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October 11, 2012 7:00 pm
Like a jilted lover, BAE Systems now has to look ahead to life on its own. Among those most keenly affected by the repercussions of the failure of the EADS deal are BAE’s 35,000 UK employees – many of whom face an uncertain future.
The main reason for this is the planned rundown in big UK defence programmes, together with a more difficult environment for export orders as military spending worldwide comes under pressure.
Many of those in the UK who backed a BAE-EADS marriage did so because they believed an expanded business – with a stronger position in civil aerospace – would have put the British company in a better position to maintain its home workforce at something approaching the current level.
Included in this camp is Tim Maddison, managing director of T&R Precision Engineering, a Lancashire-based components maker that counts BAE and EADS among its customers.
“If the deal had taken place, it would have strengthened BAE and EADS. [In the aerospace and defence industry] the bigger you are, the safer you are [in terms of guaranteeing future work],” Mr Maddison says.
The stronger global position of a combined BAE-EADS could have provided better protection for BAE’s large concentration of plants and development centres in the UK. Britain is responsible for 42 per cent of BAE’s global employment but last year accounted for just a fifth of its £19.1bn sales.
The company’s UK activities range from the manufacture of Typhoon fighter jets – where the main factories are in Warton and Samlesbury, both near Preston, Lancashire – to turning out software for breaking military codes.
Prof Steven McGuire, director of the Centre for International Business and Public Policy at Aberystwyth University, says that – given the cuts in global military projects – the size of the company’s order book “does not justify” having 35,000 workers in the UK.
But he feels the negative fallout for BAE’s UK plants from the failure of the deal will be limited – and will probably not be that much worse than what the company might have expected as a result of the planned rundown of defence programmes.
Rakesh Sharma, chief executive of Ultra Electronics, a maker of electronics systems that supplies BAE and EADS, says: “Has BAE become a weaker business as a result of this [failure]? I think probably the answer is no.”
BAE acknowledges that – at least on the warship side of its UK production activities – it will soon have to cut UK operations as a result of a tailing-off in large military programmes.
The most important among these are the £5.2bn project to build two giant aircraft carriers for the Royal Navy, together with another scheme to manufacture six Type-45 destroyers at a cost of £6bn.
While BAE refuses the discuss the size of possible jobs cuts, employment at two big BAE centres – Portsmouth and Glasgow – will almost certainly be heavily trimmed over the next few years,
The workforce in Warton and Samlesbury may also fall due to a reduction in orders for conventional fighter aircraft, even though BAE hopes the size of the cuts will be mitigated by demand for a new generation of unmanned drone aircraft that are now under development.
Among BAE’s big UK production centres, probably the most secure is the giant base in Barrow-in-Furness, Cumbria, where the workforce has risen from 3,000 a decade and a half ago to 5,400 on the back of an ambitious programme in building military submarines.
Another argument related to the company’s UK workforce is that about a quarter of them are employed not in manufacturing but in related service operations.
These include, for instance, maintenance and repair of military equipment, from ships to aircraft. Under such schemes, BAE collects payments under long-term contracts , for instance with the UK Ministry of Defence. Nearly 45 per cent of BAE’s global sales in the first half of 2012 came from services.
A Typhoon fighter jet of the sort built by BAE can cost £80m to buy but then require up to three times that amount of spending to keep it in good shape during a 20- to 30-year life.
BAE has stressed that it sees long-term maintenance contracts as a big source of orders and also a way of keeping high-skilled – and relatively well-paid – employees.
Andy Neely, a professor at Cambridge University who is an expert on manufacturing/services companies, says: “BAE takes the service side to what it does extremely seriously and has become highly proficient at it.”
BAE’s supporters argue that this strong focus on services – where the need to provide these tends to stay constant even if the manufacture of new equipment dips – is one reason why any cuts in its UK workforce in the next few years may be fewer than some fear.
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