Last updated: September 30, 2012 8:42 pm

UK suppliers keep anxious watch on talks

BAE and EADS logo PICN

Even allowing for the feverish excitement generated by the plan to link EADS and BAE Systems to create the world’s biggest aerospace and defence business, Richard Gilbert is following the manoeuvring with more than usual interest.

The managing director of BL Gilbert, a supplier of machine tools and related hardware, Mr Gilbert counts BAE as one of his biggest customers.

BAE and EADS map

BAE and EADS map

His 50-year-old company is based in Barrow-in-Furness, just a few streets away from the UK defence company’s massive complex of submarine building plants that employ about 5,000 people.

“How this deal works out could have a massive impact on us,” says Mr Gilbert. “It’s extremely important that BAE remains a strong company, in whatever form it ends up.”

Mr Gilbert’s comments underline how the proposed union of the two businesses reverberates far beyond the small number of top executives and advisers involved in planning it.

A new EADS-BAE group, assuming it kept the two companies’ UK workforces, would employ 52,000 people in Britain. That compares with combined BAE-EADS workforces of roughly 50,000 in both France and Germany, and 40,000 in the US.

The combined group would comfortably be Britain’s biggest manufacturing employer, its workforce 9,000 bigger than that of India’s Tata Group, which employs 43,000 in the UK.

BAE’s UK operations are mostly involved in manufacturing and servicing military aircraft and naval vessels.

Its biggest centres include plants around Preston in Lancashire (where Typhoon fighters are designed, assembled and maintained), Portsmouth and Glasgow (the main centres for surface ships) as well as Barrow for submarines.

In Britain, EADS concentrates on making wings and other parts for Airbus passenger jets, with its main sites at Broughton in north Wales and Bristol.

In addition, the EADS/BAE footprint in the UK includes 3,700 people employed by MBDA, a maker of guided missiles. Its two main shareholders are EADS and BAE, both with a stake of 37.5 per cent.

There is little overlap between the UK activities of both companies, reducing the theoretical potential for the businesses to make large cuts in their UK-based operations, at least in the early days of any new group.

The combined value of the sales of products and services originating from the two companies’ UK sites last year came to more than £12.5bn, while spending by the two businesses on UK-based suppliers totalled £8.7bn.

BAE has 7,500 UK-based suppliers and EADS 3,300, with some overlap between the two.

EADS’s UK workers and their suppliers appear to be in a more secure position than their BAE counterparts, as a result of the two businesses’ vastly different order books.

While EADS has benefited from a surge in demand from airlines for its Airbus jets, and has global orders worth £430bn, BAE has been hit by the worldwide retrenchment in military spending and has a backlog for new work totalling a relatively paltry £36bn.

Philip Lawrence, an independent aerospace consultant, points out that as a result of this disparity many BAE suppliers in the UK can see the benefits of the companies teaming up.

This is on the grounds that the suppliers would then be in a better position to bid for work organised by a larger and more diverse group.

Graham Payne, managing director of Darchem – a US-owned aerospace engineering group based on Teesside that makes parts for BAE and EADS – says the proposed union “makes a lot of sense. What would emerge is a more competitive company which would give the UK a stronger position in the whole of the aerospace industry”.

Ged Mason, chief executive of Morson, a Manchester design services company that supplies both companies, says the tie-up would be positive because it would “increase the profile” of the UK in the civil aerospace industry, an area in which the UK’s role has fallen back since BAE’s 2006 decision to sell its 20 per cent stake in Airbus.

However, backing for the merger is by no means universal. Chris White, MP for Warwick and Leamington and joint chairman of the associate Parliamentary manufacturing group that represents MPs interested in the sector, says he is “extremely cautious” about its merits.

Tony Burke, assistant general secretary at Unite – the main union representing BAE’s UK workers – says he is not convinced that a deal would turn BAE into a stronger force. “I have a lot of concerns about potential job losses and want to speak to both sides [BAE and EADS] about providing some element of employment guarantees to their British workforces.”

In the UK, the BAE employees particularly exposed to potential job losses – for reasons that have nothing to do with a merger – are on the naval surface ships side of the business.

Here, work on two giant aircraft carriers costing a combined £5.2bn – plus a series of high-tech Type 45 destroyers – is resulting in BAE’s UK shipyards working at close to full capacity.

However, work on these programmes will tail off substantially in the next few years, with new programmes still some way from being agreed.

As a result the UK company will almost certainly need to cut heavily at its main shipyards in Portsmouth and Glasgow fairly soon.

But even here, says Prof Trevor Taylor, of the Royal United Services Institute, a defence think-tank, there is a chance that the shipbuilding activity of BAE could benefit from the “stronger global position” of a new BAE-EADS group, perhaps through bidding for work in continental Europe on naval vessels.

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