Shipbuilding overcapacity sealed fate of BAE yard

Shipbuilding overcapacity sealed fate of BAE yard

As Nick Cunningham, managing partner at research boutique Agency Partners, explains: “We have had a purple patch. The carrier contract overlapped with the contract for the six Type 45 destroyers, themselves huge ships that cost about £1bn each. I doubt we will see that again in our lifetime. Now, there’s not enough work in the programme to sustain three shipyards. To be honest, there’s probably not enough work for two.”

BAE rode this particular wave, inheriting most of Britain’s shipyards with 1999’s £7.7bn purchase of GEC Marconi’s defence interests. Ten years later, BAE pretty much wrapped up the entire industry, paying £346m for the naval interests of VT Group, the company formerly known as Vosper Thornycroft.

With that deal came the Portsmouth shipbuilder it is now closing, one whose heritage spans Henry VIII’s Mary Rose, the galleons that drove off the Spanish Armada and the first modern battleship in HMS Dreadnought.

But whether BAE really wanted to buy VT in 2009 remains a moot point. The word at the time was that the UK Government – inextricably linked with BAE and today responsible for more than a quarter of the company’s sales – leant on the defence group to do the deal.

Ministers wanted, the theory goes, a single company to negotiate with when it came to managing the decline of UK shipbuilding – and the air cover that goes with having a big corporate beast to hide behind when the tough decisions got made. Nothing about Wednesday’s choreographed announcement scotches that theory.

What did BAE get in return? TOBA – a legally binding, 15-year Terms of Business Agreement, whereby the Ministry of Defence promised BAE a minimum level of shipbuilding work and support activity worth about £230m a year.

As defence analyst Howard Wheeldon puts it: “In a world that has been rapidly looking to downsize defence capability BAE’s TOBA has looked increasingly unworkable. It became harder to imagine how the Government could keep its side of the bargain in providing a balanced number of new orders. Thirty years ago the Government would take just short of four ships a year – today we take on average about 0.7pc of a ship per year.”

Defence Secretary Philip Hammond was particularly splenetic about TOBA yesterday, saying it obliged the Government to pay BAE even if its yards were “idle” and workers “produced nothing while their skill level faded”.

But as Cunningham points out: “Either you forgive him for being badly briefed or he’s being very selective in what he chooses to remember. Without that deal, it would have been Vosper Thornycroft getting closed down by the Government – or one of the Glasgow shipyards.”

Yesterday’s compromise was a two-parter. First, a stop-gap contract for three offshore patrol vessels, at “a marginal cost of less than £100m”, according to Mr Hammond, compared to leaving the yards idle. And second, the ability to let BAE take the rap for closing Portsmouth.

Of course, that did not quite wash. The Government was immediately plunged into a row over whether BAE had been put under political pressure to save the Glasgow yards to avoid whipping up more Scottish nationalist fervour ahead of next year’s independence vote.

BAE denied that, saying the decision was purely “commercial”, given it already had most of its naval shipbuilding workers and skills in Scotland, where it employs 3,200 people versus just 1,200 engaged in shipbuilding in Portsmouth.

Whether BAE now has a sustainable shipbuilding industry is still questionable, though how much that matters to a group that last year saw a transformational merger with Airbus-owner EADS fall apart is far from clear. Out of BAE’s total sales last year of £17.8bn, shipbuilding made up a small part of the £4.48bn revenues it had with the MoD.

This may not be the last tough decision BAE makes on British shipbuilding.

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