Corrected oral evidence: The relationship between the Government and the defence industry

Oral evidence, 30 June 2026.

Chris Newland

No, that is fine.​ ​​The Chair:​ Thank you for that. I would like to start with a fairly general question, if I may. You will be very familiar with last year’s strategic defence review, and it was that that called for the creation of a new relationship between Government and the defence industry. I am interested to hear from both of you what both cultural and practical changes are now needed to bring about that new partnership, particularly with an eye towards supply chain companies. I do not know which one of you would like to begin. Chris Blackford. I had a conversation with someone from the British Army this week about one of the key challenges we face and the cultural challenges around awareness of how industry works. If we look to the Ukraine war, where from an unmanned system perspective millions of systems are being built on an annual basis, they are in a total war scenario, whereas we are in a very different scenario, albeit part of the supply chain into them. We have the DIP coming out today, supposedly—we shall see. Were we to approach a scenario where there was a demand on UK industry to ramp up, there are significant barriers to us being able to ramp up. A principal cultural challenge is awareness of how industry works, and that industry is not a switch. You cannot switch it on and off. One of the things I often speak about is muscle memory. A bit like learning a new skill, the more you practice it, the better you get. The more people who know how to do it, the better able you are to support a new demand or a new challenge. If you look at the UK manufacturing sector more broadly—I wrote a paper on resilience about two years ago specifically on this point—it is highly stratified. You have very large companies at the top which are not agile, which are very burdensome in terms of bureaucracy, and you have a few in the middle, but the majority of companies in the UK sit in the SME space. There are lots of small companies, highly capable, with great skillsets, but they are very inward-facing typically, in the sense that they are very good at producing a product or a range of products, but they are limited by capacity. Their capacity is defined by multiple variables, one of which is time and the ability to scale up. The other is access to capital. If you are a small company, raising debt, for example, becomes quite challenging, particularly if you are in the defence market where, if you look at contracts, they are typically purchase order to purchase order; they are not long-term agreements. From a risk perspective, it is very hard for a small company to lean on its balance sheet and say, “Actually, we’re going to invest to have greater capacity.” There are very few outlets to support that. It is hard to go and raise debt as a small company. Lots of them have high customer concentration, ie they have their revenues made up by, let us say, two to five customers in some cases. This is where opportunities such as the Defence, Security and Resilience Bank (DSRB)[1] could open up new avenues of funding, because if there is a scenario where significant demand is put on industry, I would argue that it will take between 18 and 24 months for these companies to reach scale. It is not in their interest financially yet to invest in new sites, new people and new capital equipment. Some capital equipment, such as autoclaves, can take 12 to 18 months in lead time. If you want to build a new factory, what about planning permission? That takes time—complaints from your neighbours. There are many variables that need to be considered, and from an MoD, Defence Equipment and Support (DE&S) or a government perspective, we simply cannot turn a switch and expect industry to respond. For me, one of the principal cultural challenges is really getting into the nuance of how manufacturing works and how it can or cannot react to potential future demands. The other one, I suppose, is commercial contracting. As I said, the majority of work that comes down from the primes is on a purchase order basis, so you have a limited revenue visibility: let us say three or six months ahead, in some cases— maybe 12 to 18 months. Long-term agreements are a scarce thing. Then there is the complexity of the contracting, where a prime will do what is called back to back. They will effectively pass their contract down to you. Let us say it is 1,000 pages, and you are a company of 100 people of whom 90% are making a product. You have no internal legal capability. These days, contracts stipulate that you cannot use AI—most will probably do that. That means that small companies are now taking risks on a contract simply to win new work and get new revenue. I know ADS has pushed for change, to generate an easier, more standardised contracting format, but I shall give just one example. I ran a company several years ago that worked in oil and gas. Oil and Gas UK[2] has a very strong approach to contracting, whereby the oil and gas market, which is made up of very large and expensive assets that form part of our national critical infrastructure, cannot operate without small companies. However, their liability is capped by this contracting. It is capped at between one and one and a half times the contract value, so the risk on a small company is incredibly low, which means that you have more companies willing to take risk and then engage in that market. If we could put together something similar, whereby these larger organisations—the defence primes—are not asking small companies to sign up to onerous, burdensome contracts with massive liability, we would see more companies willing to engage in this market. ​​The Chair:​ You mentioned an article you wrote two years ago. My guess is that my colleagues are already finding it, but if not, would you be able to send it to us? That might be helpful. ​​Chris Blackford:​ Yes. ​​The Chair:​ You also said that it can now take 18 to 24 months to get something going, but we are warned that we could be at war by 2030. The timescales do not seem to fit together very well. ​​Chris Blackford:​ I did not finish my point on muscle memory, which goes to this point. If there was a continual flow of smaller contracts, for example, there would be more muscle memory—more experience of business—to then scale up. But because it is so “feast and famine”, there are examples of companies hiring people to deliver, ramping up lots of experience, and then suddenly the contracts disappear and they have to scale back and reduce or remove cost. It takes time to scale because scale requires not just people and facilities; we also have to think of the supply chain in the broader, global context. For example, we both work in composites, and a lot of the base material comes from Japan. What if there is a global surge in demand for the products that make drone airframes and unmanned service vehicle hull structures? If there is a global demand for that because there is a new war, we might end up at the back of the queue as price takers. We have little control over that. To be able to scale up, there needs to be confidence from the primes working for the Government that there is money coming through, all the way down through that supply chain to those who supply the base material. If the suppliers right at the bottom want to invest in giving themselves more capacity to sell more to the likes of us, they need to have the confidence and the long-term guarantees that money is coming down, so that they are not risking their own investments. It is a much broader challenge. One way to potentially look at it is to ask, as we did in Covid: can you aggregate demand? Can you go to different industries in the UK and say, “From a composite perspective, on a quarterly or annual basis, what is your demand?” If you then aggregate that demand, you can arguably become a bit of a price setter. You can go to the suppliers because you are buying in such vast quantities and, over a longer period of time, you have greater economic flexibility to deliver better value and to deliver products to UK manufacturers, such as ourselves, who can then potentially shorten that timeline to manufacturing at scale and high volumes. Q32 ​​The Chair:​ Thank you. I would like to come back on one point afterwards, but I wonder whether Mr Newland would like to respond. ​​Chris Newland:​ If you do not mind, I will read from my notes, because I am known to be verbose and would like to be quite accurate. Coming back to your question about the strategic defence review, the main cultural change needed is that the Government have to become more confident engaging with smaller companies, not just large primes, original equipment manufacturers (OEMs) and tier-1 contractors. If the Government want value for money, resilience and innovation, they need to recognise that much of that capability sits lower down the supply chain in specialist SMEs and manufacturers. I will now break off from my notes and become a bit more verbose. When I started work in the 1980s, when we were a defence-orientated SME, the large companies would give us a design. In the 1990s, they would ask you to do the design. In the 2000s, they would come to you saying, “We do not quite know what we want. Can you assist us with this design?” Scrolling forward through the 2010s and into the 2020s, our customers are now giving us a wish list; they do not really know what they want. Behind that is the fact that, as the defence industry contracted, the Joint Ventures (JVs) joined forces—they amalgamated, and a lot of the internal capability within those larger companies was lost. They could not retain the overhead within their businesses because there was not enough business for them, which is also why they were joining. That left them devoid of a lot of technical capability, lower-level engineering and detailed engineering, which moved down the supply chain to the SMEs, or the people doing it became consultants. You then have an issue where those smaller businesses are not being fed as regularly as they should be, and that skill base is starting to also go. I will come back to that. At the moment the system is understandably risk-averse. The Government feel safer placing contracts with large companies because they appear more secure, but that comfort comes at a significant cost. We see this all the time. Too much money is absorbed by administration, integration, management layers and risk margins rather than going into manufacturing capacity, skills, equipment and innovation. Primes have an important role—do not get me wrong—and on some complex programmes they are absolutely essential, but many primes are now less manufacturers and more integrators or contract holders. That should not automatically be a default model for everything. The Government need to understand who is actually delivering the capability and where the current route gives best value, and that is where your SMEs come in. That would be my answer to your question about the strategic defence review: the Government must learn to deal with SMEs. Some of your later points, which I will not cross now, will come into that. ​​The Chair:​ Presumably you have both—it came out slightly more from what Mr Blackford said—been talking to the Government over the 12 months since the SDR came out. Are they listening to you? Do you feel that they are aware of what you have just told us? ​​Chris Newland:​ I do not think we are necessarily telling the authors of the SDR. We are recipients of their knowledge, and that SDR is based on operational experience and the way they think requirements for the UK defence industry need to go, given the threats of tomorrow. ​​The Chair:​ Sorry, I was perhaps not clear. You have presumably been speaking to the Government over the past year about the problems that you have just outlined to us. ​​Chris Newland:​ We go to lots of events, shows and committee meetings to put our points, but I am unaware whether that shapes things. They listen, but I am not entirely sure whether that has an output in our favour. ​​Chris Blackford:​ I have had limited engagement. In my past career, I was an Army officer for seven years. My network—or my age—is such that my peers are now at full-colonel, one-star level, so I have engaged at that level. Another challenge is that we need to treat SMEs as a dynamic, agile asset. A lot of what we do could arguably be considered very unsexy: we are at the bottom rung of the ladder, effectively. If you take, for example, the Uncrewed Systems Centre in Swindon, all the press is on the new, emerging defence technology companies. They are the sexy ones because they are getting all the masses of investment, but their enterprise value—their valuation and growth—is fundamentally linked to the ability of the SMEs that sit beneath them to support and grow with them. None of these companies is manufacturing drones; they are effectively the design IP house. They might do some assembly work, but all the manufacturing is passed out to the swathe of manufacturing companies around the UK. It is a broader point around the defence industry. Germany now has several unicorn companies growing very quickly. The UK has companies such as Cambridge Aerospace, for example, which are doing very well but whose future success is entirely reliant on the ability of companies like ours to support them at scale. As I said in my opening remarks, for us to support them at scale, we need access to capital and new people. One of the critical components of people is time: it takes time to find people. For what we do in the marine sector, it can take months to train someone up to a reasonable standard. Equally, there is a shortage of younger employees coming through who want to get their hands dirty. For example, a lot of our employees come from Poland, where there is a strong legacy of shipbuilding. There are many variables that dictate what we can and cannot do, but, as I said, we are fundamental to the growth of the sector more broadly. Q33 Lord Barber of Ainsdale:​ You have both already commented to some extent on the issue that I want to focus on: the arrangements that you have with primes, in particular the extent to which the way they frame the contracts is manageable for companies like yours and is variable between primes, with some being much better than others. You talked about 1,000-page contracts and the degree of complexity often involved. Are all the primes culpable—if that is a fair word to use—for the complexity, or are there examples of primes that are much better at working with SMEs and managing the relationship in a way that addresses some of the issues that you have talked about?

Chris Blackford

The established primes have many layers of management and have developed these systems of controls over many decades. But their slice of the pie is slowly being eaten by the emerging defence technology companies—if you look to America, the likes of Anduril and Helsing, and their European equivalents—which have come from the ground up and grown incredibly quickly over the last five years, or 10 years in the case of Anduril. They have grown with limited governance, compliance, controls and systems. They have been growing quickly. They have been iterating, developing, getting product to market and have grown through mergers and acquisitions (M&A). They are more agile and lean more into what I suppose you could call the Silicon Valley model; a more agile approach to contracting. So there are better examples there. The challenge with the primes is that they may consider something for two years, and then you get it and you have two weeks to turn it around. There is a mismatch on the expectation around the time it takes. If you look at a small company and apply an hourly rate to every individual, your head of business development, say, is burdened with the task of going through this onerous contract to try to work it out when they could be going to market and selling. Time is critical, because you are losing selling time to simply focus on the contract. There are many burdens. There are various accreditations around cyber security, ISO[3] and Intellectual Property Rights (IPR). Going through the supplier onboarding process with a lot of these companies takes a long time. You have to submit a lot of documents. An easier way of doing it would be if there were some sort of MoD centralised function where every defence company, or company that works in defence, could be accredited through some national scheme. The primes could go to that centralised function and see that you tick certain boxes and you could then be part of a tender process. That element of contracting—it is not just the contract; it is all the supplier accreditations you have to go through—is incredibly burdensome to smaller companies, who then lose the ability to focus on what is really important, which is growing and becoming more valuable.

Chris Newland

I concur. We are dealing with a contract at the moment from one of the primes. I was in South Africa on business in January last year when I received the inquiry. We are still working through it and it will not be awarded—potentially—until December this year. As my colleague said, that ties up an awful lot of resource. Our cost of sales for something such as that is just enormous. There are no fees or money at that point. If you want to change anything in some of these protracted contract negotiations, which require engineering support, technical support, financial support and commercial support, it runs into thousands of pounds, and there is no guarantee that you will get it at the end. That has always been a problem. I once shared a taxi with the head of sales of one of our biggest primes and I asked him, “What is your conversion rate on inquiries to sales?” He said 1%. I was shocked.

The Chair

What figure?

Chris Newland

One per cent. That is the conversion rate of that particular prime. I will not mention its name. It was an interesting taxi journey. I did not expect him to say 1%. At the time, we were making a lot of defence-related and motorsport-related products at that company—an SME—and I would feel very bad if I was getting worse than 66%, or two-thirds. If I were getting nearer to one-third, I would be worried that I was not offering something that anybody wanted or that we were really misaligned with what we are trying to sell to people. We simply could not survive on that. When your 1% is an aircraft carrier—I do not want to give away the company name—that is a big sale. From our point of view, we need that continuous feed of work. To get SMEs into a situation where they are protracted in contractual estimate quotation processes without any sort of funding or any known success at the end of it is a real challenge and always has been. As a result, we have to pick our fights really carefully. Coming back to the 66% bit, I have to be very careful about what we are going to get involved in. You have to look at it and think: what is the likelihood and how long is it going to take? We do it because we love it—we do it our whole life—but that is a huge problem to smaller companies, and I think it should potentially be funded by the Government through a selected supply base and below. I have just lost a contract. My customer lost the contract. It has gone to another company—I will touch on this later—with a UK postal address. I am sure you know what I mean by that. It is a company based in Europe. A contract has been awarded to it rather than to a UK company. Although the UK company is actually an American company, it manufactures everything in the UK. The postal address company, historically, has not. The majority of its work is made in Germany. The work that it has been awarded will undoubtedly be made in Germany. But I am sure it will bolt a couple of bits together and put a sticker on it and say that it is made in Britain. That is losing a lot of technical capability, research, design, development and IP. It is exiting the UK. We were not asked questions about this but it is one of the things that brought me to the meeting.

Chris Blackford

I will add two points to that. The first is proportionality. If there could be tiered and proportionate contracting according to the risk and value of a contract, that would be far more straightforward. There seems to be little differentiation. The second point follows up on a point that Chris made. The balance sheet and access to cash can be a challenge for small companies to deliver in the early stages of a contract. We have gone to the primes and asked to have contracts or payment terms restructured. Most of the primes outsource their payments to a third-party company. To get paid, you have to go through a portal, which is very onerous. They pay on time, but having the contractual terms change, particularly around how you are funded, is very hard if not impossible, so many accept the risk and go ahead with what they have. I will go back to the DSRB and the way it is looking to introduce new forms of giving access to capital for companies up front so that they can start funding the early stages of these contracts. Again, it supports the companies already operating in defence. Equally, I know of lots of companies that are not willing to work in defence because of the challenges they see in working in defence. The pool is very narrow when it should be very broad because there are a lot of companies. Like with anything in life, if you can make it a more attractive place to work, more people will be willing to engage.

Lord Barber of Ainsdale

I have one follow-up point. All the points that you are making are very interesting and powerful. You used the term “wish list”. The pattern of the way in which contracts are framed has changed over the years and, increasingly, things are coming down the line that are potentially saying, “We kind of know what we are looking to deliver, but with regard to exactly how a product might be appropriately designed to meet those requirements and so on, we really want you to do that”, potentially with significant IP implications. Is that kind of issue an added complexity for smaller companies in particular?

Chris Newland

That is an interesting question. I do not think I finished my chronology there. I will just finish one more bit. In the 2010s, customers were sending us work specifications—details of what they wanted—and they did not send us the real detail any more. The wish list is really a cardinal point specification. Now, we will receive a cardinal point specification where they simply seem to whip round their company with all the technical staff they have left, which tends to be the principals now rather than the soldiers that they had before. This particular one had a 69-point wish list cardinal points specification. What they are asking the supplier to do now is fill in the blanks, because they really do not have the capability internally to generate it, but they have the ability to critique it after. Your point about IP is a very interesting one. Here we are faced with a large company with great commercial and legal backing behind it, and we are being asked to create something for it because it does not know what it wants. Then we get into an argument on what is foreground and background IP. It has paid all this money out, so therefore what that money is creating as IP is then that company’s. You want the work, so where does that leave you as an SME? You are actually developing and designing these products and trying to hang on to your IP, but it is paying the money, so that is therefore that company’s. I would argue that the UK Government should own all the IP because they paid, but that is the argument we end up with with IP. It is a big company against a small company, I am afraid. But they are our customers, at the end of the day. Q34 ​​Lord Udny-Lister:​ I am going to ask you something; you have been touching on it all the way through but I will now ask you to be a bit more granular with it. What are the main barriers to UK companies getting involved in the supply chain, and what actually is needed to address that problem? If you had a wish list, what would you actually do? Then I have a slight supplementary question, because you picked it up, about money. Is the problem with money about equity or debt, or is it both? Can I just leave that one on the table? ​​Chris Blackford:​ If you take the first one, I will take the second one. ​​Chris Newland: Oh, I was​ going to do the cash flow. Chris Blackford:​ I will come back to my five key points around the challenges of operating in defence as a manufacturer. The first one is the capacity that exists; we can be relatively elastic and can scale, but, as I suggested, if we were to go double, triple or quadruple the scale, there are many different variables that impact that. Therefore, capacity and scaling is a challenge. If you are a company looking to go into defence, why would you commit additional capacity, which you could give to customers that give you long-term contracts with good revenue visibility, to a customer that has onerous contracting terms and no revenue visibility, unless you have this great moral drive to serve your nation? From a business perspective, it is pretty challenging. The only counterargument to that is that there is more money slowly coming in; we are doing a lot in the export market, where there is more money. Another challenge is that we are a critical part of the supply chain, but, again, a lot of people look at that through the lens of, “If you are so critical, why is there such limited support from the primes and others?” Then there are challenges around contracting arrangements—long-term agreements versus purchase order by purchase order—contracting reform and keeping muscle memory warm. As I said, we need to keep those contracts coming, and, despite the delay in the DIP, contracts have been provided. I think the press have actually been a little naughty in the sense that they have not highlighted that there are still contracts being issued, although clearly not at the scale that most want. To your point of debt or equity, from a securitisation point of view, if you go to the debt market as a small company with limited assets, and you have three or five customers, and maybe one customer making up more than 60% of revenue, it is going to be incredibly challenging to raise debt. Most also have limited EBITDA[4], so you are not going to raise a great deal. There are other ways: one option is Funding Circle, backed by the British Business Bank, or there is equity, but a lot of these companies have never had to raise capital, so they do not have a network; they do not know where to go to raise. They are not going to raise from venture, and they are typically too small to raise from private equity. Therefore, again, the options to raise capital to grow are pretty limited. Yes, you can do a hire purchase on assets if you are buying a machine—that is more straightforward—but the avenues for these companies to explore to raise capital are pretty hard. Again, that is where something like the DSRB or an equivalent—where the liability is held by someone else, whether that is the Government or the prime, to allow some capital to be given to those smaller companies so they can grow—would be an excellent scheme. I am not paid by the DSRB, but I do think it is a worthy opportunity to consider in terms of other mechanisms of funding. ​​Chris Newland:​ I would add to that that the defence sector is not considered to be commercially attractive, if you look at other areas. When the UK made defence products and sold heavily around the world, that was a fairly large market for a lot of UK companies, but that is not the case any more. You then mix into that that everyone, not just the UK, is now concerned about their sovereign capability, for lots of good, different reasons; some of those are obviously security-related, but some are fiscal-related as well. Effectively, our ability to trade and make sales abroad from the UK defence industry to other countries’ defence ministries is very limited, because they want to buy from their own countries. If you try to sell something military related to France, and you are not French, that is going to be really difficult, and it will be the same with Germany. But I have to say—going back to my earlier point—we do seem to leak a lot more than other countries that we deal with. We try to get work from foreign nations, mainly European, but they are very sovereign-based in what orders they want to place. Defence is not very attractive to a lot of companies. It is not high-value, high-capacity, high-volume goods that you are looking at here, so why would somebody get involved in it if they could make something that went into 10,000 washing machines? I am lucky if our volumes are in the hundreds, really, with what we make; normally, tens of specialist stuff is the norm. Defence used to have a good value attached to it—I am old enough to remember cost-plus in defence—but that has gone a long time ago. There is not the value nor the volume for it to be commercially attractive. Some of my colleagues on previous committees have talked about how the country has—I have lost my point, actually; sorry. ​​Chris Blackford:​ One thing we are missing is that Brand Britain has a lot of equity value. Look at our heritage in Formula 1 and aerospace; we have excellent manufacturing and a lot of IP in process. We as a company are currently acquiring a factory in Europe and exploring factories in the Middle East. The reason for that is that we have learned that there is a lack of this type of capability in many of those countries. For example, if you take the Gulf states, the Emirates’ relationship with the UK was a bit iffy pre Iran, but now, by all accounts, it is pretty strong, as with the Saudis and others. In a post-Iran environment, sovereign manufacturing and resilient manufacturing are very important to them. They do not know how to do it necessarily, but we do in the UK. There is therefore a market not just for exporting product but for exporting capability. We do not design anything; we are not an IP house; we are, as I said, at the bottom, doing manufacturing. But what we do have is know-how, reputation, experience and expertise, so we are treating that as an exportable commodity and talking to various other entities around bringing our expertise to other nations. A lot of UK defence companies are actively selling products to the export market because the DIP has not yet been delivered. Defence is a challenge, but I am very much “glass half full” about it. In every crisis there is opportunity. While we are not in a crisis per se, there is definite opportunity out there for us to capitalise on. Q35 ​​Lord Teverson:​ Thank you both. To some degree you have answered my question already, but I will just go through it quickly in case you want to add anything. Do procurement processes and contracts need to change for the new technologies and requirements, such as drone and anti-drone capabilities, and how would you make it easier for supply chain companies to engage with them? I think you have gone through most of that, but if you would like to add anything, or say what the nub of that would be, that would be useful. Chris, do you want to start? Chris Newland:​ Which Chris? Lord Teverson:​ The other Chris.

Chris Blackford

The only thing I will add is that we work in uncrewed systems and I would argue, particularly from a marine standpoint, that it is about decoupling the platform from the payload. We make boats, basically, and boats last for decades. There is an argument—Al Carns made it a while ago, as have others—about stockpiling. I am of the opinion that we need to start stockpiling components or some structures because, as I said earlier, we cannot rely on us scaling very quickly. We should be buying a number of boats, for example, because the boat does not change; the aerodynamics and fundamentals of what a boat hull looks like have not changed in decades. What does change is the payload, operating system or technology that gets fitted into it. So, if we are moving to a more hybrid Navy, for example, or are looking at how we defend our undersea infrastructure from a resilience standpoint, why not build a stockpile of these systems which can then be retrofitted with the latest technology? That is something that should be a real consideration in looking at contracting and working between Government and industry.

Chris Newland

I am going to read this answer, if that is okay. I think that was your question 4. In its current form, I do not think that the procurement process is designed to adapt at pace. It has too many layers of assessment, approval and governance. Those checks exist for a reason but, in fast-moving areas like drones and counter-drone systems, delay can mean that an operational need has already moved on. It is about eight days in the field, at the moment. There needs to be a parallel route closer to the urgent operational requirement model. When an end-user identifies a real operational problem, there should be a faster way to engage industry, fund a trial, test a solution and iterate it. Are you all familiar with the UORs?[5] I will come back to that one in a minute. Ukraine has shown how short the cycle can become when commanders and industry are much closer together. The UK system is not currently set up to move at pace. We have seen what is possible when normal processes are simplified. In the late 2000s, we worked on a complex unmanned underwater submarine for a major prime and, as a test case, it removed its governance with the agreement of the MoD to engage a company. I was working for a motorsport company at the time, which had a large defence side to it. The company had spent about £10 million in 10 years in getting to where they had and had a crude product at that point. We were given £300,000, three months and 15 people—seven and a half from us and seven and a half from them. In month 1, we designed it; in month 2, we tooled it; in month 3, we built it; and in month 4, we did not put it in the water on 1 April—we refused to do that—but we put it in the water on 2 April. It went off and sailed in three months. We got a BAE Systems Chairman’s Award for that. It just shows what can be done when the rules are decoupled from the supply chain. A motorsport company was chosen for a reason: because we put cars on track and, if they do not arrive on the day of the race, it is too late. I touched on urgent operational requirements. A classic one is the Falklands War. We went down to the Falklands War with through-deck cruisers, which was a bit of a dodge because they were not aircraft carriers—but they are. We did not have any AEW capability, so we could not do any airborne early warning on them, because it did not exist. That went out with the “Ark Royal” and “Hermes” when it was fixed-wing flight, which was when the Gannet went out of service. What do you do then? We have a problem. In a matter of days and weeks, somebody took a Sea King, put a blow-up radome on it and pinched a radar out of a Nimrod aircraft. That was in 1982. That aircraft was an urgent operational requirement; I can tell you that it did not go through multiple layers of procurement and committee. That aircraft served in its various formats right until the Crowsnest helicopter came into effect, which was about 10 years ago, so it had a good 30 years of life. I just wonder whether anybody ever did some cost analysis on that: how much did it actually cost? There were probably just technical people in the hangar bolting bits together, welding things up, smashing it together, making it work, and that platform served for 30 to 40 years. That is a type of urgent operational requirement. There have been loads in Afghanistan. Are they really expensive UORs? Are they really well thought-out? That is effectively what Ukraine is doing: it has urgent operational requirements in which they have a problem, they solve the problem, they field the problem and that is it. That will not sort all the problems we have but, from our point of view, UORs are quite interesting, because they are well funded and quick; not a lot of people are involved, and it just gets done.

Lord Teverson

So do we need to do that now or do we wait until first shots are fired? What is the inevitability?

Chris Newland

I attend and my team attends quite a lot of events, and I sit here quite uneasy, because I am not sure that the population and the public know how bad it really is. I keep going to these things, and it was eight years, then it became five, then it was three and now they are worried about two years. I went to one at RAF Waddington on Thursday last week; it was a group captain and air commodores giving us their personal perspectives. They did not really want to go on the record, but you are looking at two years and that is frightening. I come back to my age again—sorry. I was born in 1966, in West Berlin, a divided city.

Lord Teverson

In the House of Lords you do not have to worry about your age.

Chris Newland

The Russians were next door; I saw them. I went across Checkpoint Charlie when I was a child, because the Russians wanted to show you how great it was on the other side. There were all these toys and sweets in the windows for all the children, and that is what we used to do.

The Chair

I—

Chris Newland

Sorry; do you want me to cap that one? I will wind back from that.

The Chair

We really want to concentrate. We are trying to look at solutions. We are asking about the relationship between industry and the Government. We really want to see what our major asks of the Government should be. I was born in West Germany, in the same situation as you, so I understand that well, but could we just concentrate on solutions?

Chris Blackford

To answer your question around speeding up decision-making—it is a sort of iteration of Chris’s point—we need to give clear demand signals to companies so that they understand what the expectation is. In my example, a prime spending two years and then expecting a small company to react in two weeks simply does not work. The other one is a cultural shift around failure. The SDR called for innovation at pace or “at a wartime pace”, I think it said. We have done that before. In some ways, we need to be a bit more American in how we look at failure. Take SpaceX as a very big example: lots of rockets crashed, but where is it now? It has developed a rocket that can take off and land, and failure was a fundamental route to success. In fact, failure is the only route to innovating and ultimate success. If we can treat failure as part of a process, rather than penalise it again, we will have more companies willing to engage in that process.

Lord Teverson

Can I just come back quickly on one thing, Chair? You mentioned export. We are a committee that looks at British industry; we are not a UK defence committee. I am interested in why we do not just put our brass plates in Europe and do what they do or is that particularly difficult because we are not part of the Security Action for Europe (SAFE) programme, say, within the European Union?

Chris Newland

If you noticed, there was actually a different answer between the Chrises on this table. The type of work that Chris gets involved in is machining, generally. Do you want to categorise what you sell abroad as an export?

Chris Blackford

We are working with various companies that have a product to sell to the UK and other nations. As I said, those other nations want to manufacture a product in-country for their own sovereign capability but, in many cases, they do not have the expertise. In this case, we are buying a factory and exporting our expertise to train that factory, to scale it and to deliver for a British company, albeit to a European customer.

Chris Newland

Is that offset, in effect?

Chris Blackford

That is what it was called historically, but I do not know if it still called that now.

Chris Newland

Where I am coming from, one of our customers makes naval navigation radars. They are the world leader in it; they sell them quite well all over the world. Other products that we make are, in effect, UK components that go into primes. We have tried to go to Germany or France; we tried very hard with sonar domes in France that we manufacture in the UK, but France will not even entertain it. There is an absolute barrier, and it does annoy me, because we are not considered equal at the table when trying to sell goods to Europe. They buy their own; even in the EU, Germany will buy German. When we were in the EU, we were seen as playing by the rules. We would place an inquiry out there and all these companies from all over Europe would bid on them, and they would go anywhere—like armoured personnel vehicles to Spain. But it seemed that, when someone like Spain, Germany or France put out a contract, it strangely always ended up with Spain, Germany or France. We seemed to be the only ones who were playing cricket at that point, and that is the problem we have; they just do not want to entertain a sale.

Baroness Harding of Winscombe

I hope you can hear me all right; I am afraid that my reception is not brilliant. You have covered some of this already, but I just want it to be clear. We have heard that the MoD’s requirements can be far too complex for SMEs, and you have given us lots of examples. [Inaudible.] I wondered if you could set out in a bit more detail your experience of the MoD’s role in contracting and whether you are receiving hundreds and thousands of pages of requirements. If that is your experience, what changes could the MoD itself make in improving the situation?

Chris Blackford

I come back to my point about a standard, proportionate SME contract. The primes do not do that. Arguably, if the MoD led on this, and if it led with a standard, proportionate contract size for SMEs, you might see that trickle-down effect into the primes and others. Something that manages liability, exposure and the various accreditations would make life a lot easier and would be shorter. It should be something written in standard plain English where a non-legally trained individual can decipher exactly what it is trying to say. I remember, when I ran my first business, using a highlighter to highlight the words I actually understood, and then I would try to read the contract. I imagine lots of people do the same thing. I also made the point earlier that people are now using AI to read contracts and, in effect, summarise them for them. Clearly, that comes with a risk but, equally, NDAs are now being signed where the contract supplier is specifically stating that AI should not be used or cannot be used. Humans will always find ways to navigate the complexities of life but, again, if it was simpler, standardised and proportionate—to go back to my earlier point—you would see far more companies engaging in the process.

Chris Newland

I would agree with that; I agree with almost all those points, really. We rarely see the MoD contracts directly. We are an SME, and I have been involved in larger SMEs before. We very rarely see the MoD engaging with an SME, so the MoD contract is irrelevant to me. What is relevant to me is that it flows down through our primes, our tier 1s and our OEMs to us. They should pass everything they possibly can down that chain. It is interesting that you used the word “proportionate” because I have said that, if Government want more SMEs in defence, the paperwork has to become proportionate to the opportunity. I totally agree on the AI tools. For a little while, we almost levelled the playing field with having the ability to use AI tools; we used them to look at contracts. There are professional versions, which are supposed to be quite close and we are very cautious with what we put on them but, when looking at basic contracts that run to thousands of pages, they are a great tool to help summarise. It gives us an ability to have an argument, or a discussion, about what comes in and what goes out. In the end, however, as I said before, you ultimately reach the point of, “How much do we really want to argue with this person?” This is your customer, and that will become a negative at some point. You are quite right that a lot of the contracts coming through now say that AI cannot be used. I wonder whether it is because it is the security breach, which could be managed. Perhaps the Government should look at a closed AI-type system that we could use.

The Chair

I am sorry to interrupt, but is not the problem that we should be saying to the department, to the MoD, “We should be able to understand this. You must write it in a form that we can understand”? Is that not the solution?

Chris Newland

I think the MoD should be sympathetic to SMEs. What flows down through their contracts into the prime does not necessarily flow down into an SME, so perhaps there should be a lighter SME-type boilerplate contracting model that could end up at the SME, which would lessen the burden and make the contracts less of a risk to those SMEs. It is a problem, because we obviously look at some of these contracts and have concerns.

Baroness Harding of Winscombe

We have heard that the Pentagon has been much more effective at—[Inaudible]—the percentage of work that they contract out to SMEs. Is there anything that you can add to that? Are there other levers than simplifying the business to flow to SMEs?

Chris Newland

I am afraid that I did not get much of that, sorry.

The Chair

The Pentagon seems to have managed better. I think that what Baroness Harding was saying is that we have been told that it has a much higher success rate in the percentage of SMEs in its contracting. Therefore, are there other things that it is doing that we could learn from?

Baroness Harding of Winscombe

That is correct.

Chris Blackford

I have no specific exposure to or experience of the Pentagon or how it contracts. You often hear about organisations such as the Defense Innovation Unit; there is a very good book about that. From an SME perspective, however, there are things that the primes can and will do and things that they cannot and will not do. To take the example of Project Octopus, which is a UK-Ukrainian partnership, the primes simply cannot support that. The volumes are too high, the turnaround is too fast and the unit price point is too low. In many cases, it is only the SMEs that can support certain projects. It is the same for Brakestop, which is making a Storm Shadow replacement; it is a relatively low-cost missile. I think MBDA is involved in that. The SDR set a new strategy of 40-40-20, so 80% is uncrewed systems. From a defence perspective, with the way that we are going, there will inevitably be price compression, so a unit price becomes a real determining factor of success. SMEs have very low overheads; primes have very big overheads. The natural winner from a price perspective should be SMEs so, arguably, there should be a lot more work coming to the SME market.

Chris Newland

I do in fact have experience of the Pentagon on some programmes. It is prepared to take a risk—a technical risk—and prepared to put money behind that risk. It may not work out; it might be high risk or low risk, but it seems to set that against what its requirements and needs are. To think, in particular, about the airships and Hybrid Air Vehicles (HAV) at Bedford, Northrop Grumman ended up as the prime and the Pentagon funded that and tried it. It did not actually meet what the Pentagon wanted to meet at that time, but it is coming back, potentially, for that business. Then there are organisations such as London Tech Bridge, which is scouring—for the Americans and other potential users, but generally the Americans—for technology that it can harness and go and fund. They are out there physically looking for new ideas and new developments, which they will take back and say, “This is interesting—fund it”. It is about the ability to take a risk, and probably having more money.

Baroness Harding of Winscombe

That is very helpful.

The Chair

We are slightly running out of time and we have quite a few questions to get through. I just wonder whether you have seen any progress through the Defence Supply Chain Capability Programme.

Chris Blackford

The supply chain is challenging. I am aware that there is capability within the MoD, for example, to really go deep in the supply chain and understand where things come from. Clearly, from a defence perspective, a lot of roads lead east. There are many products being made in China, and we cannot escape that—batteries, things that contain rare earths. That is more of a strategic challenge. The Chinese also manufacture outside of China. If you look at it from an SME perspective, we buy from UK companies, but where do they source it from? The supply chains can have a long tail. The challenge for an SME around supply chain security and supply chain credibility is that you do not have the time, the resources or the means to explore backwards, to the second, third or fourth degree, where that product might come from. We know that most of our product is made in Japan, with things like resins and prepreg, but otherwise it can be quite complicated. The MoD, though, is taking quite a pragmatic approach to supply chains and recognising that some things will come from countries that are less friendly.

Chris Newl

I echo the same thing. Everyone wants supply chain assurance, but SMEs need the time, resource and support to provide it properly. It is so complex. It is like your pizza from Tesco that has 13 different ingredients across many nations. In the resin that we use, for example, you can have one minor component from China and would never know. We are not chemists—we use the end product. We and our customers work very hard at trying to find everything, but we have limited resources at our end. It should maybe be part of the contract value.

Baroness Carberry of Muswell Hill

I also want to ask about supply chains and where you are able to source critical components and inputs. You mentioned a couple of times, Mr Blackford, the reliance on Japanese-origin base material, as I think you called it. Can you give us an overall sense of the proportions of the critical inputs you rely on that are available within the UK supply chain, so that we can get a picture of that?

Chris Blackford

There are several materials we source, but most are not made in the UK. We do not manufacture the base material.

Baroness Carberry of Muswell Hill

It is not just the base material but other critical components and inputs. Do you see scope for more of that critical input to be sourced in the UK, perhaps with more government or industry input? Or is it just something you have to live with?

Chris Blackford

It is a bit of both. Unless you are going to build a new conglomerate to manufacture chemicals, it is very much established and you have to accept that that is where you are getting it from. As I said, the challenge to that is that, if there is a surge in demand, small companies are price takers, not price setters. However, the key determinant of all this is price. The Government will go so far in paying more for a sovereign-produced product, but only so far. The other question is what “sovereign” actually means. There are battery companies in the UK that assemble batteries, but all the batteries are made in China, so it is sovereign assembly but not sovereign manufacturing. There needs to be clarity around what sovereignty means and to who, and how flexible they are on that. If buying sovereign means that we cannot deliver a certain product to fight a war, clearly that is a challenge that needs to be addressed.

Chris Newland

Coming off the back of this question, Chris and I are effectively involved in the composites industry, which is carbon fibre. You will know about that from a Formula 1 racing car, for example, or a commercial aircraft. A lot of military aircraft and equipment are made of carbon fibre composite-related materials. Historically, it all really started with Ciba-Geigy at Duxford, which made its first Bakelite Spitfire in the war. That was the first composite product. But the material technology and the science have leached out of the country over many decades. It does not really exist in the UK any more. Resins are from all over the world and the fibre is predominantly from Japan. The problem is that, if we went to war in two years, we could not make the platforms that those things go into—you could not make a Eurofighter or a submarine on that timescale. It is simply impossible. The supply chain of your materials is irrelevant, because you could not make the platform in that time. If you have asymmetric warfare with drones, they are quite straightforward to make, but a lot of those are composites and the materials supply could be turned off and your stocks are what they are. It is a life material as well; the worst, most volatile ones have three months of life, and some have 18 months. You could not hold huge stocks because it would be useless to you at the same time.

Baroness Valentine

You have covered a huge amount of my question already, but let me give it to you and, if there is anything more you wish to say, please feel free to do so. What support would you need to be able to increase your capacity if the Government were to radically increase their procurement demands? If your contractors expected you to be able to supply more components with very little notice, what sort of contracts would you need to be able to maintain sufficient capacity?

Chris Blackford

For strategic manufacturing like submarines and jets, you have a bill of materials. Those contracts last for 10, 20 or 30 years and they are great if you can get them. Principally, it is a different contracting model. It gives up-front payments. It is for demand confidence, so that there is revenue visibility. You know that you can look forward 12, 18 or 24 months and understand where your revenue is coming from, which allows you to take a bit of risk on new capital equipment, new staff and new facilities. Those are the principal challenges we face. Finally, it would be access to additional capital, where required, over and above that which you get through your contracts.

Chris Newland

I have the 60-second answer. Surge capacity cannot be summoned for free. If the country wants defence capacity available at short notice, it has to pay to keep that capacity warm. This comes down to money, capacity and certainty. The UK manufacturing base has continued to contract even in basic areas such as machining. As capacity reduces, lead times get longer and costs increase. Suppliers also manage constraint capacity through large minimum order quantities and longer lead times. For an SME to increase its capacity, we need contracts that give us confidence to invest. That means funded stockholding, funded readiness, advanced orders, long-term commitments and fair margins that allow us to retain skilled people and equipment even when demand fluctuates. If we are expected to hold capacity just in case, that capacity has to be paid for. Otherwise, SMEs cannot carry the cost of spare labour, machines, materials and floor space on the possibility that an urgent requirement may come later. There is also a wider issue about priority in the supply chain. We do not control our suppliers’ businesses. In a genuine national emergency, the Government may need mechanisms to prioritise defence-critical work, whether through commercial incentives, strategic agreements or, in the most serious circumstances, emergency powers.

Baroness Valentine

It is always quite easy to say that we need more money to stockpile or whatever. Is there a more sophisticated way of answering the question? Are there certain specific things that, if you had to stockpile, you would say to the Government are critical if you are trying to do things quickly?

Chris Newland

It is about what we are stockpiling—it is not materials, but labour, people and machines. To increase rapidly, they have to be there, and then they have to be paid for. We cannot just keep people without revenue associated. It is not an SME saying, “I want more money”; it is about the practicalities of it being there on tap. If it is not being used and is idle, it costs money.

Chris Blackford

It is about managing your expectation. If you want us to surge quickly, I am afraid that has a cost, so you need to keep us going. As Chris said, you need to keep us warm and keep that muscle memory alive. If you do not do that, when it comes to that time we will not be able to surge capacity. It is not particularly sophisticated. It is quite simple.

Lord Best

There is lots of talk these days of devolution to mayors, regions and combined authorities. I do not know if either of you has any experience of the defence growth deals that are currently running. If you were to shape these deals, what key components would be best for SMEs?

Chris Newland

We see some strange things happening here. We have to recognise that in this country there are areas of expertise in certain things. If you want electromagnetics and radio frequency (RF) structures, then it is in the Malvern Hills in Worcestershire. If you want aircraft, it is north-west Wales. There are specific areas around the country that should be targeted to generate those skillsets and capacities. We should not try to retransplant those to another area, because people do not move. An example I was going to give, which is not defence-related, is motorsport. If you want to race, there is a reason why everyone who makes Formula 1 cars is in the UK—or mostly, other than Ferrari. It starts with Lotus in Norfolk and goes right through the country as a diagonal line to end up in Witney in Oxford with Williams. If anybody wants to be involved in Formula 1, they will be on that line somewhere, because all the people are there. It is the same with any defence or other specialist activity. There are areas of the country that have absolute capability, and we should really focus our efforts and how we fund those specific areas. Rather than just spreading money around, you have to accept that it is where it is. We should target it in those areas, support the technical colleges and apprentices in those areas, and fund activities in those areas that promote their specialities.

Chris Blackford

I agree. I have just written “funded skills and training programmes”. What we do will not be automated. It requires people. It requires dexterity, but it requires trained staff to deliver. There is consistently a challenge to find people. I do not know whether that means investing in local colleges. Yesterday Andy Burnham mentioned something around reappraising how we look at university education. If we think about 10, 20 or 30 years down the road and the impact of AI, I think manufacturing will come out of this quite rosily in the sense that it is fairly stable. There is little damage that can be done and little change that will be seen as a result of it, other than great efficiency, but we still need trained people.

Chris Newland

We do not see a lot of younger people coming in at the bottom end, and that is a concern. Their resilience—their staying power—is questionable. My concern is that pretty much all the engineers I deal with are well into their 40s or in their 50s. I am still working with people who came out of the OEMs when they consolidated and became smaller; a lot of people became consultants. Some of the consultants I deal with, in very specialist activities, are in their 80s—and I am still working with them because nobody has come along to replace them.

Lord Best

It sounds like the House of Lords.

Chris Newland

I am sure you are all very credible people.

The Chair

We are concentrating on the relationship between Government and industry, and there are two things you have mentioned in various answers. One is about being able to raise debt, either for scaling or just for keeping things warm or whatever. The other is about training and us perhaps not producing the next generation of engineers. That means talking to different parts of the Government. It means perhaps talking to the Treasury or the FCA about how they are dealing with their banks; and, on education, to either local government or the Department for Education. I am interested in whether you as an industry get an in to those other bits of Government, not just the MoD, for these wider aspects of how you work as a successful industry.

Chris Newland

It is probably not a subject matter for today, but there is a huge cultural issue. As I said a moment ago, engineering is not considered prime for a lot of people. They do not want to enter—it is too hard. We put so many apprentices through college who do not even finish now. The other cultural thing is that your minimum wage as an apprentice is so small. They will come to you and say, “I can go to the supermarket and get £13 an hour stacking a shelf”. They do not recognise that that is an adult wage. The supermarkets will pay what would be an apprentice an adult wage; it cannot discriminate between a young person and an old person stacking a shelf, and £13 an hour is quite attractive for them. They do not want to take a minimum wage for an apprentice to go through college and spend all that time learning on that smaller wage. They do not seem to want to invest in their futures any more—I speak as a vocationally trained ONC/HNC engineer.[6] We have a real problem, and I see it as being the whole workforce in the industry I am involved in and the people I work with regularly. It is just going up all the time; it is not coming down.

The Chair

Are you talking to Government about any of these issues?

Chris Blackford

I suppose I come at it from a point of view of control: what can I control and what can I not control? I can influence how I recruit and engage with apprenticeships, colleges and that sort of thing. On the bit I cannot control, we have engaged with the FCO, for example, to get introduced to various British embassies. I have limited access there. For me, it is more a case of: where can the Government be efficient to satisfy what we need to do and want to do? I would much rather engage from a growth perspective. More people equals growth, but we have greater control and influence there than were we to go through the Government.

The Chair

On the issue of debt, I have heard that sometimes the banks are quite reluctant to deal with the defence industry. Is that something you have experience of?

Chris Blackford

It is getting better. We have been courted by several of the bigger banks for various projects. However, I still think that from a risk perspective they do not understand it enough. Defence is not like other markets, in that typically it does not have recurring revenue, revenue visibility or many long-term contracts. From a financial stability perspective, if someone is going to lend to you they would place a lot of risk on those factors. That said, there are private funds setting up and coming through. They have reasonably large funds to commit debt or equity to companies such as us and other smaller companies because they recognise the growth opportunity. There are potentially structural tailwinds of five, 10 or 20 years. But how do you find those if you are not plugged in to that network?

Lord Udny-Lister

We have been going over the contract issue and the money issue quite a bit. I cannot believe the Ministry of Defence is not fully aware of this, so my question is rather a naive one. Why is there not a simple form of contract for a value below a certain amount, with guaranteed payment systems within it? That would create recurring revenue and answer all your questions. That seems to me to be what a procurement person would want to do, especially for smaller items. Is there nothing like that in their system?

Chris Newland

If you know one, I would love them to come my way. The MoD, as much as it tries, does not seem able to engage with small companies. There are occasions when it really wants something and will go and do it, but on the whole its biggest fear is that if it engages with somebody and buys something from a small company, that company may not be there. It is about the resilience of that company. Will it be there in 10 years? The MoD’s main worry is that it buys something and, five years in, the company goes into administration. By dealing with a prime, a stable commodity, the prime takes that risk. The prime can go to multiple SMEs. There are ways around that. Only a fraction of the sort of money it gives large companies would secure SMEs for a very long time, and it would get good service. It is just that SMEs are too small to engage with the MoD, and that is a big issue.

Chris Blackford

I mentioned earlier that ADS has engaged Government on a new, standardised contract, but I do not know where that has got to. I urge you to look at the oil and gas LOGIC contract.[7] It is a very simple, easy-to-understand contract. I would recommend that something similar be rolled out to support the defence market.

The Chair

Thank you very much; that has been really helpful. Mr Blackford, please send us the paper you referenced. If, having heard our questions, there is anything you would like to submit in writing, we are open to take evidence until 21 July and would be very interested in any other comments you have to make. For the moment, I thank you both for your attendance. That ends this session of the committee. [1] The DSRB is a proposed international financial institution which would be backed by member states and provide financial support for defence and security-related investments [2] Now Offshore Energies UK. [3] International Standards published by the International Organization for Standardization [4] EBITDA stands for earnings before interest, taxes, depreciation, and amortisation. It is a commonly used measure of a company’s financial performance. [5] UORs, or Urgent Operational Requirements, are now often also referred to as Urgent Capability Requirements. When there is a need to respond to an unforeseen threat or safety risk by urgently procuring new or additional equipment, UORs allow the MoD to procure this equipment outside its normal procurement processes. [6] ONCs and HNCs are vocational qualifications. An Ordinary National Certificate (ONC) is a Level 3 qualification (equivalent to A-Levels), while a Higher National Certificate (HNC) is a Level 4 qualification (equivalent to the first year of a university degree). [7] These are standard contracts for the oil and gas industry managed by a not-for-profit subsidiary of the trade body Offshore Energy UK. The subsidiary is called Leading Oil and Gas Industry Competitiveness (LOGIC) and this name is used for the contracts.