Alex Dorrian: 'It's an ethical business. We must remove the arms trade image'

The Business Interview: Defence and aerospace are the unsung heroes of the British economy, the chief executive of Thales UK tells Sarah Arnott

The annual Defence Systems and Equipment International (DSEI) exhibition that starts next week in London can be an eye-opener for the uninitiated. Exhibits range from machine guns to missiles to fighter jets, and the show attracts a broad international clientele, including some with briefcases chained to their wrists and sunglasses that are never removed.

To apologists, the arms business has an image problem – caught between amoral, James Bond-style glamour on one side, and uncomfortable, post-colonial controversies such as the Iraqi supergun scandal on the other. But with the recession battering growth, the financial services sector's role as the mainstay of the economy tarnished, and the Government poised to slash public spending the misunderstood defence sector needs a makeover, according to Alex Dorrian, the chief executive of Thales UK and also executive vice-president of the French giant's divisions in Canada, Australia, New Zealand and the US.

"The problem is that people just think of the 'arms trade', when in fact it is a really ethical business," Mr Dorrian, a deceptively softly spoken Scot, says. "We have to take away the arms trade image and think instead about the UK exporting technology and creating a huge number of jobs, which makes us a force for good."

For a start, defence no longer just means warships and combat aircraft. In the modern world of asymmetric threats, it is about sophisticated surveillance systems, counter-terrorism, next-generation communications systems – many of which have benefits at home as well as on the battlefield. "We need to think of defence and national security as a continuum," Mr Dorrian says.

But as the UK reconsiders its reliance on high finance and the debate rages about the country's industrial future, the defence sector's strongest case is economic. The industry employs 300,000 people, supplies 10 per cent of the country's manufacturing and engineering jobs, and has a turnover of £35bn through 9,000 different companies. For several years the UK has consistently held a 20 per cent share of the global export market, and in 2007 became the world's biggest exporter, with £10bn-worth of new contracts.

The danger is that short-term financial pressures will sap such strength. Mr Dorrian will not stick his head so far above the parapet as to join the debate on soldiers' equipment. But even the most diplomatic cannot pretend that the Government's defence budget is not seriously under threat. A second iteration of the Defence Industrial Strategy is already under way, and a full-scale review is due to begin after the next election, with a view to deciding the UK's role in the world and what kind of military that requires. These are big questions, and they have major economic implications as well as political ones. "My fear is that defence spending will be reduced," Mr Dorrian says. "But when it comes to making choices, people have to understand that there needs to be a premium for high technology manufacturing in the UK."

The defence sector is one of the last bastions of UK manufacturing. Thales alone has 9,000 UK staff, across 40 sites. In total, the industry supports at least 300,000 jobs, covering everything from electronics to software to complex heavy manufacturing. "It needs to be understood at the highest levels of government that a real driver of skills generation – jobs for graduates and exciting children into engineering and manufacturing – is driven by defence and aerospace," says Mr Dorrian, who started his career as an engineer designing ships and submarines in Glasgow.

The numbers bear out the rhetoric. The defence industry exports around £23,000 of goods per worker per year, almost four times the £6000 per worker contributed to exports by the car industry. Its productivity ratio is 17 per cent higher than the manufacturing average. Such a contribution is also relatively cheap. In the current financial year, the government budgeted £38bn for defence, only around a quarter of which is for procurement. Out of a total national budget of more than £670bn, less than 6 per cent is allocated to defence. As a yardstick, the budget for education is £88bn, health is £119bn and the benefits system is £189bn. That shakes out as roughly £3,000 per person per year on social support, £2,000 on the NHS, £1500 on state education and £600 on defence. "Given the furore over defence spending, the public probably believes we spend more money on defence than we actually do," Mr Dorrian says.

Another part of the problem is a defeatist attitude. There is a common perception that the UK has already made the shift to a service-dominated economy, that manufacturing is a relic with no future, and that the UK simply cannot compete. But while France and Germany may have bigger overall industrial bases, high-tech manufacturing output in France and the UK is about the same. "In the UK, we substantially underplay what we are doing," Mr Dorrian says. "People think we have slithered to a service economy. It is not as bad as that yet, but there is a threat unless people understand and are prepared to invest going forward."

With money so tight, being prepared to invest is a difficult message, Mr Dorrian admits. And because the defence business has longer cycles than the acutely-troubled car industry, the sector appears healthy enough to handle cuts. But cuts now mean trouble to come. "It will have a devastating impact on our future capability in aerospace and defence if we cut research and development (R&D) now to save money in the short term," Mr Dorrian says. The threat is not just to manufacturing capability, but also to the UK's ability to compete for investment by the big international defence companies. "It is important that they feel they can develop R&D and skills in the UK."

Thales is one such international giant and Mr Dorrian's impassioned case for British industry may sound strange from a French company. But more than half of the group's 68,000 employees are outside France, and the defence industry by its nature requires an unusual degree of "going native" from its national divisions. "When you are dealing with government, having a very local face is very important," Mr Dorrian says.

In many ways Thales is not a typical defence company. Over the past decade the focus of the industry has shifted from the "platform" – such as the ship or plane – to the systems the platforms carry. For Thales, which started life as an electronics specialist, it is a natural fit. At the moment business is booming. Last year Thales UK's order intake was global company's highest, and three-quarters of the big programmes were defence, including contracts for new aircraft carriers and Watchkeeper unmanned planes. It also has a growing transport business, including a contract to upgrade the signalling on three London Underground lines.

But central to the company's strategy is the deep roots put down in each of its domestic markets. "Thales UK is a UK company and the government is very clear of that," Mr Dorrian says. "It is run by Brits, 95 per cent of supply to the Ministry of Defence is sourced in Britain, and the intellectual property remains in the UK."

Amid the rocket launchers, hand grenades and surveillance drones at DSEI next week may lie the future of Britain's knowledge economy.

Alex Dorrian: An engineered career

2008-present: president of the Society of British Aerospace Companies

2002-present: CEO Thales UK, executive vice-president of Canada, Australia, New Zealand and the USn 1999-2002: senior VP of Thales's global naval business

1998-99: British Aerospace

1991-98: BAeSEMA

1970-91: Yard engineering consultants