Defence procurement. The Turner prize

Date: 07/01/06

A national champion makes a dramatic comeback

A FEW years ago BAE Systems (which used to be plain British Aerospace until it bought GEC-Marconi in 1998) was staggering from one disaster to another. Profit warnings came thick and fast as British defence contracts ran over budget and behind schedule. As recently as February 2004, 80% of BAE business was subsidising losses made on the 20% tied up in British defence contracts.

But by then a pugnacious chief executive, Mike Turner, was taking on the bureaucrats at the Ministry of Defence. He re-negotiated contracts, refused to sign new deals until the ministry assumed some of the risk involved, and repeatedly threatened to abandon Britain for more lucrative business in America. He got his way. Contracts announced on January 4th for new armoured vehicles underline BAE's renewed status as a national champion.

BAE can now do little wrong in the eyes of the stock market or, it seems, the British government. The company's shares have tripled in the past three years. They bounced over 10% in a couple of days in December, reflecting new triumphs at home and abroad. One plum was the contract by Saudi Arabia to buy Typhoon fighters, largely made by BAE.

These are the re-branded ever-so-late, ever-so-over-budget Eurofighters made by an Anglo-German-Italian consortium. The deal, under the framework of the controversial 1980s Al Yamamah oil-for-arms contract which underpinned BAE's profits during many a lean year, indicates that this gravy train has new momentum, just when it had seemed like running into the Arabian sand.

December also saw a new defence white paper on procurement that throws out 20 years of industry bashing started by Margaret Thatcher. She brought in competition to end the cosy days of cost-plus contracts, and made the British defence equipment market the most open in the world. Whereas America buys only 9% of defence equipment from foreign sources, Britain has been buying nearly one-third.

European companies such as France's Thales, Italy's Finmeccanica and America's Boeing, Lockheed Martin and General Dynamics all have significant business with the Ministry of Defence. That could be about to change. The defence industrial strategy white paper, which helped send BAE's share price soaring in mid-December, makes it pretty clear that the concept of the national champion, sustaining technology and manufacturing capability for defence systems, is back in fashion, as it has always been on the continent and in America.

Such was the open nature of the British market that, in 1999, Thales bought Racal, a British defence electronics company, in the hope of winning juicy contracts. Now Thales and others are miffed that their investment in Britain is not being sufficiently rewarded. Only Finmeccanica is protected since it bought Westland, Britain's sole maker of helicopters, and merged it with its own Agusta business.

General Dynamics, an American maker of tanks, is said to be fuming that the white paper more or less hands BAE the role of prime contractor for Britain's new land-based combat vehicles, although Thales, Boeing and Lockheed Martin have won part of the development contracts announced this week. On the naval side, Thales has seen its hopes of dominating the contracts for two new aircraft carriers dashed. Its design will be used, but BAE will run the contract--something that seemed most unlikely only a year ago.

Artcile suggests that the BAE Systems has made a dramtic comeback as a UK 'national champion'.

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