Colloquium
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Post Cold War Transition in a Globalising Defence Technological Industrial BaseBrian HiltonProfessor, School of Defence Management
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IntroductionUS corporations with extensive defence sector interests are currently concerned with "right-sizing" their defence interests. (3) A key issue for them is the value of government programs aimed to assist this process. There are two relevant types of "right-sizing". First, there are those aimed at "conversion" i.e. using existing resources to non-military ends. Or second, defence industrial technological capacity can be preserved by "dual-use", i.e. creating non-military developments with the potential for future military uses. The 1993 report of the Defence Conversion Commission lists more than 145 programmes of both types in the USA (4).The US has long and honourable tradition in this area. (5) But other's experience can be useful, especially when it provides wider intelligence on emerging markets. This is the goal of this paper. It starts with an analysis (6) of the post Second World War transition of major UK defence aerospace enterprise. This case illustrates the issues of interest to this paper, i.e. the successes and failures of policy for military to civil transformation and vice versa. Based on this analysis a further study has been started on the conversion prospects of defence enterprises in three of the Newly Independent States (NIS) of the former Soviet Union: Belarus, Ukraine and Russia (7). This paper uses this to comment on the potential viability of mutually advantageous co-operation between high technology NIS and US defence enterprises, to be achieved by assisting both with post Cold War transitions. The aerospace market in the NIS, in particular, has huge potential for mutual benefit through joint ventures (JVs) between US and Russian enterprises. The US government is encouraging such co-operation (8) including through a joint programme to support the establishment of such high technology US-Russian JVs (9). This initiative must be seen as a tentative success so far (10). This paper provides analysis pertinent to judging the commercial value of such JVs. Economic transformations, as they effect defence enterprises, have three defining political-economic dimensions: national marketisation, defence transition and globalisation. These characterise the political-economic context in which defence contractors operate. Over time, enterprises evolve in response to the pressures of such an environment. In this paper this is illustrated by reference to over fifty years of experience at a specific defence enterprise in the UK aerospace industry, AVRO International. In the Second World War this company produced aircraft for strategic bombing and reconnaissance. Now it only manufactures regional jet airliners. The authors have been unable to identify another instance where an enterprise on the same site using the same staff and largely the same organisational hierarchy has managed to accomplish such complete conversion, albeit slowly. General lessons emerge from this experience. During this company's most recent drive to convert to commercial production its financial viability became suspect. At one point, it was possible that all aircraft production, civil and military, would halt. In the end it survived. It successfully re-engineered its financial structure and formed a JV with the French-Italian consortium, Avion de Transport Regional (ATR). This illustrates the two central premises of this paper. Defence conversion/transition is not simply a technical problem, and international JVs are found to be one way of addressing the problems raised. The latter are shown to cover the total system of interests: managerial, human, marketing, production, technological and, as in the example quoted, financial. Having the technology to build military airframes is no guarantee of a capacity to produce, sell and finance the production of technologically similar civil aircraft. It has often been hypothesised that a workforce imbued with cultural attitudes derived from working to satisfy the Department of Defence's (DOD's) contractual requirements can never adjust to operating in a fully commercial way (11). This paper sets out to test the validity of this view. Problems arise because states discharging national security responsibilities see it necessary to use nationally controllable resources. They direct resources, human, R&D, marketing and financial into enterprises that otherwise would not be commercially viable. They have to do this in a manner that ensures proper concern for public probity in using tax dollars. The state then becomes obligated to the owners of the resources directed or paid to re-deploy. On the cessation of its security need the state generally feels obliged to assist the adjustment required to allow the owners of such resources to redirect them to new ends. It does so while prudently ensuring industrial capacity is sustained to support possible, future, security needs. This is the basis of "dual-use" policy, which tries to ensure that commercial developments also have the potential for military use. As such, the business of being prepared for war need place no burden on the peacetime economy, and the pursuit of economic advantage does not increase national security risks. This idea is the basis for the USA's Technological Reinvestment Program (TRP) (12). In any case, corporations with defence business ought to be prepared to make discontinuous adjustments in their defence businesses in response to the often abrupt changes that occur in their countries' national security policy. By comparing the results from the NIS with the UK case we have obtained material useful to US corporate and national security interests. It can help to evaluate the desirability of current US domestic defence transition policy and to form a view of the prospect for easing post Cold War adjustment by setting up JVs with similar enterprises in the NIS along lines proposed by the US Department of Commerce (13). To do this effectively we need to consider in more detail what we see at the three dimensions in which such policy options have to operate. The Three Dimensional Context for "Conversion" and "Dual-Use" PoliciesPlanning to Market Driven: In war, or under its threat, the state usually plans and controls the allocation of all resources. Even in peace, to minimise reliance on non-nationals in war, products for the military are often planned for and provided nationally. Defence enterprises thus tend to operate in a planned, highly protected national environment. When hostilities, or their threat, have gone, the state generally relaxes its grip on the wider economy. This allows market forces to influence distribution again. This is the planning to market transformation, or marketisation, dimension to this study.Military to Civil: The above transformation does not generally apply to defence enterprises. The state ensures either that it alone is a defence enterprise's sole customer, or, has significant control over to whom it sells. If the state's requirement for a good ends suddenly, its supplier needs to diversify, export under state control, "downsize" or close. This reflects the military to civil dimension of the change process we analyse. Evolution along this dimension occurs for reasons distinct from those driving marketisation. National to International: Over the last half century the commercial environment has changed from a national to globally focused affair. International trade was based purely on national comparative advantage, so it did not have the global off-shore non-national focus it has now. In the global market, marketing, sourcing, ownership and governance all change continuously in response to international, rather than national, defined market considerations. This is the third and final dimension to our analysis. The evolution over time of firm originally specialising in defence goods can be characterised within the framework of these three "dimensions": the extent to which its activities are planned or driven by the market, the degree to which the firm produces military or civil products, and finally the extent to which the global character of the world market has political-economic significance. We have structured the paper around these three components of a defence firm's context. Further definitional material relevant to military to civil transformation sub-categories are given in the next section. The three dimensions are now used to structure the analysis in our case study.
Table 1
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| Military to Civil | |
| "Joint Production" | Making civil and military goods on same site |
| "Dual-Use" | Developing and producing civil goods to support potential for military development and production |
| "Conversion" | Diversifying out of military production all together |
| Planning to Market | |
| "Transition" | Nationally planned production and distribution to market led production and distribution |
| National to International | |
| "Globalization" | National political-economic context to international political-economic context |
In the 1940s the site was responsible for the assembly of the famous Lancaster strategic bomber. In 1945 the plan was virtually 100% devoted to military production. In 1995 Woodford became a purely civil aircraft production site for the first time. It is now devoted to the production of regional jet airliners, the RJ146, for a joint Italian, French and British consortium, Avion de Transport Regional (ATR). The evolution of production on this site is interesting on a number of counts. In particular the case captures experience in four ways relevant here. It covers what we call "conversion", "joint production", dual-use" and "rightsizing".
"Conversion": The Woodford Plant provides a pure example of defence "conversion". It has moved from 100% devotion to the defence imperative fifty years ago. It then produced large volumes - approximately 150 per month at peak - of piston engined propeller driven large aircraft. In the present it is driven by the commercial imperatives of developing and profitably selling low volumes - 18 per year - of small jet airliners. The former happened in the state planned and controlled context. The latter occurs in a highly competitive global market place. This "conversion" was realised on this single site using the same facilities. The staff especially was enculturated by the experience and pride of producing high quality military aircraft vital to their country's national defence. This "conversion" took some 50 years to accomplish.
"Joint Production" has been a significant feature of the working environment on this site. Military and civil aircraft types were often assembled on parallel production lines at the same time. Staff and resources moved regularly from one to the other. DOD's contracting and accounting rules make this kind of working difficult in the US context.
"Dual-use" as a state inspired policy was in operation on several occasions over the period covered by this study. "Dual-use" is the basis of current US government policy for sustaining its Defence Industrial Technological Base (DITB) (14) at a time when there will be few military orders. The successes and failures of this similar UK endeavour is thus of interest to those now informing current US policy.
"Rightsizing" is well illustrated by Woodford. It provides an excellent case for studying such strategies from a financial and personnel as well as a marketing perspective. This is independent of the "conversion" or "dual-use" issues.
The Woodford case has features helpful to developing understanding of issues important to stabilising the post Cold War global economic and security environments.
The first source used was the public record, official or otherwise, as recorded in places such as the UK's Company Registry Office (15) in government (16) in the legislature (17) and in published secondary sources, e.g. histories of activities at Woodford (18).
The next major source of material was a series of interviews covering the working life histories (19) of former employees whose working lives have been dominated by work at the Woodford Plant. Next the case was based on extensive research in the archives of the two major newspapers local to the plant: the Guardian and the Manchester Evening News (20). This research was supplemented in later years, 1980 to date, by a global on-line search of the Reuter's press agency database.
Finally, interviews were conducted with senior plant executives: the Chief Executive, the Heads of Finance, Marketing, Engineering and Strategy.
The plant went through four phases, each characterised by a distinct change in at least one of the three axis of dimensionality identified. These phases are defined in Table 1 and form the basis for the structure of the next section and are set out diagramatically in Figure 1.
| Economic Distribution System |
Transformation Policy for Production |
Market Scope |
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| (Planning. Market) |
(Military. Civil) |
(National. Global) |
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| Phase. 1945-1957 |
Planning |
Dual-Use |
National |
| Phase II 1958-1974 |
Indicative Planning for Market |
Partial Conversion and Joint Working |
International |
| Phase III 1975-1984 |
Market |
Joint Working |
Global Recognised |
| Phase IV 1985 - |
Market |
Conversion |
Global Accepted |
Phase I (1945-1957)After WWII, the UK government decided that it had to sustain a capacity for strategic interdiction. A prime site for this was AVRO's Woodford Plant. However, the country could not sustain such a capacity solely dedicated to the production of strategic bombers if and when required. A "dual-use" policy was therefore pursued, which included the Woodford Plant. It was to develop and produce a series of large commercial airliners, the Tudor. The state owned and controlled commercial airlines "British South American Airways" (BSAA) and the "British Overseas Aircraft Corporation" (BOAC), were directed to purchase their aircraft. Although these airlines had a requirement for such aircraft they wanted to buy existing tried and tested American types from McDonnell-Douglas and Lockheed.Re-enforcing the "dual-use" nature of the project was. Ministry of Supply directive that the Tudor was to use as many Lancaster parts as possible. The Air Ministry also directed that the aircraft should be built to BOAC's specification, using the same project management methods as the Royal Air force. BOAC had no experience of these management methods, nor did it want this particular aircraft. It also had no financial stake in the success or failure of the project. During the design, production and service phases of the project, BOAC continuously altered the detail of the design to suit changing priorities. It was thus unclear where ownership, and ultimate accountability, for the concept and the technical, financial and reputational dimensions of the project lay. Even if one argued that all the areas of responsibility remained with the government it was unclear where: was it in the Air Ministry which set and managed policy on the UK aviation industry? Was it in the Ministry of Supply who controlled both the access to foreign markets and the stocks of materials and material required to build the aircraft? Was it in the UK Cabinet itself who set up the policy in the first place? The evolution of the Woodford site to this point and beyond is displayed in Figure 1 below.
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So the state planned, conceived, financed and marketed Tudor was not a success even when seen as a non-commercial "conversion" project. However, from a "dual-use" perspective, one can consider it a success. The Tudor project provided a financing and human resource retention bridge between the end of Lincoln bomber production in 1946 and the advent of the Vulcan in 1952. The latter was a high specification strategic nuclear bomber. It should be noted that the Vulcan, being a high altitude delta winged jet, represented a design discontinuity for the company. However, it was an example of reputational and marketing continuity being-like the Manchester, Lancaster and Lincoln also produced at Woodford - a long range strategic bomber. The Vulcans, the B1s and the larger B2s, were a source of stable cash flow for the Woodford site right into the sixties. They effectively shielded the company from the full fallout from the reputational and commercial disaster of the Tudor (21). From a political-economic point of view, after World War II the UK government retained wartime central planning, currency and tariff controls. It thereby isolated its national economy from the international economy. This created a relatively stable context conducive to national planning. While the election of a Conservative government in 1951 started the dismantling of this system, this was not completed even during that government's lifetime. Phase 2 (1958-1974)In 1958, the UK pound was made convertible. This exposed the UK economy to more international market pressure. In the domestic economy, the country moved from direct planning to a mild form of indicative planning. In particular, the National Economic Development Office (NEDO) co-ordinated strategic market planning for the state and industry.The 1957 Sandy's Defence White Paper (22) made clear that with the advent of ICBMs and an effective air defence for Russia, future high level strategic bombing was ruled out. So the Vulcan bomber would not be replaced by another manned aircraft. Sandy's announcement therefore left Woodford with a stark choice: it could either close or move to civil aircraft production. However, the government had announced in advance its intentions. This provided AVRO with an indicative planning period in which to design and produce a high quality civil aircraft. Analysis of the market need for aircraft indicated the need for a McDonnell-Douglas CD3, Dakota, replacement. With some government launch aid and cross subsidisation from Vulcan cash flows, this concept was turned into the successful HS 748, Andover. This development only represented partial conversion. Woodford continued to produce a reconnaissance and electronic warfare aircraft, the Shackleton. This had been developed in the late 1940s. This aircraft was a lineal development from the World War II "Pathfinder's" and maritime reconnaissance version of the Lancaster and their successors in the Lincoln series. Thus the Andover was not conceived by the government, but its development was clearly precipitated by its decisions. The Andover was partially financed by the state, thus helping to bridge the costly gap between design and break-even on sales. From 1958 on, "joint production" was the strategy with both a civil type, the Andover, and a military one, the Shackleton. Phase 3 (1974-1985)In 1965 the Plowden Committee (23) set up by the legislature reported that for commercial viability, even for military aircraft, the UK had to be seen as part of an international, perhaps even global, market. In 1974 to establish a single viable UK player in this market the government signalled its intention to nationalise the aerospace industry. They saw this as the only means to rationalise this industry to exploit available economies of scale and scope. In response, Hawker-Siddley, Woodford's owner at the time, stopped development on its four four-engined HS146, small, quiet, go-anywhere jet. As is clear from Hawker Siddley's Annual reports (see segmental analysis, Figures 2 and 3) the firm preferred to use shareholder's equity in activities not to be nationalised. In consequence this aircraft came to the market five years later than would otherwise have been the case. It lost five years of potential gain in market share. It might thus have got to break-even in this time and would have generated the cash flow necessary to develop a successor. This was not to be. So, contrary to what happened during Phase 2, the indicative planning inspired by the Plowden Committee had a negative impact on the enterprise's aerospace activities. British Aerospace (BAe) was created in 1978.Figure 2 |
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Figure 3
Hawker-Siddley Aviation
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The HS146 which was produced during Phase 3 was not a Woodford designed aircraft. The Woodford aircraft at this time was the ADP (Advanced Turbo Prop) development of the Andover. It was during BAe's rationalisation in the 1980's that the assembly of the HS146 was moved to Woodford. At the same time, Woodford was developing De Havilland's Comet airframe as a successor reconnaissance and electronic warfare load carrier, to the Shackleton. During Phase 3, production at the Woodford plant continued to be "joint" and, interestingly for both civil and military types, evolutionary in terms of reputation, marketing and technology. Phase 4 (1985- to date)While in 1978 BAe had been created to prepare for international competition, it was again de-nationalised in 1985 to permit it to prepare to be properly fit for globalisation. This meant that BAe was not only going to buy and sell products in an international market, but that it would move to globalisation by adapting its asset base and corporate strategy as its shareholders saw fit in their commercial interest.Part of the globalisation process can be seen in the government's decision to abandon the idea of following through on the Nimrod maritime reconnaissance and EW aircraft with an AWACS version. It opted instead to buy the Boeing 747 based AWACS. This decision not only pointed up the increasingly global nature of aerospace, but also made it clear that in the medium term, Woodford would have to convert completely to civil production. However the five years development delay in the HS146, now revamped and called the RJ146, took its toll. The regional jet market was now oversupplied with two-engined aircraft that were cheaper to operate. To develop the required two-engined version of the RJ, the XJ, Woodford needed finance but this was not commercially viable. To sell its existing aircraft it had to offer it on shorter leases than the market would bear. So the company decided to sell and lease back its own aircraft. It then leased them on shorter time scales and easier terms than it itself had been able to get from the banks. This produced a huge overhang of financing liabilities. These made the financing of a future development unrealistic without some external injection of resources. A joint-venture was thus sought. In the end, despite talks with Taiwan, it was to be the deal already described with ATR. Issues Raised by the Woodford CaseIn this case, four interrelated barriers to transformation need to be examined: technology, reputation and marketing, finance and human resources.Technology: The Woodford case is probably the easiest one could imagine for military to civil transformation, since the technology involved for each of their types was similar. The perceived technical ease of most of the transformations made at Woodford was clear from the interviews we conducted. However, despite this there are inescapable differences in technological emphasis between military and civil aircraft as "products", as well as in the technological "processes" used in their manufacture. These differences can be related to the technical risks involved. These are made clear in Figure 4.
Figure 4
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| Capital Equipment Input |
||
| Human Resource Input | High | Low |
| High | Military Production Technical Risk Low |
Military R & D Technical Risk Very High |
| Low | Civil R & D Technical Risk High |
Civil Production Technical Risk High |
The high human resource input, in both quality and quantity, required for military aircraft development and production reflects the military's desire to be at the leading edge of technology. They are willing to take the high technical risks involved given the similarly high military pay-off that comes from being able to out-fly the enemy. To achieve this, heavy use is made of high quality technical stuff.
In addition, once a prototype exists, the defence procurers can be precise about the volumes they intend to buy. With such certainty on numbers, and with the state as a secure customer, up front capital investment in production tooling can be made to ensure minimum cost for the known production volume.
In comparison, in civil aircraft design and production, one wishes to minimise on fixed costs. Development costs are contained by limiting the use made of expensive highly qualified design staff. One way to achieve this is by using as much tried and tested technology as possible. The other way is to use as much design technology to support staff as possible, e.g. nowadays CAD/CAM etc. The object is not to design at the limit of technology but well within it. This ensures reliability, economy of operations and above all, safety. In addition, since one never knows for certain how well an aircraft will sell, there is a need to minimise the use of expensive production tooling and equipment. If the aircraft is not a commercial success, this may not be fully amortised.
As we have seen, Woodford made a few leaps in design concept even for military types. They had a lot of experience of incrementally developing within types and from one type to another. There were two exceptions. The civil exception led to the Tudor disaster. The military to the Vulcan success. It thus appears one cannot look to excessive technological discontinuity for a sufficient explanation for commercial failure.
Reputation and Marketing: There were catastrophic failures with the Vulcan, in both flight testing and service. However, these did not have the impact of those of the Tudor. The loss of life was minimal and a degree of risk is considered part of the military's job. Provided it delivers domination of the enemy, such risk may be deemed worthwhile. The military customer, both procurer and serviceman, thus make their own decisions on this in a way airlines and their passengers do not. There is, therefore, an asymmetry between military and civil views on losses. This results in a different reputational impact in each case.
However, reputation is essential for a place in any market, military or civil. The Tudor illustrates the commercial cost of taking risks with technology in the civil aerospace market. This problem was avoided on other civil types by evolving new products from well proven existing ones. This does not mean that reputation is insignificant in the military sector. However, since the ownership of the technologies deployed lies largely with the customer, the reputation of the producer is not so vulnerable to problems related to its impact on safety, provided it delivers militarily. A reputation for such delivery was sustained by Woodford with the defence procurers. Generally, this was achieved by making incremental step changes in design, as opposed to making revolutionary leaps. The exception was the Vulcan. However, like all other Woodford types, its conception as. Woodford product was consistent with the plant's position as the UK's major supplier of strategic bombers.
Finance: For the technical and military reasons outlined, the financial requirements of civil goods producers differ significantly from those for defence ones. Military design and production engineering requires considerable up front working capital. This is required to fund the highly trained staff one needs for design work, and the large base of expensive highly specialised tooling assets one needs to ensure minimum cost production of pre-specified quantity. The state accepts this and is willing to pay. The result is cost plus contracts. These yield high absolute profits from a low politically acceptable profit rate. Civil markets, on the other hand, require the smallest conceivable asset base and the highest possible profit margins. This ensures that returns are quick, given problematic sales volumes despite the relatively high initial development costs required to ensure safety. Furthermore, in civil markets, the global market sets the price, independent of the cost base of individual manufacturers. In economic terms, the military context ensures high fixed costs and low variable costs. The civil one ensures low fixed costs with consequently high but escapable variable costs. This situation makes "joint working" difficult without a sophisticated management accounting system. A plant capitalised and built for one purpose carries with it a cost structure unacceptable to the other. On civil work, labour rates are high and machine rates low and vice versa for military work. DOD and OMB rules for government accounting are such that these facts alone make "joint working" or "dual-use" on the same US site difficult.
| Capital Equipment Input |
||
| Human Resource Input | High | Low |
| High | Military Production Commercial Risk Very Low |
Military R & D Commercial Risk Low |
| Low | Civil R & D Commercial Risk Very High |
Civil Production Commercial Risk Medium |
The key to commercial success with civil aircraft is to ensure one has a desirable product in a market not immediately accessible to competitors with alternate products. It is essential not to compromise such early mover advantages by taking risks on safety. Woodford was successful on both fronts with the Andover. It failed on safety with the Tudor. It failed on delivery to the market with the RJ 146 and the ATP. The latter were both overtaken by the market before they were launched. This, as we have seen, was due to understandable but perhaps avoidable delays in financing their development. The RJ146 case also illustrates that any resulting selling difficulties cannot easily be avoided by financing ones way out after the event. The costs of competing against products with a more timely market fit are too high.
In the global market now existing for aircraft, the discounting and financing temptations of a corporation with good credit lines are very tempting for sales staff. BAe's regional aircraft sales team bowed to them. The wisdom of selling and leasing back may be doubted in retrospect, but at the time in the 80s, it turned their aircraft over at a good rate despite the higher support costs of a four engined aircraft. These sales kept Woodford in the game with a hand, of aircraft and design capacity, to play later. As we have seen, on the downside, it forced the company to take an exceptional charge to its accounts in the 90's of over 2 billion and to set aside further provisions against the leasing and other liabilities involved. At one time nearly half the original jets on sale were on short leases owned by the company itself. This made the cost of exit from this particular market exceedingly high. To leave would have meant the leased planes being returned to the company's own leasing enterprise. These costs and their associated risks have now been amortised appropriately. A proper estimate has been made so as to ensure prudent financial cover now exists for the downside risks of these contingent liabilities. Based on the 1992 accounts, a further provision of 750 million was made in 1993 to cover these liabilities and a further 250 million of tax credits written off (24). Cahill, the Group chairman at the time, in a speech reported on by Reuters on 23 September 1992 said, "of every pound we earn in the defence business, 96 pence was absorbed by the losses of regional aircraft" (25). Even with the described technological conservatism in civil aircraft design, their development costs have to remain high given the reputational risks of any development compromises that endanger safety. The break even point for most commercial aircraft thus tends to run into hundreds. The detailed figures are not available from Woodford for commercial reasons, but it is believed that apart from the Andover, none of their civil type reached break-even before market imperatives pushed them on to the next development. However, given the company's evolutionary approach to design, one could argue that the development costs of earlier aircraft were being successfully recovered in their successors.
To follow through on this strategy now, the company needs to introduce the XJ two-engine redesign. However, it has no cash flow to fund it. The funds generated from current sales are insufficient. By this argument, a JV is the only way out, "without the partnership it's going to the wall" (Joe Dougherty, AEE Union Regional; Organiser (26)).
However, the huge overhang of debt means that the ultimate holding company, BAe, could not afford to keep Woodford, but for the same reason it could not sell it. The financial provision described went part way to solve the problem. However, in the course of 1993, BAe managed to sell its Corporate Jets business to Raytheon for 250 million and its civil engineering business, Ballast-Needham, for 175 million. By 1993 analysts reckoned that the company needed 200-300 million to cover the cost of closing Woodford. Similarly, on the leasing side, the Asset Management Organisation (AMO) that BAe set up to look after its own leased aircraft was doing better by the middle of 1994. It had 118 RJs on its books at the beginning of year 1993/94; but by the end of the year it only had 107 of which 89 were on lease with only 18 idle. These deals made the funds available, to Woodford's holding company BAe, to enable them to negotiate on. JV, from the strong position of being able to get out of regional aircraft production (27) altogether, if it so chose.
As is now clear, closure was not the preferred solution and the joint-venture with ATR holds out good hopes for the future. However the human dimension of change remains. The difficulty of cross cultural co-operation is often seen as a "show-stopper" in the management of change. We now turn to that human dimension in our consideration of the transformation problem.
The Human Dimension: Many writers have seen the main problem of change as lying in the attitudes of people towards it. These are generally seen to be unenthusiastic. However the evidence gathered from the interviews made for this study indicated that workers and managers saw no difficulty in transferring between one type of work and another.
However, while they might not have difficulty in principle, and even say they had no difficulty in practice, change may nevertheless have been difficult because of some lack in the technical, administrative, or intellectual competencies involved. Given the high average education of the people that were interviewed a priori this seems unlikely to be an issue in the defence sector. Of course, the move from exciting path breaking design and engineering to more mundane civil work may involve difficult adjustments in self image. This alone may generate resistance to exiting from defence work. However, no substantive evidence of such difficulties was found in our research at Woodford.
Why, then, might one often consider human resistance to change as significant for defence transformation? One reason may be that the incentives are not right. First, in an non-market, planning context, the only motivators are those available through the management hierarchy. Such motivators are acknowledged as weak. In the Woodford case this is supported by the observation that the worst performances on the human front seemed to occur when the decision makers and or deliverers did not own either the process or its outcome. The Tudor case illustrates this. Accountability for its design was unclear and the apparent potential pay-offs to the parties involved slight. However, seen from a "dual use" perspective, the Air Ministry and AVRO may have seen its costs as well covered by the prospect of the bridge it provided to the pay-offs from the then secret Shackleton and Vulcan contracts. Such "dual use" benefits perhaps compensated for the clearly problematic prospects for the Tudor in an emerging genuinely free international market. The state airlines indeed did not want to buy this aircraft at all.
In contrast, with the Andover there was no doubt as to who owned the design process and its outcomes. It was unequivocally AVRO. Without this aeroplane, their remaining military business would not have sustained the company. The same is now true of the RJ146 and the XJ; without the latter, all aircraft manufacturing would cease at Woodford.
Joint Ventures: The way forward from this latter position is, of course, the JV with ATR. JVs are theoretically a useful way of dealing with many of the problems we have identified in this paper. They spread the high financial cost of civil aircraft development over a wider equity base. This minimises any of the in-service risks to commercial success that could arise, i.e. problems such as economy in fuel, maintainability or safety. A take-over or a merger could in theory supply the same equity base - this is what happened with the Dutch company Fokker when taken over by the German Deutsche Aerospace (DASA). A JV is not a take-over. Ownership and therefore accountability is not absorbed by some wider amorphous commercial entity. Each part of the task is separated out and contracted for with a clear specified owner. This leads to a well specified accountability for each partner on delivery on specific parts of the project, whether they be complete products or sub-assemblies. In such a context, motivation is driven by tough market pressure and not merely by the weaker hierarchical internal incentives available to a monolithic organisation. In addition, and most particularly, a failure to deliver to specification and time, has reputational penalties for the defaulting party in excess of those for the JV as a whole. Downside risks, therefore, tend to fall where they lie, upside risks are generally more equitably distributed. Therefore, all parties are generally benefiting in proportion to their equity. There are also clear market penetration advantages to internationally orientated JVs and arguably even better ones for a global consortium. In addition, real opportunities exist for technical cooperation to produce mutual advantage from the exploitation of complementarities in significant skills or IPR. Finally there is no need to be concerned about the costs of enculturation into a new global organisation style. Each party to a JV enters as themselves and there is no subsequent expectation that they take on a common culture. The goal is to find a way to operate that allows them to work together professionally fully recognising their differences. Ownership of design and production quality happens through market contracts that leave liability clear. Consequent accountability and pay-offs are also modulated by the market. Thus - well structured JV can be useful for its asymmetries in the reputational downside. If anything should go wrong, the reputational effects are less general than they would be if one legal entity owned the whole decision.
In the UK case, the effects of the three dimensions of post-war change occurred in a gradual manner. There was a long pre-war experience of operating in a national market embedded within an international context. This is not the context in which the military to civil change now has to occur in the NIS. Their enterprises have been thrust discontinuously from a planned national environment into the domestic market like context. In addition, they have evolved into an already established world economic order with a very well-developed global market. This leaves these defence enterprises much more exposed than their British counterparts were half a century ago.
However, the results of this pilot study indicate broad similarities to those found in the UK. First, workers and managers see little difficulty with transition from military to civil work and identify finance as the key problem. The reasons for these views are virtually identical to those expressed in the UK: the technological distance from the military to the civil products involved is generally small (31), and since the workers and managers are highly skilled, they are confident of their ability to cope with the changes required. Mentally, they have a positive attitude to change, but they feel let down by their past and the system as it is operating today. This is especially true of their views on the system's willingness or ability to give them the finance that is required to develop marketable products so they can apply their skills in new but related contexts. Financial and market realities are consequently at odds with what they believe is possible technically and humanly. This is especially true in terms of their understanding of marketing and associated reputational issues.
In the past, marketing has not been a necessity for NIS enterprises. The state planning hierarchy directed the industry what to produce and to whom it was to be distributed nationally. Enterprises had no direct access to international markets. This was handled centrally by the planning authorities. Defence enterprises, in particular, were kept away from direct contact with outsiders. As such, the more important defence enterprises were situated in closed cities from which foreigners were excluded.
The key issue in Russia seems to stem from human attitudes to change and work. However, these do not stem from an unwillingness to change, but from a lack of confidence in the political-economic systems' willingness to sustain market values. The mental attitude gained through many years of working in a command system rather than in a diverse market context can be profound. In a command system, any use of personal initiative could be interpreted as a threat to authority. It could be seen to question the need to employ the individual or institution in charge. In such an environment, the ideas necessary to implement Total Quality Management such as staff empowerment and commitment to personal and institutional improvement through constructive critiquing, are hard to implement with any ease. In the West, there are many enterprises and people faced with similar difficulty, but there they are not a defining characteristic of employees in general. In the NIS they can be.
Most Russian managers have no experience of operating in response to decentralised local pressures for action, but only from vertical hierarchical ones. In such a context, provided an employee respected authority in the hierarchical chain, no matter how inappropriately it might be exercised, he was protected. The idea of deploying local initiative without any hierarchical reference has never been part of work experience in the NIS. In this particular study this was reflected in the small number of respondents who felt they could say something useful about marketing issues, some 26 out of a sample of 130 (32), and the even larger number of respondents feeling that they could make a useful contribution if they were only asked (33). The big marketing issues for the NIS states is the poor international reputation these products have, justified or not, for reliability and after sales support. NIS products have this negative reputational effect to cope with in the domestic market, as well as in the global economy. Consequently, foreign goods are often preferred to domestically produced ones.
In civil aircraft, reputation is vital. One cannot afford any disasters, especially in the reputational context just described. The Russian aerospace industry is distinguished for high quality design. However, it has difficulty in the global market due to lack of supportability and due to doubts about the consistency of manufacturing standards. In such circumstances, the NIS cannot afford the late 20th century Tudor or Comet disaster.
Joint Venturing: We now return to JVs as a possible way forward. It is unlikely that internal finance is available in the NIS for setting up the production management and control systems necessary to develop NIS enterprises into reliable high tech suppliers of parts, components and sub-assemblies to Western aerospace companies. A fortiori, they will not be able to develop into enterprises, able to produce and sell globally competitive complete aircraft. The reputational risks to potential customers will therefore remain significant no matter how low they price their products. International and home grown finance also does not exist to develop the products and systems required to satisfy the need of the global market place for "Just In Time" self certifying suppliers. A JV may offer the solution to this problem. First, A JV may provide the funding necessary for transformation of the enterprise. Next, the western partner can establish reputational firebreaks that permit the NIS to enter the international market. Returns from such a JV are potentially very large due to the availability of cheap but high quality labour, and given the huge size of the Russian home market. On the other hand, the risks involved are considerable. However, a JV enables the downside reputation risk to be managed and provides an incentive structure, especially in terms of accountability that can be made to work. JVs can thus provide the leverage for success in terms of expatriate labour, finance and process management technology necessary for transformation. They can also supply the marketing skills necessary to enter and survive the global market place.
However a price was paid for this in terms of reputational damage. This made the long term result more expensive than it perhaps had to be. This appears not to have been the result of fuzziness in formal contracting. It came from the informal aspects of the relationship between the supplier, the state and the ultimate customer. This engendered a lack of clear lines of enforceable accountability. Such fuzziness, and its consequences, is the price one always has to pay for dealings between a bureaucratic hierarchy and its clients. As a user of tax dollars the visible probity and professional impersonality required in spending tax dollars can be at the expense of efficient procurement practice. This clearly is not the best way to deal with people or business, hence the huge effort now in train to Re-Invent Government in the US and the rest of the world.
It might be argued that it is not in US corporation's interest to assist in the survival of potential competitors in the NIS. This was not the experience of the Marshall Plan in the short run. Anyway, in the long run, market access generally requires a quid pro quo. It is unlikely that foreign aerospace suppliers will get unrestricted access to the NIS no matter how much some potential customers might wish it. BOAC and BSAA could not give such access to McDonnell-Douglas and Lockheed in the 1940s. It is unlikely that unrestricted free trade will be allowed to the NIS in the short run either. Access generally requires some kind of offset or JV to be forthcoming. As we have seen, provided the reputational risks can be controlled, JVs offer a means to acquire market access. The NIS has the potential to be the largest airline market in the world and is a cheap source of high quality technical and scientific labour.
However to make this work, finance is key. It was so in the UK case, and is now in the NIS. Without state finance, especially after its early reputational failure in civil aerospace, the Woodford site would not have survived. In the NIS it is fairly clear that local finance will not be available in sufficient quantity to allow all the "right" enterprises to survive. Financing through the decentralised market selectivity of foreign companies seeking access to NIS markets through. JV, would appear to be one solution. Pari passu they can also make a contribution to solving the reputational problem of NIS producers through a carefully thought out approach to product development. Observation of the UK case suggests that an evolutionary approach to product development provides the least risk exposure. In a JV it might be possible to do this, as Woodford did, by developing a product initially developed elsewhere within the ambit of the JV.
Russian design and analytical skills are of the highest order. They are therefore well able to carry through on the above agenda. It should be possible to use their skills to mutual advantage without high financial or reputational risk exposure. Equally some material or even the manufacture of some non-safety critical components can provide a means of making the necessary JV viable from a Western perspective.
The NIS market provides the new frontier. However, it is a technically highly sophisticated frontier. The risks and potential returns are both high. The US's pioneering heritage and technical strength puts it in a good position to exploit such a context to mutual benefit. The pay-offs are likely to be most easily accessed by early entrants. It seems that JVs formed in a positive supportive manner in a tough contractual market context with clear accountability have the greatest chance of survival. However, even a JV's potential for success could be put in jeopardy if due regard is not paid simultaneously to all the factors we have discussed: reputational, financial, technical and human political.
Association of the Industrial College of the Armed Forces, op.cit.
Lundquist, J. T., "Shrinking Hard and Fast in the Defence Industry", Harvard Business Review, November-December 1992.
Defence Conversion Commission "Adjusting to the Drawdown", "Compendium of Programs to Assist the Transition", Appendix G, Logistics Management Institute, 1992.
The Federal Office of Economic Adjustment (OEA) exists for this sole purpose.
Hilton, B. J., "A Case Study in Defense 'Conversion', 'Dual-Use' and 'Right Sizing': the Woodford Aircraft Assembly Plant 1945-1995", Report for the UK MOD Procurement Executive.
During 1995 we extended this work. A study was set up along similar lines. This work is a comparative study of "conversion" policy in the UK, Russia, Belarus and Ukraine. It examines how enterprises in the former USSR's Military Industrial Complex (MIC) are adapting to the dramatic change now going on in their working context. This work was funded by the International Association for the Advancement of Cooperation with the Scientists of the Former Soviet Union, INTAS for short. The project pilot ran from December 1994 to December 1995. "Defence Conversion and Diversification in the UK and NIS: A Public Policy and Applied Regional Economics Approach", INTAS Final Report, Brussels, Jan 1996.
Association of the Industrial College of the Armed Forces, "Building Industrial Partnerships in the Former Soviet Union", Proceedings of a Conference held April 19, 1995.
The DOD through the Nunn-Lugar program has given money to four US-Russian JVs and the Department of Commerce has set up, some time ago, their Business Information Service for the Newly Independent States (BISNIS) to provide information likely to lead to such JVs being set up on a purely commercial basis. To this end they produce and keep up to date the "Russian Defence Business Directory", Department of Commerce, Bureau of Export Administration, 1995.
Association of the Industrial College of the Armed Forces, op. Cit.
Purcell, W. R., "Commercial Profits for Defence-Space Technology", Schur and Co, Bohm, 1965; Maddock, E., "Civil Exploitation of Defence Technology", Report to the Electronics EDC, Department of Trade and Industry, London, 1983; Gilmore, J.S. and Coddington, D.C., "Defence Industry Diversification: An Analysis with 12 Case Studies", US Arms Control and Disarmament Agency, Jan 1966.
ARPA, "Program Information Package for Defense Technology Conversion Reinvestment and Transition Assistance", 1993.
Companies House Files, Various details on A. V. Roe Ltd, Hawker-Siddley Aviation Ltd., AVRO International Aerostructures Ltd., BAe PLC
UK Defence white Paper, Sandy's 1957.
HM Stationary Office UK, "The Committee of Enquiry into the Aircraft Industry" Cmnd. 2853, pp. 1-119, December 1965. "The Plowden Report".
Wood, D. C., "The Design and Development of the Avro Lancaster", The Royal Aeronautical Society; Holmes, Harry, "AVRO: The History of an Aircraft Company, Airlife Publishing Ltd., 1994
Campanelli, P. & Thomas, R., "Working Lives Developmental Research" - Employment Department, Jan 1994.
Manchester Evening News, 1944-1995; Manchester Guardian 1944-1995
It is interesting to note, however, that after the Tudor was grounded as a passenger carrying aircraft, it went on into the 60s as freight carrier, the Tudor Trader and carried the largest volume of freight by any aircraft, including the DC3, into Berlin during the 1949 airlift.
Reuters On-Line 1992, Sept. 23.
Reuters On-Line 1992, Sept. 23.
Reuters On-Line 1993, Oct. 15.
Reznichenko, G. and Chuguevski, V., "Russian Report: INTAS Conversion Project", paper read at the Association of Defence Political Economic Advisors Conference, Templeton College, Oxford December 1995.
Filonov, I. "Belarus Report: INTAS Conversion Project", paper read at the Association of Defence Political Economic Advisors Conference, Templeton College, Oxford December 1995.
Novak, V. and Rodchenko, V. "Ukraine Report: INTAS Conversion Project", paper read at the Association of Defence Political Economic Advisors Conference, Templeton College, Oxford, December 1995.
In the Ukraine, however, the technical distance was quite large, i.e. military aircraft repair and maintenance, to toy and furniture manufacturing. Novak and Rodchenko, op. cit.
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