JGP0037
Written evidence submitted by the ADS Group Limited
INTRODUCTION
ADS is the trade association for the UK’s aerospace, defence, security, and space industries. ADS has more than 1,000 member companies across all four sectors, with over 95% of these companies identified as Small and Medium Size Enterprises (SMEs). The UK is a world leader in the supply of aerospace, defence, security and space products and services. From technology and exports to apprenticeships and investment, our sectors are vital to the UK’s growth – generating £79 billion turnover a year in the UK, including £46 billion in exports, and supporting over one million jobs.
The UK aerospace sector is amongst the worst affected by the pandemic with 15,000 job losses announced in 2020 across UK aerospace manufacturing. Thousands more remain at risk in the wider aviation sector, as well as companies in the interdependent defence, security, and space sectors. Many of our member companies face continued threats to their future, given the ongoing impacts and restrictions. Currently, UK aviation statistics for March are over 80 per cent lower than comparable figures from 2019 due to the pandemic, severely impacting aerospace companies who rely on fly-by- hour or maintenance and repair contracts.
ADS therefore believes the Government should extend support to the aerospace sector until pre-pandemic levels of demand return, for example by offering business rates holidays whilst demand is reduced or through continued and increased support for the Aerospace Technology Institute (ATI), which sets the technology strategy for the UK aerospace sector and funds world-class research and development (R&D). Policies such as these will safeguard the sector’s recovery from the pandemic and set the foundations for the UK’s Jet Zero ambitions.
EXECUTIVE SUMMARY
QUESTIONS
JOBS, GROWTH, AND PRODUCTIVITY
1.1 Traditionally, government policy or government intervention is required to stimulate economic growth when market failures arise. Aerospace manufacturing production output in the UK is currently 39.3% below where it was in February 2020. The last twelve-month period has seen international travel bans, travel restrictions, testing requirements and quarantine periods taking place in the UK and on a global scale. As a result, international travel at the end of 2020 was 75% below 2019 levels, orders of new aircraft are at some of the lowest figures since the global recession, deliveries have been deferred, and aircraft manufactures announce cuts to rate production by 40%.
1.2 There is an expectation that when restrictions are eased, demand for travel will return and the sector recovery can begin. However, there has already been significant restructuring in the UK aerospace sector, with 15,000 jobs lost and businesses opting to post-pone investment decisions, which ADS believes represents a market failure. In this scenario government policy could be used to support the sector, as it has done for others, for example by offering business rates holidays whilst demand is reduced. Similarly, there are policy decisions that could be made to support a recovery for the sector and encourage investment in the UK R&D, such as continued and increased support for the ATI.
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3.1 Businesses across all ADS sectors have made widespread use of the Government’s Job Retention Scheme in a direct reaction to reduced demand in our sectors. Last year, we estimated that at least 14% of the cross-sector workforce was on furlough. Despite this support, the aerospace sector has been amongst the worst affected by the pandemic with an estimated over 15,000 job losses in UK aerospace manufacturing in 2020.
3.2 The delays in announcements of extensions to the furlough scheme exacerbated uncertainty for the sector, making planning difficult during lockdown when many factories were closed. This likely resulted in redundancies that would not have taken place had there been more certainty around the Job Retention Scheme, as the sector had already committed to restructuring in Q2 2020 before an extension of the scheme was announced. The scheme is still helpful for larger companies that are seeing ongoing low demand due to international travel bans but who expect certain skills to be needed again once demand for aerospace products returns.
3.3 Whilst the focus on protecting jobs has helped prevent some redundancies, ADS believes there needs to be a greater emphasis on sector support to allow companies to make the necessary investments to maintain their competitiveness post-pandemic. Support offered to sectors such as hospitality need to be extended into industries such as aerospace, as these will take several years to recover to pre-pandemic levels and could therefore suffer further job losses or business closures without Government support.
3.4 The Centre for Economics and Business Research (CEBR) has recently conducted some independent economic forecasting looking at three scenarios for the potential pace of recovery for UK aerospace production.[1] They have found in their analysis that if aerospace recovers at the same pace as UK manufacturing more widely, the UK aerospace sector will not be back to pre-pandemic levels of production until Q1 2023 at the earliest. However, they have also noted that if there is a more subdued recovery, including prolonged barriers to international travel, the UK aerospace sector may not return to pre-crisis production until past 2025, which would deepen the effects within the industry exponentially.
3.5 The Government should therefore offer support beyond this time of initial crisis and into the next few years to ensure the UK aerospace sector’s recovery. This support should not be hindered by controls such as caps on the amount businesses can claim. Other countries, including the US and those in the EU, have offered longer term and greater levels of support to their aerospace sectors, in the form of immediate support and longer term investment in research and development of the next generation of cleaner aircraft. ADS has argued that the UK Government should consider policies that will foster a level playing field for UK industry in the face of international competition as the aerospace sector is a truly global market.
3.6 Aerospace is also at the heart of exciting growth opportunities, including achieving the UK Government’s Jet Zero ambitions, for example through the development of new aerospace technologies developed in the UK. Much of this R&D is managed through the ATI, which promotes transformative technology in air transport and funds world-class research and development through a £3.9 billion joint government-industry programme. ADS believes the Government should more than double funding for the ATI from its current level of funding from £150m per year to £330m per year to sustain core technologies and deliver the next generation of electric, hybrid and hydrogen aircraft.
3.7 Government recently announced that the ATI programme would be closed to new applications for at least the next year due to high demand and lack of additional funding. This suspension will be particularly disappointing to small companies looking for support to develop the next generation technology needed to achieve net zero aviation. The Government must look at boosting the ATI’s long-term funding as this is essential to ensuring that technology for the future of flight is developed here in the UK, generating vital manufacturing exports and prosperity, which will help the sector and the UK economy more broadly to recover from the pandemic.
5.1 The Government should work with industry to identify creative solutions for people who have lost their jobs in our sectors. It is vital that the skills and knowledge are retained in the UK, and that individuals can continue to use their skills either in similar advanced manufacturing jobs or in alternative settings, for example by teaching Science, Technology, Engineering and Maths (STEM) subjects. The focus on these skills is key to the future workforce being able to take advantage of future technologies and the Government should work with schools, colleges, universities, and local communities to promote the benefits and diversity of a career in STEM.
5.2 The COVID-19 crisis is likely to accelerate transformation across the global economy. There will be a focus on building a greener, more sustainable economy, and the aerospace sector will be at the heart of this. Apprentices entering our sectors bring with them fresh thinking and the digital skills required that will drive a fourth industrial revolution and encourage disruptive innovation. The Government therefore needs to invest significantly in apprenticeships, on-the-job training, and career development to allow the UK workforce to become more agile and resilient in the face of the changing nature of work.
5.3 ADS sectors welcomed announcements to help workers develop the new skills they need and to support apprenticeship opportunities. Many companies are still facing serious challenges and we must make sure this crisis does not prevent the next generation of talent from developing the advanced skills we need to compete in international markets. Several companies, predominantly in defence, were able to take part in the Government Kickstart scheme, whilst others chose to focus efforts on retaining current programmes where possible.
5.4 ADS welcomed changes that were announced to the Apprenticeship Levy, meaning those who pay the Levy will be able to transfer unspent levy funds to SMEs. However, the costs of training an aerospace apprentice are very high and far outweigh the level of funding offered by Government incentives. To address this, Government should fund employment-related costs of newly recruited and existing apprentices to ensure there isn’t a long-term skills gap. Part of the Levy funding should be used to pay wages of existing apprentices to ensure their positions are safeguarded to support young people to catch-up on their learning. Additionally, we would want to see an extension to the period for employers to use funds from 24 to 36 months to include the next 12 months.
6.1 The Government’s ambition to promote productivity growth and create new high-quality jobs is very welcome, but there needs to be a greater focus on delivery. The Government’s strategy should focus on promoting industries that have high levels of productivity, such as the aerospace, defence, security and space sectors, that provide high-skilled, well-paid jobs. Average annual salaries in aerospace manufacturing are £43,000, 42% higher than the UK average, and in defence are £36,500 on average a year, which is 20% higher than the UK average. Investment in aerospace also produces a ‘spill over’ effect, as aerospace technologies are frequently adopted into other areas of the economy, including automotive, defence, and advanced manufacturing, creating more jobs up and down the whole UK and driving growth.
6.2 To promote productivity, ADS believes that Government policies focused on R&D are highly beneficial. There is an appetite from industry to invest in R&D and, as an example, every £1 of Government investment in aerospace leverages £12 of industry investment. Furthermore, given the geographical spread of the ADS sectors across every region and nation of the UK, this kind of investment supports the Government’s levelling up agenda. With that is mind, ADS welcomes the current review of R&D tax reliefs underway and hopes that the Government will take the opportunity to strengthen the incentives and support available to foster investment in R&D by industry, given the rate of return on public investment.
6.3 The Government’s National Security and Investment Bill, which identifies a series of strategically important sectors and technology areas for the UK’s national security and sovereignty, can help protect high-quality jobs in the long-term. It will allow the Government to decide whether action is required to rebalance the playing field to protect strategically important sectors, where foreign suppliers may been significantly subsidised industry so as to undercut the UK offer and drive UK suppliers out of the global marketplace. However, in doing so the Government must also ensure that the UK’s attractiveness as destination for international investment is not hindered by an unduly burdensome investment screening regime.
6.4 Legislation such as this should be complimented with Government assistance and early investment in relatively high-risk new technologies and regional capabilities. There should also be recognition of the fact that innovation comes from all levels of the supply chain. The Government should work to support all companies, especially SMEs, to continuously innovate and provide clear routes to market for new companies to ensure their success, as these will provide the high-quality jobs of the future.
7.1 The UK Government, as part of its COVID response, offered business rates holidays for industries that have suffered highly contracted demand during the pandemic. This included retail, hospitality and leisure who were forced to close, but has not included the aerospace manufacturing sector. ADS believes this kind of measure should have been extended to the aerospace sector, given the similar drop in demand, to free up cash flow in the near term and encourage companies to reinvest to aid the economic recovery. Ongoing support such as this would have allowed manufacturing companies to be able to access business rates holidays for operating at a reduced capacity owing to diminished demand.
7.2 Improved incentives for R&D capital expenditure would help redress the recent slow pace in manufacturing sector R&D. Indeed, some CAPEX and R&D investment has already been delayed or postponed, which will have notable long-term impacts and damage UK competitiveness, productivity, and environmental sustainability. Any prolonged slowdown in investment will have a lasting impact on skills in the sector, which are already in danger due to widespread furlough, significant redundancy risks, and whole innovation projects currently on pause. Prolonged investment pauses in R&D and working capital will impact future growth potential, making it harder for the UK to compete in the global market and develop new technology when highly specialised skills and capabilities have then been lost.
7.3 ADS welcomed the strong emphasis on achieving strategic advantage through Science and Technology (S&T) in the recently published Integrated Review. The paper set out useful policies for encouraging R&D, such as improved protections for UK-developed intellectual property and greater transparency about the Government’s long-term national security requirements, which will help encourage corporate investment in innovative technology. As part of this, the Super Deduction announced in March’s budget could prove useful for companies, but would work better as a longer-term policy, as many companies are suffering short-term cashflow problems brought on by the pandemic, meaning that they do not have money to invest in research and development in the first place. The Government needs to provide a longer-term commitment that first allows industry to recover and then builds confidence for businesses in their ability to invest in innovation.
7.4 ADS notes that there are currently restrictions upon the amount of support that can be given for capital expenditure (20%) and for R&D (50%) in terms of the ratios of match funding, but these restrictions should be reviewed with a view to making the UK the best place for R&D and infrastructure investment. Government support for new production lines is required to foster their development in the UK, as the onset of Industry 4.0 and advanced robotics mean that new facilities require significantly more upfront investment. Aid intensity levels need to reflect the market dynamics and long investment cycles within advanced manufacturing sectors such as aerospace and defence.
8.1 ADS welcomes the Government’s “Plan for Growth” which offers an opportunity for increased innovation and sustainable growth. In terms of a focus on regional growth, the geographical spread of the ADS sectors means that investment in cutting edge aerospace technologies has the potential to leverage exceptional industrial strengths in every region and nation of the UK, levelling up opportunities for all and regional growth.
8.2 ADS also welcomes the UK’s ambition to become a Science Superpower. Pioneering capabilities in our four sectors exist across the UK that demonstrate our credentials in this area and Government should ensure that it invests sufficiently in these areas of R&D to ensure that the UK maintains its advantage. Indeed, the UK’s aerospace sector can demonstrate global leadership in developing world-beating technology that delivers sustainable aviation solutions to the world and captures significant industrial value from the global transition to net zero, which will form a key part of the Government’s Global Britain agenda, as mentioned in the Plan for Growth. Similarly, the UK’s defence and security industries will play a critical role in helping to secure the UK’s strategic advantage in critical areas of S&T, for example in offensive cyber, CBRN, and the maritime domain. By providing greater transparency about requirements and adopting a new own-collaborate-access framework for S&T the Government can develop a more collaborative partnership with industry to meet the UK’s national security and prosperity objectives.
8.3 UK aerospace is committed to net zero aviation by 2050 and is excited by the ambition of the Jet Zero Council, highlighted in the Plan for Growth, in achieving that goal. We fully support the Council’s ambitions and believe that a collaborative approach is needed through increased investment through the Aerospace Technology Institute to deliver this vision. Government and industry must work together to incentivise, enable, and support a new age of aviation.
8.4 ADS would like to see further clarity on the policies that will bring the Plan for Growth into fruition and would welcome cooperation with Government on its long-term strategic direction to ensure that these policies are both feasible and achievable. There is also a need to ensure that budget restrictions in the wake of the pandemic do not leave the “Plan for Growth” as just an ambition, rather than a strategy in which to drive the UK’s economy forward. There should be a focus on developing skills in key sectors, as well as ensuring that the UK supply chain has the support it needs to recover and grow, as SMEs are the primary driver for innovation, which is crucial to the UK’s long-term competitiveness.
8.5 ADS welcomed the new defence funding settlement announced at the end of 2020 and the strategic direction set by the Defence and Security Industrial Strategy, alongside the Integrated Review. Assuming they are implemented in a thorough and timely way, these will help to provide both the confidence and framework required for growth in the defence and security sectors.
9.1 Some parts of the UK economy will inevitably bounce back sooner than others. There is clearly pent up demand, which has been demonstrated by growth during periods of lightened restrictions, which allowed the UK to avoid a double dip recession. However, there are clear differences between different sectors. The UK defence and security sectors have remained resilient throughout the pandemic, thanks to strong Government support for the sectors that has maintained business confidence and even allowed many companies to grow during the pandemic. However, the UK aerospace sector has been one of the worst hit by the pandemic, with significant restructuring having already in companies large and small across the sector. The Government will therefore need to introduce long-term support for sectors such as aerospace that will see a comparatively depressed recovery well beyond the easing of restrictions.
10.1 The UK has a strong industrial base and excellent record for R&D. Sectors such as aerospace and defence have historically been some of the most innovative and productive industries, creating technologies that have supported UK exports and crossed into other areas of the UK economy. The Government need to ensure that UK manufacturing has the support it needs to recover from the pandemic and invest in innovation to ensure that competing countries around the world do not outperform the UK due to higher levels of state support and investment.
10.2 The Government’s recently announced Advanced Research and Invention Agency (ARIA), which will be supported by £800m of funding and is set to take innovation from early stage discovery to the delivery of tangible outputs, is a good example of how to maintain the UK’s competitive advantage, and thereby realise sustainable economic growth. Increasing R&D investment through ARIA, UK Research and Innovation, and more specialist organisations, such as the ATI, is key to ensuring that the UK has the ability to not only take advantage of future technological breakthroughs, but to make the breakthroughs in the first place, placing the UK as a world leader in innovation.
MACROECONOMIC POLICY
11.1 In the near-term, fiscal policy can be used, and indeed has already been used, to support businesses suffering from cash flow constraints. This is still an essential requirement for businesses operating in our sectors who are not yet experiencing, and cannot yet fully forecast, when post-pandemic growth will return. By making temporary changes to tax policy in the near-term, companies can benefit from reduced liability that can either be passed onto consumers in some instances, or reinvested in new technologies, which would assist companies looking to invest in making a sustainable recovery.
11.2 Given the delayed recovery expected for our sectors and expected increase in consumer consumption levels, it is sensible that monetary policy remains flexible and inflation rates remain low and controlled, until pre-pandemic growth returns for the whole of the UK economy. As growth outlooks become clearer, both monetary and fiscal policy can help ensure that the right environment is created to encourage firms to invest and consumers to spend.
11.3 The Bank of England (BoE) has previously cautioned that the UK’s reliance on foreign capital inflow ‘makes the UK vulnerable to a reduction in foreign investor appetite for UK assets’’, which could lead to a tightening in credit conditions. Given the current vulnerable position of many businesses in the UK that have been so badly affected by the pandemic, this is a risk that the BoE should continue to monitor.
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15.1 Given how the BoE has handled monetary policy so far throughout the pandemic, ADS is confident that as long as the BoE are kept informed of future policy intentions and can accurately assess their economic impacts alongside the Office of Budget Responsibility, then they should be well positioned to stay ahead of any inflation risks. As mentioned above, growth needs to remain the focus to ensure the economy moves securely into recovery.
16.1 Given the current state of the economy, ADS believes that ‘running the economy hot’ would be counterproductive, especially as there are indicators and drivers for growth in play that will be able to function as expected once restrictions ease and consumption increases. For ADS sectors, more support in the form of fiscal incentives would be welcomed to help companies remain active and relevant throughout the economic downturn.
May 2021
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[1] https://www.adsgroup.org.uk/blog/cebr-analysis-of-post-covid-recovery-of-the-aerospace-sector/