Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 120 - 140)

TUESDAY 27 JUNE 2000

MR NICK REILLY CBE, AND MRS KAREN LEGGIO

Mr Chope

  120. Can I ask you about research and development. What percentage of your research and development is carried out actually within the UK, at the moment?  (Mr Reilly) Quite little. Specifically Vauxhall, we have an engineering centre in Bedfordshire that is responsible for our commercial vehicles and our recreational vehicles, so the Frontera and the vans that we produce are now the responsibility of that centre, and the research and development is being carried out there; that is quite new, we have actually brought that into the UK relatively recently. All our passenger car research and development is centred in Germany, although we use UK companies as sub-contractors, sometimes, to do various things; for example, we use Lotus quite a lot, and other engineering companies in the UK, for development. However, within the General Motors Group, we also have a large test site, also in Bedfordshire, called Millbrook, and they do a lot of test and development work for us, and for Opel, and indeed for other manufacturers; but, because it deals with other manufacturers, it is set up as a separate company, it is not part of Vauxhall, as such, but it is part of our Group, and that is a sizeable R&D outfit.

  121. So what was the thinking behind investing your £5 million in the Millbrook engineering plant?  (Mr Reilly) It was a win-win, really, for here, because we won the investment to manufacture the vans, for Renault and ourselves, and then we also decided to maintain production of Frontera in this country. And when we set up the venture to produce the vans with Renault we did not really have a General Motors centre of expertise for engineering for those sorts of vehicles, and Renault's is in France, and so we recommended that, rather than add to our facility in Germany, we would put it nearer to the assembly plant, and because we have also got this test track in Millbrook it was a very good fit. So the manufacturing actually brought the engineering with it.

  122. And what do you see as the future for your R&D in the UK, do you think we can increase the share of your ...  (Mr Reilly) Considering it was more or less nothing, not long ago, we have brought this back; clearly, if you are in it then you have got an opportunity to bid for more things. Recreational vehicles is likely to grow, as a market. We are, as a company, getting more into the commercial vehicle market, and we probably will have more models there. And so, I think, having a presence and showing our expertise in that, we are likely to grow. I am not suggesting we are going to become the centre of Europe for R&D for General Motors, far from it, but I think there is an opportunity to grow that business over the next few years, from relatively small beginnings.

  123. You say in your evidence you would like to see increased efforts, including by the Government, to encourage a rise in the science and engineering skills base; have you got any particular policy changes in mind there?  (Mr Reilly) No. I think what we mean there is, you will find, particularly, in some other countries, more evidence of the world of education, the world of higher education as well, and research, working very closely with industry, so that they are researching things that are going to be immediately useful to local industry. I think, here, it is sort of a bit more ad hoc, that is not necessarily worked on so obviously here, and I think the grants that are given for research should be those that are going to benefit the manufacturing base of the country, rather than something that somebody decides they would like to work on, is probably what we mean, there could be closer working there.

Mr Butterfill

  124. You are spending a lot of money on the Luton plant, at the moment, which we believe is in anticipation of producing the new car, the Epsilon, there, the replacement for the Vectra. Is it certain that you are going to be building the Epsilon, or whatever it is going to be called? Given the state of the market, we might call it Vicarious.  (Mr Reilly) We have mentioned this word `Epsilon' a couple of times; it is a code-name, every car company uses code-names. The car is not going to be called Epsilon; so just in case—

  125. I suggested Vicarious, given the state of the car market.  (Mr Reilly) But the answer to your question is, yes, we will build the replacement Vectra, and that decision was confirmed earlier on this year.

  126. And what was the competition within GM for that?  (Mr Reilly) The competition, well, it is Germany and Belgium, and we decided to build it in the UK and Germany.

  127. And will that be exclusively the only car that will be built there, or are you thinking of perhaps building two models in the same plant?  (Mr Reilly) Not for the foreseeable future. It will be the only one. Of course, the van plant, that I have talked about that is going to build this van for both Renault and ourselves, is right next-door, so they are both in Luton, but the passenger car plant will just build Vectra.

  128. How would you look at the relative advantages and disadvantages of the Luton plant? Somebody will say it is awkward, physically-constrained, or whatever, and we have heard all these things, Ford talking about Dagenham, and Longbridge, and everything else, they say, "Oh, well, the plant was always a difficult one." Does that apply to Luton?  (Mr Reilly) Layout-wise, it does, but I have been in manufacturing quite a few years and my belief is that you can get 85 per cent to maybe 90 per cent of the gains of productivity through implementing lean manufacturing techniques, and then you will be constrained by the plant, you will be constrained by the layout, or whatever, physical things. So there is an awfully long way to go before we can say we are perfect, from an operational point of view, and there is waste we can still take out, and improve our productivity and improve our costs, before we could blame it on the layout. Having said that, we have improved productivity quite a bit in the Luton plant, in the last couple of years, and so part of this investment that you referred to is actually to improve the layout, and therefore go for that extra 10 or 15 per cent, on which we are held back because of the layout. So we are actually improving the physical layout of the plant with that money.

  129. Is it big enough to survive, in the long term?  (Mr Reilly) Yes, it is big enough. Clearly, that depends on an awful lot of things, it depends on us continuing to improve productivity at a rate at least equal to our competitors, that is both inside and outside General Motors. We have talked about the level of the pound; that obviously has an impact. If that suddenly shot up and stayed up, we may not be able to offset that, in the short term. But, by and large, we think we can survive, yes.

  130. How would you describe its relative advantages and disadvantages; obviously, the motorway and the airport, presumably, are helpful factors, or are there negatives there?  (Mr Reilly) Actually, our logistics costs generally are a negative, because we do export from the Luton plant as well as produce for the UK market; in fact, last year was quite substantial exports. And so we have to offset the costs of getting it back across to Europe; and, remember, as I said, we have to bring in some components from Europe. So our logistics costs tend to be a negative, versus the other plants. Our total productivity is a benefit. We are able to produce left-drive, right-drive estate cars and saloon cars with no problem; and our working practices are pretty flexible, we can still improve, and we have a very good relationship within the plant, so our efficiency is pretty good. So our manufacturing costs are a plus, are an advantage to us.

  131. My last question is about the Astra. Can you tell us, does it have a future, is there going to be a successor car to it, and, if so, when, and how?  (Mr Reilly) I do not think it will be giving away commercial secrets to say that the Astra is a very successful car now, and we definitely intend to replace it. I would not say exactly when, but, typically, models have a six- to seven-year life, and so you can work out when that means it will be replaced, it has been going about three years now. It is being produced today at Ellesmere Port, both the Astra and the Astra van; it is certainly our intention, as a Vauxhall Company, to continue to produce it there. But it will be some time yet before final decisions are taken as to where we invest, so we have to prove our competitiveness at the right time.

  132. But, in principle, you would like to continue to produce it in the UK?  (Mr Reilly) Yes.

Ms Perham

  133. You have talked several times about producing the vans with Renault at Luton; is that going to be the sole site for those vehicles? And the Frontera is going to Ellesmere Port; but the production of vans with Renault, is that going to be the sole site?  (Mr Reilly) Yes, it is, to start with, at least, and we will be producing it for ourselves and Opel, obviously, and Renault, and it will be the sole site for those vans. You can never tell what the demand is going to be, and every six months we update our sales forecasts, and, of course, we have not sold a single one yet; but sales people get optimistic, and so it is possible that if it were very successful it would outgrow that plant and a second site might be needed, and that would be a consideration then. But, certainly, for the first couple of years of its life, it will be the sole site.

  134. What sort of numbers will be left-hand drive?  (Mr Reilly) We are going to produce somewhere around 70,000 to 80,000, and, I think, in this country, approximately, between 15 and 20 per cent are right-hand drive, so the rest are export.

  135. The Frontera is going to Ellesmere Port, I think you mentioned this in replying to Mr Chope on the R&D questions, and you mentioned about manufacturing bringing engineering with it; was there any particular reason for the Frontera going to Ellesmere Port? And you also said, in your press release, in May, that it had gone there against international competition?  (Mr Reilly) Yes, there were actually five different locations looked at for the Frontera, and all of the others were outside of the UK. We had a couple of advantages at Ellesmere Port, we had a building which houses our V6 engine plant, the other half of which is not occupied, and therefore was available. Also, the cycle, this is a perfect example of what I was saying earlier on, about cycles and moving people around, the Astra is right at the peak of its cycle now, in the sort of second, third year, and we were planning at some stage to, we have got a mini third shift up at Ellesmere Port on the Astra to take care of the peak demand, we were planning probably to take that off early next year, and so we had some people that were going to be available, so those were two significant considerations. The other one is that we do have a relatively high source of UK components in the Frontera, because it was already built at IBC; so if it was built in other locations, and Turkey was one that was looked at, and Finland was another, and there were others, there would have been logistics penalties to take the components to those countries. So, when you added it all up, it was actually a close-run thing, but we decided to keep it in this country, in the end.

  136. And are they going to be for export?  (Mr Reilly) Yes; again, in that case, it is slightly higher, at about 70 per cent export, 30 per cent UK.

Mr Baldry

  137. Could I just go back to overcapacity, because overcapacity seems to be, understandably, the word that everyone in the industry uses for any decision that is taken. How do you see the automotive industry as a whole sorting out overcapacity, and you said that there would be plant closures? Do you see every volume manufacturer reducing their volume; if so, how and by how much, and where are you going to be reducing your volume? Or do you see this as a very competitive market-place, where in due course volume manufacturers will be knocked out altogether, because there are other players coming into the field, from Thailand, Malaysia, Korea? How do you see the industry going forward on this basis, because it sounds, or can sound, as though decisions have been taken in a slightly capricious way, with overcapacity being given as the justification for any decision that is taken?  (Mr Reilly) Overcapacity is a pretty good reason, because if you do not take decisions and you get into serious overcapacity then, in the end, you do not compete and you lose completely, so you lose 100 per cent. So it is a responsibility, I think, of all of us, to try to get our capacity approximately level with our sales requirements; that is obviously not that easy to do in the short term, because you get things wrong. I indicated that, in terms of our total capacity, we could probably do with one less car plant, but at the moment the decision has been taken not to do that, because we think we can run the existing plants efficiently without doing that. Other car manufacturers I do not think have got quite as good capacity utilisation as we have, and they may be closer to having to close a plant down. And, clearly, the actions in the last year, or so, has actually taken out, or will be taking out, the decisions that have been made will be taking out capacity, out of the industry in total. The market will grow a bit, so that will take up some capacity. So I think it will be a combination of maybe taking a shift off, in some plants, maybe closing some other plants, and the market growing, will get the capacity utilisation up gradually.

Chairman

  138. Finally, is there much that you look to Government for, in the way of assistance and support, I know you get RSA of about £5 million, I think was the content in the May announcement; but, in making these decisions between one country and another and between one plant and another, is there a role for Government to be of assistance, to back the British plant, as it were? Do you look to us for anything?  (Mr Reilly) There are probably a couple of areas we have not talked about. There is a lot, other than just purely overcapacity, that makes these decisions. For example, if your quality is not as good as somewhere else, that counts heavily against you, and clearly your productivity, your service, your industrial relations record, and so on, all are very important factors when these decisions are being made. And so the quality of our workforce is extremely important to us, and we invest an enormous amount of money in training. I would say that the education system could definitely provide people with skills that are probably more appropriate to business and to industry than is the case at the moment, generic skills such as problem-solving, such as project management, working in a team, those sorts of things are things we have to train our people in, which in other countries definitely is not the case, they come with those skills. So I think the whole skills agenda is something that would definitely help us tremendously, and that is something that we have not really mentioned today.

  139. Given these British disadvantages, where do you stand, say, in cars produced per worker per year, from your UK plants, as against, let us say, the ones in Antwerp and in Germany?  (Mr Reilly) When you adjust for the various differences in spec. of cars and volume, and other things, we are very comparable, and, in fact, we actually prefer to look at cost rather than just cars per employee, because that is what matters, at the end of the day. As I mentioned earlier, we are, even at today's exchange rate, comparable to our sister plants in Europe, on a manufacturing cost basis, and if the pound were below three deutschmarks we would have an advantage.

  140. Thank you very much, Mr Reilly and Mrs Leggio. I think that some of us will be hoping to be able to visit one of your plants before too long, to see how you go about your business. We think it is important to talk to a range of people in the industry, and so we look forward to continuing this dialogue, if not with yourselves then certainly with other people in your organisations. So thank you very much for your frankness. If there are any points that we want to come back to, we will get back to you in writing; so thank you very much.  (Mr Reilly) You will be most welcome to come. Thank you.

  Chairman: Thank you.





 
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