Brexit, Big Fish and the UK Aircraft Industry

August 12, 2018
A version of this article first appeared in the July 2018 edition of our free newsletter, to subscribe click here
In the last couple of years there have been a number of new aircraft projects in the UK. I Have been involved with some of them and it has been interesting to see the progress and reactions.
The new startup companies complain that while there is public funding or other types of assistance available (innovation centers co funded by the larger corporations in the industry such as Rolls Royce Aero Engines and Airbus) there is a freezing out of startup companies in favor of internal projects within the two giants in the UK.

Of course you would expect this. Little Billy Startup has little to no political sway compared to the established players. So when it comes down to the final decision it does not matter how good your design or business plan is, you’re just not in with the in-crowd.

You can see this in the UK. Rolls Royce has come up with a VTOL urban mobility design concept. It looks like around 20 other VTOL design concepts and has the same likelihood of success.

Rolls Royce have never proposed an aircraft program before. They have not issued an aircraft concept. Why now? Why are they competing with a bunch of startups in a field with a low probability of eventual success?
Do they plan to be the first to market? Do they see themselves as the post brexit UK aerospace leader? Is this just a case of keeping up with everyone else? Or is it a route through to public money meant for innovative startups?

The public should be worried as traditionally the market monopoly position of companies is used as a boogeyman to justify blocking mergers and acquisitions. An equal problem, but one that is largely ignored is the monopoly over public money. The more new companies depend on public money to get off the ground and overcome the unavoidable statutory product and corporate costs the more critical this becomes.

Mergers and corporate consolidation create this problem, as public money that is meant to promote innovation and technical risk ends up covering the day to day expenses of inefficient industry giants.

One of the most egregious cases of this is Bombardier in Canada (although I am sure you all have your own favorite). No one is really sure how much public money that they have received at the federal and provincial level in the form of cash gifts, grants, loans and subsidies. But the ones that I have counted in recent years come to over $1bn per year. I am sure it is impossible to calculate the total amount but it is significantly over this number.

This keeps a lot of people employed – which is a good thing. But what is the opportunity cost?

For the same money you could give 1000 technology startups a grant of $1m each. Imagine the innovation you would be fostering if you did that? How many ‘Bombardiers’ could Canada create with that approach? Well, hopefully not ‘Bombardiers’ that need $1Bn per year just to get by – but you know what I mean
Right now Canada has one – and it is very expensive.

So the UK as a newly independent nation (Theresa May notwithstanding) has a choice to make with it’s public funds. It can follow the Canadian model, it can reward inefficiency and established corporations or it can actually help cover the downside risk of innovative start up companies.

From what I have seen from my contacts and clients in the UK, it looks like it is business as usual. Just the process of applying for funding from these pots of public money is so onerous that many companies do not even try.

A project run by a good friend of mine was all ready to get approval for a substantial government grant. They had got top marks from all of the adjudicators and had ticked every box. Two days before the formal announcement of the award they got a call that things weren’t actually so cut and dried and that they should not assume that the grant will be awarded.

Another project we are working with are looking at getting space in an innovation center funded by Government and large industry partners. But this is in doubt because they may be judged as competing with one of the giant industry partners involved in the funding.

In a society where taxes are high and success, in a large part, depends on getting some of those taxes back in the form of a government grant, the monopoly that we allow large companies over this process is just as negative as a monopoly over the market. Maybe more so, as the only way the market can be bought is by providing additional value to the actual customers. In order to monopolize government grants you just have to lean on your local or national politician – a much simpler and less expensive process.

So with the large players being a big fish in a much smaller post-brexit pond where does that leave the little fish?

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