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DSEI 2021: UK defence industry policy risks strategic incoherence (Opinion)

8th September 2021 - 17:00 GMT | by The Clarence in London

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UK-based F-35 component manufacturer Meggitt is set to be bought by Parker-Hannifin. (Photo: Meggitt)

The UK has a globally regarded network of defence and security companies — but industrial sovereignty is being eroded by a steady stream of bids from overseas.

Key parts of the UK defence industry appear to be up for sale to speculative US investors that are keen to swoop, secure a bargain and reap the rewards. 

At the same time, UK steel company Sheffield Forgemasters has been effectively nationalised to protect critical parts of the UK defence supply chain.

These two events highlight what is best be described as growing strategic incoherency in the UK approach to protecting its sovereign defence industrial capabilities. There are potentially significant ramifications for these actions, yet no clear sense that the UK government has a plan on how to address this.

The UK has a globally regarded network of defence and security companies that form one of the largest domestic defence industries in the world. It is often forgotten that the UK is home to the second-largest aerospace sector by value globally, and is considered the world’s second-largest defence exporter by value, with some £11 billion ($15.2 billion) of orders secured in 2019.

The companies making up this sector often work with advanced technology, developing leading-edge products that are used by the MoD. Given the strong global reputation, the label ‘used by the UK’ is a strong draw for many customers keen to see similar products or capabilities in use in their own countries.

For investment firms, the UK offers rich pickings in terms of niche companies with a strong presence in their sector, highly advanced products, and a government attitude to foreign investment and acquisition that is supportive and unlikely to pose difficulties.

When coupled with wider considerations — such as the ability of UK companies to easily sell into NATO and other nations and not be subject to sanctions regimes, or the ease with which many UK companies can and do sell into the lucrative US market — investors can spot significant opportunities.

Assurances have been made but there are fears that if firms are sold to US investors, they will be broken up and much of the technology and intellectual property lost forever.The Clarence

This has led to a rise in UK companies being acquired and dismembered into smaller parts to turn a fast profit. In January 2020, for instance, military aviation support and electronics specialist Cobham was acquired by US investment firm Advent.

Despite assurances made to the future of Cobham and its UK workforce of more than 10,000 people, by October work was underway to offload various parts of the company, including a 13% stake in the AirTanker consortium which provides air-to-air refuelling and airlift for the RAF.

A significant player in the UK defence industry was therefore in the process of being broken down to raise funds, in a move that is unlikely to benefit UK defence.

Similar concerns have been raised about the proposed acquisitions of sonar and sensor specialist Ultra, which plays a key part in RN anti-submarine warfare operations; and Meggitt, a supplier for the F35 aircraft.

Assurances have been made but there are fears that if these firms are sold to US investors, they will be broken up and much of the technology and intellectual property lost forever.      

The UK faces a major challenge to strike a balance between supporting a free-market approach, something that governments have historically supported, and maintaining a sovereign defence supply chain and capability.

One reason why the UK has traditionally enjoyed influence and access on international defence projects is the strength and capability of its own defence industry. For many partners, working with the UK enables access to domestic industries and the ability to draw on UK-derived R&D to put world-leading products into service.

Cobham once held a stake in the AirTanker consortium. (Photo: AirTanker)

From an international relations perspective, the UK derives influence from the quality of its defence industry. Being able to put together pitches for defence exports, drawing on advanced equipment that is used by the British military, and offering a package of sales, export credit and wider support and co-operation on training and exercises makes for a potent and successful, combination.

If firms are sold, or their capability ends up being moved overseas, it is harder to market it in the same way. Likewise, the risk for the UK government itself is it will lose access to capabilities that it has relied on for many years suddenly being sold to new owners outside their control.

The risk in the medium term is that when this sale of defence companies is completed, there will be a tangible loss of control over many formerly UK companies and their assets. To prevent this from happening, the UK government needs to think carefully about its strategy on ownership and the guarantees it would want to seek in the event of future sales.

At its heart, this is a complex policy debate — on the one hand, the UK has long embraced the free market, with companies buying, selling and disposing of other companies. One of the reasons that the UK is home to several of the world’s most prominent defence and aerospace companies is in part due to a long series of mergers, acquisitions and growth over many years – BAE Systems being a classic example of this.

These companies have a diverse footprint globally – for example, Cobham, at the time of its acquisition by Advent, derived roughly half its revenue from operations in the US and less than 20% of its workforce was actually based in the UK. Were the UK government to take too protective a stance on these sales, then it could reduce the prospects for UK companies to carry out similar acquisitions in future, and damage wider relationships.

Equally the government needs to determine to what extent it wishes to retain sovereign capability, and what it is happy to rely on the market to provide. The extent to which it can rely on the free market has been made clear by the decision to intervene and nationalise Sheffield Forgemasters.

The MoD will spend some £2 million to acquire the company and invest a further £400 million over the next few years to ensure it retains the ability to produce the steel necessary for the construction of nuclear submarines. Fears that the collapse of the company could lead to a reliance on foreign manufacturers led to this, suggesting that the UK would, if required, take a more proactive step to safeguard its interests.

Whether this desire to protect interests extends to electronics and other areas of the defence industry or not remains to be tested. The challenge is that without these companies in UK ownership, the longer-term ability to retain a sovereign capability in some critical areas may be under threat.

This may be keenly felt, as the UK looks to develop new generations of advanced equipment such as the Tempest programme, which will form the next generation of UK military aircraft and requires a significant amount of development in the next few years. A loss of UK-owned companies capable of supporting RAF requirements will increase dependency on foreign nations, and reduce the amount of sovereign control that the UK has over the design as a whole.

The UK government needs to think carefully about its strategy on ownership and the guarantees it would want to seek in the event of future sales.The Clarence

For potential partners in Tempest, the possible benefits of participation with the UK may be reduced, if collaborating does not bring with it access to UK technology. The loss of major partners would be problematic, increasing the cost to the UK, and potentially making the programme unaffordable, with ensuing damage to the UK aerospace sector.

Similarly, the UK may find it harder to gain access to advanced collaboration projects, particularly with the US, if there is a perception that the UK no longer owns companies that produce desirable advanced technology. The medium-term impact could be to see a significant decline in both UK influence, access and manufacturing capability.

There is too a wider concern that the more companies are sold and the pool of UK companies narrows, the harder it will be for MoD to find UK suppliers, reducing competition and having a negative impact on costs. The impact of this could be felt in both the defence budget and taxpayer pockets.

These challenges leave the UK government facing an unpalatable series of policy choices about the extent to which it wishes to intervene or support a UK defence industry. New rules from January 2022 will increase government powers to step in when takeovers raise national security concerns, although it remains unclear about the extent to which they are likely to be used.

It remains to be seen whether the decision to nationalise Forgemasters is a one-off or heralds the start of a strategic approach by the government to protecting security-critical industries. One defining characteristic of the Johnson government is a willingness to overturn long-held political dogma, often at very short notice.

Conservative MPs are left wanting to protect the UK defence industry while also championing the benefits of free-market competition – a mutually incompatible position to put it mildly.

There is, though, a clear sense of strategic incoherency in the current approach, which seems to be reliant on the nationalisation of some companies while leaving others to be sold out of national control. The result is likely to be a potential mess that could have long-term implications for the UK defence industry as a whole.

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