13 September 2010
Can David take on Goliath?
Can SMEs compete against larger electronics organisations in the defence sector?
As the defence sector emerges from the recession, it may bring rise to new challenges for electronics SMEs. The market will almost certainly be leaner – therefore more competitive – and SMEs could find larger defence companies bearing down on them with one eye on acquiring their expertise. Add to this the prospect of the Strategic Defence and Security Review, which could implement cuts of up to 15% in the MOD's budget, and the challenges seem insurmountable.
So can David really take on Goliath? Marco Pisano, programme manager at technology trade association Intellect believes that it's not impossible – but it won't be easy. "The defence sector is characterised by a relatively small number of large consolidated prime contractors (the so called system integrators) and a well established supply chain community," he explained. "In this environment, it is extremely difficult for an SME to compete with primes, even if you have a unique selling proposition.
"The advice I would give is to seek cooperation with established firms, build relationships and raise the profile of your company with primes as the MoD is usually reluctant to award contracts directly to SMEs."
Guy Anderson, chief analyst at defence consultancy Jane's Information Group, agrees that SMEs need to play to their strengths, typically an entrepreneurial spirit that can often be lost in giant organisations. "The UK market has a number of emerging opportunities for SMEs – notably the ISTAR (intelligence, surveillance, target acquisition and reconnaissance) domains; the cyber security arena; and the provision of electronics based military services."
Looking beyond the UK and into Europe, Anderson suggests there is reason for cautious optimism. "European markets have traditionally been pretty closed to SMEs, given that governments typically favour their own industrial base in matters of defence. There is a European Union directive heading our way that – from 2011 – should start to tear down those borders."
The Directive on Defence Procurement 2009/81/ec, which becomes law in the UK in August 2011, will herald a major change in public procurement. It will introduce new procurement rules for contracting authorities aimed at opening up the European defence and security market. This will have many important implications for companies supplying into the UK and European defence and security markets.
If the European market 'plays ball', Anderson thinks that major UK firms could win contracts in Europe and use their established SME suppliers back in the UK – rather than assembling teams in the country where the contract is won.
While the defence sector welcomes – and ostensibly encourages – innovation, the tricky part seems to be committing to R&D funding when budgets are tight and kit needs to get into the field. According to Anderson, the UK's R&D defence funding from the government has hovered around the $4.8billion mark over the last few years and isn't likely to move much over the next five years (Jane's forecasts it will stand at $4.7bn by 2014). As a result, it's tempting for governments to pull back from domestic R&D funding and to buy equipment off the shelf. "The other issue is directing R&D funding, which is always tricky," he added. "How do you make sure it's going to the right projects and organisations, when it's very difficult to say who is going to make the next breakthrough that's going to change the face of warfare?"
Nigel Whitehead, group managing director, programmes and support for BAE recently stated that there is a clear and compelling need to realign the way in which the MoD and industry work together. An example of this is BAE's Taranis unmanned air vehicle, which was the result of a partnership between the MoD and a number of industry stalwarts.
Pisano stressed the importance of SMEs building strong relationships through a reputation for delivery on time, schedule and quality. And to successfully implement he believes that industry needs to be involved in shaping the requirements along with the MoD via early engagement. "However," he warned, "there is a small 'club' of big companies that seems to have ongoing conversations with the MoD, whereas the multitude of SMEs are kept out of the picture." He says that this could result in primes awarding contracts to their own subsidiaries at the expense of the wider supply chain. "Intermediaries, such as trade associations, could help overcome this problem as they sit between primes and government, thus providing an independent and better informed perspective."
Clearly, it is difficult for SMEs to become established in defence supply chains, so is it simply a waiting game? Anderson fears it is. "We often hear the phrase 'dead man's shoes'. Companies trying to get onto the approved supplier lists of the big boys can face a frustrating time. It's often a case of waiting for a gap to emerge. My advice would be to at least speak with regional defence cluster groups, like Northern Defence Industries. These groups tend to do a good job of at least introducing the top tier contractors and the SMEs, particularly when the biggest firms are putting together supply chains to meet specific large scale contracts."
Such networking appears to be crucial if SMEs are to establish a strong reputation in the defence sector – although it could take several years. Pisano concluded: "The best advice is to join trade associations, get active and network heavily. It's only through considerable investment in time, energy and thoughts that companies will see rewards in this very peculiar, but fascinating, sector."
Industry and defence working together
Keeping up with trends in the defence industry is crucial for SMEs and the increased demand for unmanned air vehicles (uavs) is one are where defence and industry have worked hand in hand.
The latest uav is BAE Systems' Taranis prototype, which recently unveiled at BAE Warton. Described as 'the first ever autonomous stealthy unmanned combat air vehicle' (ucav), it could be capable of precisely striking targets at long range – even in another continent.
Taranis – an informal partnership between the MoD and industry stalwarts such as BAE Systems, Rolls Royce, QinetiQ and GE Aviation – is designed primarily to provide the MOD with critical knowledge on the technical and manufacturing challenges and the potential capabilities of unmanned combat air systems.
According to Nigel Whitehead, BAE's group managing director, programmes and support, the most significant technical challenge overcome in the development of Taranis has been the difficulty of combining a number of elements within one vehicle.
Whitehead said: "Without wishing to presuppose the outcome of the Strategic Defence and Security Review and any changes to the Defence Industrial Strategy, there is a clear and compelling need to realign the way in which the MoD and industry work together. The Taranis programme holds many of the clues as to how this should work."