BAE Makes Case for Defense as Military Spending Review Looms

BAE Systems Plc said a surge in Russian military spending following the annexation of Crimea and the importance of the defense industry to the U.K. economy should be key considerations in a review of Britain’s security needs.

With Russia’s arms budget increasing by 30 percent a year and set to reach an annual $62 billion -- the highest since the collapse of the Soviet Union -- declining investment in key systems among North Atlantic Treaty Organization members should be higher on political agendas, BAE Chairman Roger Carr said.

In the U.K., Prime Minister David Cameron’s Strategic Defence and Security Review is “timely” given the twin threats from Russia and Islamic extremists, Carr said, adding that the public has become more accepting of military needs, ranking them the fourth-highest national priority in a recent survey.

Carr commented after General Nicholas Houghton, chief of Britain’s defense staff, warned this week that operations against Islamic State and elsewhere have stretched the Royal Air Force’s fast-jet squadrons to the limits of their capacity following a drastic reduction in aircraft numbers.

Speaking at the publication of an Oxford Economics study showing BAE accounts for 1 percent of all U.K. exports and 0.5 percent of gross domestic product, Carr said Chancellor of the Exchequer George Osborne’s surprise budget commitment to spending 2 percent of GDP on defense through the end of the decade had been “very welcome.”

Naval Guarantees

Critics of government policy had suggested new items might be included to help meet the NATO requirement, and while Osborne said that won’t be the case, he cautioned that U.K. armed forces must deliver efficiency gains and that the defense review will reallocate money in the most effective way.

Nigel Whitehead, BAE’s managing director for programs, said in an interview it’s more concerned about the aviation sector than the naval budget, with four new “Successor” submarines due to carry Britain’s nuclear weapons protected by a “triple-lock” commitment in the last Conservative manifesto.

There’s also a “clear route” to construction of 13 Type 26 frigates, as well as three offshore patrol vessels that will help BAE’s Scottish business bridge the gap to that program from current work on two Royal Navy aircraft carriers, he said.

In contrast, there’s “less of a clear picture” regarding continuing development of the Eurofighter Typhoon and the number of Lockheed Martin Corp. F-35 Lightning IIs Britain requires, Whitehead said. BAE is principal subcontractor on the F-35 -- the world’s biggest defense program -- making fuselage and tail sections, as well as the jet’s electronic warfare system.

‘Total Farce’

Whitehead said the government is aware of the importance of further developing key defense platforms in order to enhance their “exportability” to markets such as the Middle East.

Jeffrey Sterling, a Conservative member of the House of Lords, said at a briefing on the Oxford Economics study that the defense review will determine Britain’s capabilities for decades and “must be got right.” The previous review under Cameron in 2010 was “a total farce” and hurt Britain’s standing among its allies, especially the U.S., he said.

Alan West, a former first sea lord and chief of the naval staff who commanded a ship sunk in the 1982 Falklands War, said the government shouldn’t be tempted to substitute less costly technology for genuine war-fighting capability.

“Cyber is not a panacea for spending on defense,” said West, who also sits in the Lords.

Carr said BAE will make further evidence-based submissions to support its viewpoint and is devoting “a huge amount of energy” to dialog with the government. Key figures involved in decision-making will also tour its submarine yard and the Eurofighter production line, both located in northern England.

“This is about our standing in the world,” Carr added.

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