By Jon Cronin BBC news online business reporter

The UK defence industry is that rarest of things, a British manufacturing success story.

Waving goodbye to UK ownership?

After the United States, Britain is the world's second biggest arms exporter.

Defence and aerospace groups such as BAE Systems and Rolls-Royce are major players in the field, generating billions of pounds in sales and employing hundreds of thousands of staff.

But could much of Britain's defence industrial base be on the verge of falling into foreign hands?

The European Commission is expected to rule on Wednesday on the �309m ($553m) takeover of the UK's only tank builder, Alvis, by US defence firm General Dynamics.

The ruling comes the week after UK engineering group GKN revealed it was in talks to offload its stake in helicopter maker Agusta Westland to its Italian partner Finmeccanica, signalling an end to British ownership in the industry.

National champions

Even mighty BAE Systems, Europe's biggest defence contractor, is at the centre of transatlantic merger rumours.

Speculation is mounting that BAE Systems, born in 1999 from the merger of British Aerospace and GEC Marconi, is planning to ditch its navy shipbuilding interests and link-up with a major US rival, perhaps aerospace giant Boeing.

BRITAIN'S ARMS INDUSTRY Second biggest arms exporter Combined turnover of �17bn a year Employs 345,000 in the UK Comprises 3% of UK manufacturing

Tantalisingly, BAE has not countered the rumours, saying simply that it is reviewing its options.

But some balk at the thought of Britain losing control of its national champions.

Engineering union Amicus believes foreign ownership of the defence industry is nothing less than "a threat to national security".

John Wall, the union's national secretary for aerospace, says: "This is unacceptable not only to our members but to any citizen in the UK who feels that national security is important."

Protectionism or support?

Accusing BAE managers of "touting" the business, Mr Wall argues the government should stand up for British ownership of defence firms and points to the example set on the other side of the English Channel.

"We have to contrast the level of support the French have for their sector with the level we have with ours," he says. "I wouldn't call it protectionism, I would call it support."

The success of the UK defence industry owes a great deal to the size of the UK military budget, but also to the way arms procurement in the country is driven.

Ownership is not the problem. What is important is keeping skills in Britain Paul Beaver, Ashbourne Beaver Associates

Although the UK defence budget is dwarfed by that of the US - the Pentagon spent $335.7bn in 2002, accounting for 43% of military spending globally - Britain still spent $36bn that year, putting it in third place behind Japan, the Stockholm International Peace Research Institute says.

Excluding general operating costs, such as paying soldiers' wages and buying fuel for planes, the Ministry of Defence (MoD) plans to spend almost �13bn on equipment this year alone.

However, while UK-owned firms could once relax in the knowledge they were the only ones in line to pick up juicy MoD contracts, they now face tough foreign competition under procurement rules which stipulate it is not Britishness that counts, but value for the taxpayer.

French interest

MPs may wince at the prospect of UK defence firms in their constituencies being swallowed-up by overseas rivals, especially the implications for local jobs, but the MoD is relaxed about foreign ownership.

"The key thing is that we have the appropriate security procedures in place for UK sensitive information and technology when foreign ownership is involved," it says.

French defence contractor Thales is one of a number of overseas firms which has recently targeted the UK market.

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The company does 12% of its business in the UK, and after buying UK defence electronics firm Racal in 2000, is now Britain's second biggest defence supplier.

It remains deeply involved in the �2.9bn deal to build two new aircraft carriers for the Royal Navy, despite losing a bid for leadership of the contract to BAE.

Meanwhile, with competition so tight in its own backyard, BAE has increasingly focused its attentions overseas.

Although BAE represents 80% of the turnover of the UK-based defence industry, it accounts for only a fifth of UK government spending.

'Good people'

Half of BAE's shares are foreign-owned, while last year the company's sales in North America topped those in Britain by more than �1bn.

With this in mind, defence analyst Paul Beaver, of Ashbourne Beaver Associates, says it matters little on which side of the Atlantic the company is run.

"Companies like BAE are in the business to make money for their shareholders," he says.

"Ownership is not the problem. What is important is keeping skills in Britain. We need a strategy to keep certain skills in this country, or are we just out to be metal bashers?"

Mr Beaver says it is only a question of time before BAE, like Alvis, becomes part of a bigger American company, giving both companies a chance to grasp the real prize - a bigger slice of the massive US defence market.

In the end, Britain's defence industry is a success because "we make good things and we've got good people", Mr Beaver says.