Speech by Mr Simon Jewell, Future Systems Managing Director, BAe Systems

Speech by Mr Simon Jewell, Future Systems Managing Director, BAe Systems
Equipping Our Armed Forces for Europe's Security and Defence -
Priorities and Shortcomings

Getting the Best out of what the European Armaments Industry can Offer

I stand before you today as a representative of a transatlantic systems company, BAE SYSTEMS. Of the over 100,000 employees of the company, around 25,000 of these are US nationals, based in the United States. And let's not imagine that this is in anyway unique to the UK. It is true - or is the aspiration - of a number of companies across Europe. In the UK we have had to redefine what being a British defence company means. Today, I think it's true to say that most would accept that a company is defined as British where the workforce is based in the UK, and that they are, and will remain, a fully integrated part of the economy. Ownership per se is not of fundamental concern. Does a similar redefinition need to take place at the European level? Indeed, more fundamentally, is the term European Defence Equipment Market (EDEM) ever to have anything more than a somewhat symbolic geographical connotation?

Of course this presupposes that the military in some way cares where the manufacturer of his equipment is based. It is after all a truism that coming second place in a duel is something you only ever do once, so you better have the best equipment available, if you want to continue to have the means to fight. The question needs to be answered, so why not simply buy from the United States?

Another aspect of the debate is the pace of change. Companies across Europe are put under the performance spotlight at least once or twice a year. Changes therefore in the demand side of the market, measurable only in the granularity of years, even decades, are of little help. The footings of defence capability go deep, they require substantial capital investment and scarce skills that are not found or developed easily. Corporate strategic planners need to take decisions on where to prioritise, where to locate and how to evolve. Candidly, they need to know where Europe stands!

I recognise that a great deal is already being done. One can name the Letter of Intent and the resultant Framework Agreement to Facilitate the Restructuring of the Defence Industry, the work of OCCAR, the WEAG panels with its talk of the European Armaments Agency, NATO and the Defence Capabilities Initiative, the Helsinki goals and the Petersburg tasks and most recently the European Capability Action Plan. Do we need more, or as has been mentioned by other speakers, do we need fewer, initiatives?

So far I have asked 4 questions.

· Is the term European Defence Equipment Market ever to have anything more than a symbolic geographical connotation?
· Why not simply buy from the United States?
· Is the pace of change in Europe satisfactory?
· Should we have more or less defence initiatives in Europe?
I would now like to return to each of these and to make specific recommendations from a personal, industrial perspective on each. In so doing I would also like to bring in related topics that influence the decisions we all take.

Firstly, is the term European Defence Equipment Market (EDEM) ever to be anything more than symbolic? I believe that this question will remain unanswered as long as the more fundamental question of setting a European policy for defence, and agreeing the approach to enacting the policy, remains open. My concern is that the long-term health of the industry is being undermined waiting for this answer. However I also believe that much more can be done, than is the case today, whilst we wait.

The defence market is essentially monopsonistic in nature, by this I mean that there are more sellers than there are buyers and this impacts the dynamics of the market place. Governments with defence industries talk of opening markets and yet at the end of the day are reluctant to do so, fearful no doubt of the impact of competition on their indigenous industry. This is an understandable concern given that the playing field is far from level, but equally it is not a sustainable end state. The US Government enjoys a healthy relationship with its defence suppliers, it invests in them and it supports them internationally. They, nor I, see anything wrong in this approach. The problem for European based industry is how do we compete globally given this scenario? We appear to have two options, as the third option, `do-nothing', represents the path to the complete demise of any vestige of European capability.

It has already been said that European industry is not wanting when it comes to the science base and its ability to undertake cutting edge research. The availability of skilled resources is a problem that cannot be overlooked but that is not the topic for today. However, funding research is in itself not enough. The armed forces have a capability gap that will only be plugged by programmes. The areas of shortfall are well documented - the list is long - Intelligence gathering, interpretation and distribution, surveillance by satellite and Uninhabited Air Vehicles (UAV), Deploy Sustain Recover assets, be they by land, sea or air. Air defence, missile defence, secure communications, wide band communications, C4ISR, Uninhabited Combat Air Vehicles (UCAV), unified C2, the ability to create rapid effect and its need for highly deployable medium forces, suppression of enemy air defences, electronic jamming, etc, etc, etc. And this is just the first wave, beyond this lie the unknown of nano-technology and micro-machines, cyber warfare, directed energy weapons and perhaps genetic bio-warfare. These are all potential threats that may one day have to be faced.

One option is to address this at a national level by removing the barriers to market entry to allow European industry to bid as equals to the indigenous industry. The alternative is to raise the stakes to a European level and drive through harmonisation at the price of national preference. It cannot be got around that both options require an increase in the equipment component of the defence budgets - probably replacing the high overhead of large and largely ineffective conscript forces. Allow industry to bring with it innovation. The right balance of competition and partnering can go a long way if given the opportunity. The clear danger is that it will always remain expedient to talk as good Europeans but to revert to type when the electoral buttons are pressed.

The second question was why not simply buy from the United States? To answer this I believe we have to go back to first principles. It is the duty of government to ensure its people are safe. It is the duty of the armed forces to undertake this mission and it is the duty of the supply community to give them the most cost-effective means of ensuring they have the best tools for the job. It is at this stage we need to step back and take a holistic approach.

Correctly managed defence procurement is an investment and is not a cost when the contribution to the economy measured in terms of revenues from employment and company taxation, from export earnings both in the form of levy and balance of trade, the contribution to the technology base and the benefits of employment over sustaining high social costs are taken into account. In my mind where the economics of buying from the US outweigh the total economic advantage than doing otherwise, then we should buy from the US. Equally the converse is true.

This does require a proactive approach to developing defence capability through the concept and assessment phases of programmes. We cannot wait until we need a system and then complain that there is no European alternative or that the risk of development is too great.

Like the US, European Governments need to work with its industry to generate technology, develop concepts and undertake technology demonstrator programmes to remove programme risk. This means taking decisions, enacting them and sticking with them. Our track record of doing this is poor.

For me however the most compelling reason not to rely solely on the US for our defence equipment is that we simply cannot afford to. This is for two reasons. Firstly, the US is developing a doctrinal approach to warfighting that is network centric. Ultimately everything links to everything else and information is circulated to the right place at the right time. The Joint Strike Fighter is a case in point where it will rely on off-board sensors to keep a low electronic signature as one of its low observable features. It will also work in unison with F-22 air superiority fighters and aircraft with active stand off jammers to help confound the enemy. But what if you can't afford all of these? Now you are flying an asset optimised for the US air environment in your own environment. Is it as survivable and if it isn't what are you going to do about it? By definition your own industry has long since gone to the wall. It seems to me you have one option - ask the US to fix the problem for you. But will they if they do not have the same problem and if they do agree to do so, at what price and with what urgency? This doesn't mean don't buy JSF. It simply means do so in balance within the wider industrial debate.

In summary, I do believe that we should cooperate with the US on defence technology and must avoid at all costs the polarised options of `buy American' or for that matter `buy European'. Again, just as it is between European nations, reciprocity of market assess is key and it is the role of government to ensure that we all enjoy equal market rights at both the prime contractor and sub-contractor level. Here the work on the Declaration of Principles (DOP) and the Defence Technology Security Initiative (DTSI) are key.

For its part, European industry should continue to break down the artificial boundaries and develop transatlantic companies pooling the capabilities of both sides, to most effectively meet the military's requirements.

The third question was regarding the pace of change in Europe. There can be no hiding that it is of immense frustration to industry that the process of reform in Europe takes so long. The 6 nation Letter of Intent was launched in 1998, four years later we are still discussing the content of the Framework document and I regret we have some fundamental concerns that the product will do little to further the cause of facilitating defence consolidation as it was intended to do. You exposed your frustration on A400M yesterday but we could have added Meteor, TRIGAT, MRAV, TRACER and many more. The asymmetric threat is by definition not so constrained and Darwin's principles of evolution, will ensure that it will evolve faster than we can react - for if it didn't it would not survive at all. Through our own agility we need to minimise their period of advantage, be they State or non-State actors.

The military response to this is to develop the concept of rapid effects undertaken by a medium force. Highly deployable, highly agile, with the goal of, when necessary, being highly lethal. The key for military planners is to determine the effect that they wish to achieve and to fundamentally move away from merely reacting to events. Ultimately the goal should be to restrict the enemy's aggressive options simply by his being only too well aware of your capable response if he does. Industry has a key role to play in several aspects of this issue.

Firstly, it can use its balance sheet to bring into service solutions that a nation could not otherwise afford. The UK's public private partnership programme (PPP) and the Private Finance Initiative (PFI) are examples of how this can be done. The Future Strategic Tanker Aircraft is one example of this today with the Military Flying Training System (MFTS) following along in 2004/5.

Another opportunity is in the key area of defence logistics. For many years it has been routine for contractors to act in the supply chain. However, the opportunity exists to go much further. Why should the military pay to keep inventory sat on a depot shelf?

To do this they have to buy the asset, build a warehouse, employ people to manage it and establish an infrastructure to command it. Far better to never own the asset in the first place and simply pay for the output of the product and steer clear of the infrastructure costs that would otherwise follow. True, industry won't do this for free - but it is hard to think of a better incentive for them to do it more cost efficiently.

The UK has set itself a target of taking 20% out of the cost of supporting its armed forces. It spends upwards of £4.6 billion per year doing to today. There will be some tough decisions along the path, the Sea Harrier being taken early out of service, in the UK, being just one example.

The last point I would like to make on the pace of change is the question of not being overwhelmed by the scale of the task ahead of us. We know that budgets, even if they are to increase, as they must surely, will never allow the procurement of all the systems so badly needed today. Even taking into account savings that can be made in logistics and through industry playing a role in financing capital equipment it will still take time to recover the neglect of the last 10 years. However we must not overlook that current systems too can be dramatically improved through programmes of networking, signal and data processing, the introduction of real time automated target detection and classification, real time multi-sensor fusion, enhanced ISTAR systems and autonomous decision-making tools. It is my view that Europe should not get fixated by platforms but should look at the infrastructure that brings them all together into the System of systems. It's something I think we are good at - and is something that would provide a large increase in military capability.

I believe it is important, therefore, when we consider combining defence research that we bear two points in mind. The first is that research programmes must be defined against a real requirement with the intention of following through to a fielded solution. The second is that we need to focus at least as much on delivering incremental enhancement to legacy assets as we do to new platform solutions.

The fact that the Nimrod R (the reconnaissance variant) and the Canberra PR9 (a surveillance asset) are still capable, and are operational as we speak, are practical examples of what we can do.

Turning now to the last question, should we have more or less defence initiatives in Europe, and what in particular is the supporting role of industry? I guess it would surprise no one if I were to make a small plea for fewer initiatives and more action. I am confounded by the number of different groups that I am asked to support harmonising military requirements - we undoubtedly need to harmonise the harmonisers - but not if this creates another opportunity for masterly inactivity.

There is politics in defence, there always will be politics in defence, but we must never end up with politics instead of defence.

In conclusion, industry must accept the commercial pressures of the open market and be prepared to play to its strengths and not look for governmental protection. Equally governments need to assess value for money in a holistic sense, taking the whole economic picture into account and not abdicate responsibility towards developing national and European prosperity by hiding behind a convenient and narrowly defined definition of lowest cost supplier. We need to live in the real world of global markets and global competition and demand equal access and rights, as we would expect to give to others in our own markets. Industry and governments need to go forward as strategic partners, this does not mean the end of competition, just that competitions must be conducted earlier in the process and more economically.

By definition this means selecting prime contractors on criteria other than cost alone as this will not be definitively known so early in the project.

The chance for substantial further competition exists amongst the supply chain later in the process. Such partnering requires strategic vision, flexibility and a common sense of purpose. Industry must be prepared to bear risk, but governments need to balance this with realistic profit margins and by sensibly spending money early in the programme to better quantify and reduce the impact of risk on cost and schedule.

I truly hope the next decade will be one of meaningful activity, where Europe again gets on the front foot and brings its formidable capabilities to bear in support of our military. In BAE SYSTEMS we have the expression, `innovating for a safer world'. We are proud to play our part in securing a peaceful environment. Our US Electronic Warfare facility in Nashua has the mission statement; `We Protect those Who Protect Us'. I personally can't think of a better reason for going to work.

Simon Jewell

BAE SYSTEMS

6 March 2002