Shipyards weathering the storm

EVEN as his warmly welcomed words dispersed the morning chill, piercing questions emerged last week as Nick Clegg assured workers in Rosyth that Scottish shipbuilding jobs were safe.

The Deputy Prime Minister's arrival in Scotland just hours before the unveiling of the defence spending review on Tuesday was seen as a gratifying stay of execution for the industry.

The hastily-arranged visit led to initial confusion as to where he might appear - Babcock's refitting dockyard in Rosyth, or BAE shipbuilding yards along the Clyde - but it seemed certain that the coalition government would go ahead with the 5.2 billion contract to construct two massive new aircraft carriers for the Royal Navy.

Together with Scottish Secretary Michael Moore, Lib Dem leader Clegg hailed the "great news" that the cloud of uncertainty hanging over Rosyth had been lifted. Though the relief was palpable, not all were convinced that shipbuilding's long-term future was secure.

Labour politicians in Scotland seized on the fact Clegg and his boss, Conservative Prime Minister David Cameron, plan to either mothball or sell one of the carriers, the HMS Prince of Wales, on its scheduled completion in 2017. The coalition had been keen to cancel this second vessel's construction altogether but was unable to because former PM Gordon Brown negotiated an "unbreakable" contract that made it more expensive to call off than to go ahead and build.

Long-term maintenance on the Prince of Wales would have been carried out at Rosyth, where assembly of the components into finished carriers is also being undertaken. The maintenance contract would have provided 40 years of valuable work for the roughly 1,600 people employed there.

Thomas Docherty, Labour MP for Dunfermline and Fife, condemned the decision to mothball as a continuation of the destruction begun when former Tory defence secretary Malcolm Rifkind chose to transfer a major submarine refit contract away from Rosyth in 1993. He accused the coalition's leaders of effectively announcing the closure of Rosyth, as the dockyard would not have enough work beyond 2020.

Scottish Labour leader Iain Gray weighed in with similar views: "Rosyth is the premier refitting yard in the UK and the decision to mothball one of the carriers after three years could have a serious impact on its long-term future and shipbuilding in Scotland."

Meanwhile, the decision to cut the UK's fleet of frigates and destroyers to 19 raises the prospect of less work at BAE's yards in Govan and Scotstoun.

The current frigate fleet is due to be replaced by new multi-role Type 26 vessels, whose requirements and design are being ironed out by an assessment team from BAE and the Ministry of Defence. However, BAE will in the long-run need to secure work from elsewhere to keep its Scottish yards in full production.

"We will certainly be working more for overseas orders," says Charles Thompson, Scottish-based communications director for BAE. "Exportability is now one of our key criteria."

He points to the defence cooperation agreement signed last month between the UK and Brazil, which has opened the door to sales of Type 26 frigates to the South American country. There have also been reports of similar talks with countries such as Australia and New Zealand, though BAE faces formidable global competition for frigate sales from the likes of France, Italy, Germany and China.

BAE has conceded there will be some pain in its UK operations as it moves towards a more export-oriented model. Its interim management statement issued on Thursday noted that the defence spending review would cost it 1p in earnings per share from next year, equivalent to about 48 million annually.

Babcock has so far declined to comment on the impact of the review, though more details are expected when it releases its half-year results on 9 November.

Michael Abram, the head of Glasgow-based shipping specialists Henry Abram and Sons, says he was "delighted" with the government's decision to go ahead with construction of both carriers. Without it, he says Scotland's entire shipbuilding industry would have collapsed, as there would be no other work to fill the void.

Latest official government figures show that shipbuilding employs 6,000 people across Scotland generating 780m in annual turnover. However, this doesn't include smaller supply chain firms such as family-owned Henry Abram, which has an 85m contract to transport sections of the carriers from yards across the UK to Rosyth for assembly.

Abram says it is difficult to predict what will happen to the Scottish industry after the carrier work is completed in a few years' time: "You can only think that the government will continue with naval shipbuilding, though the question is when that work might come through, and whether they have got to source that from the UK."

Despite the uncertainties, many across the sector believe there is a long-term future for shipbuilding in Scotland.

The industry, they say, has been overhauled so that it can now compete effectively for work from outside the UK. There is also scope to diversify into other areas such as the production of massive offshore energy equipment.

BAE has already taken some tentative steps into diversification. Earlier this year, it formed a 30-month research and development project with Scottish renewables firm Aquamarine Power to enable large-scale commercial production of the latter's Oyster wave energy converter.

Such moves will be necessary to counter-balance the defence spending cuts that many suspect would have been deeper if not for pressure from the US. Officials across the pond are believed to have lobbied for less draconian reductions, as the US would not welcome the significant weakening of one of its key global allies.

Mike Allen, analyst with Panmure Gordon, says this sort of pressure should keep the UK on course for real growth in defence spending over the long-term. In the meantime, many are relieved that the cuts are not as deep as they could have been.

"The first thing I would say on defence spending overall is that a month or two ago, we were talking about cuts in the region of 20 per cent," Allen says. "Looking at it now, the 8 per cent cuts that we got seem pretty good - you would have happily taken that a couple of months ago."

Jim Moohan, chair of the Confederation of Shipbuilding and Engineering Unions, is hopeful that the go-ahead for construction of the HMS Prince of Wales and HMS Queen Elizabeth aircraft carriers will open the door to securing more work for Scottish and other UK yards. "I do believe the carrier project will burst the bubble in terms of gaining work from the European and world market," he says. "It will be a showcase of our skills, qualities and capabilities."

Moohan adds that restructuring may have left the UK shipbuilding industry with only six main yards, but these are now all working together to secure business, rather than beating each other up over the same contracts.

Industry leaders also stress that as far as the UK government's spending decisions are concerned, nothing is set in stone.

Stuart Patrick, chief executive of Glasgow Chamber of Commerce, says: "This has all been done in the last three to four months at breakneck speed to meet the needs of the emergency budget and spending review. No one can seriously say - except perhaps Chancellor George Osborne - that this is the end of the discussion."

Patrick, who previously chaired the Clyde Shipyards Task Force while working for Scottish Enterprise, says predictions of the demise of Scottish shipbuilding feel like "incredibly familiar territory". He also highlights the irony that for any other industry, guaranteed work for the next five or 10 years would not be regarded as a prelude to disaster.

"If you ask me, are the Govan and Scotstoun yards and Rosyth capable of doing competitive work in a global market, then the answer is yes," he says. "On that basis, there is no reason to assume there will not be an industry here long-term."