British Quickstep to World Markets

Industry contraction spotlights business adjustments.

By Clarence A. Robinson, Jr.

Twin pressures of extremely complex advanced technologies and far fewer major defense and aerospace programs are propelling the worldwide consolidation of industry. This evolution is characterized by moves away from nationally based, fragmented approaches and toward mergers, consortiums and joint ventures in an era of fewer major global prime contractors.

A case study in this crucible of market changes involves the merger of British Aerospace with Marconi Electronic Systems. The resulting BAE Systems, with a strong presence in nine world markets from its Farnborough, United Kingdom, company headquarters, emerges as one of the world’s two largest defense corporations. Soon, with anticipated acquisitions, it could become the world’s largest defense company. Top corporate officials view BAE Systems as principally a defense organization; approximately 80 percent of its business is in this sector. The remainder is in the commercial aircraft area.

But mergers are only part of the case study. The company also is entering into a number of joint ventures involving major military and civil aircraft and weapons programs such as the Airbus A300 commercial airliner series, Typhoon Eurofighter and Matra BAe Dynamics activity in guided weapons. Matra BAe Dynamics is being enhanced and expanded further through an agreement to blend the guided weapons businesses of France’s Aerospatiale Matra and Italy’s Alenia Marconi Systems.

The British Aerospace merger with Marconi Electronic Systems provides technical solutions for naval, air and land systems. Company management considers integrated systems to be the heart of most weapons development, procurement and modernization programs. Trends toward greater interoperability of armed forces and growing use of precision-guided weapons drive growth in electronic systems. Consequently, electronics content is rising in proportion to total program value. This is an area where the company expects to expand rapidly.

The complexity of electronic systems creates a need for greater fusion of data, resulting in large system-of-systems solutions, company officials stress. Technologies required for integrated airborne systems also complement those necessary for naval and land systems.

BAE Systems’ Simon Keith, managing director, Europe, describes the merger process in a SIGNAL interview during Eurosatory 2000 at Le Bourget Airport north of Paris.

Keith explains how the company closely observed other major corporate mergers before his company’s consolidation with Marconi Electronic Systems to gain insight into possible advantages and pitfalls. The time necessary to obtain regulatory and shareholder approval was a boon for BAE Systems, allowing detailed planning for well-placed immediate steps in combining the two businesses to exploit their synergies, he observes. As a result, the company emerged with a focus on the customer, agility and performance, which require some radical cultural changes.

One of the more painful reminders, he cites, is the reduction of senior management by 15 percent as a result of overlap in the new company. “These were some very difficult choices. A lot of good people have gone,” Keith recalls.

On the positive side, the geographic expansion of its business signals a dramatic shift in the company. It has evolved from being a largely United Kingdom-based domestic producer to one positioned in far-flung markets. Keith notes that BAE Systems employs 110,000 people, including 18,400 in North America. Pending additional U.S. acquisitions could raise that figure to more than 20,000 employees, he adds. The U.S. market is an important one, with more sales in 1998 from the now merged company to the U.S. Defense Department than to the U.K. Ministry of Defence. Annual U.S. sales in 1999 were more than $2.5 billion.

As this acquisition plan unfolds, the company could become the world’s largest defense and aerospace company, supplanting U.S.-based Lockheed Martin. Annual BAE Systems revenues are 13 billion pounds ($18 billion), with an order book for more than 35 billion pounds ($49 billion). “We are in fact just the second biggest company in the world in defense, just behind Lockheed Martin, and we are in discussions with them about purchasing another of their units,” Keith shares. He adds that Lockheed Martin is still sorting out its own merger and selling off elements that do not fit its core business. The possible acquisition of a Lockheed Sanders control systems unit would add another 1,200 employees.

“Effectively, ourselves and Lockheed Martin are about equal, and then there is Boeing’s defense [involving the McDonnell Douglas merger]. But Boeing is mostly a commercial aerospace company,” Keith relates. He continues that BAE Systems is “a big company with a large footprint in the United States.”

With 30,000 employees in continental Europe, the company sees itself as basically a European business, Keith reflects. He notes that it participates in numerous ventures that encompass Airbus, Eurofighter and Tornado aircraft programs. This view also includes BAE Systems’ 35 percent stake in Sweden’s SAAB, other joint ventures and collaborative programs throughout the continent. Keith also insists that initially the company will not compete with the emerging European Aeronautic Defense and Space, or EADS (see page XX [ French-main ] ). In many areas, where there is similar business—guided weapons, space, commercial and military aircraft—the two titans are partners.

Keith believes that there are essentially two major defense companies in Europe, EADS and BAE Systems. “EADS will begin shortly sorting out their own structure. They have a lot of work to do there, but they have the expertise. So, you will have a sort of Spanish, German, Italian and French consortium, which will evolve, I’m sure, into a very successful company,” he says. Civil aircraft design and production, however, is EADS’ major emphasis, with approximately 25 percent of its business in defense programs.

“An interesting fact is that about 70 percent of EADS business is in partnership with BAE Systems,” Keith assures. This arrangement includes both civil and military programs. “On the other hand, only 23 percent of BAE Systems’ business is in partnership with EADS.” He allows that in the current defense and aerospace climate, today’s partners could easily become tomorrow’s competitors for new programs.

Keith claims that his company has its own plate full as it strives to deliver promised cost savings to shareholders from the synergy in the Marconi Electronic Systems merger, which cost approximately 7 billion pounds ($9.8 billion). The promised savings of 275 million pounds ($385 million) each year for the first three years is on track, and additional savings are being identified, company officials assure. “We have a huge task, but we knew there was a lot of synergy that would result in savings we could provide.” By sitting back and studying Lockheed Martin, Boeing-McDonnell Douglas and Raytheon mergers, the company discovered a great deal. “We’re not gloating about it; they took big steps, went first and worked hard. We were lucky enough to see what they did and learn from it,” he stresses.

BAE Systems also brought in outside consultants to work on the new structure, and there was no fall in the stock price, as emphasis was maintained in core programs. The company’s new structure provides for two chief operating officers, both reporting to John Weston, chief executive officer. This concept reflects a fundamental philosophy of emphasis on major programs, with full visibility at the board level. These major programs are the primary sources of value to the company, Keith explains.

Under the new organization, the management focus is on every program of at least 1 billion pounds ($1.4 billion). Each program manager reports directly to Steve Mogford, one chief operating officer. He also handles the all-important customer support for the company.

Major BAE Systems programs include the 2 billion pound ($2.8 billion) Bowman voice and data system for the British Army with ITT and Racal; Eurofighter Typhoon aircraft, with eventual deliveries of 620 aircraft for four nations, beginning with 148 Typhoons in 2001; Gripen combat aircraft with 200 orders for the Swedish air force and additional export sales to South Africa; Hawk, a range of advanced jet trainer aircraft selected for use by 17 countries; Nimrod MRA4, a 2.2 billion pound ($3 billion) U.K. Royal Air Force replacement patrol aircraft; and Tornado GR4, a major upgrade to the Royal Air Force strike aircraft.

The company is also the prime contractor for three Astute-class nuclear powered submarines in a 3 billion pound ($4.2 billion) U.K. Royal Navy program. The first delivery is due in 2005. BAE Systems is also the prime contractor for the new Type 45 destroyer, a 3 billion pound ($4.2 billion) program for 12 ships scheduled to enter service between 2007 and 2014.

The other chief operating officer, Mike Turner, is responsible for the company’s business operations, including commercial aircraft activities, avionics and partnerships. Turner’s mandate also includes North American operations, international partnerships, avionics, integration, Airbus, aviation services and regional aircraft sectors.

“Over the top of all of the business sits our corporate marketing, and the great thing about this is that our chairman of the board, Sir Richard Evans, has a strong background in marketing. This is very important when 80 percent of our business is in the export market,” Keith confirms. “Our central marketing organization is now led by Sir Charles Masefield [group marketing director] who previously headed the government’s defense export services and prior to that was director of sales for Airbus. Marketing is across the whole rest of the company.”

Corporate marketing is organized to maintain close contact with each business unit, and there are 30 marketing representatives in key markets around the world. “We stay extremely close to the customer, whether in Tokyo, Australia, the Middle East or Europe. If we don’t stay close, somebody else will,” Keith emphasizes.

Keith continues that technology development is a very senior responsibility. The engineering director operates at the top management level. Technology guidance flows from the headquarters to the appropriate business units. “We have picked up a lot of R&D [research and development] establishments that were part of Marconi, and we are putting our BAE Systems R&D together with Marconi’s.”

With one of the largest research and development budgets of any private organization, the company has projects covering the spectrum of technologies, materials and synthetic environments such as virtual reality and three-dimensional modeling. These environments constantly extend the frontiers of performance. The high software content in the company’s complex systems makes software development a key activity that involves more than 10,000 systems software engineers.

The reorganization after the merger has not been easy or painless, Keith suggests. As a result of the restructuring, the company had to expand its order book while concentrating on core programs. It anticipates business growth through three strategies: increase orders in core defense and aerospace areas, expand in the civil aircraft sector, and establish a customer and solutions organization. “We see enormous growth that comes from putting customer support right at the top of the agenda on everybody’s plate—taking it out of small departments within business units and giving it a company structure and organization,” Keith adds.

As a group managing director, Robin Southwell will head up customer support operations. “He has set himself a task of growing the business three times its present size in three years,” Kevin maintains. Spending for military contracting in support services, turnkey operations, training, maintenance, spares and support is growing rapidly as reductions in force structure come into play.

Keith points out that a major trend is the expansion of command, control and communications (C3) programs. He considers it a high-risk but strong growth defense area. “If we get it right, there is a high profit margin as well. So we will synergize American technology with European technology to offer very much improved C3 systems.” He maintains that the company’s involvement in the TRACER/FSCS [tactical reconnaissance armored combat equipment requirement/future scout cavalry system] is a classic example. “The C3 system in the scout car will be one that an average soldier can work very simply. But on the other hand, it must also be integral to the whole complex battlefield information system. There are more lines of code in the TRACER setup than in the Nimrod aircraft.”

In February 1999, a 91.25 million pound ($128 million) contract was awarded to BAE Systems by the Ministry of Defence for the project definition/advanced technology demonstration phase of TRACER. The objective is to define an affordable integrated system with low risk and move toward full-scale engineering and manufacturing development. This new system is needed to give the British and U.S. armies a leading capability in manned armed reconnaissance through state-of-the-art sensor suites, a high degree of stealth, reliability and survivability, Keith concludes.