BAE Systems reveals all about its national influence

Posted on 20 Apr 2011 by The Manufacturer

Britain’s biggest engineering company, BAE Systems, has explained its influence on the UK manufacturing supply chain and the wider economy in graphic detail in a report published by Oxford Economics and Geoeconomics.

The independently researched study, The economic contribution of BAE Systems to the UK in 2009, emphasises that the company’s business model in high value-add and high technology manufacturing, and its geographical footprint in the UK, aligns strongly with the coalition government’s objectives to rebalance the economy.

Employment – indirect and direct, and geographical distribution – productivity per person, exports, tax payments, the supply chain effects of indirect jobs on consumer spending, and support for R&D in the UK by the engineering prime are covered by the report.

Combining direct, indirect and “induced” benefits from BAE Systems’ nationwide operations, the company contributes £7.12bn value-added to the UK economy and supports 125,000 jobs in total.

Productivity at BAE Systems, as measured by value added per full-time employee, for example, was £78,175 in 2009. This was 85% higher than the UK economy average of about £42,200 and 34% higher than the average for the manufacturing sector of £58,300.
For every 10 UK jobs created by BAE Systems directly, another 12 jobs are supported in the supply chain.

The research and development that the company invests in has added a total of 1% to UK GDP over 12 years, the report says.

Its UK operations generated net exports of £4.9 billion and contributed £653 million in taxes in 2009.

The study recognises the magnitude of BAE Systems’ indirect contribution to the economy, measured by its own spending on goods and services that generates jobs and GDP outside the company. In 2009, the report says, the company spent an estimated £4.1 billion on the procurement of equipment, components, raw materials, rent, energy and services from UK suppliers.

In addition to these “indirect” benefits of the company, the report disseminates the affect of the secondary jobs dependent on the company, directly and including supply chain effects. Taking these “induced” benefits (£1.4bn) together with the indirect effects (£2.4bn), BAE Systems influence extends to £7.1bn of value-added production.

A statement of facts, not a plea
BAE Systems is a global company, with what it calls ‘home markets’ – countries with BAE manufacturing operations – in five countries outside the UK; Australia, India, South Africa, Sweden and the US. Total revenues accruing to the UK part of the company were £9.2 billion in 2009. BAE Systems’ strategy to vigorously pursue market share in the vast US defence market is well documented, and through a series of acquisitions it now generates more than 50% of group revenues from its US operations.

At the press conference on Wednesday, Neil Davies, a senior economic advisor at the MoD, questioned chief executive Ian King about the assumptions the report makes about the large influence of the UK Ministry of Defence on BAE’s business, and the over-reliance on the spending behaviour of government. He asked if the purpose of the report, timed so closely to the publication of a white paper on defence spending, was to appeal to the government to invest in defence.

Mr King responded that, in reference to the Strategic Defence and Security Review, BAE Systems has not asked for more money to be allocated to defence. “We have merely said very clearly that, when government consciously makes decisions to alter or cancel defence programmes, they should take into account the capability, scale and economic contribution of BAE Systems in the defence sector – across skills, engineering expertise, productivity etc. This report is a statement of facts, that is all; we are not pleading for more money or that UK defence needs to be a certain size.”

Nevertheless, BAE Systems’ influence on the SDSR and consultation papers is profound. When asked about the influence of the company’s R&D spend (£900 million in 2009, including contract-funded R&D) on the UK manufacturing supply chain, Sam Moore of Oxford Economics who co-authored the report said the contribution of R&D to the full economic contribution was difficult to unpick, but further research will try to capture this.

Ian King said that BAE made ‘the level of granularity’ in its supply base clear to the government in the SDSR, and that given this dependence it was extremely unhelpful to “continuously reprogramme the timescales [of large projects]. We want the process to be completed and not short-circuited” – a point made perhaps in reference to the aborted £3.3bn Nimrod MRA4 programme.

On the value of exports and the UK’s contribution within the company’s strategy with five international home markets, Mr King said: “This is not a global marketplace. Each country we supply to has the same security restrictions on how they can protect and deliver their security hardware and service needs. India, Australia, the US are all the same – you can’t automatically transfer solutions [derived in the UK] to foreign jurisdictions that comply with domestic rules.”

Missing table shows summary of BAE Systems' economic impact on the UK economy, 2009

Regional balance
The report shows that BAE Systems’ footprint is well-distributed throughout the UK, with a particularly strong presence in the North West, where the Warton, Salmesbury and Barrow-in-Furness factories are located.

This, said the report’s authors, made the company a good exemplar for government’s stated aim of rebalancing the economy throughout the regions and away from the South East. BAE Systems’ share of manufacturing employment in the local authorities of Portsmouth, South Ribble, Wyre, South Lakeland, Preston , Fyfe and Barrow-in-Furness are all over 15%. The company also has a profound effect on the quality of jobs in these regions, where it employs a disproportionate number of people in both skilled manual, and executive, manager, professional and technical occupations.

In this regard, the UK has few very large manufacturing companies with widely dispersed operations, and along with two or three other big primes is carrying the burden of expection to redress the regional economic balance. Asked what the company could contribute further to the challenge of redistributing jobs and wealth, group managing director of programmes and support Nigel Whitehead said that the company’s strategy for locating operations was influenced heavily by the location of the appropriate skills base, and couldn’t speak for how other large companies could potentially redress regional prosperity.