Page 53 - Five Forces of Americanisation Richard Hooke 04072025 final post SDR1

The UK Defence Industry in the 21 Century
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The Five Forces of Americanisation

policy demanding competition, including the need for disclosure and stability of specification shared
between suppliers, many of whom will be foreigners. And the risk of being “beaten up”.

“A resilient industrial base underpins Defence’s credibility as a fighting force. Our evidence
consistently showed that the UK’s defence industry is unprepared for high-intensity, prolonged
conflict due to decades of budget cuts and reduced industrial capacity since the end of the Cold
War. Our witnesses strongly emphasised the role that the Government should play in reversing
this process.”
“There is a significant trust deficit between the defence industry and the Government” 8
House of Lords International Relations Committee 26 Sept 2024 “Ukraine: a wake-up call”
Whilst reduced cost might have been be an anticipated benefit of a competitive procurement policy,
the National Audit Office, reporting in December 2023, offered no reassurance on current
performance and raised alarm in anticipating the future.
“Military Capability Development – shaping the Equipment Plan”
“Guiding Principles for Capability Development
“.. Principle 7: Maintaining a balanced and affordable Equipment Programme. An over-heated EP
slows delivery and leaves minimal room for adoption of new capability or innovation.”
TechUK (UK Technology Trade Association) 20 July 2022

“The MOD acknowledges that its Equipment Plan for 2023–2033 is unaffordable, with forecast
costs exceeding its current budget by almost £17 billion. This is a marked deterioration in the
financial position since the previous Plan….
“The MOD should consider how future Plans can achieve their core purpose: providing a reliable
assessment of the affordability of its equipment programme and demonstrating to Parliament
how it will manage its funding to deliver equipment projects.”
(National Audit Office Press release; 4 December, 2023)
A further consequence of competition policy has been its negative effect on UK defence companies’
creditworthiness, emphasising their relative lack of scale, especially when compared with peer US
companies, squeezing profitability and margins, weakening their competitive positioning and the
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visibility and sustainability of future revenues. Moody’s ratings offer a useful guide, illustrating how
the policy affected the credit capacity, cost of debt and, especially
important during the financial crisis just over a decade ago, the
liquidity of the UK DIB.
Lenders are reassured by the long-term visibility of borrower’s
earnings and a track record of positive cash conversion. Long term
government contracts obviously provide reassurance (though
execution risk can still be a negative factor), but UK companies like
Meggitt, Ultra and Cobham had also been able to demonstrate a
history of recurring sales – even without contract cover - and above
average margins stretching years ahead. Investors would refer to
this as a company’s “Competitive Advantage Period” (“CAP”): the
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period during which its trading forecasts are held to be reliable .
Creditworthiness and credit capacity are important features of an individual company’s ability to
manage fluctuations in working capital but they affect companies throughout the supply chain. Any
reduction in the credit capacity of a prime contractor or tier 1 supplier will affect the entire supply
chain, by extending invoice settlement terms or the cost and availability of invoice discounting
arrangements. (It is often overlooked that supplier invoice discounting programmes will consume part
of the discounter’s credit capacity, as will other payment or performance guarantees.)

Even so, one of the criteria supporting a higher credit rating is the level of conservatism of the
borrower’s financial policy. Although the board’s commitment to a strong credit profile will attract
lower debt financing costs, opening up access to more sources of liquidity, this can constrain a

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07/07/2025 Richard Hooke 2025