Search:  

 Blog     e-Newsletter       Resource Library      Directories      Webinars     Apps
AFCEA logo
 

Myriad Forces Poised To Change U.K. Industry

August 17, 2009
By Henry S. Kenyon

 

The global economic crisis and upcoming national elections in the United Kingdom could lead to a change of governments and a round of cuts in defense spending. Major programs, such as the Royal Navy’s Type 45 destroyer, which has already seen the number of requested ships cut from 12 to six, may see additional funding cuts.

Politics, economics set stage for possible cutbacks, mergers.

The United Kingdom’s defense industry is in a state of flux that may lead to a potential round of consolidations in the coming years as small and medium-size firms are acquired by larger national and international companies. This fluid state is being caused by two factors: the global economic crisis and upcoming general elections that could put the Conservative party in power for the first time since the late 1990s—a move that would trigger a major strategic assessment of the nation’s defense priorities.

Britain’s Labour government has until June 3, 2010, to call an election, says Cmdr. Russell Searle, RN (Ret.), director of RJD Technology and president of AFCEA UK’s Southern Chapter. He explains that the upcoming event will put a short-term damper on major acquisition decisions. Similar to a U.S. presidential administration’s final year, where it is difficult for a chief executive to pass legislation, the current Labour government is hindered in making major policy decisions in the face of an oncoming election. The political climate has a direct impact on defense procurement says, Cmdr. Searle. “People find it very hard in those circumstances to make major decisions on capital defense programs,” he explains. Decisions on multibillion-pound programs likely will be delayed until after the election.

Another major factor is the global financial crisis, which is affecting overall U.K. government spending. Cmdr. Searle notes that defense spending will not be immune to any upcoming budget cuts, but he adds that many billions of pounds will remain for spending on defense programs.

In addition to the promise of cuts to the defense budget, a major strategic review of military capabilities is scheduled for next year. The commander explains that this study is similar to the U.S. Defense Department’s Quadrennial Defense Review. He notes that the Conservative party’s Shadow Defense Secretary Liam Fox has stated that if his party wins the election, it immediately will commission a strategic defense review to completely reassess the nation’s national defense priorities and related spending. But Cmdr. Searle notes that there is little possibility of any defense funding increases under the Conservatives, and that the best outcome will be a zero-sum game.

Whichever party controls the government, military policy will remain focused on asymmetric warfare, Cmdr. Seale says. Although a major conventional conflict is possible in the long term, he notes that the current consensus in U.K. defense circles is that in the short to medium time frame, the British military mainly will be occupied by asymmetric conflicts. This viewpoint will shape the strategic defense review and drive defense planning.

Politics and broader economic decisions will affect the future shape of the U.K. defense industry. The current national defense industrial base has two facets: dedicated defense firms and industries developing dual-use technologies such as software and electronics components. Cmdr. Searle notes that many of these commercial products are not designed specifically for the military markets but were applied to military uses, such as plastics for electronics equipment or synthetic fabrics for uniforms.

U.K. industry is dependent on the global markets and has been hit hard by the financial crisis. In the near future, the commander believes that the nation’s entire industrial base will undergo a major shakeup, with the larger and healthier firms acquiring their ailing competition. However, he notes that the current fluid situation also opens opportunities for entrepreneurs and emerging technologies to create new markets. Cmdr. Searle concludes that the fallout ultimately may have a positive effect on the nation’s industrial base.

As with their U.S. counterparts, U.K. defense firms have two business sectors—export and the national market. Cmdr. Searle shares that British companies earn more through exports than sales to the Ministry of Defence (MOD). As a consequence, British firms always are seeking to export equipment originally developed for the MOD, he says. But the government does not always look favorably on this sales policy, and export regulations prevent sensitive technologies from being sold to certain nations. These conflicting interests create tension between industry and government. Cmdr. Searle explains that defense firms claim that they cannot make adequate profits selling only to the MOD, but the government mandates that certain nations are off limits to export sales for reasons relating to human rights or national security.

The U.K. defense industry currently is buoyant with many of its major firms on a solid financial footing. But Cmdr. Searle notes that in times of financial downturns, there is always discussion of industry consolidation. It is possible, he says, for U.S. firms to seek to acquire U.K. and other defense firms around the world. Likewise, many large U.K. firms such as BAE Systems and QinetiQ may look for acquisitions in the United States. “We’re seeing a globalization of defense companies, and it has been very noticeable over the last 10 to 15 years. Companies that were intrinsically British or American now have a global footprint and own companies in many friendly countries,” he says.

U.K. defense companies range in size from major contractors that design and manufacture platforms and systems such as warships, tanks and aircraft to smaller and medium-size firms that provide much of the supporting subcontracting. Contributions by supporting companies include software, individual electronic components, and knowledge and expertise. Many of the smaller firms form the support chain that supplies prime contractors and government agencies. If defense spending decreases, the commander believes this constraint inevitably will cause an industry consolidation on both sides of the Atlantic, with the smaller and medium-size firms at the bottom half of the market being acquired.

Ongoing structural changes to the government’s acquisition process represent a final factor affecting the U.K. defense industry. An example of these efforts is Through Life Capability Management (TLCM), a major restructuring of MOD acquisition practices that has been in progress for several years. Early this April, the effort reached a key point in its development known as TLCM Phase 4. TLCM Phase 4 is part of an MOD change program designed to transform the way the ministry conducts business in eight areas. Three of these areas are: operating within a reduced budget, reducing logistics tails and their associated processes, and increasing the coherence between programs. The fourth goal is to take a through-life view of all projects, not just acquisition but its sustainment and eventual disposal, Cmdr. Searle says. This view emphasizes environmental concerns with the proper disposal of potentially toxic and hazardous materials found in military equipment.

 

To quickly get new equipment to its troops in the field, the Ministry of Defence has launched a series of high-impact, rapid implementation demonstrator (HIRID) programs. The BAE System’s high endurance rapid technology insertion (HERTI) unmanned aerial vehicle is one of several candidates for the persistent wide area surveillance HIRID program.

The fifth TLCM goal is to respond to the accelerated pace of technology, and the sixth is to share knowledge better across the battlespace and the defense enterprise. Goal number seven is to sustain, where appropriate, the United Kingdom’s industrial base. Cmdr. Searle notes that the United Kingdom does not have to support certain capabilities that can be performed by allied nations. Likewise, certain key capabilities must remain within the government’s grasp. He explains that the MOD has a concept of which capabilities should be sustained nationally.

Finally, the eighth aspect of TCLM is to comply with increased legislation. The commander notes that, as with the U.S. military, the U.K. armed forces were exempt from many laws and regulations in the past. But the military now must comply with international regulations such as European Union requirements and new national legislation.

Within TCLM, the government is seeking to improve three areas: capability planning, capability delivery, and research and development. For capability planning, the goal is to understand the gaps in the process and what must be done to rectify them. Another aspect is for government to take a broader view of capabilities to match the government’s needs more efficiently.

In capability delivery, the goal is not only for procurement organizations to take out tenders and contracts to defense firms for equipment or services, but also to provide some form of support chain within the contract to manage systems through to their eventual disposal. Another part of this through-life consideration extends to services such as training and doctrine. The commander explains that all of these various aspects are now being considered as part of a program’s through-life appraisal. He adds that while previous programs may have considered training and doctrine, it is now essential for all of these processes to be addressed to move a program forward. “Very often in the past, training has been an orphan. When you’re delivering a main battle tank, you don’t need to complicate your life by considering training. But now that’s changed and they [the contractors] really need to consider these things in their entirety,” he says.

Another major change has been the creation of the Unified Customer, which brings together five areas into a single entity. This includes the Equipment Capability Customer, the organization sponsoring Unified Customer; the Defence Equipment and Support organization, which is responsible for program procurement and support; the science and technology community to provide technology refreshment; frontline commands; and the segments of the MOD responsible for high-level planning and development. Cmdr. Searle explains that this organization combines the user community, the sponsors, and the science and technology community.

Until the recent change in the MOD’s procurement policy, front-line U.K. commands did not have any direct say over procurement spending. They now are responsible for the first five years of the procurement process. For example, the commands of the army or navy now have direct input into how the first five years of funds are spent. In years six to 10, responsibility shifts to the United Kingdom’s Defence Equipment and Support organization. Cmdr. Searle maintains that these are significant changes to national acquisition policy.

In 2008, the MOD’s Defence Procurement Agency and the Defence Logistics Agency were combined to form the Defence Equipment and Support organization. He notes that this merger represents a continuing refinement of the procurement process. The goal is to make acquiring new equipment more efficient and to reduce the amount of resources involved in military programs.

The U.K. government research arm is trying to change pace to keep up with both operational demand and the pace of technological change. This need has led to several changes, such as the creation of high-impact rapid implementation demonstrators (HIRIDs). The goal of this effort is to move from a concept to operational proof-of-concept testing within a three-year period. If the technology proves successful, the effort seeks to move the new equipment quickly into production. Cmdr. Searle notes that failure is an option for HIRID demonstrators.

There are two HIRID programs in 2009. The first is persistent wide area surveillance using a range of novel sensors in an unmanned aerial vehicle platform to monitor an area for a long period of time. The second demonstrator focuses on battery technology. This effort has reached out to industry and academia to develop longer lasting and lighter batteries to power soldiers’ equipment.

WEB RESOURCES
U.K. Ministry of Defence: www.mod.uk
Defence Equipment and Support: www.mod.uk/DefenceInternet/MicroSite/DES/