Brave new world for defence manufacturing
Hundreds of jobs at risk at GKN Yeovil
Last Friday GKN announced that it may have to “close or significantly downsize” its Yeovil site which employs 227 people. A statement from the company blamed the decision by Leonardo Helicopters to relocate all future A159 Wild Cat helicopter assembly away from the GKN Yeovil site to one of their own facilities. However, the story is more complicated than that and it raises the emotive debate of how much the Government is willing to invest in order to preserve the UK defence industry?
In my 9 Aug blog ‘Common sense in UK Defence’, I highlighted that in July the UK MOD announced it would be purchasing 50 Apache AH64E helicopters directly from Boeing for £2bn, rather than buying them from Augusta Westland (now Leonardo) on license from Boeing as was done for the original fleet of Apaches. I noted that from my external perspective it was heartening to see the MOD making a rational decision based on procuring the best equipment at the best possible cost.
Lord Paddy Ashdown, formerly the MP for Yeovil, has been quick to point out that it is the Government’s decision to buy Apache’s from Boeing, rather than the latest decision about Wild Cat production which has sounded the death knell for the Yeovil site. He is probably right, but should the Government have made an uncompetitive decision in order to preserve jobs?
It is a controversial and complex debate. At its heart lies the fundamental question of whether the Government is willing to afford protection to the UK defence industry in order to maintain skills and technological capabilities? Ten years ago this was thought to be the case, but since then protections have gradually been eroded and we are seeing the MOD conducting more and more ‘off the shelf’ purchasing. This undoubtedly leads to cost savings but risks losing long term British innovation, and with it an entire generation of engineers. The only remaining bastions seem to be nuclear submarines and missiles where the Government remains determined to ‘buy British’.
This is forcing defence companies at every level of the supply chain to rethink how they do business; with many focusing on export markets and cutting production costs wherever possible in order to be competitive on price. Historically in defence a company has only been able to export a product once it is in service with its own nation’s military, but again this may start to change as the MOD continues to operate under a constrained budget. From the government’s perspective, it should also be concerned as the UK is currently the second largest defence exporter in the world. However, there are plenty of countries plying their wares to the UK’s traditional export markets, who are only too willing to fill any voids.
Defence manufacturing is entering a brave new world.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.