BAE's success runs on kosher rocket fuel

Amid all the gloom about Britain’s economic prospects, it is often forgotten that there are still areas where the nation excels. Thriving sectors include aerospace, pharmaceuticals and, more obviously, finance.

As an aerospace/defence group struggling with a legacy of alleged corruption from Saudi Arabia to Tanzania, BAE (formerly British Aerospace and BAe Systems) often receives a bad press. It is presently under investigation by the Department of Justice (DoJ) in the US over controversial payments to Saudi middlemen. In Britain, the Serious Fraud Office is seeking a settlement with it over alleged payments to a number of countries from Eastern Europe to Africa.

A large fine of £500m or more from the US DofJ and Britain’s SFO casts a long shadow over BAE. Management at BAE has been endeavouring to clean up its act. It is currently seeking a new ethical start by implementing recommendations of a committee headed by former Chief Justice Harry Woolf in a report completed in May 2008.

Modern BAE dominates UK defence manufacturing in air, land and seagoing platforms. Its main western customers are the UK defence forces and the Pentagon. But its most famous and profitable contracts are in the Middle East, where it is the arms manufacturer of choice for Gulf states — with the secretive Saudi Arabian Al Yamanah contract the jewel in the crown.

It is currently responsible for modernising the Saudi airforce with the supply of Eurofighter Typhoon planes. It employs more than 5,000 engineers on the ground in Saudi Arabia. The close relationship with the Arab states has largely precluded it from direct arms sales to Israel.

Under an informal agreement with the US, BAE, on behalf of Britain, is generally the main supplier of weaponry to the Gulf states. And the United States provides much of Israel’s advanced equipment. This arrangement dates back many decades.

A great deal of BAE’s muscle as a defence contractor was inherited from Lord Weinstock, arguably Britain’s most impressive post-war industrialist. His General Electric Company (GEC), like the contemporary BAE, did not supply Israel. But there was one famous exception during the Six-Day War in 1967. When Weinstock asked the leaders of the Joint Israel Appeal what he could do to help, he was put in touch with the Israelis and arrangements were made for a covert shipment of vital arms supplies to the Jewish state.

In his business career, Weinstock rarely had a good word to say about BAE. BAE, carved out of a number of nationalised air frame manufacturers, had a reputation for being wasteful and mis-pricing big defence contracts. Indeed, this brought it close to financial ruin on several occasions.

Were it not for strong revenues from Al Yamanah, British Aerospace might not have survived. The start of the transformation began in 1999 when Lord Simpson, who succeeded Weinstock at GEC, made his dash into telecoms. Defence was not part of Simpson’s plans and GEC Marconi (the defence arm of GEC) was sold to BAE.

BAE was able to bring together the genius of GEC avionics and defence systems, which were fitted to BAE planes, as well as GEC’s domination of Britain’s seagoing defence platform. It benefited from Weinstock’s accounting disciplines and different management culture. It is no coincidence that the current chief executive of BAE, Ian King, was a Weinstock protégé who has risen to the top. King is moving BAE in new directions. Last year it bought the security group Detica for £540m, a recognition that given the terrorist threat, defence is not all about hardware.

Through its separate American offshoot, BAE Systems Inc, the group owns Jerusalem-based Rokar International which specialises in satellite navigation systems used in airborne defence. The group is also developing new Asian markets and is expected to sign a contract with India to supply BAE’s iconic Hawk trainer jet.

For now, BAE remains unfashionable because of its lingering ethical problems. King knows this and is anxious to see recognition for a burgeoning order book at a time when the demand for ever better equipment for the British forces in Afghanistan is rising. But he is determined not to settle with the SFO until the dossier it has assembled has been examined by a QC and an indication from the Attorney General, Baroness Scotland, as to whether the government intends to prosecute.

Given the political sensitivity of the issues and BAE’s importance to Britain’s export-led recovery, it is still possible all of this could be strung out for several weeks if not months.

Alex Brummer is City Editor of the Daily Mail

    Last updated: 10:43am, November 19 2009