Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 82 - 99)

TUESDAY 27 JUNE 2000

MR NICK REILLY CBE, AND MRS KAREN LEGGIO

Chairman

  82. I think we will begin, Mr Reilly and Mrs Leggio. Can I say we are very pleased to have you here this afternoon. As you probably are aware, we started an inquiry some time ago, in fact we have just had the Government's response to an inquiry into Rover and Longbridge, and when we started looking at the subject we realised very quickly that we needed to look at car production in the UK, and in fact vehicle production in the UK, in the round, and so we felt it was important to talk to all of the other major players. And so we are very grateful to you for coming along today. I suppose one of the first questions we would want to ask is where do you see vehicle manufacturing going in the UK? It has been transformed over the last ten years. Looking into the crystal ball, which is usually the most unreliable of guides, but, nonetheless, what do you foresee as the prospects for the industry, say, over the next decade, and, for that matter, Vauxhall GM's part in this process?

  (Mr Reilly) I think I would probably give you an answer generally, first, and then mostly about Vauxhall, because obviously I cannot talk about individual other companies. But I am sure it is no secret to anybody that there is significant overcapacity in the car manufacturing industry worldwide, and certainly in Europe, estimates range anywhere from sort of 20 per cent to 25, to even 30 per cent, some estimates. And so, based on that, competition for car manufacturing is extremely intense. Some years ago, I would have thought our position in the UK was relatively strong, there are many countries, I think, that would cut off their right arm to have the number of leading worldwide manufacturers that are assembling cars in this country, and I think, quite honestly, the picture looked fairly rosy. The first question though is overcapacity, and there is no question that the market-place is extremely competitive, and so everybody is trying to drive down costs, and one way of driving down costs is to take out that capacity. And so every car plant, I think, in Europe is probably on the list as a potential for closure, by any car manufacturer, and there are lots of different criteria that go into whether or not they will stay open. Coming closer to home and switching to Vauxhall, we have been in that situation ourselves; a couple of years ago, we knew that a decision was going to be taken within our Group that could reduce the number of plants producing the Vectra, which is one of our best-selling cars, from three to two, and our Luton plant is one of the three that currently makes it. Now the decision on a thing like that is usually taken two to three years before you start production of a new model, and that was about the position we were in, and there were serious considerations of closing Luton as a Vectra plant at that time. Our focus then, therefore, was to prove to our parent company, because obviously these decisions are not just in our hands, that we were the right place to continue manufacturing cars for the new model. The end of the story is that, in fact, it did go down to two instead of three and we have decided not to continue producing the next Vectra model in Antwerp, which was one of the other three plants. To do that, we had to demonstrate some very dramatic productivity improvements, we had to plan on a pound that was not going to get us out of trouble, although, of course, that was very difficult to predict, but basically we had to plan that it would not devalue substantially, and we had to show that our quality and other attributes of the manufacturing facilities were equal to the competition, and we managed to do that. There were lots of considerations in the discussion, one of which is that we sell a good number of Vectras here and so the market is important to us; but that, frankly, was probably a minor decision. So I give you that as an example, because the same thing will happen with the Astra, which we produce at Ellesmere Port, the same sort of discussions and same sort of decisions, and I imagine that those same decisions are going on in every car company that operates in Europe. Some car companies obviously have got more overcapacity than others, and we are in not too bad a position, relatively speaking; but I think it fair to say that, if we wanted to, General Motors in Europe could close a significant-size car plant and get by with the remaining capacity. So we do not anticipate it getting much easier, we do not anticipate the pound devaluing rapidly to get us out of trouble, nor would we welcome that, because it brings all sorts of other problems with it; so our focus is to keep a very strong productivity gain coming through in our manufacturing operations. That is a long answer to your question. The short answer is, the future can be good but it is going to be extremely competitive, and nobody is owed a living in this business.

  83. You have actually anticipated some of the other questions I think we were going to ask you, but maybe you could be a wee bit more specific as to the British advantages. You have mentioned that you have got to meet the productivity levels and you seem to be confident of doing that; you are not too optimistic, I get the impression you are a bit ambivalent, on the pound, in the sense that you do not anticipate it devaluing too much, so you are going to have to learn to continue to live with this high pound. Was the euro a consideration; was the flexibility of our labour market an advantage over any of our European partners, in particular in Antwerp, on questions of social costs, and things like that? It has been put to us, in relation to another company, I have to say, that Fords would have found it easier to close their Dagenham plant than their plant in Cologne. I am not asking you to pass comment on that, but do you see the legislative framework within which you have to operate, or legislation within which you have to operate in the UK, as being a difficulty for you, or is it an advantage as against some of your European competitors within the GM Group, as it were?  (Mr Reilly) Specifically, some of the things you mention, the euro, if I could take that first. Yes, certainly, the level of the pound against the euro is an important consideration, it is by no means the only one, but it will drive our costs, it does drive our costs now, and the difficulty that we have, as a UK company putting forward an investment case right now, and we have just had examples of it this year again, is that we have a risk factor in it, whereas our European counterparts do not; and, therefore, that is something that counts against us in an investment decision. I said that, at about three deutschmarks to the pound, we had planned to be competitive, and we are. Our manufacturing costs for the same car made here, as opposed to made in Belgium or Germany, the actual costs in the manufacturing plant are roughly similar, it differs a little bit between Ellesmere Port and Luton, but are roughly similar, at three deutschmarks, which is a little lower than today's rate and the equivalent euro rate; and we had planned on that, we had planned to get our costs to that level. The trouble is, we have other things that count in our costs, and one of the important things is our supply network and supply chain, and unfortunately we have lost some supply out of the UK to continental suppliers, in recent years, and what that means is that a car produced in Luton has to bring components further than, say, a car produced in Antwerp or Germany, and therefore our total cost, even though our manufacturing costs in the plant are competitive, our total cost for the car, if it has got to be exported back to Europe, now tends to be higher. We are still alright if that car is going to be sold in the UK, but it makes our exports more difficult. You mentioned flexibility, it depends what you mean by flexibility, but our workforce has embraced the concepts of lean manufacturing very well, and we have, as a consequence, brought in flexible working practices, that have allowed our costs to reduce; things, for example, like flexible hours, when the market is down or up, we have introduced in our last agreement, and that helps our costs, people moving from job to job, when required, is a norm in our companies now, it is not necessarily so easy on the Continent. Finally, you mentioned social costs, social costs are lower here; that has two sides to that coin. It helps you win investment; on the other hand, obviously, if there is a decision to close, then, generally speaking, the closure costs are less here than they are in Europe.

Mr Baldry

  84. Can I just ask a question which follows on from the Chairman's question. Our inquiry is called an Inquiry into UK Vehicle Manufacturing, but, I just wonder, when your board gets together, what are you looking at; are you looking at and do you consider it to be a global car industry now, or a European car industry, or a UK car industry? On what scale are you making decisions? Mrs Leggio, I know, when she speaks, we will hear, is from the United States, I suspect you have got someone else in your team, there is probably someone from Germany. What are we looking at; and where, in either a European car industry or a global car industry, does the UK fit? Are we now just dependent on the market that we generate, when you talk about the number of cars which are bought here, are we dependent upon that? What are the conditions precedent which will actually ensure that we have a viable car industry here in the UK, but where do we fit into the global and European picture?  (Mr Reilly) Particularly when you are talking about our manufacturing resource, as opposed to our selling resource, because obviously selling is concentrated more in the UK market, for Vauxhall, but particularly when you are talking about the manufacturing resource, our primary point of focus is Europe, in the European market. There is an exception to that, and that is in Mrs Leggio's area, but the cars that we make in our plants are left-hand drive, right-hand drive, coming down, one after another, it does not matter which, Opel-badged, or Vauxhall-badged, and they are 90-something per cent sold in the European market. And, so far, the US market is still different, for vehicles, and we sell some cars to the Far East, Australia, Japan and some other markets, but predominantly our major focus is being competitive in Europe, and, generally speaking, I think, that is the case with a lot of our competitors. As years go by, we are sharing more platforms on a global basis; we have got an interesting split, actually, I think, in the industry. The idea of a global car, i.e. exactly the same car being sold around the world, I think most people have given up on; on the other hand, sharing a platform and sharing components around the world is becoming more and more common. So that picture I have just given you, which is principally focused in Europe, is gradually going to change to more global, it is definitely not going to change backwards the other way towards the UK. The only exception, as I mentioned, is in the component area of the business, already, that is largely sourced on a global basis; so, our component suppliers, we tend to look at them, particularly for major systems of the car, for global manufacturers of components. Having said that, still the vast majority of our components are sourced in Europe.

Mr Butterfill

  85. Can I just come in on that component point. You said that there was an increasing trend to source components from mainland Europe, and that that might present a problem, but, presumably, the high level of the pound means that they are cheaper for you to buy in?  (Mr Reilly) That is the major reason why that is happening.

  86. That is the main reason; it is not because they are better made, or more readily available?  (Mr Reilly) No. There is no desire to move components from here, but some of the UK component companies have found it impossible to compete at this level of the pound.

  87. So there is some advantage to you in having a high level of the pound?  (Mr Reilly) I would say again, it is not universal, we still have good business with UK suppliers, but some have not been able to; and it is not only a price issue, but certainly the pound has not helped.

Helen Southworth

  88. I have had a couple of suppliers who have said to me that they have been required, not particularly by your company, to reduce their prices within the year, in one particular case to reduce the price twice within the year, as a requirement of keeping the contract. Is that something that your suppliers will be experiencing?  (Mr Reilly) We are constantly working with our suppliers to reduce their prices, if they can; that is a matter of life, and there is nothing particularly new. And, clearly, when the pound gets high then, relatively speaking, UK suppliers' costs become higher than their foreign counterparts'. But we do not go in and say, "We need a price cut of 15 per cent or you've lost the business," we have a process by which we work with our suppliers, and Karen Leggio can expand on this, but we go in and work with suppliers to help them reduce their costs, we have a specific programme to do that, both ourselves, at Vauxhall, and sometimes we use the Industry Forum to help do that, actually to enable suppliers to take costs out, and therefore to pass that on in price and keep the business. But the idea of bidding to keep our costs as low as possible is part of a purchasing function, obviously.

Mr Hoyle

  89. It is on similar lines; can we move you on to content, and obviously if we could look at the main UK products, the Vectra, the Astra and the Frontera. I wonder if you could say what the UK content is on each of those principal products?  (Mr Reilly) Taking the normal definition of UK content, which is percentage of the net selling price, it is about 60 per cent on both the Vectra and Astra, and a little higher than that, I think about 65 to 70 per cent, on the Frontera.

  90. What about on vans, because rumour has it that, Vauxhall, the only content is the badge that goes on the vehicle?  (Mr Reilly) I do not know who you have been listening to; that is not true.

  91. That has always been the rumour about them, Japanese vehicles badged; but it is not the case, is it?  (Mr Reilly) No; sorry.

  92. The little Bedford Rascal, that used to run around, they said it used to just slap a Vauxhall badge on, and that was the only thing that it sold of UK content?  (Mr Reilly) We stopped making that particular van several years ago, but at the time we ran out—I happen to know because I was running that plant—it was about 50 per cent UK content. Our Astra van is roughly the same as the Astra car, so it is about 60 per cent. The new van we are going to make next year, for ourselves and Renault, which we are going to make in Luton, is a little higher than the cars, it is probably about 65 per cent. Now I do not want to mislead you, but, just in case somebody thinks I did not give you the full answer, we are changing the Vectra in the not too distant future, and we expect that the local content on the replacement model will be less than the current model.

  93. Would it be right to say, is that the Epsilon?  (Mr Reilly) It is sometimes referred to as the Epsilon in the media, but whatever it is called it is the replacement Vectra, yes.

  94. So would it be about, what, 40 or 50 per cent?  (Mr Reilly) No, it would be more than 40, but it is likely to be a little less than 50, from 60 down to 50, or a little less.

  95. Below 50?  (Mr Reilly) Below 50, yes.

  96. Obviously, the figures that you have given to us, are they resilient to scrutiny, but also do the figures include advertising, and do you count all powertrain as 100 per cent UK, wherever the components come from?  (Mr Reilly) It does include advertising and it includes powertrain, but it does not count powertrain as UK, unless it comes from the UK. We only make a V6 engine here in this country, so, by and large, powertrain is imported.

  97. So that is excluding all the bits?  (Mr Reilly) And it is counted as imported, yes.

Mr Cunningham

  98. Can we move on to sourcing. How difficult is it to change suppliers mid-way through a model?  (Mr Reilly) It is not something we want to do, necessarily, but it is possible, in certain circumstances, if someone lets us down significantly, in terms of quality, or if price gets way out of line and they cannot do anything to adjust it, but obviously tools are laid down and it is not something we often do, or want to do. It depends a bit on the component. Perhaps I could ask Mrs Leggio to elaborate.  (Mrs Leggio) Some of the components have higher requirements, in terms of validation and testing, so, some, it might be a much longer lead-time to be able to introduce a new supplier, and some, that are more like the `shoot and ship' kind of components, would be less.

  99. How much notice would they need, how much notice would you have to give them, to change suppliers?  (Mrs Leggio) Again, it would depend upon the component and it would depend upon what really drove the need to change. If it were something fundamental, where the supplier just could not perform, where they came to us, sometimes they would come to us and say, "I can't do it any longer," and we would accelerate that process. Basically, it depends upon the lead-time of the component and what the circumstances are that drove the requirement to re-source; if it is a performance issue, where the supplier cannot get something ready for us fast enough and we need to find another supplier, obviously we would do that very, very quickly.


 
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