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Business Analysis & Features

British tank industry on the wrong track?

If the Scout deal goes to a US firm it will kill the British tank industry, and shine a spotlight on the UK's open defence policy. Sarah Arnott reports

BAE Systems yesterday launched a last-ditch attempt to win the £2bn deal tank deal which the Ministry of Defence (MoD) is poised to give to US rival General Dynamics.

Taken in isolation, the decision on the 600-vehicle first phase of the multibillion-pound "Future Rapid Effects System" (FRES) programme simply proves the unrivalled openness of the UK defence market. But, coming just a week after Europe's EADS pulled out of the bidding for a $35bn (£23bn) US defence contract claiming that the terms of the deal "clearly favour" Chicago-based Boeing, the decision is reigniting the debate about the long-term impact of Britain's "level playing field".

BAE Systems has spent £50m over five years developing its CV90 vehicle to compete for the 600-vehicle FRES "scout" contract. But the Government is reportedly about to hand the deal to General Dynamics' Spanish and Austrian-built Ascot. In desperation, BAE is playing the jobs card – offering to bring elements of the programme that were to be done in Sweden back to its Newcastle factory, creating 400 new jobs and reversing redundancy plans for 400 others in the process. If the deal goes to General Dynamics, it will be the death knell for Britain's century-old tank-building industry, the company is warning.

It is probably too late for BAE. Insiders claim that the decision has already been through the MoD's full evaluation procedure and that considerations about jobs do not carry so much weight in current cash-strapped times.

Leaving aside the furore over the specifics of the deal – critics' claims that the General Dynamics vehicle is as much as three years' behind BAE's in development terms, for example – the broader concern is that the same kind of open competition is in scant supply elsewhere.

None of the big European markets is as open as the UK. But the most protectionist of all is the US, which is both the biggest market and the home of the most dominant industry. Last week, EADS announced its withdrawal from the bidding for the US Pentagon's KC-X in-flight refuelling tanker programme over concerns that the competition was weighted heavily in favour of the Boeing aircraft. The decision prompted a string of condemnations across Europe. Lord Mandelson, the Business Secretary, said he was "extremely disappointed" at the situation – sentiments echoed by the French Finance Minister and the EU trade commissioner.

Worse still, the refuelling tanker is not a one-off. The competitions for combat search and rescue helicopters, and the Marine One choppers for flying the US President, both raised questions about European technology included in the bidding.

"It is not a level playing field, it is one where the US side tips 90 degrees and in the UK it slopes the other way and is open to everybody," Howard Wheeldon, at BGC Partners, said. "The US is operating a fully protectionist policy – EADS pulled out because it knew it didn't have a chance."

The implicit protectionism in the US defence industry is not only a question of awarding the contracts. It also extends to US companies' activities abroad. Washington's International Traffic and Arms Regulations (ITAR) are designed to keep US technology out of the hands of its enemies. But in practice the onerous restrictions on, for example, sharing of software coding, have major implications for support, upgrades and competition from other suppliers.

The US market is by no means closed to non-US suppliers. But those that do business there find the terms skewed in favour of the US, unlike the equivalent in the UK. "Winning contracts in the US is either because you have something that they don't or because you site a lot of the work there," one company said. "But then the intellectual property rights remain in the US and you can't export without permission."

Against such a background, critics are increasingly sceptical about Britain's much-vaunted open competition policy. And with the all-important Strategic Defence Review due to start soon after this summer's general election, and the Government's parlous financial position already weighing on expectations for future budgets, the industry is increasingly concerned that bids will be judged on headline price alone. There is a real danger to both Britain's industrial capability and its independence. "This is potentially hugely, hugely damaging," Mr Wheeldon said. "We destroy the defence industrial base in the UK at our peril because once it is gone we can't rebuild it and, as a country, we will then be reliant on the US and others."

The concerns are particularly pointed in the light of Lord Mandelson's trumpeted strategy to rebalance the economy with "less financial engineering and a lot more real engineering". The last 12 months have seen a renewed focus on Britain's manufacturers, backed up by a £950m strategic investment fund. It has born fruit, with a string of recent investments in the nascent off-shore wind sector, for example. But such advances mean little if existing industries lose out elsewhere.

"Talk is good, but actions speak louder – and the question with the tank contract is how is the Government in making sure this is sustainable?" Graeme Allinson, head of manufacturing at Barclays, said. "What we need is not just a long-term understanding from the strategic defence perspective but also from the manufacturing perspective."

A century of British tank building: Running into the sand?

If the contract for the next-generation armoured "scout" vehicles goes to General Dynamics rather than BAE Systems, it will be the end of nearly a century of British tank-building.

Tanks were invented in the First World War by Lieutenant Walter Wilson (pictured right) and the Mark 1 – from a prototype dubbed "Mother" – first went into battle at the Somme in 1916. The development was a desperate bid to smash the stalemate of trench warfare, and the so-called "landships" became known as "tanks" because the top-secret designs were disguised as water tanks to outwit spies.

The main battle tank on which the modern British Army relies is the Challenger 2. It was built by Vickers, which was subsequently bought by BAE Systems, at factories in Barnbow in Leeds and Elswick in Tyne and Wear.

But after more than nine decades, the industry now hangs by a thread. The last Challenger was built in 2002. The Leeds factory is already closed. And the Newcastle plant does little manufacturing. It is engaged in building the lightweight Terrier, but the programme concludes in 2014. Otherwise it is used for upgrade and maintenance. The skills to make tanks do still exist in the UK, but not for much longer if the FRES contract is lost, warns BAE.