Lifting off

“The aerospace industry is a significant contributor to the Scottish economy and it’s almost hidden,” remarks Scott McLarty, Prestwick-based vice-president of UK operations for Spirit AeroSystems. “It is a massive number and I think sometimes it gets overlooked.” In a country famed for its food and drink exports, oil and gas production, and tourism industry, McLarty’s argument is persuasive. Spirit – a US-based firm that employs 1,000 people in the UK, the majority of which are at Prestwick – makes airframe components for Boeing and Airbus aircraft. A total of 770 sets of wing structures were delivered to various customers last year alone. “In the next twenty years it is going to double to about 1,500 aeroplanes a year, so with the emergence of China and India the demand for aircraft is going up by a significant percentage each year,” he says. “The requirement for more suppliers, which is a UK challenge, and more engineers and more skilled people to build these aircraft is a challenge.”

It is a challenge not limited to aerospace. Rather it is a wider one permeating through the entire aerospace, defence and marine sector, a sector that generates £5.56bn annually in sales and is worth £1.76bn to the Scottish economy, according to latest Scottish Enterprise figures. “We can see our order book being continually healthy, comfortably in five years, and reasonably in ten years,” says Norman Bone, managing director of the airborne and space systems division at Selex ES, a defence firm responsible for radar and advanced targeting that has been based in Edinburgh for 70 years.

“But that requires us to continually innovate, continually invest and continually bring through the best skills. If we couldn’t find the skills, that would be our biggest risk. Not our ability to innovate, not our ability to continually develop our product and systems, but it will be a challenge if we can’t find the right people.”

Around 2,000 people are employed at their site in the Scottish capital, 70 per cent of whom are professionals. Almost half are engineers. Like other Scottish-based companies, Selex ES must work “hand in glove” with the educational system to develop that skill base; more so, because the numbers coming through fail to match the rates that they covet. It quickly became apparent that addressing this at the stage of university was too late, says Bone, with the process now being taken all the way back to primary school-aged children.
“Our education system needs to change,” says Bone. “Education of our teachers needs to change. I’m involved in something personally called the South West of Scotland Engineering Group, which is sponsored by the Duke of Rothesay, and in that both of us have this passion of how do we get young people involved in engineering. We brought 170 primary school teachers into an event at Dumfries House – he spoke at it as well – and we presented the case for engineering.

“What was stunning was that [of] the 170, less than 3 per cent of them actually had an understanding of the skill shortage of engineering, the opportunities that present themselves in engineering, and therefore they weren’t pushing children to think that science, technology, mathematics are really the things that we should be doing in this country. I think we went through a phase with previous governments, maybe 10 years ago, where we started saying the UK wasn’t competitive in manufacturing – and it drove people away from it. We also started devaluing what an engineer is. The way an engineer is held in esteem in the UK is not the way they’re held in the same esteem in other countries, in Germany or Italy.”

Within the south-west of Scotland, industry has provided funding for a science and technology professional to be available to schools, to go in and talk to pupils and add to what teachers are doing, explains Bone. “We really need the Government to see the potential of doing these things and supplement it as well,” he says. “Kids are playing with electronics from the age of four and five. By the time we start really teaching science in the Scottish curriculum it’s 12 and 13 – it’s too late. They know how to play with the gizmo, what they don’t know is the sciences behind it and they can’t relate a Playstation or an Xbox back to physics, mathematics, and the hard sciences. Unless we’re capable of changing that mindset we’re going to have an army of people growing up who know how to play something but they don’t recognise the sciences behind it. We’ve got to address that because it’s a massively missed opportunity.”

Also involved in the Dumfries House project is Steve Callan, managing director of Prestwick-based UTC Aerospace Systems, which is involved in the maintenance, repair and overhaul of nacelle, engine build up and flight control aerostructure components for commercial aircrafts, dealing on average with 100 airlines each year. “The initial reason we set up here was skills, it’s the people,” he says.

“Scotland does, rightly so, have a strong reputation as a good location to do engineering activity. The downside of that is for a whole number of years the environment created by our schools and teachers and parents and government and newspapers didn’t necessarily foster our kids wanting to go in and do the hard subjects, the STEM subjects. It’s changing but we foresee a bit of a challenge in the future. The numbers we need here in Prestwick are not that huge but the amount of people that the big companies, your power companies or oil companies and even the likes of [what] Norman has got, his demographics are such that he needs a lot of people. You can see in five to ten years from now, we’ve got a bit of a headwind heading our way.”
The engineering sector, more broadly, has an “image problem”, one that Callan – though pointing to the excellent relationship UTC has with economic development agencies – believes the Scottish Government is not doing enough to shed.

Interpretations vary. Work that has flowed out of the Skills Investment Plan for engineering, produced by Skills Development Scotland (SDS), has suggested that the perception of the engineering sector is “significantly higher than [what] we think it is”, says Ian McMahon, head of engineering and aerospace, defence and marine at Scottish Enterprise.
Though as yet unpublished, a piece of work undertaken by the enterprise agency looking at perceptions of the engineering sector more generally found it rates higher than medicine and law as being a career of choice, he adds. “The evidence seems to indicate that the pipeline is actually quite solid,” says McMahon.
“The difficulty we have is at the other end in that only 36 per cent of people who study an engineering-related qualification at a university in Scotland go into engineering, so something is happening at the other end that we are now trying to address.”

Increasing the future skills capability of the sector will be one of four strands running through a revamped Scottish Aerospace, Defence and Marine Strategy being drafted at present. Its predecessor, the first of its kind, was published in 2009 by the ADM Industry Advisory Group, which brought key agencies such as Scottish Enterprise and SDS together with members of the three sectors.

Research and development, the business environment and internationalisation will likewise feature. Unsurprisingly, the key areas north of the border very much mirror those most prominent south of it.

McLarty, as VP of UK operations for Spirit, represents the only Scottish company on the board of the Aerospace Growth Partnership (AGP), a collaboration between government and industry that takes forward the UK Government’s seven-year £2bn Lifting Off Strategy unveiled last March. Though welcome, it is evident there is frustration with the time it has taken to sit up and take notice of the need to preserve the UK’s position in the global aerospace market as second only to the United States. “The aerospace industry is one of those industries that if you look at the growth chart over the last ten 20 years, it has always been going up five, ten per cent every year, it has never really dipped,” he tells Holyrood.

“Except, the worst impact was when things like SARS hit and people stopped travelling, or September 11. Natural disasters will affect airline industries but pretty much, it’s a sound investment. If you invest in aerospace it is going to help the economy. It’s only going in one direction. The UK Government, I think, have finally recognised this and the Scottish Government have pretty much always known that. The issue for Scotland is there is not that much aerospace in Scotland and the two or three large companies we do have, we really need to protect them. I’ve always been optimistic about the future of the industry; the challenge has been competing with foreign economies. Now the UK Government have woken up and are going to assist us in that, I think that’s absolutely the right thing to do. My concern is it’s a little bit late. We’re behind the eight ball here, but absolutely, it’s the right thing to do to make sure we maximise the most of it.”
That sluggishness has been borne out, to an extent, within the aerospace supply chain. McLarty, for example, now builds a lot of his sub-assemblies in Malaysia, where Spirit employs 650 individuals. Foreign governments are throwing money at firms to bring work to their country – the Malaysian government built Spirit a factory – leaving the UK with a degree of catching up to do, he intimates. “We have a massive weakness in our supply chain here,” he says.

“As a manufacturer and supplier of significantly complicated equipment I have to buy a lot of my stuff abroad because I cannot find the supply chain that is technically competent in the UK. I am hoping that AGP – AGP has a strategy to address that – will help. But there is an opportunity for suppliers in similar industries to actually use the government funding to move into aerospace and become suppliers to companies like myself and others.”

Increased diversification by defence companies away from a purely military focus, for instance, could potentially open up opportunities for Spirit to keep work within the UK. Given that dwindling defence budgets is a dilemma facing firms worldwide though, McLarty underlines government support will be vital to fend off further competition. Irrespective of whether it is aerospace or not, there is undeniably a trend toward greater diversification by defence companies into adjacent markets that can make civil application of the products that are being developed.

“It varies by company,” says McMahon. “Some companies have already gone more in that direction than work in defence. I think we’re not at the tipping point yet for the vast majority of them – you’ll still see defence being the majority of what they do, but you’ll see that as a declining proportion over the next eight to ten years as companies morph into other fields. Remember, this is done against the backdrop of the companies all still growing so it is not necessarily a significant decline in defence, as you would expect, and I think you’ll see a trend towards more export orientation in their markets which is welcome because they are very meaty, export opportunities as far as the Scottish economy is concerned.”

Foreign opportunities, of course in the context of export control and UK Trade & Investment guidance, are therefore more important than ever. The Middle East provides a “developing” market, says Bone, so too the BRIC countries. Radar on the new generation Saab Gripen fighter has been exported from Edinburgh, for instance, while around 65 per cent of the avionics on the Eurofighter Typhoon come from Selex ES. Eight years on from becoming the first company to sell airborne radar from Europe across the Atlantic, 90 per cent of their targeting business in the Scottish capital is sold to the US. Still, Bone is keen to underline the Ministry of Defence is still a valued customer ahead of the next Strategic Defence and Security Review in 2015.
“I wouldn’t say [work] has dried up,” says Bone. “I would just think that today the budgets are smaller, the UK forces are smaller, it is still as advanced as it has ever been, there is still a desire to have it [but] probably the pace of it has slowed. If the UK has particular engagements – either Iraq, Afghanistan or that – you go through some small peaks of that, but long-term planning has probably got better with the MoD. It’s a tough environment, their budgets are shrinking [but] I wouldn’t say it has dried up though. We’re still strategically important to them and they are to us.”

A 50-50 split between the military and civilian market is envisaged within the next five years. Border protection and maritime patrol represent developing markets within a military field leaning further and further towards paramilitary. Infrastructure and energy are two of the main areas that Selex ES will look to move into, suggests Bone. Evidence of a tendency towards a more diversified portfolio will come this summer when the company, as the official protective perimeter security provider for Glasgow 2014, will provide a wide range of physical security measures to secure over 20 Commonwealth Games’ venues.

It’s another showpiece six weeks later that is creating more of a headache for Selex ES, however. “For us in business, it creates uncertainty,” says Bone of the referendum on 18 September. “You want to be able to plan. I present to my head office a five-year plan and then a ten-year plan and in that I have a classically unknown answer, and that makes it difficult. When you’re fighting for your investment money and you’re trying to put up the case, you create an uncertainty.

“We have a single integrated ICT solution across this company in the UK which means we can plan and work across any part of it. I don’t know if I have to treat that as an export in the future, I don’t know which currency it will be on, I don’t know if I am a member of Nato, I don’t know if I am a member of the UN. It’s uncertainty and uncertainty isn’t good when you’re trying to plan in a business. That’s why we want the referendum to be done, let’s get it over with, and then we can carry and plan as a business.”

Callan cannot envisage a change in constitutional arrangements making a huge difference to UTC’s business, unless the tax structure changed. “The UK industry work collectively as a whole and I don’t see the referendum affecting that,” adds McLarty. The potential for loss of funding streams from down south could impact the aerospace sector, though it is in defence that much more is at stake.

It was during his visit to Selex ES’ Edinburgh site last October after all that the UK Defence Secretary, Philip Hammond, claimed thousands of Scottish jobs in the defence industry would be thrown into jeopardy by a Yes vote. “I think he’s right,” says Bone. “I’ll go back to what Philip Hammond said: defence companies in certain areas don’t put work in foreign countries so from Philip Hammond’s point of view, he’s the customer, that’s his view, yes.”

Asked if he envisaged jobs at their Edinburgh site being put at risk, he adds: “I would say there’s a strong possibility. We don’t know how that would come together. Clearly, the governments need to talk if that was the case. But there is a risk. It’s the uncertainty that is the risk.”

Hammond’s intervention followed a Scottish Affairs Committee report last April that suggested lucrative work with the MoD would be retained within the UK, while research funding would be redirected elsewhere. The future of the Selex ES site in Edinburgh “is very much at risk under separation”, said the Westminster committee. “Elements of it would certainly be at risk, yes,” says Bone. “We take a lot of work from the UK MoD. If the UK MoD made the decision not to place it here, it’s a stable part of our employment base.”