Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 100 - 119)

TUESDAY 27 JUNE 2000

MR NICK REILLY CBE, AND MRS KAREN LEGGIO

  100. But normally a new supplier would be tooled up; or would they need a bit of time to tool up?  (Mr Reilly) Yes, they need significant time to tool up. Of course, the other thing that makes a huge difference in this is whether or not we are dual-sourced or single-sourced, as General Motors Europe, because we are making the same car, the Vectra or Astra, for example, as is being made in Germany or Belgium. If we have got one component supplier for the whole of those plants, it is more difficult to, or it takes longer to, re-source, but if there is already a second supplier, perhaps supplying Antwerp or Germany, then we could re-source almost overnight, and not literally because the other supplier would have to probably add a bit of capacity and hire some people, or whatever may be needed. But that can then happen, certainly, in a matter of a month or so. But if it is a single-source supplier and if it is a complex supplier, it can take six to nine months, or even a year, because of the validation process; it depends.

  101. Do you use the electronic market-place, would many suppliers use that, or would you use that?  (Mrs Leggio) We have done some trials, in terms of electronic requests for quotations, through our global purchasing system, and we will be doing a lot more there in the future, but so far it has been on a pilot basis.

  102. What is the indication from the pilot basis; is it going to have a dramatic effect in the future, do you think, from the evidence from your pilot schemes?  (Mrs Leggio) Yes, very much so; in fact, when you hear about General Motors talking about Trade Exchange, that is the direction we are going forward, where all our quotations will be done electronically, through that mechanism.

  103. Some experts actually see that, in the years to come, there will only be a few dozen large suppliers; do you see it that way?  (Mrs Leggio) The trend is definitely towards fewer suppliers, as we talk about more modules and more systems; you look at who has the technology, the capacity, the global nature, to be able to support that on shared platforms. We are definitely migrating to fewer, larger, global suppliers.

  104. Could you put a figure on that, roughly?  (Mrs Leggio) No, in terms of how many we will end up with. We do not really target, from a General Motors perspective or a Vauxhall perspective, how many suppliers we want; basically we look at what we are sourcing, for what programme and what makes sense for that footprint.

  105. You have got experience of the US market, in terms of purchasing; what is the difference between the US market and the European market?  (Mrs Leggio) In terms of how we source?

  106. Yes, and how you purchase?  (Mrs Leggio) From a worldwide purchasing standpoint, when you look at General Motors, we are global in that, we are one purchasing organisation, so whether we are sourcing radios, or seats, whether it is in Taiwan or the US, we follow the exact same process, we use the same bidders' lists. So when we are sourcing something in the United States, for a Cavalier there, suppliers from the UK get the opportunity to quote for that business; and vice versa when we are sourcing something for the Vectra here, in Luton, suppliers throughout the world get to source that.

  107. Is there a difference between the American approach and the European/UK approach?  (Mrs Leggio) In terms of how the suppliers quote?

  108. Yes; what the approach is, how they go about it?  (Mrs Leggio) Not so much the approach, but there tends to be bigger, globalish suppliers, and deeper maybe, from a research and development standpoint, to be able to quote something in multiple locations throughout the world.

Chairman

  109. What do you look for in a supplier, apart from price; what would be your set of criteria that you would choose as your kind of guide to potential suppliers?  (Mrs Leggio) Basically, we use four criteria, and that is quality, service, price and technology; and what we do is we will get the offerings from the different suppliers and see which supplier is able to offer us the best value with those four criteria.

Helen Southworth

  110. What role does geography play? One of the suggestions that was made to us by a number of suppliers is that the actual site of assembly is incredibly significant, and that suppliers only thrive within close proximity to an assembly site.  (Mrs Leggio) It depends upon the component, or whether we are talking of very big modular systems; some modules and systems, when we actually send them out for quotation, do not necessarily tell you where it has to be, geographically, but it will need to be within, say, a 90-minute broadcast window. So that the supplier, if they are doing a fuel tank module, or they are doing a cockpit module, or a bumper assembly, will need to be able to have the final ship-point close; whereas, a smaller switch, those could come, very affordably, from greater distances. So really it depends upon whether you are talking of a big part or a small part.  (Mr Reilly) And also it depends how capital-intensive it is, labour-intensive it is. If it is an electronic module, which is very capital-intensive but quite easy to ship, it does not matter so much where it is produced, and suppliers obviously cannot afford to invest in the capital in more than one place; but the bigger components, or the simpler components, tend to be sourced more often where the capital cost is less.

  111. So the technological investment is incredibly important for suppliers?  (Mr Reilly) It is important to keep investing in technology, yes. We use the word `supplier' here, we have used it a few times now, and, in terms of consolidation, we have been principally talking about what we call tier one suppliers, where they are the ones that we deal with, and they supply complete systems and they have to be able to produce the technology, the research and development. Of course, there are tier two and tier three suppliers, who feed into those suppliers, that maybe their investment is not so critical, but maybe their flexibility or where they are is more important. So there are opportunities for tier two and tier three suppliers, whereas there may not be so many opportunities for tier one.

Mr Morgan

  112. Last week, you announced a joint venture at Ellesmere Port with Fiat for engine manufacture; is that the beginning of you hiving off engine manufacture, so it just becomes yet another component that you buy in from suppliers?  (Mr Reilly) No. It is certainly not something we are going to hive off. That joint venture was actually a European and Latin American joint venture, so it was much bigger than just Ellesmere Port; we happen to have one of the pieces of that total joint venture in Ellesmere Port. What we have done with Fiat is put together our powertrain activities, so that between us we make about five million engines and transmissions a year. We are competing generally in the same market-place, and we have put the powertrain activities together so that we rationalise the offering, so that we are not both building exactly the same displacement engines for exactly the same type of models, developing those engines separately, testing them separately and meeting all the emissions requirements, etc., because you cannot afford to do that as the costs keep going up. So these sorts of alliances are becoming more and more popular. We still compete with Fiat in the end market, but, in the case of powertrain in Europe and South America, we have formed a joint venture, and we have an engine plant in Ellesmere Port which is part of that European joint venture.

  113. In the same article, you were quoted as saying that some of your assembly workers could, in lean times, transfer across to the powertrain plant, and vice versa; how does this actually work, if they are two separate companies?  (Mr Reilly) That is a good question, actually, which we are still working on. The reason, as I just said, that we did this was to avoid engineering development cost and meeting legislation in two different engines, it is not to save people, or to drive down wage costs, or anything like that, we still expect to produce the same number of engines between us. But what we need is, there will be times where the particular engine is coming towards the end of its life and waiting for the replacement, in which case the requirement for that engine goes down, and at that time, rather than having those people standing idle, we would switch some of those people into the car plant, if the car plant needs those, and vice versa when the car plant cycle goes down. And we need to keep that sort of flexibility that we have got today in the future, otherwise our costs are going to go up, and we cannot afford that. So we are actually, right now, working on how do we actually set up this separate company, but because the employees are going to keep exactly the same conditions, as if they were in the car plant, there will be no difference in conditions between the two sets of employees, then we should be able to switch them back and forth; and, indeed, they could come back and forth if they wanted to.

  114. You actually import engines at the moment, but I think earlier you mentioned, in your evidence, the V6 engine; is that one that you export?  (Mr Reilly) Yes, we export a lot; that is the one we build in Ellesmere Port and we export probably 85 per cent of the production.

  115. So, as a result of this venture, would you see more engines being made in the UK, in the future?  (Mr Reilly) We are just literally starting the discussions with Fiat at the moment as to how to rationalise; the guess is that that will probably be an engine that stays pretty much solo to GM in the foreseeable future. But it is possible that Fiat will require some, so maybe we will be increasing them, but there is not a Fiat engine that is going to replace it. So, if anything, it could go up, but it is more likely to stay pretty much as it was.

  116. Some people have said that this joint venture, etc., may actually lead to diesel engine production being concentrated in Italy. Is there any danger of that happening; and how important do you think diesel production is going to be in the future?  (Mr Reilly) To answer the second question first, diesel is a growing, important segment of the market, particularly in Europe, not so much here because of the taxation on fuel in this country, which is different from the rest of Europe, but it is growing and it is expected to grow, because it helps manufacturers meet the commitments of reducing their CO2 emissions. So it will grow. But it is a wrong step to assume, therefore, that diesel engines are going to centralise in Italy, we have a very good and productive diesel engine plant in Germany, and that is pure speculation on behalf of somebody.

  117. Might it be centred outwith the UK then?  (Mr Reilly) We actually do not produce diesel engines in this country at the moment, so it does not make any difference to the UK.

  118. Yes, but, following that train, if the proportion of diesel engines goes up and we do not make any then that does not sound like good news?  (Mr Reilly) As I mentioned, the only engine we make in the UK is the V6, and it is unlikely to affect the V6.

Chairman

  119. Just one point on the joint venture. There is no chance of this being deemed to be anti-competitive, is there, you coming together, making the same engines and then selling them in different vehicles; there has not been any suggestion of that?  (Mr Reilly) There has been no suggestion of it at all, no. There are many more, I think, ventures that would probably be looked at before an engine joint venture between two car manufacturers are looked at.


 
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