First-half sales fall 10% to £8.3bn, as western defence spending cuts take hold at Britain’s largest manufacturing employer
BAE Systems has posted a double-digit fall in revenues as ongoing troubles in its main US and UK markets damaged sales of defence equipment, but the group singled out Asia and the Middle East as potential targets for exporters battered by western spending cuts.
Britain’s largest manufacturing employer said first-half sales fell 10% to £8.3bn, while pre-tax profits slipped 5% to £655m, as reductions in defence budgets on both sides of the Atlantic took their toll. BAE’s figures for the six months to 30 June came the day after official data showed that the wider UK manufacturing sector shrank at its fastest rate in more than three years last month.
However, the defence group’s travails have been well trailed following military pullbacks from Iraq and Afghanistan that affected demand, Pentagon cuts and a strategic defence review in the UK that will see the £37bn defence budget reduced by 8% by 2014.
BAE makes nuclear submarines, aircraft carriers and the Eurofighter Typhoon in the UK, while the Bradley armoured vehicle is among its biggest US products. As well as making some of the most complex products in British industry, BAE generates half its turnover from service and maintenance contracts. The US accounts for 40% of BAE revenues, with a further 30% accounted for by the UK, where BAE employs about 35,000 people and has 7,500 UK companies in its supply chain.
Ian King, BAE’s chief executive, said the company can perform strongly outside its key markets, pointing to BAE booking orders from outside its two main markets worth £4.3bn in the first half, against £4.8bn worth for the whole of last year,. “We are pretty vibrant about it,” said King, pointing to interest in the Typhoon from Malaysia and Oman, as well as a potential deal with India for Hawk training jets. “We achieved order intake in non-UK and non-US territories of £4.3bn, so we are starting to see that [sales] cycle coming through from all the effort we have put in,” he said.
While Asia and the Middle East hold considerable promise for British manufacturers, particularly in aerospace given their expanding airline industries, only one country from those continents was among the UK’s top ten export destinations last year – China. However, the top 20 includes India, Hong Kong, the United Arab Emirates, Japan and Turkey.
King added that he was “encouraged” by government support for manufacturing, despite Wednesday’s Markit/CIPS purchasing managers’ index (PMI) reading, which came in at 45.4 for July and far below the 50 mark that signifies economic contraction. “We are encouraged that this government is starting to understand the strength of UK manufacturing,” he said, adding that the coalition had given stronger support than its predecessor.
David Cameron’s attendance at the Farnborough Air Show last month underlined the political commitment to UK manufacturing, he said. “There has been a sea change since this government come in to power and they are starting to recognise that defence is such an important part of the manufacturing business. The litmus test was the support at the Farnborough Air Show of the prime minister himself. So I think they do get it.”
However, he admitted that announcements such as £60m in support for a centre of excellence for aerodynamics would take time to bear fruit. “That’s always the difficulty of the political environment and the measures you take today. How long does it take to effect the statistics?”