another train bearing down upon us.

So the messages of the white paper must be understood properly both within and outside the MOD and the armed forces.

We must think more about defence and security as a continuum.

We must think more about technology, the way it is changing and what we need to protect the State.

And we must nurture the growing diversity of what once saw itself as a defence industrial base but is now a complex supply chain.

Changing the habits of a lifetime is never easy, but that is what I am inviting those of you who have not already done so to do now.

Companies have to be competitive. Growth will be hard won.

We will only be able to export something if it is competitive.

So how do we get there?

  • we build in exportability
  • we support UK companies in export campaigns
  • we invest in the right technologies
  • we allow SMEs the space to flourish
  • we protect our operational advantage and freedom of action
  • we focus on building and retaining competitive advantage
  • we collaborate more with our closest partners
  • and crucially, we always remember affordability

This approach may be driven by austerity but just happens to be intellectually right too.

Our objective should not be to protect a defence industrial base.

It should rather be to create the right incentives to grow thriving, vibrant companies that can compete globally and supply defence in the UK with what we need, when we need it, at a price that the taxpayer can afford.