Chasing the dragon
The issue: Innovation in the aerospace sector – issues, challenges and opportunities in the light of Chinese expansion
The evening’s debate ranged from how soon China might become a serious competitor in the aerospace industry, to how off-putting small business leaders find the bureaucracy of innovation funding. Despite its faults, most guests agreed that the Government’s so-called ‘Catapult’ centres – previously known as technology innovation centres – were crucial to Britain’s future aerospace success. But they warned that government, academia and industry must improve this jargon-filled process to reverse what had become a damaging ‘two class system’ of business engagement. Steve Dyson took notes on the comments.
Dr Chris Moore explained how he’d listened to various major Midland aerospace manufacturers looking to expand into China. He said: “This is a huge market for their own growth, and there are some big commercial opportunities for them, [but] there’s also a corresponding threat for them holding on to their IP [intellectual property] and being able to protect it in the face of some pretty aggressive competition. The other threat is that there’s a massive emerging body of Chinese IP which lots of companies haven’t got to grips with, China becoming the biggest filers of IP in the world.
“The supply chain, they’re looking for cheaper materials, and maybe seeking to offshore their production, which in itself brings threats to them. It’s difficult for those smaller companies in the supply chain to keep hold of their IP when they’re sourcing things from overseas, especially China. And how do they exploit their IP in the light of Chinese expansion, where China is playing catch-up in the aerospace industry, and could actually use some of the skills and technologies that some of the supply chain suppliers in this country could bring to the Chinese market?”
Richard Halstead said successful companies in the UK were those who’ve managed “the differentiators around quality and delivery” which were “massive issues” in China. He
said: “The interesting thing I see is maintaining that differential, because as China develops their own IP they will become stronger competitors and so their quality and delivery factor may reduce.
“So for me, the issue we have is how do you make sure the SMEs in the aerospace supply chain work with prime suppliers in developing the ‘design for manufacture’? Because I see a lot of prime manufacturers developing new technologies which they want to globalise, but the SMEs, the sub-contractors, just get given the designs to go and make the components. And unlike automotive, where it was all very integrated, and ‘design for manufacture’ was a buzz word ten years ago, I don’t see that happening in the aerospace industry.”
Michael Loretto said: “I’ve had a lot to do with China and I have some worries. I’ve just finished a multi-million pound programme funded by the EC [European Commission] and the Chinese government to improve the casting technology of titanium alloys. These are clearly going to be used to aerospace standard by China when they start making their own airframes. At the minute, their casting technology is golf clubs, they don’t matter if they break when you hit a ball or a bunker, but it matters if an aircraft breaks.
“So we, in that programme, have transferred our expertise to China. All universities are setting up very big interaction with Chinese cities or industries... In addition, of the PhD students that I have supervised, probably in the last ten years 50, 60 or 70 have been Chinese, and many of these have gone to very senior positions eventually in China after they’ve spent time in companies like Rolls Royce. So it’s a very efficient way of transferring technology...
“In the short term, universities are enjoying it because, as with the oldest trade in the world, the university will do anything for money, and we are getting huge fees from Chinese PhD students and undergraduates, but I’ll just put it on the table as an issue that SMEs and others ought to be worried about.”
Ken Young said: “One of the biggest opportunities the aerospace industry has got is a massive order book, so their volumes are going to go up, and that gives them a huge opportunity to capture data about what they’re doing and really get to understand the processes they use, so they can do the ‘design for manufacture’ that’s been talked about...
“If they can design planes they can actually build, without having concessions all over the place, that would save them an awful lot. The increase in volume also gives them a great opportunity to invest, both in capital kit in terms of automation equipment, but also in people they use on the line... What are the threats from China? Well China’s trying to take over all the material supply. So there’s going to be a lot of materials you need to make these things that you’re not going to be able to get hold of. [And] IP leakage is a massive problem: when you start to make things in China, how do you stop them from learning how to do it and setting up and doing the same thing as well or even better?
“We’ve heard about universities and Chinese students – look at how many students there are in this country doing Masters degrees in manufacturing. I used to work at Warwick [University]... 500 Masters students a year, 350 were Chinese. How many were British? You could count them on the fingers of one hand. That’s the difference in the way we’re training people.
“We’re doing our little bit about it. We [the Manufacturing Technology Centre in Coventry] had an £18m grant awarded yesterday [4 November] to build an academy which allows us to train apprentices, graduates, post-graduates all together – you can’t just have theoretical know-how, you’ve got to have the practical skills as well...
“The other concern I’ve got for the industry, you’re all aware of the aerospace growth fund that’s out there, they’ve got all this money but aren’t being very forthcoming on how this money should be spent and what the real issues are. So there’s a danger we put a lot of money into all the wrong things that don’t help.”
Matt Dixon said: “I’m a bit of a stuck record when it comes to IP. The challenge I see is the engagement of boards... fitting an IP strategy into a business strategy. Some businesses do it really well, but others don’t... The Chinese are now filing more patent applications than any other country. There’s a big push from the Chinese government to fund this, they’re recognising IP as important, developing into an innovation economy, and learning very fast how to use IP properly.
“The challenge in British industry, aerospace included, is that we’re not complacent and look at how we learn to do this better. If we’re innovators – you talk about IP leakage – how do we stop that? That’s the challenge. The opportunity is to do that well, and really capitalise on the excellent innovation we have: then the world is our oyster.”
David Townsley said: “Small businesses wanting to operate in the aerospace industry need to raise their game to become better businesses, particularly if they want to become world class players in what is a highly competitive market. What I mean by that is implementing things such as continuous improvement models, investing in R&D, but understanding where that investment needs to be targeted – from better collaboration with the primes and the tiers in the supply chain, to understand the issues not just in the short-term, but in the medium-term and long-term.
“Also SMEs need to get better at attracting and retaining talent within their business, particularly skilled engineers, it’s about giving clear direction about career progression opportunities there are in a small business and tying them in through some incentives. The other thing to bear in mind – we’ve talked about the protection of IP – is throughout the whole supply chain the lack of information security protection, and being robust in your systems around cyber attacks. This is prevalent right from the top of the supply chain through to the SME subcontractor.”
Andrew Mair said: “The Chinese commercial aircraft industry is absolutely tiny. They make virtually no aircraft – a handful every year, of turboprops. It’s smaller than Switzerland, smaller than Sweden. We discovered fantastic things when we were out there, that they have these marvellous aerospace companies, but if you get the breakdown of their businesses they mostly make tractors. The military industry is different, but then we can’t talk about the military industry – or can we? – because we’re not supposed to do business with it, and yet a lot of the technology will leak across.
“The IP point, an interesting one for all lawyers involved in IP and aerospace, is that here’s an industry which clearly isn’t very well organised, because although Rolls Royce has got lots of patents, the supply chain doesn’t. This point is about how the knowledge or the knowhow in our industry is managed, and intellectual property – let’s say with a small ‘i’ and ‘p’ – is not the same as Intellectual Property as in a patent, or something which is formally managed.
“Because of the product life-cycles in the aerospace industry, one of the best ways you can ensure your competitor gets your ideas is to announce that you’ve got them; and publishing them – whoa! So there’s a lot of the knowledge in the industry in know-how. Our casting companies and metal-forming companies are still working in whichever century they’re in, and the best way they can protect their IP is simply never showing people how they do it. They don’t want to share their knowledge with anybody.
“If you were Rolls Royce, your strategy towards this would be to say there are critical parts of the engine that we want to protect – what they call the ‘hot gas path’ – but they’re willing to share the other technologies with anybody who’ll buy their way in... And if you’re a Chinese company trying to make an aircraft, you might be able to do 90% of it, but the 10% you can’t do is the bit that stops you making an aircraft that will compete.”
Mair then quoted Richard Aboulafia, an aerospace expert who works for Teal Group, who recently referred to Comac, the big Chinese aerospace company, and its aircraft, as being: “Like a lot of very sophisticated technologies flying in loose formation.” Mair added: “They can buy all the technologies, but they haven’t any idea on how to put them together, and the question is: will anybody teach them that?
“There are some very interesting features that we need to think about if we are to understand how Chinese industry will develop. One of the things that came out of our analysis is that the Chinese competition will matter, but probably after I’m dead. What matters at the moment is to compete with real competitors we have on technology – and that’s Germany and the US.
“It’s going to take a very long time for the Chinese to catch up, whereas the Germans we ought to be worrying about now. The German aerospace industry, now supposed to be the third biggest in Europe, [currently behind France and the UK], will be the biggest in ten years’ time. So it’s the Germans we should be worrying about more, and that’s back to the innovation agenda. If we compete with the Germans, then the Chinese won’t cause us any trouble at all...”
Answering a question about companies moving factories to China, Mair said: “The Communist Party has probably finished raping and pillaging the peasants’ land now and there’s no more left, so they have no more money to invest in buying all the capital equipment to give our companies free operations. It was never a case of low-cost production in China, it was they were able to provide all the capital, and now they don’t have any money left. There will be very little movement of work to China from the supply chain.”
Loretto contested Mair’s earlier point about IP leakage to China. Loretto said that while companies like Rolls Royce might choose not to allow access to critical technology, in reality Chinese PhD students spent time with such companies learning such detail and were then tempted back to top positions in China. He said: “In 20 years they will have titanium technology sorted out, and will certainly have the hot parts of the jet engine sorted out, because they have the equivalent people going back from industry to China, and we cannot stop that.”
Discussing how to involve SMEs in innovation, Brian Norton expressed his frustration at the bureaucracy involved, with various bodies called TSBs [technology strategy boards], KTNs [knowledge transfer networks] and Catapults [former technology innovation centres] – jargon that “simply confused” the average small company owner.
Caroline Theobold clarified this point: “The companies are told to innovate, and the people who are supposed to be helping you innovate are making a very dense forest?” Norton agreed. She asked Halstead if that’s what his members also found, and he said: “At an SME level, yes. If you’re a university, engaging with a large, prime supplier is very easy. We’ve formed the Catapult centres to bridge the gap between academia, research and business, but they have to exist in their own right.
“The easy funding is to go to Rolls Royce and the large companies. While the Catapults do put in SME engagement managers, you’re not going to get much money out of these guys. It doesn’t quite work, because the big money, the income, is going to come from the big guys. It’s a commercial world.”
Mair agreed: “The large companies want supply chain companies to be more innovative, and yet not only their own procurement structures... but the whole innovation infrastructure, has been built for the large companies, not the small ones. We’re beginning to talk about the innovation infrastructure being part of a class system – there are two social classes.
“There are people who did A-levels, went to university, have Masters degrees and work in large companies, and know how to manipulate all the acronyms that have just been talked about, and they understand the complexity of those systems. A lot of our family-owned, smaller companies, the person that owns them left school at 16. Why? Because they hated
“So it’s difficult for us sometimes to even hold events on university campuses – it’s like we wouldn’t hold them in the Ritz, would we? Because culturally there are barriers. We need to understand those barriers, these are the people with all this fantastic know-how [and] it’s a constant struggle... Back to how the Government’s spending is spent, there are questions on the degree to which we make the systems user-friendly.”
Townsley discussed how proper innovation and R&D were expensive, long-term projects that “cost cash” – whereas most SMEs are more concerned with paying the bills “next week, the week after and paying their staff at the end of the month,” rather than the long-term strategies of the next 10 to 15 years.
He said: “We need to work more collaboratively with the primes, and the next tier down the supply chain, so SMEs understand where they should be targeting that R&D. [But] when we talk about getting SMEs engaged with universities and the likes of the Catapults, I speak to our members and they look at me like an alien and say: ‘What are these Catapults and what are they there to do?’. One of the problems is reaching out to SMEs in industry and trying to articulate what it is that a Catapult can do to help them to innovate and develop new technology.
“There’s no funding from a Catapult: it’s all about the knowledge, linking industry with knowledge institutions, and then finding a commercial project and using that information for development. The big issue is how we filter that down to an SME level to get them to use that to innovate and invest in R&D.”
Halstead said: “I’m a ‘glass half full’ guy, so I like to take the optimistic side. We have Catapults here in the region, and they have SME engagement people; we have universities, they have business engagement people; we have networks within the region to help the people collaborate. So it’s all about harnessing, and what SMEs are good at is networking, and sitting round the table, to understand what’s the art of the possible.
“Yes, Catapults are commercial ventures, they get a third of the funding from government, and a lot of the funding from running projects for the primaries. That’s right and you can’t argue against it. It’s how you connect the things together, and it’s about making connections.
“Forget the 10 to 15 years. For SMEs, we’re talking about the next product that’s going to be delivered in six months time, and their R&D is the project after that which is 12 to 18 months’ time. The Catapult should bridge that gap. They’re still doing the 10 to 15 year stuff with the big guys, but let them encourage the SMEs to come into that process at the latter stage to do the ‘design for manufacture’.
And how do we make this more cost effective? Because that’s how you compete against China.”
Townsley replied: “I completely get that, and I think the Catapults are great, but it’s about getting people in to understand what a Catapult can do for them. Let’s work out how we reach out to industry and do that.” Moore said: “That’s the same for universities as well – a huge amount of talent doing things which are infinitely applicable to the problems SMEs have day-to-day and reaching out and finding those bridges between them is a real challenge.”
Halstead added: “I was sat at a meeting where we were talking about exactly that – with the universities, with a Catapult and a few SMEs, about how we can do that. Catapults have some funding, but the universities have a lot of funding – they’re crying out for business engagement. There’s actually lots of money around.”
Peter Shearer talked about the European Regional Development Fund (ERDF) and how Aston University had gone from having no such projects to working with nine in just three-and-a-half years. He said: “The deal is you get half the money back provided you achieve certain outputs – things like business assists with an SME. We are looking for small companies and our academics will work with them to introduce innovation, share knowledge, access to facilities. One of the obstacles is getting those messages out, because the people running small companies are busy, they get a lot of communications. It is getting better, but there’s still a long way to go.”
Mair referred back to his ‘class system’ point from earlier, and said the right audience of SMEs needed to be spoken at the right level: “We need to speak to and interact with them in the position they’re currently at, as opposed to the position we think they should be at in the future.”
Townsley said: “It is so fragmented where this money lies and the various organisations in which it sits. The owner of an SME doesn’t have the luxury of sitting down and doing that research, navigating their way through various websites, trying to understand criteria on all this innovation funding. That is fundamentally the issue and why a lot of businesses are not taking advantage and tapping into what’s out there in the marketplace.”
Young said: “The ERDF is probably the best funding mechanism we’ve got for SME engagement, and it’s terrible. You get 50% of your costs if you can prove you incurred them, and the audit is terrible, so you’re lucky if you get anywhere near 50%, [and] you’ve got every chance you’ll get nothing. It’s not measured on the amount of value you’ve added. We really ought to get rid of the ERDF and put some serious money into getting Catapults and universities to go out there and help SMEs. You can achieve great things, but ERDF is not the way to do it... It’s a nightmare, it’s bureaucratic, it’s – I apologise for my language – it’s just bollocks. I want to go out there and help companies to move forward, I don’t want to fill in forms and make up stories...”
Halstead interjected and said: “But your challenge is, you’re dealing with public money and you’re falling into public spending, public procurement rules.” Dixon said: “Why is this made so complicated? The aim is to have sources of funding for innovation for particular areas that get through to SME companies so they can do good things and engage with universities.
That isn’t that complicated. Why has it been made so complicated?” Halstead replied that it was “fragmented” because so many people were approaching government asking for money for their visions, and there has to be a structure for processing multiple applications. But the Government was doing this with a weak industrial strategy and sometimes clashing policies, which only led to even more fragmentation and complexity.
Dixon picked this up, and said: “That becomes the problem. There’s all this mass of stuff there and it’s just too hard when you’ve got a business to run. I think your ‘two class system’ is really important [indicating to Mair] because it’s a bit highfalutin as well. I’m a product of the university system and lots of clever stuff, and I can’t make head nor tail of half the funding stuff without thinking: ‘I’ve got to put a cold towel on my head and work out what’s going on.’” Mair concurred: “I talk about it as a Mars and Venus thing – it’s different planets, private sector language, public sector language.”
There was much more discussion of this difference between government, academia and different types of business – referred to again as a ‘two class’ system – and how this had created huge challenges for innovations in the aerospace industry, especially with China’s expansion looming in the background.
The description of the ‘Valley of Death’ was discussed in this context, and Loretto picked this up to lament the changing nature of British industrial research in the last 30 years. He said: “Universities are pretending to do the research that [people like] IMI used to do, and we don’t do it properly. It’s a complete shambles. We’ve lost the research capacity in industry. Rolls Royce’s research effort is zero compared to what it was 30 years ago. Universities are trying to do it and we’re not good at it.
“We’re good at doing airy-fairy things for the hell of it. I didn’t need any government funding, I could do what the hell I wanted and enjoy myself 40 years ago. Now we have to do industrially irrelevant crap. It’s a complete disaster as a funding model for industrially relevant research. We have a big problem. England’s screwed it up.”
Eventually, talking about a way forward for innovation and how to help fund SMEs’ part in this, Young said: “The Catapults are set up to fill that gap and that’s got to be the answer.” Townsley agreed: “Because it does bridge that gap – you’ve got business, commercial business, academia coming together to sort the solution out.”
Young went on: “The theory is impeccable, it’s when you try to make it happen that you realise how complicated that is.” He said the universities and the Catapult centres would tussle over IP issues, and that then industry might not even recognise the opportunities. But Young said it was still the way forward: “We’ve just got to work at it and get better at it – the universities, the Catapults and industry. Rolls Royce are the best at using the Catapult centres – a lot of other companies, even big players, have got to sharpen up quicker.”
Concluding the evening, Dixon said: “The most important thing I’ve heard is this idea about business classes – I wrote down innovation ‘underclass’... Engagement with that group is going to be key, and that was something that I haven’t really heard discussed before tonight, and that was great. And I’d like to thank everybody for a very, very interesting and
The debate was held in a private dining room at the Crowne Plaza Hotel, Holliday Street, Birmingham, with the support of Harrison Goddard Foote LLP. It was chaired by Caroline Theobald, managing director, Bridge Club Ltd.