Britain gets serious about defence dirigisme...
MOD's new industrial strategy framework urges companies to "seize the future".
Labour’s John Healey launched the consultation for the new Defence Industrial Strategy today. The framework document - entitled A Statement of Intent - is the first example of a sectoral strategy, following on from the economy-wide Green Paper produced by the DBT last month. There will be a consultation lasting until February - concurrent but separate from the Strategic Defence Review.
The new government had to pick up the defence challenge early for obvious reasons:
There are realtime lessons being learned, and radical speed-ups of procurement, due to the various Task Forces inside the MOD dedicated to supplying Ukraine.
Unlike in other sectors there is an existing, statutory Defence and Security Industrial Strategy (DSIS21), outlined in 2021. It was, as Ben Wallace just admitted, sabotaged by the Treasury, and poorly executed - but it was an advance on the old neoliberal approach of “global competition by default”.
The government is spending £21bn a year on equipment with the defence sector, and has major signalling power, and needs to make the earliest possible market signal.
For clarity, I understand the MOD sees this as separate and complementary to the task of procurement reform. The whole operating system needs to overhauled, and the appointment of a National Armaments Director with authority over all three services is seen as the key to that.
The defence industrial stategy, by contrast, is about how the MOD stewards the UK defence industry as a national asset, promoting its resilience and innovative capacity in order to project economic deterrence alongside the physical deterrence provided by the armed forces.
Some key takeaways
The framework is clear about what went wrong with DSIS2021 - over and above Treasury reticence, it replaced a clear market signal (global competition) with a “case by case” approach that the private sector found hard to read. Alongside short-term budget cycles, which lead for example to vital components on a series of ships like Type-26 having to be procured ship by ship, instead of a production run, this made it hard to make an investment case in UK defence.
Now the signal is clear:
“From the outset, we want to send a clear market signal to the private sector about our preference to grow onshore production capability.”
The document does not use the catchphrase “build in Britain” which Healey used in opposition, but the sentiment is there.
Second, this is not just driven by security principles. The MOD is clear that its priorities are both to secure the nation and to boost economic growth - Mission #1 of the Labour manifesto. The task - and it will be hard - is to use state direction and public-private partnerships to channel investment into high-value, export oriented and growth producing activity.
Third, there is a clear steer on regional distribution. At present, the MOD’s spend is shockingly concentrated regionally, as a result of the large amount of business it does with primes and the natural clustering effects that have happened in defence since the industrial revolution: British warships were built on the Clyde in World War One and they're built there now, for example, This graph, from JEDHub, shows the unequal distribution of defence jobs:
NB if Southampton were classed as south-west England that region would be even bigger. As it is, the combination of aerospace, complex weapons and submarine production in NW England make it the kingpin of defence spending. If I were a regional development decision maker in the West Midlands, Yorkshire or Tyneside I would be knocking on the MOD’s door after today, because it says:
We will use Defence procurement and investment to actively generate wealth, boost export potential and create high quality jobs across all the nations and regions of the UK.
A fourth big takeaway is the partnership approach. In place of the current suppliers’ forum there will be a Defence Joint Industrial Council, with the “relevant unions” getting a seat at the table for the first time. This is an important signal for the rest of Labour’s industrial strategy planning. The primes in Britain are substantially unionised, but the supply chain is not. They’ve been arguing for a role not just in collective bargaining but in skills training and process design.
The fifth takeaway is coherence: the strategy framework sets out six goals that - from the likes of BAe and Lockheed to small SMEs producing vital stuff - investors, managers and potential workers can read. Labour is going to build defence capabilities onshore; it is clearly trying to form a land partnership with Germany; production is going to be more export focused and that means more generic, modular and export-focused design.
This might sound like Mom’s apple pie, but in defence it is important because of the MOD’s historic tendency to gold plate everything, from artillery shells to frigates. They’ve traditionally got to be high quality/low production run - and in the new threat environment, a lot of stuff has to be good enough and generic enough to be allowed to export to countries beyond the Five Eyes.
The Challenges…
The challenge going forward is, first, to concertise this into an executable strategy: there’ll be valid points made by suppliers, unions and academia but, once absorbed, you need a document like DSIS21 that is more than a set of aspirations, but specifies ends, ways and means.
Another challenge is to bring the primes on board to a world where supplier capture is weaker and government procures more efficiently. I don’t see any mention of contractual standards here but its going to have to be addressed: we have two frigate factories in the UK, working to entirely different contractual standards, creating workforce cannibalisation issues that nobody on any side is happy with.
The biggest challenge is access to capital. In one workshop I attended during the development phase, while Labour was in opposition, I heard of banks and pension funds not only using ESG criteria to avoid investing in defence, but straight forward geopolitical realpolitik: big foreign investors in certain financial corporations either don’t want to invest in UK defence or, more pointedly, anything that can help Ukraine.
So restructuring access to capital - from the early stage, where lack of scale puts off the VCs - to mass production, is going to be critical. The document rightly vaunts the MOD’s achievements in getting Sheffield Forgemasters to invest in artillery tube production, and the nationalisation of a small chip-maker in the NE. But the reason these companies are in public hands is that the private capital markets failed them.
There is a lot more to do - and the consultation process begins today - but the defence industrial strategy statement is a good start, and its focus on collaboration with unions and regional investment shows the difference between a clear-eyed social-democratic government and a confused neoliberal one.
Of course, with both Europe and the USA two years ahead of us in their defence industrial strategy execution, that’s a challenge. The UK is locked out of EDIS and needs to get on the inside as much as it can. And under Trump, the USA defence industry is going to be playing hardball on exports and perhaps even tariffs.
The full document, together with consultation details, is here.
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