BAE, Rolls-Royce Face U.K. Defense Talks as Government Seeks Cost-Savings

The U.K. Defense Ministry is to hold cost-saving discussions with 11 of its top suppliers, including BAE Systems Plc, Rolls-Royce Plc and QinetiQ Group Plc, as the government seeks to narrow the record budget deficit.

Senior ministry officials will also meet this summer with Lockheed Martin Corp., Finmecannica SpA, Thales SA and others, the minister in charge of defense procurement, Peter Luff, said in an interview in London yesterday. The immediate aim is to save more than 100 million pounds ($150 million) before making deeper spending cuts.

The U.K. is reviewing its defense capabilities for the first time since 1998 and the ministry wants suppliers to work with it to cut costs. It will also talk to Serco Group Plc, MBDA, Babcock International Group, Hewlett-Packard Co. and European Aeronautic, Defence and Space Co.

“It’s partly an attempt to focus the defense contractors’ minds on how serious this challenge is,” Luff said. “We are going to have a ‘Dragon’s Den’ later on in the summer to test these ideas.”

The minister was referring to the BBC television program, in which prospective entrepreneurs pitch ideas to five multimillionaires willing to invest their own cash.

‘Tell Us How’

“You are a big supplier to our department, you sell the ministry lots of things,” Luff said, “Tell us how together we can do things better, tell us how we can save money.”

Some companies supplying equipment to the U.K. armed forces are likely to find out as early as October whether their programs will go ahead after the review, though others may not know until next year, Luff said, speaking before a speech to the Soldiers, Sailors, Airmen and Families Association tonight.

The defense ministry will publish its Strategic Defense and Security Review once Chancellor of the Exchequer George Osborne outlines the cuts he’ll be making to individual departments’ budgets, known as the Comprehensive Spending Review, on Oct. 20.

“The SDSR will define what we need and the CSR will tell us how much money we have to do that and then we will decide how we do it,” Luff said. The defense review “is likely to give green lights, amber lights and red lights to various programs.”

There’ll then be informal discussions with suppliers, followed by a formal consultation with industry, before the ministry publishes draft legislation early next year.

Asked at what point contractors and manufacturers will be clear about which weapons and equipment programs will be saved, cut or downgraded, Luff said it would depend on individual programs.

“Clarity will emerge step-by-step in the process,” he said. “There will be decisions in the SDSR which give some people all the certainty they need,” though other companies may need to wait for the consultations or the draft bill “before it is clear what will happen” to their contracts.

Luff said there will be winners and losers, with small and medium-sized businesses possibly doing well, as they can be “agile,” providing “innovative solutions.”

“The bigger contractors may experience difficulties, but there may be exceptions to that,” Luff said.

To contact the reporter on this story: Kitty Donaldson in London at kdonaldson1@bloomberg.net.

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