Welcome to the second panel in today’s industrial policy inquiry where we are looking at growth-enhancing sectors. I am delighted that our witnesses have been able to join us to give a view on the defence industrial strategy. This session is important to the Committee because it will help us draw up our submission to the defence industrial policy, which was launched earlier in the year. Thank you so much to our witnesses for joining us. Mr Howie, I am going to start with you, if I may. What do you think the conflict in Ukraine teaches us about the defence industrial strategy that this country now needs?

I think the key thing we learn from it is that, first, it is a battle that nobody thought we would fight. I think we all thought we had finished seeing warfare in mainland Europe. I think it has changed people’s perceptions about the scale of war, the sheer volume of equipment that is being used. There are two things that are derived from it. One is about the need for capacity in the industry to support that volume of demand and the second thing, the phrase I would use, is freedom of action. The UK needs the ability to deploy equipment knowing that it has access to a supply chain that is not hindered by foreign Governments or being third in the supply chain with two other customers.

Okay. What is the Airbus perspective, Oriel?

The key learnings for us for Ukraine is what it means for European defence and also for European defence co-operation. Those are the key things. The other key issue is the pace of innovation that is clearly required to respond to what is going on.

Chris Daniels, you are from a smaller organisation. The kind of technology that you make has been widely deployed in Ukraine. What have the learnings been that you have taken?

I echo the innovation point but I would drill down into that a bit further: whatever technology is created, the counter-technology is created very quickly. It is a constant race between technology and counter-technology, and that race is happening every few weeks, and at most every three months. For an industrial strategy what that means is we should not be thinking of procuring equipment or stuff as a thing. We should be procuring a capability that can constantly iterate and change, and move forward at a rapid pace and at scale. Those are the key learnings that we are picking up. If we delivered our capability into Ukraine two years ago, it would have been defunct 18 months ago, so you constantly must upgrade what you are doing all the time. It is a key part of strategy to think that way.

How does British Aerospace look at this? Adam Forgiel-Jenkins: Again, similar to John. I think a resilient industrial base has absolutely demonstrated why we need capacity in our system and obviously a lot of focus on stockpiles, rightly so, but it is about plus one, day one, on the stockpile. How quickly can we replenish—having that ability to replenish at pace? Again, similar to my SME colleague, I think what we have seen is the ability of the Department to respond very quickly. I think we have learned that in a time of crisis defence can respond, and can do it swiftly, and industry can respond. I think it is now how we take those learnings into the industrial strategy going forward, into acquisitional reform going forward, and build on what I think industry has done and responded to over the last three years.

Can we win the conflicts that we imagine in the future without a defence industrial strategy that is stronger than it is today?

Again, it is important to have innovation in our system, and again that ability to respond in a matter of days. We were just talking about the unmanned part of the conflict. It is that ability to take learnings, bring them back home quickly, evolve and go again. You have heard Ministers talk about this always on mentality. This ability to react and respond will put us in the best position to react to future conflict.

Can you win a conflict in the future without a good defence industrial strategy?

I would argue no.

Okay. What kind of capabilities do you think we now must think about onshoring? The defence industrial strategy talks about a couple. It talks about sovereign capabilities, it talks about digital, it talks about cyber. It does not say much about chips; it does not say much about a few other things. What have we learned about the capabilities that we now need onshore?

Again, I think it is about having a range. Naturally at BAE Systems we are lucky enough to be at the front end of building things such as submarine ships and combat air capability. It is about having a balanced capability across the UK that supports everything from the large platform down to the small UAS, and about the ability to respond to EW. As you have rightly pointed out within that there are going to be a range of things. You could argue that battery technology, for example—that ability to source and build batteries—could become a critical enabler in a future conflict. Again, we cannot do it all, so there must be a conversation with Government and industry partners to identify where it is we want to have that resilience and hold that sovereignty.

Mr Howie, where are the capabilities that we currently do not have that you think we are going to need to build in the future?

That is in a sense a crystal ball question. In some sense it depends on the nature of the conflict we would be fighting. I know that one of the things the strategic defence review has been doing is trying to think about those various types of conflicts. What if it is a naval incursion from the high north, or if it is a land battle? I guess the threads, again going back to the learning from Ukraine, there is an argument that we need to improve our ability to be self-sufficient around munitions. A lot of our munitions capability we buy from suppliers who have multiple government customers. Are we always first in the queue? As Adam said we have always kept things such as nuclear submarine production onshore. We have not done quite the same with ships. More complex warships, yes, but auxiliaries we have allowed to be internationally procured. I think there is a debate about whether that is the right strategy going forward. I think it would be foolhardy not to be self-sufficient around autonomous systems, not just from the point of view of their use in battle but as a critical technology that the UK should try to be in the forefront of. Picking up on Adam’s point, there is a range of what I might call enabling technologies, be it chip manufacture, battery systems, propulsion, that it is quite hard to be self-sufficient in some of the other capabilities without them.

In your supply chains do you source chips from Taiwan, for example?

We do not source chips directly, partly because a lot of our business is sustainment rather than direct production, but we do deal with suppliers who predominantly buy chips from Taiwan. One of the things we now know is that Taiwan as part of its assurance mechanism keeps the very high-end technology onshore. They do not invest that in the plants they build overseas and you can understand why they do that but it does mean that we have critical reliance on some of these nations. I guess from a supply chain point of view we all looked at what happened when that Evergreen ship got stuck in the Suez Canal and how quickly just in time supply chains started to falter. I know that the Department and the Ministry of Defence have looked very closely at how you reconfigure the supply chain at pace when your normal run of the mill supplies just do not work out because of a pandemic or an incident like that.

When you look across your supply chains do you see dependencies that make you think, “I am not sure we are going to be able to sustain that in the future, I am not sure it is wise to be dependent on that particular supplier in that particular place”?

There is no doubt the SME community suffered quite dramatically during the pandemic, trying to keep their businesses going. We had to bail out a number of small companies who just would not have survived and could not have honoured the contract terms they had signed up to because of that. You must deal with those things. The other thing we must look at is those critical defence technologies that we need. We must make sure that there is not just resilience in the suppliers that supply them but in the supply chains that sit behind them. In some of those cases we do not buy enough volume in the UK to make that supply chain robust. Nuclear submarines would be a good example. The nuclear submarine supply chain has always had fragility in it because we are not building 60 submarines like the US. I know the Department are painfully aware of that and there has been a lot of work done to ensure that they have mapped where those supply chain dependencies sit, but it is an ongoing debate.

Oriel Petry, what is your view from where you sit?

I think there is considerable capability here in the UK and for us the opportunity for the industrial strategy is for us to build on that considerable capability. I am thinking particularly in our case about military satellite communications, which are heavily relied on by NATO allies including the US, I hasten to add. That is at geostationary level but we also have considerable capabilities at low earth orbit level. We have just won a contract with the Ministry of Defence for new satellites at LEO level for reconnaissance and intelligence. These are sectors, as my colleagues here have said, that need to be sustained and for them to be sustained and for that industrial capability to thrive in the UK, air-to-air refuelling is another example, you do need to have a Government that is supporting you to export it across the globe. As John has said it is important that your market is not limited to the procurement of your national Government. The industrial strategy is a great opportunity for us to work together to identify the areas where we have real capability, cyber is another one, and to make sure that it is fostered for the long term, built on and developed. The supply chain does have certain vulnerabilities linked for the same reasons. The supply chain has the same challenges, constrained also by the lack of it being a market that is sometimes beyond national. It has some specific challenges for us in our case and I think it is probably the same, by the way, across our civil side. There is a huge amount of similarity across the two, particularly around funding, digitalisation skills and innovation.

That is really helpful. Let me just flick back to the question at the top, which was you talked about capabilities that we have onshore that we need to strengthen and that is absolutely one way to answer the question, but the question is what are the capabilities that we are going to need to onshore that we do not necessarily have, for example, in your supply chains? When you are looking across your supply chains today what are you thinking is going to need to come onshore in the future?

I think we would see it as a mixture. I do not think the solution can just be that you are onshoring.

No, but I am interested in what you think should be onshored.

Yes. As colleagues have said the strategic defence review will I think set out clearly what the capabilities are.

I hope so but what is your view?

Exactly. Let me give you one example, which is an example around composites. The next generation of wings for our aircraft, which again are dual use, both for civil and for military, rely heavily on composites. That is particularly because of the lightweighting. One of the things that we are extremely concerned about, and we are talking to the Government about, is the lack of a supply chain in the UK for that composite work. That is a very practical example that is going to hit us relatively quickly and without of course the depth of the supply chain in the UK that makes a prime such as us also vulnerable.

I have three points. We have had this question answered recently with covid, so as an example as a small company—at that stage we were maybe 10 people, we are now 35—we could not get enough chips and semiconductors, and particularly Raspberry Pis, which are these little hobbyist computers that we use as our brains in our drones. We could not get hold of enough of them and even Raspberry Pis we could get hold of, but they were rationed, so we got everyone’s parents and friends to order a Raspberry Pi. That suggests that those chips and semiconductors and computer devices need to be onshored. What we have seen from Ukraine is as much as it has been a conflict of lots of things it has been a conflict of resource and the ability to get stuff into Ukraine has been problematic, whether it is artillery shells, drones, or chips. We need to think through how we do that. In any conflict history would suggest that our allies are not necessarily the same allies that we think we have a couple of years before the conflict who end up because diplomacy as in the game happens. The other point that is not really brought up much is second and third order effects. In world war two when we ran out of metal, everyone turned up with their garden tools into buckets and it all was melted down and we carried on. I wonder if in the same scenario we all turn up with old mobile phones, of which there are lots, and things with chips in, and we recycle them. I think a really interesting piece of work is how much residual useful stuff is available that if there is a proper crisis we would be able to get hold of. Some clever person probably can do that calculation at some point. The third point in our business, which is drones, which is going to be a crucial bit of any future conflict, is that we have not experimented with drones at scale. The MOD have procured a tiny number of drones in its history—probably in the hundreds, definitely not in the thousands—and we do not yet know what happens if we start trying to procure drones in the tens of thousands or hundreds of thousands, and we have not tested and stress-tested those supply chains. What is the thing that is missing? I do not know and I do not think anybody knows.

From chips to composite materials, that is quite a broad range of capabilities. Thank you very much for setting the stage with that.

The Prime Minister has given us our increase from 2.5% from 2027 to the end of the Parliament. Of that, £286 million is spent on equipment and supply, which are lumped together as industry in the whole, and that is mapped out from 2023 to 2033. A quite simple question would be: is that enough? What does that profile say? Does that allow you to do what you are asked to deliver, because the profile is already set out, and is there enough space there for you to innovate? Adam.

Obviously again we await anxiously the outcome of the SDR to see where the Government would like us to support them and invest. We welcome the increase in defence spending. It is a positive sign of intent to the UK’s national security but also the narrative around the role that industry is going to play in national security is certainly one that we welcome and support. The criticality for our industry as you say is long-term line of sight, so anything that gives us confidence into the future will allow us to invest in people, plant, machinery and capability. Obviously we need to wait and see what we are being asked to do and what we are being asked to support, but again it is a sign of confidence.

I am quite optimistic. It goes back to the Chair’s point about what lessons we have learned from Ukraine. One of the lessons I should have mentioned is we have learned that no one was willing to deploy what we might call the exquisite assets, the stuff that is too expensive for anyone to contemplate losing, so it has driven a growth in more affordable, attritable-type technologies. I look at things such as our Type 31 frigate, £250 million each versus FREMM in France probably more than twice that price. I think we will see more money being spent on affordable technologies that we are willing to put in harm’s way and that probably means we will get more value from the budget. The other thing and again I would say this as a sustainment partner to the three armed forces, there is a lot we can do to get better availability from the legacy equipment that is already in service. Getting that fighting force to the front is a combination of the new equipment we deploy for new threats and making use of the equipment we already have.

I am trying to steer, and perhaps connect you on to the Chair’s area: there are some obvious implications with that profile on our ability to ramp up and make things sovereign. We have already laid out 10 years so perhaps from your perspective, Chris, a smaller business and industry and the ability to scale up sovereign.

I do not see a number, a percentage number of GDP, as being the important factor. People love to focus on numbers and targets.

Especially here.

Absolutely. Do we have the capability and the capability is not do we have the capability now, it is do we have that capability pointed out to scale up rapidly in the future? That is an element of insurance policies. If you think about the Nightingale Hospitals in covid, there is a SWAT team of people in the NHS who could create Nightingale Hospitals in a month, or whatever the time was, and I wonder what is the SWAT team in defence that could scale up? At the moment our business could maybe produce 10 drones a month but I know we could produce 1,000 or 10,000 if we needed to but nobody is stress-testing us to do that or giving us the money to experiment and do that as a practice. I think that is the really important part of the capability.

On the demand signal, are you receiving one? A demand signal has to be more than just a narrative for the big primes. There might be enough comfort in there to invest, for smaller companies, yes or no?

No. We are subject to the annualization of budgets in the MOD, so last year we received about £4 million from the MOD in revenue to produce things. Next year we do not know and next year starts in a few weeks’ time. I do not know whether it is zero, £8 million, £10 million or £1 million. From an investor perspective that is a nightmare because they want to see revenues and from our perspective it is impossible to plan for the business. We therefore always plan conservatively, do not hire enough people, because we are always on that edge of what happens if the MOD suddenly decide we are not going to get anything. The annualization of budget, which is a lack of strategy, is a real problem for SMEs. We have done very well out of the MOD despite the MOD, not because of it.

I will give you the opportunity to respond, Oriel, going small to big, but from the Airbus perspective there is a clear message that there is not adequate fidelity for the smaller firms about what the profile means and the money, and there is almost no dissent about £286 billion not being enough, but you were all quite clear earlier that there were things that you needed from broader Government where money needs to be spent in other Departments. The reason why I wanted to come back to Oriel is that in particular you spoke about digitalisation skills. For business and trade, skills and exports are fundamental, but we also need digital skills within the economy and STEM, in particular welding, which is in my industrial strategy submission and MHCLG. The question to you all then is where does money need to be spent elsewhere in government to be able to get after delivering the outcomes that you need? Oriel first.

Maybe the answer is not where should it be spent elsewhere in government but to look at where the commonalities lie. Clearly there is an exceptionalism about defence. Nobody is arguing with that, but when it comes to industrial growth and industrial capability, there are a lot of overlaps between the two. I am thinking in particular in civil aerospace we have had a very effective industrial strategy over the last 14 years. Successive Governments have worked with industry. As part of that we set up the Aerospace Technology Institute, £4 billion of joint funding on the industry and government side, for instance, financed a very strong wall in Bristol that can test not only for civil but also can test for defence. Does defence ever test there? It does not, as an example. To go back to your earlier question, I think one of the things about spend and spending it efficiently is how industry and government work together on innovation openly. The challenge that we have because defence is bought by the Government is sometimes that cocreation gets a bit complicated in a way that it is easier on civil because the market is the market. I think there are lessons to be learned there as well. Particularly when we come to things such as technology, so if we look at the work that we are doing with start-ups in our Stevenage site that does all the satellites, it is around things such as quantum, propulsion, in orbit manufacturing that again spans not just defence but goes beyond it. I think you are quite right to identify these different digitalisations and innovation but I think there is much to be gained for us to not just think of defence separate from other areas of advanced manufacturing but integrated. If you look at our supply chain, and I do not know whether this is true for my colleagues, more than 50% of our supply chain is both defence and civil. I think we do ourselves a disservice hiving off defence too much. Of course there are things that you need to make perfect for defence but there is a greater commonality that I do not think we are collectively leveraging as much as we might.

I concur. Social value.

Just very briefly, Mr Bailey.

Sure. Social value within the tendering process is very important, how and where that money is spent. Do you have any examples of where companies have applied that? John and maybe Adam.

As an example, I was part of a Type 31 frigate programme, and part of your social value piece was encouraging people back into the workplace. We ran a programme to hire people called production support operatives that specifically targets people that are not in education, employment or training and we have so far brought in probably 200 people through that route, people who wanted a second career, parents of young children who needed to get back in the workplace. That has been transformative for the local community so we will now run that at a national level.

Again, just to pick up on the partnership point, Team Barrow is a great example of where the whole of government can come together to support what is a national endeavour, so with the Submarine Enterprise, which outputs at Barrow, albeit with a UK-wide supply chain, we have seen successfully how multiple Government Departments can come together to ensure that the town of Barrow can support submarine delivery for decades to come. We have had the Department for Education on skills, Transport on access and the health system to ensure that there is a hospital there. As the town grows, and the population grows, that is going to require a whole of Government response. To echo Oriel’s point we cannot see defence in isolation. It must be a whole of Government effort.

Before I start, I would just like to refer you to my entry in the register of interests and my directorship of Strategic Risk Control, which is a holding company for a company that operates in the operational technology cybersecurity space and the international defence markets. Moving on from that, starting with both Babcock and BAE, what barriers do you currently face in your ability to grow?

I suppose the most important thing around growth is certainty—understanding what we are growing into—and naturally we want that growth to be sustainable. We have just talked about capacity and off the back of Ukraine there is a lot of demand at the moment. We are making investment: for example, we are growing our facilities in South Wales around munitions. We want that to be sustainable. On demand, for us, we are oversubscribed on skills. People want to come to work in our sector. Again, this year has been the most successful. There are barriers of course around things such as energy, and again as our facilities grow we are going to have challenges around grid access. I heard the previous panel talk about grid access. We can see some of those challenges down the line for us as we invest in infrastructure. We are a growing sector, so we have been growing. I guess the limit of that will depend on where the Government get on defence spending, and in the longer term what their requirements are, but we believe we are ready to support that growth. We are continuously investing in our people, our plant and our innovation.

I would say that predictability is key. Predictability gives industry the opportunity to invest because we need certainty. On access to skills, like BAE we are fortunate in that we get the skills we need by and large, but the defence sector does have a reputation issue. Much has been made of the ESG issues that cause people to disinvest in defence.

Can I just ask specifically—

No, go on, because it is an important point.

Can you be specific about the types of skills? Obviously defence covers a range of skillsets.

One of the Members mentioned things such as welders. There is a national shortage. Shipbuilding in the UK predominantly relied on eastern European transient labour, which we now cannot bring to the UK. BAE and Babcock are both investing heavily in training but that takes time. The flash to bang time is measured in years. With those skills, particularly technician type skills, there is lots of investment in apprentices and graduates, but again it takes time to build experience. The other thing where support would be helpful is a joined-up Government approach to export support. It is an area where the UK lags behind countries such as France, Italy and the US, not because there is not enthusiasm for exports, but because we do not hunt as a pack internationally.

What are the specifics that those other countries do that we should be doing? I know we will have to keep it brief.

They do Government-level deals that are broader than just the defence product. We tried to sell frigates into Greece, but the order went to France because France offered to support Greece in the event of a conflict with Turkey. The French President went straight—they own quite a bit of the industry so that makes it easier but they hunt as a pack abroad. Without ministerial level support for some of these big export deals there is not a chance and that is an area where relatively little money would make a huge difference.

Thank you to the panellists. You may know I am representing the Northern Ireland Affairs Committee today and thank you, Chair, for that inclusion. We have conducted an inquiry on defence spend in Northern Ireland. Babcock and BAE were recognised back in 2017 and the National Shipbuilding Strategy was to follow a modular path to try to spread the industrial capacity across the United Kingdom. The statement of intent that was published in December had prosperity as their fifth target and that was about the spread of high-end jobs throughout the United Kingdom. I will start with Adam and then I have some questions for Oriel, but do you as companies feel an onus or a burden or the ability to answer the clarion call of Government when they say, “We would like to see you spread investment across the United Kingdom”?

By our very nature we are geographically diverse already. I know there is lots of focus on the south-east in lots of sectors. I think we are quite proud of our heritage in the north-west, in South Wales, in Scotland. You rightly identify we probably do not do as much in Northern Ireland as others, but for us it is about our having historic roots in many parts of the country. Equally our supply chain is all over the UK. We have 6,000 suppliers who spend £4 billion a year in our supply chain and we will go to the market and we will find suppliers that offer us the capability, the equipment and the skills that we need. We absolutely recognise the importance of spreading prosperity, social mobility and everything else.

One fifth of the UK average in Northern Ireland for defence spend, just to encourage you. John.

Like BAE we do not do a lot in Northern Ireland but again we think it is an opportunity, not a risk. The aircraft carrier programme was a great example of using shipyards around the UK to bolster the national capability and we should do more of that. There are real opportunities there. We spend about £1 billion a year on our supply chain but we have over 1,000 suppliers in what would be classed as economically deprived areas and we have 3,800 SMEs in our supply chain, so a lot of that money already goes into areas that are economically disadvantaged. I do think defence is a great area to use for economic stimulus in areas where there is lower economic social mobility.

Oriel, do you roll your eyes whenever a Government put out these grand plans that do not align with your corporate ambition or do you seize them and invest in the regions of the UK?

As a former civil servant.

But she is free to speak now, Chair.

As a civil servant it is a very easy answer. No, we do not rely on it at all. I would pick up Adam’s point around historic roots. As we have been exploring with you here the skills, the knowledge that we rely on as defence and advanced manufacturing businesses are built over long periods. John I think was talking about welders. With our cyber people in Wales, it is seven years to train them up to be who they need to be. Northern Ireland, as you know, has some strong capabilities and while the arrangement that we are working through with our competitor on Spirit in Northern Ireland was something we would have preferred to keep Spirit as a supplier we are excited, I can tell you, to have Northern Ireland added to the portfolio of what we do in the UK.

Thank you. You have mentioned already composites are very important but we led the way in Belfast with the A220 there, the wings facility, so you have been paid £559 million to take the wings facility. What is taking so long for it to be concluded?

The £559 million is not just for Belfast, as you know. It is the overall Spirit deal. That is something that is arbitrated by the market, not by us. We are very excited to be taking over the wing factory in Northern Ireland and very glad to have that skillset join the skillset that we are doing. Composite, clearly what you do there is quite magic and adding that to what we do in North Wales is a positive.

When do you think it will be concluded?

I am not in the deal team. I understand it is nearing completion.

To move away from my first question about this process, can I ask you about your frustrations? We will take one example recently, the medium-lift helicopter procurement opportunity from MOD. It has a civilian side to it, it has a defence side, it is clearly a defence procurement opportunity. The tender goes out, they set criteria, they end up taking bids from the one company that can satisfy the criteria. How does that interaction assist with building a resilience and a confidence within the private sector when you are trying to assist government with their aims?

The new medium helicopter, Chair, was the request for a large military helicopter and we put together what we thought was a very exciting bid that was going to have a new production line in our North Wales factory with a number of suppliers including Spirit in Belfast. We took on the challenge of the social value propositions and everything that you have been talking about. It was very much focused on new jobs. It was a new advanced manufacturing line in North Wales, crucially because we believed that the UK could be the home base for we estimated in excess of £5 billion of exports. I suppose the slight frustration for us, having built this campaign with tremendous support, and many thanks, from parliamentarians, when we then looked in detail at the way the procurement was run we were surprised that the weighting for those social value aspects of the campaign were not as we expected them to be. That then led to us to have to conclude.

Do we not need to think differently now about social value? If we are trying to onshore capability with a new vigour, if we are trying to make sure that that capability is well spread strategically around the country, do we not need to think differently about social value in the future? Is it not now strategic value?

Chair, I would say I think we have the foundations for what to us as a business looks like pretty sound criteria of jobs, growth, long-term capability, sovereign capability, so I think we have the ingredients. From our point of view what we would like to see is the ingredients that by the way are in the statement of intent that the Ministry of Defence has put out very clearly or the Prime Minister saying UK jobs, UK innovation, UK growth. What we would like to see as businesses is that pulled through. I think the implementation is the key and again now is the moment through this industrial strategy to focus on that implementation, I would suggest.

Picking up on that point around procurement and where we want that to go, what direction that might take, the Committee visited Scotland yesterday to look at our defence industry partners. We had a fantastic visit to BAE and some of the supply chain. Can you comment on how you think the procurement by the MOD might need to change? Some of the things you have already mentioned included annualization of budgets being a challenge, perhaps there needs to be innovation embedded, and we heard from BAE yesterday about a profile of commitment, that that could help to get things on the right keel. One of the things that we heard about was the Defence and Security Accelerator as being one programme that the MOD does that works quite well. There could be some tweaks but that creates revenue and that helps investors to see that potential. From your experience of both knowing your supply chain and yourselves could you comment on those two elements?

I guess the plea we would make most, and this is a conversation that we have with MOD all the time and Andy Start as the International Administrator absolutely understands this: with defence procurement, the biggest challenge in it is, for want of a better phrase, the red tape phase. The flash to bang time from setting a requirement to placing a contract is probably twice as long as it needs to be on average. There is a lot of time taken up. The other thing it does is restrict the supply chain, because the cost of bidding becomes high. That is fine if you are a national champion with a big balance sheet. If you are an SME or a mid-cap company it is a bit more of a challenge. One of the things I know that the DE&S reforms aim to do, and we will see how it plays out, is to try to get some additional pace into the system, so take out cost, take out red tape, so that the military capability is delivered faster and that it makes it easier for SMEs to play a part of that supply chain.

To be honest it is about having the right procurement model for the right capabilities, ultimately and again I think I referred earlier and we all talked to it about the Ukraine response. The Department responded admirably and rapidly. We have been the recipient of some rapid turnaround on perhaps the more disposable capabilities but also some more substantive capabilities. The DE&S obviously donated an AS90 and they acquired the Archer from Sweden in less than six months. It can be done. Equally we have talked about nuclear submarines here today. That is not something you can acquire on a rapid turnaround. It is about having the agility and the right model but industry then understanding that approach. Again people have talked about having that dialogue, so understanding what the customer need is, engaging with the industry early and then working to satisfy as quickly as possible. Again, reforms are underway and hopefully that will lead to an agility that I think we would all welcome.

Can I respond? We have been recipients of three DASA grants and that has been super helpful to get us going. The challenge is there is not a process to go from that early stage, innovation, to the next stage, to the next stage, to the next stage and if the system was working properly it would be by exception that DASA does not lead to a front line large procurement contract. If you look at the statistics it is probably less than 1% of DASA funded that ends up on the front line. The problem with that is it is like crack cocaine for start-ups in that it gets you started but then there is not an easy way of following up on that. Can I also respond on the location point? Six years ago we were two people in the company. I came in as a third and we had one person working abroad and the CEO was half in Newtown in Wales and half in Edinburgh. We could have located anywhere. Because the defence market is so inefficient you must be where all the defence procurement and MOD people are, which is basically London, possibly Bristol, Filton Abbey Wood area, and that was our decision, that we must be within an hour of that to be in the face of the market. We could have stayed in Edinburgh and we could have moved to Northern Ireland, we could have moved anywhere, but we almost could not because you cannot grow a business without doing that and you cannot as a start-up and we are now an SME or a scale-up, as a start-up you cannot afford the travel costs to keep going to these MOD industry days and information days that you must go to, to get the next level of business.

Adam, how do you think the procurement process takes stock of our changing relationship with the US?

I suspect like many people we are constantly taking stock of geopolitical events. It stands that the US is a longstanding ally and partner of the United Kingdom. I think many of the capabilities we have talked around today involve partnership with the United States. Similarly, we have other partnerships into Europe and by our very nature we are collaborators as a nation. Our combat air sector, for example, Typhoon, F-35, Tornado, are all collaborative efforts. I know we have talked a lot today about sovereignty and onshoring but the nature of our sector is that we ultimately collaborate. For us the US is important for our business. It is important for the United Kingdom and similarly we are seeing other evolving partnerships through AUKUS and GCAP. I do not think we should lose sight of the importance of the broad array of partnerships that we have.

Oriel, on that point, do you think that ultimately we will need to get to a position of sovereign resilience to not be reliant on the large players such as the US or do you not see that as a world we are coming towards?

The US as it is for BAE remains an important market. We have two final assembly lines there, 5,500 people so the US remains critical. I think I would go back to some of the things I was saying earlier around the UK capability. I mentioned the contract that we have just won with the Ministry of Defence for a low earth orbit intelligence and reconnaissance satellite. We already know that Norway and Germany are interested in that. We are seeing particularly also in our very sovereign cyber capability there are new conversations opening up with some of our Five Eyes’ colleagues. That is technology that you would not want to export beyond very close allies. There are opportunities that the UK just needs to be alive and agile to that other countries may look to procure and look to the UK for certain capabilities in a way that they might not have before. From our point of view, as for Adam, the US remains a key partner.

Obviously defence exports are huge—the numbers are absolutely astonishing and that upward trend is likely to continue. If I might come to Oriel first, given your involvement with UK Trade and Investment in Paris, you talked about the cocreation with Governments and sometimes the difficulties that can create. What do you think the Government can do to better support defence exports? Allied to that, a question about where it should sit within government, and again you are a former civil servant. Should it sit with the MOD who have the expertise in this field, or should it sit with the Department for Business and Trade?

I do not have a view on where it should sit. I suppose my view is, going back to the earlier conversation, that Government need to work hand in glove. I think as John and Adam mentioned before I do think as Airbus there is opportunity for that export support, particularly in defence and for defence equipment to be more aligned and have a Government to Government wrapper. This is one of the big differentiators for the UK compared to some of our main competitors. France is quite a good example but there are others where—

Could you give us a quick list of the others?

Of the other countries? France, and the US is a classic example. They are probably the two main ones, but Italy and other countries do do it a little bit. Where we fall short is some of what I would call wiring that sits underneath it. There is with a Government to Government, often a prepayment, which is the rubber stamp that a Government give, and we have not in our system succeeded to do this, despite a lot of work. From my point of view, and I do not know if my colleagues would agree, one of the great things that we could get out of this process of the industrial strategy is to focus on that export because that is the key to the sustainability of the sovereignty if you are not just reliant on one nation but reliant on a whole host of allied nations to buy your kit. To go back to my dual use point, one of the reasons why a business such as ours is doing dual use is that you manage your long lines of defence with the civil side of it and exports could have that same function. While you are waiting for the next review to come up for the UK to buy the next piece you are selling across the globe. I will add, as you have referenced my background, the importance for the national, bilateral relationship of having that tie between nations is also extremely important. I would like to see industry used more as a way of fostering bilateral diplomatic relations.

Chris, can I come to you, a smaller company? Is exporting on your radar? Is that something that you want to do? Is it too daunting?

No, we have done business with the US Department of Defense—we have had three different small contracts with them. They work very differently in that they have technology scouts, effectively liaison officers, who guide you through the process and make it easy for you, which the UK does not have. I would thoroughly recommend that you have somebody that is a single point of contact—

That is quite remarkable. The Americans approached you and helped you supply them?

Yes. I have a single point of contact, who is the European technology scout for the US DoD, and his job is to do all the 100 or 200 conversations with different people in the US Department of Defense to put our product in the eyes and ears, whereas in the UK I have to do that myself, which comes back to my point about inefficient process. That is why it is an easy place to do business. From an SME perspective, the order of export is you start with your home country. You then go to the US because its defence budget is bigger than everyone else you will ever do business with combined. You then go to the next easiest, which is probably the middle east, once you have the rubber stamp of the UK and US. Currently the area of interest for us is what we call the JEF nations, which are the Nordics and the Baltic states and Poland. Although their defence budgets are not huge, their discretionary budgets and their budgets for technology are disproportionately large, and they put a lot more of their GDP into defence.

You experience is good but just not here.

Again, exports are exceptionally important to us as a business and as a sector and to the communities I have referred to. First and foremost, having something to export is exceptionally important. We export around £4 billion a year from the United Kingdom. As you said, it is not an insignificant number. You can draw a golden thread back from an export out of this country back to an apprentice in the UK. It underpins everything we are doing. Typhoon is a great example. We invested £10 billion to £12 billion up front at the beginning of the programme and it has returned nearly £30 billion to the United Kingdom. That is significant not only to sustaining the capability that we started this session with, around the importance of being able to respond to global uncertainty. Considering exports at the beginning of a procurement process is regularly talked about. We have plenty of examples to show where that is important.

John, you have one eye on the export market with the global combat ship that you are putting together in Babcock at Rosyth. What can the UK Government do to help get that sailing the seven seas?

The Type 31 is a good example of a product that was deliberately bought to be exportable. I will echo Adam’s point because it takes us back to the whole piece about sovereign capability. We cannot export something if the intellectual property does not reside in the UK. When we choose to buy from an international supplier, the chances are the intellectual property resides in its home market and so that is where exports happen from. There is an unbreakable link between domestic procurement and export capability. The Type 31 is exportable because the design rights reside in the UK and the shipyard capability is in the UK. The global combat ship on the Clyde is the same. The Government have been supportive. We would not have won in Indonesia and Poland without them. However, if I go back to my earlier point, both the DBT and MOD recognise that in the UK, if you pardon the phrase, we need as a country to up our game and compete with people who do not always play by the same rules that we do.

This is to the whole panel. You talked about exports and scale-ups and SMEs. What tangible outcomes would you like to see from the defence industry strategy by the end of the Parliament? What must be successful? I will start with Chris, because I am an SME fan.

I was hoping to go last so that I had time to think through that question. First of all, the starting point is innovation, and so we would like to see a single innovation hub—at the moment, there are about 10 within the MOD—and then that links directly to the next stage, which is proof of concept testing, which then links directly to the next stage, which is buying at small scale, which then directly to the next stage, which is buying at scale, and having a clear process so that you know right from the offset that this is how it all works, with—coming back to the point—a single liaison person who helps you and guides you through that process. I would like to see a clear amount of money for certain capabilities put aside that is multiyear, which means that you have some visibility and then you can raise investment and you can raise equity off the back of that. I will probably stop there. That is all done. I could give you a list of about 100 Christmas presents I would like.

Do feel free to write to the Committee with that because we have to come up with some advice on how the Government should judge the success of their defence industrial strategy and so that would be useful.

At the end of this Parliament, the best outcome would be to have policies that are coming out of the Government that reflect the industrial reality. By that I mean that there is not the artificial divide—or at least not such a tight artificial divide—between defence and wider advanced manufacturing. The Government have some ideas on this. Going back to the funding challenges for the smaller businesses, it is welcome that National Wealth Fund is now looking at defence. The work for the British Business Bank to look at smaller companies and funding is also welcome. That should be not just for defence or other businesses. It needs to be across the piece. I would like to also see, particularly in technology, much greater policy that merges—you all know this—between defence and non-defence technology because that is where quite a lot of innovation will sit. From my point of view, my third—can I remember my third? I will stop there because it has gone out of my head. Thank you.

Once again, any advice you want to supply to us after is welcome.

I will say two things. In an ideal world, we would get real guidance on the capabilities the UK wishes to see as sovereign that the industry can then invest in with some certainty. The other thing is about the difference between policy and process. The UK operates probably the most open defence procurement market in the world, which is often not reciprocated by other nations that we give access to, but it is understanding the difference when we run open competition to get the lowest price or the fastest delivery and when, going back to the social value piece, we use other criteria to make sure that we retain that capability in the UK and invest in it where we need to. That will not always be the cheapest or the short-term best solution, but it may ultimately be the one that delivers the best gross value add to the economy in the longer term.

Many have been taken. We talked a lot today about certainty and instability and I know that is a key theme of the industrial strategy. We would like a clear road map that sets out the UK’s direction of travel and where it wants to invest and sustain a sovereign capability in which then industry can invest and invest in people with that long-term certainty. We have talked about how it takes many years to generate skills and capability in this country. That is crucial for us. We would like something around the importance of partnership. Again, we cannot do what we do without a close partnership with the Government, not just defence. We have talked about other Government Departments here today, but also Parliament. We would like something that sets out how we will go forward in a clear, close, open and collaborative nature with the MOD. We would like something for the wider population. We talked a lot today about—and we welcome again—the Secretary of State’s comments about bringing defence up and bringing it out there and demonstrating that it is a great driving sector. That will be beholden on everybody. Documents such as the industrial strategy, the defence review and the national security strategy will have to think about how we take the population at large with us on this journey as we grow our industry.

The fact that the national wealth fund has now this explicit inclusion of defence is positive for all the reasons that we have discussed here. Sovereignty, clearly, is key. Technology is key. As I was saying before, not having an arbitrary division between defence and non-defence is positive. I imagine it will be similar in Scotland as it is in the UK.

Yes.

A no-brainer, yes, absolutely. Access to investment is always welcome.

And the broader recognition of the contribution that defence makes.

That has been incredibly useful. Thank you very much indeed. That has helped the Committee with its thinking on the submission that we supply back to the Government in response to their consultation on defence industrial strategy. Very briefly, Mr Bailey.

I want to make sure that my entry in the register of member’s interests is on record. I am working with Airbus on the space strategy and I have flown their aircraft. I have also been working with Babcock for our submission for the industrial strategy on skills, and I have on the same tie as Chris.

Thank you. That is on the record. Thank you very much. That concludes this panel.