BAE Systems is pinning its home market expansion plans partly on additional exports of the Eurofighter Typhoon
BAE Systems will arrive at this year's Farnborough air show in mixed spirits. On the plus side, last month it announced the selection of an internal candidate, Ian King, to become its next chief executive, and on 3 July it received contracts linked to the production of two new aircraft carriers for the UK Royal Navy.
But the company also faces continued uncertainty over the future of several of its key aerospace products, and is still trying to restore a corporate image severely tarnished by investigations into alleged financial impropriety during its past deals with Saudi Arabia.
Last October's announcement that Mike Turner would step down as chief executive of the UK's leading defence contractor prompted widespread speculation that BAE would look outside its senior management for a replacement, or even consider appointing a foreign national - a move that would have required UK government approval.
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But the 27 June confirmation that King, the firm's current chief operating officer for the UK and the rest of the world (excluding its North American business activities) would take up the post from 1 September should guarantee a smooth transition. Announcing his selection, company chairman Dick Olver noted: "Ian is a highly experienced business leader with a proven track record."
Promoting from within also underlined BAE's corporate commitment to the UK, despite the massive growth of its US business.
Delayed progress on the Royal Navy's future aircraft carrier project included contracts to UK industry worth more than £3 billion ($5.95 billion), and enabled BAE and VT Group to launch their long-planned BVT Surface Fleet joint venture. The carriers will enter service in 2014 and 2016, and the Ministry of Defence is expected later this year to approve the purchase of two initial operational test and evaluation examples of the short take-off and vertical landing Lockheed Martin F-35B Joint Strike Fighter - its preferred combat aircraft for the 65,000t vessels.
This is good news for BAE, which produces the rear fuselage section for the F-35. But the company may have to wait until early 2009 to discover the fate of the UK's planned Tranche 3 purchase of the Eurofighter Typhoon, with the MoD having also sought pricing options to possibly halve or even cancel its remaining commitment to the four-nation programme.
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Uncertainty also hangs over the future of BAE's Hawk advanced jet trainer, with orders nearing an end from the UK and the US Navy, which operates the Boeing-modified T-45 Goshawk. BAE is also concerned that the MoD has yet to decide whether to increase its firm production order for the Nimrod MRA4 from nine to 12 aircraft, as the type moves towards a delayed in-service date of late 2010.
The MRA4 was partly responsible for a major crisis at BAE early this decade, when the company's strategy of winning the fixed-price contract at any cost came unstuck as the project hit major development problems.
The company has recovered from this and other contractual crises, and now has a much more "risk averse" attitude to securing such complicated deals. Speaking earlier this year, then-group strategy director Alison Wood said: "We are now through the process where we have fixed the business it is performing."
Wood recently left BAE, and was replaced on 1 June by former land systems business head Andrew Davies, who will pursue new areas of domestic activity, such as homeland security and infrastructure protection.
But it is on the international stage that BAE sees much of its future growth potential. The company has already established footholds in Australia - a position recently strengthened by the acquisition of Tenix Defence - plus Saudi Arabia, South Africa, Sweden and the USA. Other "home markets" are now sought, with King telling Flight International last year that India and Japan are key future objectives.
Immediate Hopes
Although its immediate hopes are partly driven by an EADS-led campaign to sell the Typhoon to New Delhi, Wood said: "It is not good enough just to sell equipment into India." BAE is investigating a possible Hawk joint venture with Hindustan Aeronautics, and a land systems deal with Mahindra & Mahindra. Longer term, it views South Korea as a possibility for investment and partnerships.
BAE's international dealings have come under great scrutiny in recent years. A long-running probe into past Al Yamamah deals between the British and Saudi governments by the UK Serious Fraud Office greatly damaged the company's reputation it has always vehemently denied any wrongdoing.
Company officials had hoped the SFO's controversial December 2006 decision to drop its inquiry on national security grounds would draw a line under the affair, but it has so far been unable to move on, with legal wrangles still rumbling on in the UK appeal courts. Crucially, however, an earlier threat that the investigation could derail Riyadh's planned purchase of 72 Typhoons failed to advance, and the first BAE-assembled example will be handed over in 2009.
Across the Atlantic, an investigation by the US Department of Justice has also resulted in embarrassment, with several senior company officials, including Turner, having been detained and questioned during business trips to the USA this year.
As part of a sustained "hearts and minds" campaign to re-establish its reputation, BAE in May published the findings of an internally mandated, but independent report into its business activities. Headed by Lord Woolf, former Lord Chief Justice for England and Wales, this made recommendations including that the company should "develop, publish and implement a global code of ethical business conduct", boost transparency and enforce tougher controls when using external advisers during offset negotiations.
But even before the report was published, BAE officials were highlighting the importance of promoting "safety, ethics and diversity" across company activities, describing this as "crucial in reputation terms".
King has made the completion of such corporate reforms one of his first priorities as chief executive. "My big challenge will be to implement the Woolf recommendations and to get the changes into the DNA of the company," he said in a recent interview with the UK's Times newspaper. "The big issue for us is reputation. We are raising that bar very high, so we are a global leader."
Source: Flight International
