The UK defence industry, Brexit and beyond

The UK’s defence industry has an annual turnover of some £65Bn, of which some £35Bn is exported. It is reckoned to provide jobs for almost a million people in all, of which about 10,000 are apprentices. As the date of a formal break from Europe - of whatever sort – approaches, there are many people trying to assess the implications of Brexit on this important sector of UK industrial and economic activity.

The issue is made more complex because, unlike many purely commercial sectors of the economy, the defence industry has a special relationship with the government and broader political system. One of the primary roles of government is to defend the country and its people. In the old days this task was viewed with such concern that all the means to equip the forces, from R&D through to production and product-support was a Government-owned and controlled process.

Not so today; in many cases the Armed Forces prefer to buy off-the-shelf equipment – and often from abroad. Even in the case of complex items such as armoured vehicles or missiles, the UK is happy to allow overseas companies to set up and control a manufacturing facility in the UK - or to just buy these items from overseas, as in the case of Trident missiles – or Boxer vehicles.

The Armed Forces are likely to be a significant factor in the Government’s deliberations about the place of the UK in world affairs post-Brexit. The strength and capabilities of the UK’s military will underline the UK’s commitment to its allies, as well as to cause others to want the UK to remain involved in global issues that might require the presence of a credible force for good.

The UK’s future relationship with Europe is, of course, one of the most immediate concerns. No-one in the EU can doubt the fact that the UK has one of the most capable and professional armed forces in Europe, and that these include one of only two European nuclear deterrents. Given all that is going on with Russia and the Middle East, there are probably few on the continent who would actually welcome the withdrawal of the British military, regardless of any current EU political grandstanding.

The need for us to be able to work closely with countries in Europe, whatever form Brexit takes, has been emphasised by the current Prime Minister on a number of occasions. She has stated:

“Britain and France are Europe’s only two nuclear powers. We are the only two European countries with permanent seats on the United Nations Security Council. Britain’s armed forces are a crucial part of Europe’s collective defence. And our intelligence capabilities – unique in Europe – have already saved countless lives in very many terrorist plots that have been thwarted in countries across our continent. After Brexit, Britain wants to be a good friend and neighbour in every way, and that includes defending the safety and security of all of our citizens.”

What does this mean for our defence industry?

As already mentioned, we no longer manufacture all our own equipment. In fact, apart from the US, China and Russia, which probably still make a very high proportion of their kit, the rest of the world’s militaries have to rely upon substantial amounts of non-domestic technology and production to have access to the latest weapon-systems. In addition, to get the economies of scale needed to be able to afford sophisticated, modern equipment , countries have to work together to buy in bulk (although, as the spiralling costs of the F-35 fighter have shown, even this strategy has its limitations).

Remember also that defence acquisition is no short-term matter. We might crash out of the EU tomorrow, but there are many current contracts in place that will run on for years and decades even. Eurofighter, MAN trucks and Boxer, for example are major items developed with, or bought from, Europe. Just as with the automotive world, many other items are sourced from Europe, either directly or indirectly, as second, third or lower-tier items in the supply chain; examples might include starter motors, avionics, or any number of small parts that the average service type is unaware of in their everyday use of issue-kit.

One problem that we now face in the UK is that, straight after the Brexit vote, we signed up to a plan to establish a central EU defence budget. This process effectively started in 2016 as the Security and Defence Implementation Plan (SDIP), and led to the setting up of Permanent Structured Cooperation in defence (PESCO), regarded as “the foundation for an integrated EU Armed Forces”.

The EU Commissioned then published the “European Defence Action Plan” (EDAP), which included proposals to set up an EU Defence Fund to pay for joint EU military units and EU defence research, funded by the European Investment Bank, in which the UK is the largest stakeholder with Germany.

According to a report drawn up by the Brugge Group, we had every reason to worry about what was going on as the aims of EDAP and the EDF were clear:

“In summary, there are 3 main proposed measures. Firstly, a European defence fund for collaborative research projects. And as a separate element, the joint development of defence capabilities, to be owned by EU countries in priority areas. Secondly, supporting SMEs by fostering investments in defence supply chains. Thirdly to ensure Europe has an open and competitive single market for defence.”

All of the above was done within weeks and months of the Brexit vote – which left many wondering what the motives of the European Commission might have been, especially as neither the then-Foreign Secretary or Chancellor raised any objections to the involvement of the UK in these plans.

Some view EDAP as being especially concerning as it lays out Mr Juncker’s strong personal desire for a European “Defence Union” and the creation of a single market for military equipment. However, it takes matters one step further as it also involves a move to a centrally-coordinated European defence industry strategy, with the implicit intent to remove individual member-states’ rights to independently specify, select and acquire many sorts of defence equipment, such as warships.

The European Commission plans go further, according to its June 2018 press release titled: EU budget: Stepping up the EU’s role as a security and defence provider:

“The Commission presented the first version of the European Defence Fund in June 2017, which has allowed defence cooperation at EU level to be tested by means of the Preparatory Action on Defence Research (PADR) for 2017-2019 and the European Defence Industrial Development Programme (EDIDP) for 2019-2020.” http://europa.eu/rapid/press-release_IP-18-4121_en.htm

The release also says:

“The new €13 billion European Defence Fund will provide €4.1 billion to directly finance competitive and collaborative research projects, in particular through grants. Beyond the research phase, €8.9 billion will be available to complement Member States’ investment by co-financing the costs for prototype development and the ensuing certification and testing requirements.”

Basically, the EU is going to be offering large incentives to defence companies to develop aspects of technology that might previously have been unaffordable. That sounds good – but of course it puts great pressure on UK firms who might want to be involved in these handouts or in any future EU “Defence Single Market”. By extension, it will also exclude UK companies from participating as primes or sub-contractors to any future ESF project. Which is somewhat concerning as the European Defence Fund “will place the EU among the top 4 defence research and technology investors in Europe.”

Reading the “European Commission Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing the European Defence Industrial Development Programme aiming at supporting the competitiveness and innovative capacity of the EU defence industry (Brussels, 7.6.2017)”, you will see that there are number of subsidiary aims, including this one:

“to ensure that the European defence technological and industrial base can fully meet Europe’s current and future security needs”

Which presumably means that if the UK is not part of the EU then it will at some point not only be excluded on the grounds of political imperatives, but UK defence products will simply not be needed by a centralised, self-sufficient Europe. That said, realists will point to this being just one more Chimera – or fanciful dream, on the part of Euro-federalists. It might also be a reason why, behind the scenes, Europe is keen to lock the UK into its long-term defence-industry plans.

Indeed, the suspicion that the UK is being enmeshed in this pan-European defence industrial strategy is not just a result of the fact that no UK objections have been raised to any of the above proposals to date, but also the apparent fact that long-term EU defence-related budgets seem to be based upon the UK maintaining its current financial contributions to this sector.

Furthermore, a new scheme was set up, called the European Network of Defence-related Regions (ENDR), the aims of which (according to the ENDR website) are:

“ENDR’s ultimate objective is to increase the number of defence-related projects accessing EU funding and thus contribute to Europe’s economic growth and regional development.” And that the ENDP Action Plan “underlines the support provided by the ENDR to regions that aim to integrate defence-related priorities into their smart specialisation strategies”

What this means is that they are trying to set up regional areas of technical specialisation in Europe to support the idea of European autonomy in the defence industry. Why should this concern the UK? Well, as of now, there are two defence-related regional development organisations, or “Clusters”, already established in the UK; the Marine South East Cluster, centred on Southampton (handling Energy, Maritime, Naval, Robotics); and the Dual Use Technology Exploitation (DUTE) cluster focussed on Daventry (dealing with Advanced materials, Aeronautics, Aerospace, Electronics, Energy, Networking & Communications).

It seemed worth taking a look at DUTE to see what sort of exposure the concept of the European Network of Defence-related Regions was given in their marketing material. As it turns out, it is hard to see any reference to European involvement of any sort. It was really only in the first meeting of DUTE in 2016 that slides 23 – 26 of their main presentation make mention of any EU involvement and then only as a side issue. This notwithstanding that fact that whereas the UK grants available total some £2bn, a figure of 67bn Euros from the EU is mentioned in passing.

In a more recent presentation by DUTE to UK industry, there is one EU-focussed PowerPoint covering Horizon 2020, an EU research and innovation programme with nearly 80bn Euros available between 2014 and 2020. However, it is a transport-related programme, rather than defence, and, as stated, is due to shut down as the UK leaves the EU under present proposals.

It gives the impression that there are two very different strands of though going on. On the one hand the Europeans want to try to give the UK every reason to stay in the EU, and are banking on us not actually leaving at the end of the day. On the other hand, we have the British delegations at EU meetings not wanting to come out and say “that’s it, we’re off” on the off-chance that it might be worth staying at the table just in case some sort of compromise deal is sorted. The difference between the two approaches might be summarised as a “European Fudge” on the one hand, and a traditional “British Compromise” on the other.

(Images of that BBC April-Fool news-footage from the 1960s comes to mind in which the French are seen building a massive tunnel in a 24hr operation their side of the Channel, while in a lonely field somewhere in Kent, two miners with pickaxes are seen emerging from a small trapdoor, carrying a canary, talking about it being time to go home for supper.)

This article cannot go into the more detailed aspects of a post-Brexit Britain. However, many purely commercial issues will apply to the defence industry. As one reports states:

“One of the key issues though is how the government will be able to retain access to the highly skilled labour market from the EU. The worry is that should the government be unable to secure an agreement to prevent this scenario, the Defence industry could see the UK lose its competitive edge, leaving it a less attractive place for investment. However, there has been enough rhetoric to suggest that Britain’s Defensive and Intelligence capabilities could have an even more significant part to play as Britain searches for its place in the world outside of the European Union.”

What of the US? Are we simply going to be able to turn them? Can we replace our markets in Europe with sales to Commonwealth nations and the rest of the world ? The answer is that no-one really knows. The US has indicated it is supportive of Brexit – but in reality buys a very small amount of foreign defence equipment. Britain has historically had huge trade deficit in military equipment with the States and this was one reason why there have been recent efforts to open up US markets by way of a new “Open General Export License (Exports under the US-UK Defence trade Cooperation Treaty”, dated July 2018. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/727537/18-ogel-us-uk-defence-treaty.pdf

Other markets seem receptive to the idea of UK products being put forward as candidates for their requirements (and why wouldn’t they be, it costs them nothing?). However, they will always be looking to the larger political picture before making a decision and the UK’s relatively tight and restrictive regulations covering the export of defence items can put it at a disadvantage. (It is of course quite possible that this last point might be re-examined as we face the very real prospect of skilled staff being laid off for the sake of some might consider to be un-affordable and outdated principles.)

There is one other issue that is making analysis of defence markets more complex. As the distinctions between defence, security and “IT” are blurred, it is becoming almost impossible to decide what constitutes a “defence” product. As already mentioned in the example of the two UK ENDRs above, the DU of DUTE stands for “Dual Use”. At one point, industry used to become apoplectic about trying to export ordinary trailers from the UK to the States as, by merely painting them green, they became subject to onerous military import regulations. So they were sent over in a delicate shade of blue!

Today, the distinctions are not so easily sorted. A simple laptop has the power to become the hub of an intel-cell, or an encrypted comms device. A laser pointer could become a dazzling device for use against aircraft. A commercial drone might be seen as a surveillance platform – or the means to deliver a bomb. And so it goes on.

So, on the one had it seems that the UK is being wooed by a post-Brexit Europe, which is secretly hoping that we will not leave in the first place. On the other, it is preparing for a post-Brexit world by making all sorts of brave statements about European self-sufficiency in defence equipment. Looking at recent orders for defence equipment, it would seem that the Forces are determined to stay integrated with their European counterparts.

Perhaps some are now adapting an old strategy based upon the dictum: “The defence of the UK begins at the borders of Russia”, in which case we will never be able to separate ourselves from European defence policies or planning. Perhaps Mr Putin, rather than engineer the demise of the EU as a political and military entity, is actually having the opposite effect. But that is another topic altogether.

And finally:

The Senior Service has cause to be cheerful. The PM has pledged that the Royal Navy would play a key role in a post-Brexit world, saying: “As Britain steps up to forge a new, positive, confident role for our country on the global stage, the Royal Navy will play an important part in our vision – pursuing our objectives of security on land and on sea and helping to ensure the free flow of international trade.” Rule Britannia and all that…………………………………