Select Committee on Trade and Industry Minutes of Evidence


Examination of Witness (Questions 141 - 159)

TUESDAY 27 JUNE 2000

MR TOD EVANS

Chairman

  141. Good afternoon, Mr Evans. We are very pleased that you are able to join us today. I think you have been in for the last session, so you will know the areas that we are concerned with here. Perhaps you could maybe start by putting into position for us the Ryton plant, it has a history of other ownership, it is now within the Peugeot/Citroën Group; could you perhaps just place this plant in the context of the Group as a whole for us, maybe by way of introduction?  (Mr Evans) Thank you, I will be pleased to do that. Back in 1979, the PSA Group acquired the interests of Chrysler in Europe, and those interests included the manufacturing plant at Ryton, and at Linwood, in Scotland, as well as two manufacturing plants in Europe, including a plant producing Simca cars in Poissy, near Paris. And, by the way, I think it bought the company for a dollar, so there is an interesting parallel floating around there somewhere. During the next few years, we had a difficult time, because of the rationalisation of the Chrysler product range, which was rebranded Talbot, and the existing Peugeot product range together with Citroën; and, eventually, part of that process was to drop the Talbot product range and concentrate on just Peugeot and Citroën. And we, at the Ryton plant, during those intervening periods, of 1979 through to 1983, were producing the old Chrysler cars, rebranded Talbot; and there was a major issue, in the early 1980s, as to whether we could attract group investment to start building cars in the UK. And I think the trigger-point was the introduction of a small car called the Peugeot 205, which, although not produced in the UK, proved to be a commercial success, and began to turn the Group around; and that was linked with a very strong effort by us in the UK to demonstrate the good productivity, good labour relations, a declining cost base, and therefore we attracted inward investment for the first Peugeot car at Ryton, which was the Peugeot 309, which came in in 1984-85. That really established Ryton as being potentially part of the manufacturing fabric of the PSA Group in Europe, from a tenuous start. And after having commenced building with the 309, we added another car, called the Peugeot 405, we were producing two cars at one point in time; then that was followed by us producing a car called the Peugeot 306. And then, to bring us right up to date, we are now producing in the plant a Peugeot 206, which is our small car, which we have been producing there for the last 20-odd months. It is quite important for us to take a snapshot now of our situation, because, fortuitously, the Peugeot 206 is a very successful small car for the Group, and therefore we need every car that we can make; and that put pressure on the two main plants which are producing the 206, which is Mulhouse, in eastern France, on the Swiss border, and Ryton. And we negotiated and had accepted, some 18 months ago, an annual hours agreement with our labour force, where, instead of us agreeing that they should work X number of hours per week, we reached an agreement where they would work X number of hours per year, and that gave us tremendous flexibility, in terms of being able to produce 206s, but it also moved us to a four-day working week, Monday and Thursday on two shifts. And the great news for us was that the 206 was such a successful car that, about nine months ago, we added a third shift, a Friday through Sunday shift, so we now have two shifts, Monday-Thursday, early and late, and a single shift Friday through Sunday, and we are therefore producing, on an annualised rate, at the moment, almost 200,000 cars a year, from a plant which, in living memory, struggled to produce 100,000 cars a year. So we have virtually doubled the productive capacity of the plant. So when one talks about capacity in Europe, as was a subject, I think, by Nick Reilly, with you, for us, capacity in Europe is not an absolute, because plants can operate on a slimmed-down, single-shift system as much as 65 per cent of their installed capacity, but if you put in three shifts they can operate as much as 120 per cent of their installed capacity. So when one talks about overcapacity, one has to be a little bit careful, that it is not an exact science. And, fortunately for us in the UK, the Ryton plant now is the most productive within the Group in Europe, operating at this 120 per cent of capacity calculation. So we have a very successful manufacturing business in the UK because we have a very successful car, commercially.

  142. What proportion of the total output of vehicles from Peugeot does the 200,000 produced at Ryton constitute?  (Mr Evans) It constitutes about 8.5 per cent of the total productivity capacity of the Group across Europe; and, of the 200,000 that we produce, two-thirds go to export and one-third is used domestically, sold domestically in the UK.

  143. Do you find the value of the pound a problem when you are selling these two-thirds of the capacity into Europe?  (Mr Evans) Really, it depends on what assumption you have made, and, of course, I think, speaking for my own company, the assumption that we made on the exchange rate of the franc versus the pound, back in October of last year, when we were trying to formulate our budgets for this year, we did not forecast it correctly, and the pound has run some 12 per cent stronger, as at today's rate, on average, than our budget exchange rate assumption. So, therefore, you could say it is notionally costing us money to make cars in the UK compared with making cars in continental Europe.

  144. Have you been able to absorb any of this 12.5 per cent disadvantage by other advantages that the UK offers, if there are such things?  (Mr Evans) It is not an issue with us to think about absorbing it; simply, we have such a commercially successful car, and we believe it will remain commercially successful into the foreseeable future, over the next three to four years, and therefore we need every car that we can produce, so we do not have people endlessly going around doing studies, at the moment, to look into the good points and bad points of UK manufacture. It will, potentially, become an issue when demand for this car drops, or when we have to make a major investment associated with that existing car, or when, of course, we replace that car with another car. Then, I think, if some of the conditions that prevail today prevail at that point in time then there will be some very lively arguments about the UK manufacturing base of the company.

  145. You have got a successful operation here, you are producing cars at a whopping rate, you have got these difficulties with the pound/franc, pound/euro relationship; if you were to ask the Government for anything else, to improve the conditions within Britain, let us say, the sterling issue notwithstanding, is there anything you would like to see improved?  (Mr Evans) That is a tempting prospect, to have the freedom to invite the Government to do things to help us, and I think there are three general areas that I would point to. We are increasingly concerned about the costs of logistics, not directly the point that was made by Nick, in terms of us having to now have extended supply lines, because more of our supplier base is in continental Europe, but we do import and export a lot of vehicles across the Channel, and we know that the costs of shipping goods across the Channel are penal. And, to give you some kind of yardstick, if one were to have a business in Poland and you wanted to bring parts to France, or products, or cars, it would be a hell of a lot cheaper than taking them from England to France. There does seem to be a high-cost tariff associated with goods crossing the Channel, and I think that needs to be investigated, in terms of the competitiveness that exists between the existing providers, either by Tunnel or by ship. I think a second area that we would be concerned about is, because of our distinctive circumstances, we are somewhat restricted in terms of our ability to extend and expand our Ryton facility, because of the implications to do with green belt development. We are fairly certain that if we were to invest in new facilities at Ryton, to expand production still further, then there would be major planning issues, and we would be into inquiries and we would be into public hearings, and the like. And I think that if you are remote from the UK you do not really have a good feeling about what a congested island we are, and if you operate in continental Europe, where you have much wider spaces to be able to invest and build, it becomes something of an irritant to hear that in the UK you are faced with these major planning inquiries for any further investment. So I think logistics across the Channel, costs. I think, secondly, the ability to easily expand some of our manufacturing plants, is a second issue. And I suppose the third issue I would make is a general one, and, I must say, it is something that the Government has responded to very positively, over the last several months, but they have to keep it going, and that is to maintain a position that makes UK Plc welcoming to foreign investors. Certainly, two years ago, the motor industry felt it was something of a blight, in terms of the way it was perceived, and I think that has changed over the last many months, and now there is a much more positive attitude towards car manufacturing and car use, which is encouraging. The people who ultimately make investments live in corporate headquarters around the world, and they read international media, like everybody else, and they get a feeling and a sense from reading international media, and sentiment does play some part in the final decision on these things. So I would just ask the Government to continue its trend over the last several months of being pro-car and pro-manufacturing.

  146. One small point. You spoke about the logistics; how do you actually transport these, which expensive means of transportation do you use?  (Mr Evans) We use trains through the Tunnel, and we use boats, with cars being shipped on boats, we use both systems.

Mr Cunningham

  147. You raised my curiosity there, when you mentioned planning in relation to Ryton. Can you tell me what is likely to happen to the Humber site?  (Mr Evans) The Humber site was earmarked for a major investment by one of our wholly-owned companies, to manufacture the seating and instrument layout for the new Rover 300, I think it is called the 300; and that site has been partially demolished to make way for that investment. That investment, as you can understand, has now been cancelled, because of the changes at Rover, so at the moment we have a demolished site with no decision as to how we are going to utilise it.

  148. Do you still own the site?  (Mr Evans) Yes, we do.

  149. Can I move on to Ryton, and particularly the 206. The 206 sold over half a million in 1999, but what is the long-term future at Ryton for other models?  (Mr Evans) Ryton will continue as the 206 plant for the foreseeable future. We do have a plan to add a further variant of the 206, which is not yet sold, it is a new variant for the 206 that will be added to the Ryton plant. And then Ryton will have to submit, we will have to submit on behalf of Ryton, our bid for getting the replacement car to be built at Ryton, which is in a time frame probably of some five years hence; and so no decisions will have been made at this stage, but decisions will begin to be formed in the next two to three years.

  150. How does Ryton compare for quality and productivity with other plants producing the 206?  (Mr Evans) Ryton, in the way that we measure productivity, which is a factor called the `harbour index', which takes a notional weekly rate, times the number of weeks worked in a year, and expresses that as 100 per cent, and Ryton is amongst the top in the world of PSA at 120 per cent of that particular factor; so Ryton is really holding its head up.

  151. Does the layout of the site at Ryton affect your choices; are there weaknesses in that site that would affect any choices you might want to make?  (Mr Evans) There are weaknesses, but they are not fundamental. It is very interesting that, if you travel along the A45 and you see what appears to be the facade of a building that you have known and loved and recognised over many years, it is only when you go inside the plant, and you see the amount of investment that has been made and how plants can be transformed. Now if the fundamental structure of the factory is such that you have supporting pillars, that could interfere with some kind of more efficient movement, then that is a factor, but it has not been a factor in any of our thinking about Ryton thus far.

  152. Of the 1999 production of the 206, how many were actually left-hand drive vehicles for export?  (Mr Evans) The export split was two-thirds/one-third, and I would guess that 80 per cent of that was left-hand drive, there was only a small amount of right-hand drive exports, to fringe markets, in the Australasia continent.

  153. Is the strong UK domestic demand a condition for Ryton's continuing success?  (Mr Evans) No; it is the strong European demand that will be a factor in Ryton's success. As I have said to you, we can ride out a strong sterling, a sterling above our assumptions, when we have such a hot car; the issue then becomes one of consideration when that ceases to be the case.

  154. Some manufacturers believe there is an optimum vehicle plant size, and that it is an advantage to have the flexibility to produce more than one model: can Ryton? And is this where you see the way forward?  (Mr Evans) We, as a Group, believe that the optimum size is in the area of 250,000 units per year; once you begin to go beyond that size of industrial unit, you begin to lose a degree of control that we believe is important. So Ryton, on a three-shift system, has moved very much closer towards that optimum size.

Chairman

  155. And you think that the single-model plant is the ideal one, or the preferred option?  (Mr Evans) At the moment, and this is because of the condition that the Group has in terms of its common platform development policy. Once we have moved faster towards common platforms—excuse me for defining our definition of platform, that is the underside of the vehicle on which you hang the suspension and the powertrain, it is the most expensive and complex part of the car to develop, and it is very appealing to all car manufacturers to run different body styles off existing platforms. We are aggressively moving in that direction, but the next car at Ryton will have a platform that is likely to be shared with another vehicle in the Group, and therefore offers the opportunity of more than one model being produced on the same line.

Mr Baldry

  156. Components are clearly important, because they obviously generate a lot of jobs, and for those of us, like myself, who have a constituency halfway between Cowley and Longbridge, clearly there are a lot of component manufacturers. To what extent has the relationship of sterling and the euro caused you to consider increasing the sourcing of your components elsewhere in Europe?  (Mr Evans) I think we have got to start off with the reference that we were not as committed to a UK supplier base because of our history as would be one or two other of the major car makers in this country. We also do not have long supply lines, in the way that some of the Japanese investors have. So, therefore, we start off with a lower base of UK supplier products. However, we have had to look at the supplier base that is going to give us the unique components for the new derivative of the 206 that is planned to be introduced in 18 months' time; and, in looking at that supplier base, we have moved from, in the 206's case, 50 per cent local content and 50 per cent imported, to more like 20 per cent of the unique components are going to be locally sourced and 80 per cent are going to be imported, for this new derivative. And this is because, when we went out for tender for the unique components of this new product then the pound sterling created a major difficulty for the UK supplier base to be able to compete as competitively as some of their European cousins. Now I say that in understanding that, more and more, we, as car makers, are dealing with suppliers on a worldwide basis, and these suppliers in turn have manufacturing units all round Europe, and they in turn are deciding where they are going to manufacture the components; so you cannot say it is uniquely the car maker making the decision, it is quite often the first tier supplier making the decision that he will supply us from a continental market. So I want to add my voice of caution that there is occurring at the moment some damage to the supplier base, particularly in the Midlands, for continued UK manufacture. Clearly, a number of the suppliers that are supplying the PSA Group are suppliers that were previously supplying Rover Group, and once you take away the volume from their production runs then it is going to make it more difficult for them to be able to compete on a world stage. And we are seeing, as a car maker, that there are more advantages to us at the moment for sourcing more and more components from continental Europe.

  157. But let us be clear about this, this is not a quality issue; or is it a quality issue? Or is it simply that the relationship of the pound and the euro means that it is now increasingly not competitive to produce components in the UK?  (Mr Evans) It is the latter.

  158. Do you have any UK suppliers that are supplying to other plants in the Peugeot/Citroën set-up? What is your relationship with suppliers; do you see yourself as having a kind of benign responsibility towards, wherever possible, encouraging UK suppliers to tender elsewhere within the Group, or is this a pretty hard-headed process, where basically, from time to time, you are just interested in the best deal, wherever you can find it, in Europe?  (Mr Evans) We certainly do not have a magic wand, and going around saying, "Can you please support UK suppliers." Most of our suppliers operate on the European scale and have factories operating on a European scale, and those suppliers, increasingly, are able to supply us with more competitive products by sourcing those components from European countries, and we will take every advantage of that.

  159. One of the things which slightly surprises me, and the phrase you used this afternoon was, I think the record says, something like a voice of caution, or a note of caution, the shift that you are making at Ryton, from 50/50 home-based, Europe-based, components, to 20/80.  (Mr Evans) On this one extra derivative. I was just painting an example of one derivative that was being introduced, and that was the equation on that derivative. The rest of our volume 206 production is remaining at roughly 50/50, at this point in time.


 
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