BAE Systems- Part 3


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BAE announced the sale of its German naval systems subsidiary, Atlas Elektronik to ThyssenKrupp and EADS. It was a complicated sale as there was a requirement of the German government to approve any sale. It was described by the Financial Times as a “cut price” sale because the French company Thales bid 300 million pounds but was blocked from purchasing Atlas on national security grounds. BAE then announced the sale of BAE Systems Aerostructures to Spirit AeroSystems, Inc. on January 31, 2006. BAE stated as early as 2002 that it wished to dispose of what it did not consider a “core business”.


Saudi Arabia signed a contract for 6 billion to 10 billion pounds for 72 Eurofighter Typhoons to be delivered by BAE on August 18, 2006. BAE was awarded a 2.5 billion pound contract for the upgrade of 80 Royal Saudi Air Force Tornado IDS’s on September 10, 2006. In the 2005 annual report BAE’s goal was to increase technology transfer between the United Kingdom and the United States. The focus of this effort was The F-35 (JSF) program. Minister for Defense Procurement, Lord Drayson suggested that the UK would withdraw from the project without the transfer of technology that would allow the UK to operate and maintain F-35s independently. Lord Drayson signed an agreement on December 12, 2006 that allows “an unbroken British chain of command” for the operation of the aircraft. BAE received a 947 million pound contract to provide guaranteed availability of Royal Air Force (RAF) Tornados.


BAE announced that its subsidiary BAE Systems Inc. was going to purchase Armor Holdings for 2.3 billion pounds (US 4.5 billion dollars) on May 7, 2007. Armor Holdings was a manufacturer of tactical wheeled vehicles. They also provided vehicle and individual armor systems and survivability technologies. The completion of the merger was announced on July 31, 2007. BAE (and British Aerospace previously) was a technology partner to the McLaren Formula One team from 1996 to December 2007. This partnership focused on McLaren’s F1 car’s aerodynamics, eventually moving to carbon fibre techniques, wireless systems and fuel management. BAE’s interest in the partnership was to learn about high speed build and operations processes of McLaren.


BAE announced the purchase of Tenix Defense, a major Australian defense contractor on January 18, 2008. This purchase was completed on June 27, 2008 for 373 million pounds making BAE Systems Australia that country’s largest defense contractor. BAE expanded its IT business with the 531 million pound purchase of Detica Group in July of 2008.


BAE Systems inherited British Aerospace’s share of Airbus Industries, this consisted of two factories at Broughton and Filton. These facilities manufactured wings for the Airbus family of aircraft. In 2001 Airbus was incorporated as Airbus SAS, a joint stock company. In return for a 20% share in the new company BAE transferred ownership of its Airbus plants to the new company. As early as 2000 it was rumored that BAE wished to sell its 20% share of Airbus. It was consistently denied by the company. On April 6, 2006, BBC News reported that it was going to sell its stake. At the time it was valued at 2.4 billion pounds. Due to the slow pace of informal negotiations, BAE exercised its put option which saw investment bank Rothschild appointed to give an independent valuation. Six days after this Airbus announced delays to the A380 with significant effects on the value of Airbus shares. Rothschild valued BA’s share at 1.87 billion pounds, on June 2, 2006, well below BA’s analysts’ and even EADS’ expectations. The BAE board recommended that the company proceed with the sale. On October 4, 2006, shareholders voted in favor and the sale was completed on October 13, 2006. This saw the end of UK owned involvement in civil airliner production. Airbus UK continues to be the Airbus “Center of Excellence” for wing production. They employ approximately 140,000 directly and indirectly, but it is entirely owned by EADS.


BAE plays important roles in military aircraft production. The company’s Typhoon, Tornado and Harrier fighter-bombers are all front line aircraft of the RAF. BAE is a major partner in the F-35 Lightning II program. Its Hawk advanced jet trainer aircraft has been widely exported. In July of 2006, the British government declassified the HERTI (High Endurance Rapid Technology Insertion), an Unmanned Aerial Vehicle (UAV) which can navigate autonomously. BAE Systems’ interests in commercial aviation are vested in BAE Systems Regional Aircraft. This unit no longer produces aircraft, however it continues to lease and support its products, the Bae 146/Avro RJ family, Bae ATP, Jetstream and Bae 748.


BAE Systems Land Systems manufactures the British Army’s Challenger II, Warrior Tracked Armored Vehicle, M777 howitzer, Panther Command and Liaison Vehicle and L85 Assault Rifle. BAE Systems Land and Armaments manufactures the M2/M3 Bradley fighting vehicle family, the US Navy Advanced Gun System (AGS), the M113 armored personnel carrier (APC) and the M109 Paladin.


Major naval projects include the Astute class nuclear submarine and, through BVT Surface Fleet, the Type 45 air defense destroyer and the Queen Elizabeth class aircraft carrier.   Areas of business for BAE Systems includes their “home markets” of Australia, Saudi Arabia, South Africa, Sweden, the United Kingdom and the United States.

BAE Systems is the predominant supplier to the United Kingdom Ministry of Defense. They are the only company to receive more than 1 billion pounds from the Ministry of Defense in 2004 and 2005. The Oxford Economic Forecasting states that in 2002 BAE’s United Kingdom businesses employed 111,578 people, they achieved export sales of 3 billion pounds and paid 2.6 billion pounds in taxes. These figures to not include the contribution of Airbus UK.


BAE Systems Inc. now sells more to the United States Department of Defense than the United Kingdom Ministry of Defense. The company has been allowed to buy important defense contractors in the United States, however its status as a United Kingdom company requires that its United States subsidiaries are governed by American executives under Special Security Arrangements. The attraction of MES to British Aerospace was largely its ownership of Tracor, a major American defense contractor. Since its creation the company has steadily increased its investment in and revenues from the United States. BAE’s purchase of Lockheed Martin Aerospace Electronic Systems in November of 2000 was described by John Hamre (CEO of the Center for Strategic and International Studies and former Deputy Secretary of Defense) as “precedent setting” considering the advanced and classified nature of many of the company’s product. The possibility of mergers between BAE and major North American defense contractors has long been reported and they include Boeing, General Dynamics, Lockheed Martin and Raytheon.


BAE Systems Australia is the largest defense contractor in that country. It has more than doubled in size with the acquisition of Tenix Defense. The Al Yamamah agreements between the United Kingdom and Saudi Arabia require “the provision of a complete defense package for the Kingdom of Saudi Arabia”, BAE employes 4600 people in Saudi Arabia. BAE Systems Land Systems South Africa, 75% owned by BAE, is the largest military vehicle manufacturer in South Africa. They are currently taking part in the United States MRAP program. Apart from its share of Saab, BAE’s interests in Sweden are a result of the purchases of Alvis Vickers and UDI, which owned Hagglunds and Bofors respectively. The companies are now a part of BAE Systems AB and have a combined workforce of approximately 1750.


BAE Systems’ headquarters is in the Farnborough Aerospace Center business park, with senior managers based at the registered office in Carlton Gardens, London. BAE Systems divides its business into five groups, Electronics, Intelligence and Support, Land and Armaments, Programs and Support, International Businesses, and HQ and Other Businesses.  In 2008 their net profit was 1, 768 million pounds with earnings per share at 49.6.


BAE has been criticized over two frigates sold to Romania. The terms of the sale have been a matter of controversy. Like many arms manufacturers, BAE has received criticism from various human rights and anti-arms trade organizations due to the human rights records of governments to which it has sold equipment. These include Indonesia, Israel, Saudi Arabia, and Zimbabwe. BAE’s United States subsidiary makes several subsystems for F-16s, 236 of which have been supplied to the Israel Defense Forces.


BAE hired a private security contractor to obtain information about individuals working at the Campaign Against Arms Trade and their activities. This happened in September of 2003 and it was reported by The Sunday Times. In February of 2007, it again obtained private confidential information from CAAT.


BAE has been subject to allegations of corruption. The Solicitor General, Mike O’Brien announced that BAE contracts in six countries were being investigated by the Serious Fraud Office (SFO) for “suspected international corruption”; Chile, the Czech Republic, Qatar, Romania, South Africa and Tanzania. This took place on February 7, 2007. In September 2005 The Guardian reported that banking records showed that BAE paid 1 million pounds to Augusto Pinochet, the former Chilean dictator. The Guardian has also reported that “clandestine arms deals” have been under investigation in Chile and the UK since 2003 and that British Aerospace and BAE made a number of payments to Pinochet advisers.


The SFO’s Czech Republic investigation is relative to allegations of bribery as a part of the deal to lease BAE/Saab Gripen fighters to that country. BAE has also been criticized for its role in disposing of surplus Royal Navy warships. HMS Sheffield was sold to the Chilean Navy in 2003 for 27 million pounds, however, the profit from the sale was 3 million pounds after contracts worth 24 million pounds were placed with BAE for upgrades and refurbishment of the ship. BAE allegedly paid “secret offshore commissions” of over 7 million pounds to secure the sale of HMS London and HMS Coventry to the Romanian Navy. BAE received a contract for 116 million pounds for refurbishment of these ships. In 2007 BBC News highlighted concerns of arms campaigners regarding arms sales to South Africa. This was in relation to a 2.3 billion pound deal which saw BAE supply Hawk trainers and Gripen fighters. The Tanzania allegation relates to the sale of a radar system to that country in 2002. The deal was criticized by then Secretary of State for International Development, Clare Short, opposition of Mps and the World Bank.   In response to allegations of bribery and corruption, BAE Systems 2006 Corporate Responsibility report states “We continue to reject these allegations. We take our obligations under law very seriously and will continue to comply with all legal requirements worldwide.”


Another area of criticism is their indirect production of nuclear weapons. Through its 37.5% share of MBDA it is involved with the production and support of the ASMP missile, an air launched nuclear missile which forms part of the French nuclear deterrent. BAE is also the United Kingdom’s only nuclear submarine manufacturer and produces a key element of the United Kingdom’s nuclear weapons capability. BAE was excluded from the portfolio of the government pension fund of Norway in 2006 because of this involvement.


On of 24 Panavia Tornado ADVs delivered to the Royal Saudi Air Force as a part of the Al Yamamah arms sale was subject to allegations of bribery in relation to its business in Saudi Arabia. The United Kingdom’s National Audit Office (NAO) investigated the Al Yamamah contracts and has so far not published its findings. This is the only NAO report to ever be withheld and the Ministry of Defense states that the reports is sensitive. Disclosure would harm international relations and the United Kingdom’s commercial interests. The company was accused of maintaining a 60 million pound Saudi slush fund and was the subject of an investigation by the SFO. On December 14, 2006 it was announced that the SFO was discontinuing its investigation into BAE. It was stated that the wider public interest to safeguard national and international security outweighed any potential benefits for further investigation. The termination of the investigation has been controversial. In June of 2007, BBC’s Panorama alleged BAE paid hundreds of million of pounds to the ex-Saudi ambassador to the United States, Prince Bandar bin Sultan in return for his role in the Al Yamamah deals. In June of 2007, the United States Department of Justice began a formal investigation into BAE’s compliance with anti-corruption laws. It had been confirmed that CEO Mike Turner and non-executive director Nigel Rudd had been detained for about 20 minutes at two United States airports and that Department of Justice had issued a number of additional subpoenas in the United States to employees of BAE Systems PLC and BAE Systems Inc. as a part of its ongoing investigation. According to the times this is unusual behavior on the part of the DOJ because BAE is co-operating fully with the investigation.


On April 10, 2008 the High Court ruled that the SFO acted unlawfully by dropping its investigation. The ruling was one of the most strongly worded judicial attacks on a government action according to The Times. The ruling condemned how ministers buckled to threats that Saudi cooperation in the fight against terror would end unless the investigation was dropped. On April 24 the SFO was granted leave to appeal to the House of Lords against the ruling. There was a two day hearing before the Lords on July 7, and 8, 2008. On July 30, 2008 the House of Lords overturned the High Court ruling, stating that the decision to discontinue the investigation was lawful. In June of 2007, Lord Woolf was selected to lead what the BBC described as an independent review and ethics committee to look into how the defense giant conducts its arms deals. The report Ethical business conduct in BAE Systems PLC The Way Forward, made 23 recommendations. The report stated that in the past BAE did not pay sufficient attention to ethical standards in the way it conducted its business, it is an embarrassing admission.


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Author: Sandra Miller

Sandra Miller is an Examiner from Norfolk. You can see Sandra’s articles on Sandra’s Home Page.