BAE Systems

Last updated: 
2002

1. The Company

 

Summary


 

'The Systems Company Innovating for a Safer World' (BAE SYSTEMS homepage)[1]

Industry Areas

 

BAE SYSTEMS plc is a global arms company, with interests also in civilian avionics and engineering.

Market Share/Importance

 

BAE SYSTEMS aims to be ‘a truly global systems, defence and aerospace company with unrivalled capability…[the] prime contractor and systems integrator for our customers, in the air, land, sea, and space’.[2] As such, the company has interests in areas spanning the range of avionics and defence systems, from hardware manufacture to personnel training. Primarily, however, BAE is an arms company, ranking first in the world in terms of arms sales.[3] Military equipment currently accounts for around 75% of the company’s total sales.[4] In 2000 it pulled in $13,248 million in military revenue.[5] It is the world's fourth largest defence and aerospace firm, behind Boeing, Lockheed Martin, and EADS.[6]

 

The company is a significant employer, directly employing over 100,000 people. Over a third of its workforce is outside the UK – in the US, Saudi Arabia, France, Italy, Germany, Sweden, Australia & Canada. BAE SYSTEMS is present in five continents, with customers in 129 countries, and its order book at the end of the year 2000 totalled £41 billion.[7] Its biggest rivals are the US companies Lockheed Martin and Boeing, as well as the European syndicate EADS Inc, which formed when BAE acquired GEC (see History). In theory, BAE SYSTEMS is financially strong enough to attempt a takeover of its rivals. However, BAE SYSTEMS’ ambition to merge with Boeing or Lockheed has been ruled out by the US government.[8] Nevertheless, its desire to break into the US market, by far the largest in the world for arms companies, continues unabated.

 

History and Strategy

 

British Aerospace (BAe) was first formed as a nationalised corporation in April 1977 by the merger of the British Aircraft Corporation, Hawker Siddeley Aviation, Hawker Siddeley Dynamics and Scottish Aviation. State control over the arms trade didn’t survive for very long under the Thatcher government, however, with the UK Government selling 51.57% of its shares in BAe in 1981, upon its formation as a public limited company (PLC). In 1985, the UK Government sold its remaining shares, keeping only a special £1 share in order to ensure that the company continues under British control (foreign ownership of BAE SYSTEMS is limited by law to 29.5%).

 

At around the same time as it became an entirely privately-owned company, BAe became involved in one of the biggest trade scandals of the 1980s - the Al-Yamamah deals with Saudia Arabia. According to the Financial Times[9], the arms deal (known as Al Yamamah II) was ‘the biggest [UK] sale ever of anything to anyone.’ The deals were condemned by Amnesty International as a clear endorsement of a country in the hands of a repressive regime who displayed a ‘persistent pattern of gross human rights abuses'.[10] BAe was the prime contractor for the entire deal, which included the sale of 48 Tornado bombers, 24 Tornado fighters, 30 Hawk trainer-fighters, and a large number of Rapier missiles. It also involved millions of pounds worth of corrupt commissions paid to Arabian businessmen, which the Conservative government of the time denied (see Corporate Crimes). Needless to say, this part of the company’s history does not appear on its own corporate timeline.

 

Meanwhile, in 1988 BAe began to expand its holdings, starting with the acquistion of the Rover group. By 1991 Heckler & Koch GMbh, the German small arms company, had joined them, and in 1992 the company reorganised itself. The arms side of the company were amalgamated into British Aerospace Defence Limited, whereas three new companies were formed to replace British Aerospace (Commercial Aircraft) Limited. These were British Aerospace Airbus Limited, British Aerospace Regional Aircraft Limited and British Aerospace Corporate Jets Limited. As well as internal reorganisation, BAe also began to form alliances with other companies in the arms sector; in October 1993 a joint venture company was formed with GEC-Marconi to ‘manage and develop their involvement in the naval Principal Anti-Air Missile System guided weapons project.'[11] This reflected the increasing trend for co-operation between companies in the sector.

 

Undeterred by the outrage and corruption which had mired its arms deals to Saudi Arabia, in November 1996 the Conservative Government handed BAe another morally dubious trade agreement. A large shipment of arms, including 16 Hawk fighter aircraft, was to be sent to the dictatorship that ruled Indonesia, despite widespread suspicion that they would inevitably be used to facilitate the repression of East Timor. As Robin Cook stated in the House of Commons in 1994"Hawk aircraft have been observed on bombing runs in East Timor in most years since 1984."[12] Needless to say, this evidence did nothing to dissuade BAe from extracting the maximum profit available from the deal.

 

In the following years, BAe continued to restructure its business, concentrating more heavily on its ‘core competencies’ and divesting its shares in other, unrelated businesses. In March 1998, for example, it disposed of shares representing a 16.11% ownership of Orange plc, making £763.8 million. Meanwhile, it increased its interest in the civil aerospace interest of Airbus, and continued to expand into the US arms market by joining Lockheed Martin’s Joint Strike Fighter project team. In September 1998 it entered into partnership agreements (along with Rolls Royce) with the Universities of Cambridge, Sheffield and Southampton in order to ‘research into future engineering design processes’.[13] (see Corporate Crimes section)

The biggest change for BAe came, however, in January 1999, when the company announced its merger with GEC’s Marconi Electronic Systems business (essentially the arms dealing side of GEC Marconi). In November 1999, the two businesses merged, creating a new corporate entity named BAE SYSTEMS, which became the largest arms dealer in the world. All was not necessarily rosy with the new company, however, with a profits warning issued on January 10, 2001, wiping away a quarter of the company’s value on the stockmarket.[14]

 

New developments have, however, made the company’s future look bright. The British Government continues to look after its corporate friends, with the recent £28 million sale of a military air-traffic control system to debt-stricken Tanzania causing outrage among ordinary voters. As Justin Forsyth, Oxfam’s head of policy, has put it: "It is outrageous that Tanzania's debt relief will go towards bolstering the profits of BAE and Barclays bank rather than helping the poor people of Tanzania”.[15] On top of this, the British government is currently mounting an intensive campaign to sell 60 Hawk jets, worth £1bn, to India. This is despite the danger of the India-Pakistan dispute over Kashmir spilling into war and destabilising the entire region. BAE SYSTEMS has already sold Jaguar combat aircraft to India in licensing deals that the Ministry of Defence (MoD) refuses to disclose (see Corporate Crimes section).[16]

 

External factors have also helped to secure BAE’s future - most notably the fallout from the attack on the World Trade Centre on September 11th, 2001. The ‘War on Terrorism’ cannot fail to boost BAE’s profits, and as the Board of BAE point out in their preliminary results for 2001, the loss of revenue from civilian aeronautics will be mitigated ‘by the overall improvement in performance in other business groups.’[17] In other words, the fall in civilian air traffic doesn’t matter to BAE SYSTEMS, because they will continue to profit from the spiral of death and destruction which constitutes the arms trade. The outlook is bright for this company only when it is bleak for the rest of the world.

 

Despite an increase in share prices and a generally good outlook for the company, on Tuesday March 26th, 2002, a boardroom coup shocked The City. This lead to the departure of CEO John Weston, who had been with the company for more than 30 years. It has been suggested that his style clashed with the Chairman of the Board of Directors, Sir Richard Evans, and that the Ministry of Defence (MoD) resented being ‘bullied’ by Weston. As the Observer put it: ‘Weston had irritated Defence Secretary Geoff Hoon by his opposition to the Government's defence procurement process…Weston has sometimes been criticised for adopting a ‘robust’ attitude when dealing with officials’.[18] Whatever the reason, Mike Turner (formerly Chief Operating Officer) was quickly promoted to the vacant CEO spot, and The City expects more changes to occur soon, not least in the orientation of the company. Rather than a single focus on the United States, it is thought that Turner will concentrate on keeping the activities of BAE diversified, and on rebuilding relations with the MoD.


References [1] BAE SYSTEMS homepage: http://www.baesystems.com accessed 29/4/02

[2]'BAE SYSTEMS - Overview', BAE website: http://www.baesystems.com/overview/overview.htm accessed

27/4/02

[3] CAAT (2002) BAE SYSTEMS Alternative Report 2002, website http://www.caat.org.uk/companies/BAES2002.pdf accessed 9/5/02

[4] ibid.

[5] ibid.

[6]BAE SYSTEMS Capsule, Hoover's Online, website: http://www.hoovers.com/co/capsule/1/0,2163,40681,00.html accessed 27/4/02

[7] 'BAE SYSTEMS - Overview', BAE website: http://www.baesystems.com/overview/overview.htm accessed 27/4/02

[8] Wrigley, C. (2000) Arms Industry Briefing, CAAT website: http://www.caat.org.uk/research/ArmsIndustry_Body.html accessed 29/4/02

[9] cited in Hirst, C. ‘The Arabian Connection: The UK arms trade to Saudi Arabia,’ CAAT website: http://www.caat.org.uk/research/Saudi_Body.html, accessed 9/5/02

[10] Amnesty International report (1999) – cited on BAE SYSTEMS, Reaching Critical Will website: http://www.reachingcriticalwill.org/dd/bae.html, accessed 9/5/02

[11] BAE SYSTEMS Overview: Our Evolution, website: http://www.baesystems.com/overview/ourevolution.htm, accessed 29/4/02

[12] Hildyard, N. (1999) Snouts in the Trough: Export Credit Agencies, Corporate Welfare and Policy Incoherence, Corner House Briefing No. 14, The Corner House website: http://www.thecornerhouse.org.uk/briefing/14ecas.html, accessed 9/5/02

[13] BAE SYSTEMS Overview: Our Evolution, BAE SYSTEMS website: http://www.baesystems.com/overview/ourevolution.htm, accessed 9/5/02

[14] Kuo, D. (2001) BAE Systems Dives, Market Comment, The Motley Fool website: http://www.fool.co.uk/news/comment/2001/c010110b.htm, accessed 9/5/02

[15] Denny, C. (2001) Backlash over costly high-tech for Tanzania, The Guardian website, 21/12/01: http://www.guardian.co.uk/tanzania/story/0,11441,623358,00.html , accessed 10/5/02

[16] Norton-Taylor, R. (2002) British plane sales to India raise fears of nuclear use, The Guardian website, 23/4/02, http://www.guardian.co.uk/kashmir/Story/0,2763,688932,00.html, accessed 10/5/02

[17] 'BAE SYSTEMS delivers 2001 financial results to plan with a strong order book and balance sheet', Virtual News Room, 14/2/02, BAE SYSTEMS website: http://www.baesystems.com/virtualnewsroom/archive/140202news1.htm, accessed 29/4/02

[18] Wachman, R. (2002) A very British coup at BAE, 31/3/02, The Observer website, http://www.observer.co.uk/business/story/0,6903,676379,00.html, accessed 29/4/02

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