Saturday, February 21, 2004
The Travails of British Aerospace

British Aerospace, as the strongest and last contender, for Britain to maintain a defence company at the highest level, is now facing strategic uncertainty and financial pressure. Whilst these constraints are taken into account, the future of BAe is entwined with the decisions of its paymasters, the British government, and their own view of Britain's future defence needs.

Since the beginning of this year, BAe has faced an unpromising report from the National Audit Office, blaming the company for cost overruns on defence programmes. A huge contract of ?13bn for air refuelling facilities was passed to EADS, the Franco-German group as a consequence.

The current model adopted by the government is for a quarter of all British procurement contracts to be sourced with BAe in order to maintain the company's existence. The remainder of the contracts would be put to tender, with foreign companies allowed to compete on a level basis.

This type of procurement policy has a number of drawbacks. Whilst BAe, in which the government has a 'golden share' may be protected, the underlying second and third tier of firms on which defence contracts and research depends, may find themselves underbid by companies protected in their home markets. The consequences would be the long-term decline of defence infrastructure in the United Kingdom and a greater dependence upon their competitors, the majority of whom are probably sourced in the European Union.

The current direction of this administration is to increase cooperation with other member states of the European Union in terms of defence procurement, operations and infrastructure, without undermining the existing ties institutionalised within the NATO umbrella. However, the future of BAe is decided just as much in No. 10 as it is in the boardroom. That political dimension may have proved unpalatable to Boeing after their own publicised troubles in 2003 or the British government no longer saw any advantages in tying BAe so closely to the defence contractors of the United States.

BAe's limbo mirrors the current European policy of this government. Most of its profits and research is now located in the United States but it also cooperates with other defence contractors in Europe. Whilst there are advantages to these entanglements, the danger is that this administration may sacrifice BAe to burnish its European credentials, engineering its merger into EADS and spinning off the North American unit to Boeing, Lockheed Martin or other US defence corporation. Then, the maintenance of British independence will prove far more difficult to attain, involving the disentanglement of our defence from a continental corporation.

(22.28, 21st February 2004)


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