The failure of the merger between BAE and EADS was inevitable once political differences came to the fore. BAE believed that a newly merged company could have strengthened and broadened their market share, but the insistence of unacceptably high shareholdings from the French and German governments meant the deal was not in British national interests.
The UK Government has done the right thing in sticking to red lines, but ministers now have a challenge to deliver the active defence industrial strategy which is needed more than ever before. Business as usual for BAE and the Government is not an available course of action.
Declining domestic defence budgets in the UK, US and across Europe provide a huge challenge for all defence manufacturers. The United States is deciding how to make $487billion of defence cuts, and perhaps a further $500bn in the case of 'sequestration'. As a result of the financial crisis real defence spending in NATO European states fell by an average of 7.4% per country between 2008 and 2010. In 2011 BAE sales were down 14% and profits down 9%.
The future health of the UK defence industry will depend on companies diversifying, broadening portfolios to engage with emerging sectors such as cyber security, electronic systems or unmanned technologies, as well as reaching growing international defence markets such as Australia and India. However, this is not a challenge that either companies - or their large and highly skilled workforces - should face alone.
There has been more than a little irony in Conservative MPs urging the government to take action to protect the UK national interest in defence when it is this government which said in its recent White Paper that "the MOD does not consider wider employment, industrial, or economic factors in its value-for money assessments." This is the same government which has consistently asserted that in defence procurement their "default position is to use open competition in the global market, to buy off-the-shelf where we can". That is an explicit statement that the UK is currently committed to importing rather than manufacturing. We hope that those warning against the involvement of French and German governments in defence will now get behind our demand for a more active industrial strategy from the British government.
Thousands of job losses at BAE Systems and the uncertainty now surrounding that company's long-term UK footprint, combined with the defence industry's trade body's assessment that 30,000 industry jobs in total could be under threat, underline the need for a government rethink.
We must use the power of defence procurement strategically - to strengthen standards; to increase certainty so that business can plan ahead; develop capabilities and nurture supply chains; to take account of the impact on employment when awarding contracts; to professionalise procurement staff; and to work closer with international allies.
The UK government must help UK defence companies such as BAE acclimatise to the future, investing in skills and capabilities as well as supporting exports and using Special Security Agreements to ensure the UK national interest is protected where we cooperate with our allies.
There are specific measures that could be taken to support our defence manufacturers. UK-based industry, for example, deserves greater certainty around areas where strategic investment is warranted against long-term opportunities. The government should be clearer about its 'make-buy' choice: the capabilities which will be purchased off-the-shelf overseas and those which will be developed domestically. This will allow industry to make strategic investment decisions and should guide R&T funding.
Furthermore, recent conflicts have shown us that strategic kit must be capable of undergoing major urgent operational requirement upgrades to be optimal in theatre. Therefore we may not wish to buy equipment from overseas if it cannot be upgraded here in the UK. This could be known as a "UK control test" and would protect jobs and intellectual property, and prevent against our upgrades being "put to the back of the queue" by overseas governments with competing urgencies or ambivalence about our actions.
These changes could put Government on a clearer path to helping the UK-based defence industry play its part in modernising both our industrial base and equipment programme. A strong UK defence industry can be both responsive to the changing threats we face, providing the advanced weaponry we need, as well as part of a vibrant, advanced and high skilled private sector, stimulating jobs and growth.
It is estimated that the UK defence industry employs over 300,000 people and generates over £35billion per year to the UK economy. The defence industry makes up 10% of our high-tech manufacturing. Both we and the Government seek an export-driven, private sector-led economic recovery, but for Labour this requires a partnership between productive business and active government.