Examination of Witnesses (Questions 2
- 19)
MONDAY 13 NOVEMBER 2000
MR JOHN
BRYANT, MR
FOKKO VAN
DUYNE AND
DR JEFF
EDINGTON
Chairman
2. Mr Bryant, Dr Edington, Mr van Duyne, thank
you very much indeed for coming along today; and, Mr Bryant, may
I say, on behalf of the Committee, that we are pleased that you
are feeling better today, and maybe the trains have been kinder
too, and you have been able to make it. On the occasion that you
were not able to make it, I had a constituency engagement, so
it is my gain that I am able to be here when you are here today,
and thank you very much for coming. I think you know the background
to our inquiry. We are the Science and Technology Select Committee,
we are not the Trade and Industry Select Committee, so all that
we are doing is focused towards research and development, and
science and technology. And we wish to ask questions on this occasion
about the effect of your merger on research and development within
your new organisation, and while I imagine that we shall verge
slightly towards the industry as a whole we shall try not to;
we shall try to stay strictly within research and development.
Now, before I ask the first question, would you like just to tell
us your position within the organisation and introduce your two
colleagues to us?
(Mr Bryant) Thank for, first of all,
for your wishes. I think my own recovery was a lot more rapid
than the transport system, and I am still here. I was Chief Executive
of British Steel, which is one of the two companies that created
Corus, and my colleague, Mr van Duyne, was the Chief Executive
of Hoogovens, which was the other company, and we are now Joint
Chief Executives of Corus, and have been since it came into existence
in October of 1999. In sharing what is a collective responsibility
for the overall fortune of the company, we focus in on certain
areas, in that I am responsible for the operational businesses,
and Mr van Duyne focuses on HR, technology, finance and strategy;
so that is the way in which we split things, but it is very much
a shared, collective responsibility, I think, overall, for the
company. Dr Edington is the Executive Director, a colleague of
ours on the executive committee, with a responsibility for technology,
which currently covers information technology, research and development
and environmental performance. Dr Edington was the Technology
Director in British Steel, and had been from 1992; prior to that
he had worked in the aluminium industry, and also in academia.
Dr Edington is retiring at the end of this year, at the age of
61, and his responsibilities for research and development at that
point will report directly to Mr van Duyne, so that the research
and development aspect of it will report to him. So I think that
is where we are.
3. Thank you very much indeed. I shall direct
my questions, as other Committee members will, Mr Bryant, to you,
but if you feel it is more appropriate that they go to somebody
else, then please indicate, and if Mr van Duyne or Dr Edington
want to make a comment, if they would kindly catch my eye, we
will make sure that they can do so.
(Mr Bryant) We are very happy with that.
4. You kindly gave us some written evidence
in April in which you told us that R&D is very important to
Corus. I would like to know: is that statement still true, and
if it is true how do you demonstrate that in your corporate strategies?
(Mr Bryant) It is very important to Corus, as it was
to each of the previous constituent companies, and we try, in
Corus, as I think both the companies had beforehand, to move towards
raising our products to being higher value and to being something
where we can offer our core customers something which is more
than the normal material properties, and so the commitment to
R&D remains as strong as we would have intended. Of course,
events since then; in putting the companies together, a part of
the activities of Hoogovens and a part of the activities of British
Steel directly overlap, and that is in the carbon steel business,
in the flat-rolled area of the carbon steel business, which is
a very major part of the company, and that was an area where we
knew there was a lot of duplication, and duplication as far as
administration was concerned and duplication as far as other areas,
including research and development. And so, at the time of the
merger, we said that we expected to see substantial synergies
arising from the merger, and one of those would have been, in
part, the elimination of duplicated research and development but
also refocusing some research and development so that we were
getting the benefit of the best parts of that between the former
Hoogovens organisation and British Steel. And, I think, one of
the things, we sent an addendum to the evidence, which is that
we have announced a restructuring of research and development
in the UK, which would mean focusing our research and development
activities on to one site in the UK, so that for the new company
we would have one site in Holland and one site in the UK, and
that site will be located in the Sheffield area.
5. Following that second part of my questionhow
can this be demonstrated in your corporate strategyin the
same document that you sent us in April you pointed out that,
typically, metals industries companies spend 1 to 1.5 per cent
of their revenues on research and development, and yet we understand,
from looking at your accounts, that Corus expect to spend only
0.9 per cent on R&D this year, which is 10 per cent, or 60
per cent less than typical metals industries spend. Why is that,
and how does that square with your strategies?
(Mr Bryant) I think part of that is the nature of
the spend on research and development, and I will ask Dr Edington
to expand if I jump over some things. But, certainly, I think,
what I have seen in research and development over my time in the
steel industry is that there has been a move from heavy process
research and technology more towards product and more towards
market, so that we have moved more towards market sectors where
we are seeking to grow. There was a time when a lot of research
and development was on the basic processing, and we in British
Steel had moved quite markedly away from that approach towards
something that was focused on the customer. And I think that what
that means is, in terms of what was previously process research,
a lot of the process research is now transferrable technology
around the world, where if one is looking, for example, to incorporate
the best form of technical equipment, in some basic equipment,
that is available by some form from elsewhere, in some cases by
licensing from other people; so there is a change in the nature
of it. And in basic process research we do spend less than we
would have done before. But then, when you come to look at it
from the market point of view, some of the market sectors that
we have will command a much higher proportion of research and
development expenditure. In the case of Corus, where we are not
just involved in carbon steel but we are also involved in aluminium,
the automotive sector is one which is very demanding, both technically
and from a developmental point of view; so that our research and
development expenditure would be disproportionately high in the
case of aluminium and carbon steel in support of that particular
market sector, albeit the total sector may only be 20 per cent
of our total turnover. And there are then, conversely, products
which in themselves do not require a great deal of technology,
because they represent more of the run of the mill activity.
6. Obviously, I wish to invite other members
of the Committee to put their questions, but one final one from
me, and, I hope, probably a brief answer. Accepting that your
spend this year is likely to be 0.9 per cent on R&D, and you
have answered why that might be, what do you think it might be
in the financial year starting in April 2001 and the financial
year starting in April 2002? What I am trying to get at is: is
this ability to license likely to drive R&D spending down,
or is the demand for specialist products likely to send R&D
up?
(Mr Bryant) That is a very big question. If things
remained exactly as they are today then I think the R&D expenditure
in 2001 and 2002 will be at a similar level, in percentage terms,
of turnover that we have there; it might be, for the reasons I
have said, of overlap and synergies, marginally lower, but it
will be in the range of 0.8 to 0.9. The reason, I think, that
I hesitated a little is that we have to look at where we can grow
the company in profitable areas, and so, for us, we are in, at
the moment, a period where we are looking to see what that means
in terms of our ability to be profitable, because, for us, all
research and development is about ensuring that the company is
profitable. I have to say, and you will see this in our accounts,
that really now for the last two years, the UK-based activities
of what was British Steel and what is now Corus have been unprofitable,
and that is something which is of concern, quite clearly, to us,
it is of concern to others. And during the course of the last
year we have had to take some measures, in trying to improve our
cost base, which move away from research and development to other
areas, where we have announced during the year some 5,000 job
reductions in the UK, at that stage without affecting any capacity
in the UK, because we were striving to maintain our productive
capacity. But you may have seen that in October we announced some
capacity reductions where we removed two blast furnaces, one in
Scunthorpe and one in Llanwern, in South Wales. And, whilst they
are driven by short-term stocking reasons, that there is too much
stock around, there is a concern, looking forward, in terms of
the ability, particularly within the UK, to service a UK market.
And each time you see a report in the press about one of the big
car companies talking, for example, about questioning their level
of investment here then that does have implications back for us,
because the strength of our home market, in the UK, is vitally
important to the future success of the company.
Chairman: Thank you very much.
Dr Gibson
7. Mr Bryant, excuse me, because I grew up active
in the eighties on the national executive of a union called ASTMS,
of which Clive Jenkins was the General Secretary, and I spent
my life listening to the same argument, in that period, as you
are putting forward now. And that is that we have to drive down
research and development because that is an area where we can
make the cuts, basically, and that is where we can make the savings
and we will be profitable, and then we will all be happy ever
after; well it did not happen that way, did it, in most of the
industries? The people we talk to now, who showed the entrepreneurial
spirit and went for research and development, have survived in
the global markets, be they pharmaceutical, or whatever. Now you
are almost talking down your industry, in a sense, to the eighties,
where mergers come about but at the end of the day the industry
disappears and it develops in some other country, like Japan,
and so on. The amount you are putting into research and development,
0.9 or 1.5, does not compare, it is probably the worst, I think,
of any industry in this country; and what do you say to that argument
that you are in your death throes?
(Mr Bryant) Certainly, I would not agree necessarily
with your choice of language, in terms of it. In terms of Corus,
what we have is, at the time of the merger we put together what
was the third largest steel company in the world, and that represents
something; and now, after other mergers, it is the fourth largest
steel company in the world. Compared with our peers in the steel
industry around the world, we are very much at an average level
of spend, as far as research and development is concerned. And
I think you may be addressing questions in relation to the nature
of other industries, in that if you took the pharmaceuticals industry
then the product itself, as an element within the turnover of
the company, the actual production cost of the element is very
small, and the research and development and the promotional activity
and the testing, and everything else that goes with it, is very
high. We are concerned, certainly in the carbon steel industry,
the actual cost of our product is very, very high, in terms of
what is the market price that we sell it for; by "very high"
I mean it is often in the nineties, and if you are in a loss-making
situation it is more than 100 per cent, which is the position
that we have been in. And it is almost the nature of the industry,
I think, that, globally, the steel industry is very, very competitive,
because it is possible to move material around from location to
location. So that, where I would completely agree with you, steel
companies that are able to differentiate themselves from the rest,
by going for niche business and by focusing on that, generally
have been successful; but that is not something that is associated
then with bulk production and the large investments that are associated
with that. And I will make just one other comment, in relation
to your comment about the eighties; the one thing that British
Steel did, and, from talking to my colleague, it is a similar
story in Hoogovens, what we did through the eighties was very,
very much to try both to maintain the best quality of people that
we had, that when we were faced with some of the restructuring
that had to be done we tried very, very hard to maintain those
people, to encourage them to come and work for us. And you will
find that our track record, I think, with the universities in
the UK, in attracting the best people into our operations, into
our commercial activities, in terms of our R&D activities,
is very, very high, to a point where our requirements for recruitment
were beginning to outstrip the total production that was coming
from UK universities, of suitable graduates. And so what we have
done, over the period, is actually move in not just with our own
sponsored students but we have created initiatives, like the engineering
doctorate scheme, which is in universities, where we are promoting
the development of graduates.
8. Were they entrepreneurial though, these bright
young things you brought in, or did you just stick them around
with a clip-board, and their grey suits. What did you do with
these brains, when you got into that situation?
(Mr Bryant) Again, I will just say, the nature of
the industry is that you need a combination, I think, of the brains
that are best suited for all activities that we have got. If you
are responsible for running things like blast furnaces and steel
plants then, frankly, we do not want people to be too entrepreneurial,
we want people who really do have a deep technical understanding
of what they are doing, and make steps in a very careful, considered
sort of way. I think, when you are dealing with somebody who is
looking for opportunities for the product, in terms of seeing
new opportunities to grow, then you are looking for those sorts
of entrepreneurial skills, and generally they are a combination
of commercial skills as well as technical.
(Dr Edington) It is probably worthwhile saying a little
bit about how research is conducted in the drugs and pharmaceuticals
industry versus our kind of industry. We are a physical sciences-based
industry, and physical sciences have been developed over a long
period of time and there is a lot of theory, there is a lot of
mathematics, and so the process of doing research is quite efficient,
you do not have to do so many experiments because you can work
closely with theory and get to the result quicker, so the process
of doing research is not so people-intensive. If you go to drugs
and pharmaceuticals, it is quite different; there is not much
theory, it is a massive experimental activity which starts off
with thousands of compounds and winnows it down to one or two
over a period of years, so it is very people-intensive. So you
end up with a more expensive, fundamentally more expensive, R&D
activity to get the same kind of result; so it is quite a different
process.
9. I can accept that, but there is a lot of
similarity. Let me ask a final question then. So a merger came
about; what drove that merger, and what difference would that
make to research and development, given that you have said that
it is important, just a tiny bit is important? It is not really
what you are after, though, is it, in that merger?
(Mr Bryant) I will deal, I think, with just two or
three points there. First of all, in terms of what drove the merger,
it was, first of all, I think, overall, something where we saw
the two companies' objectives as being quite similar, and that
we thought that both were looking to be more in what we said was
creating solutions for customers, which meant that we were wanting
to put resource working with our customers, some of that is technical,
some of that will be research and development, and some of it
will be commercial experience as well. So that was it. In particular
terms, for Hoogovens, I think a big driving force was that they
were a very efficient, medium-size, carbon steel company, with
a very sizeable aluminium interest; but they felt that they had
reached a stage where they would be better off linking with somebody
who was bigger in carbon steel, and, for them, I think their preferred
partner was British Steel. For British Steel, which has been primarily
a UK-based company from the point of view of manufacturing our
products, and over the time, from the seventies to the eighties
to the nineties, we have moved from being something where, at
one stage, 80 per cent of what we made in the UK was consumed
in the UK, to where we are today, where what is made in the UK
more than 50 per cent of it is exported from the UK. And so, for
British Steel, Hoogovens, as a manufacturing unit in mainland
Europe, offered some great attraction in terms of having a better
balance of operations. So those were the factors that drove it.
And I have to say that, when Fokko van Duyne and I were first
meeting and talking on that, the thing was driven very much by
a similar outlook technically, and, if you like, the opportunity
to save money on research and development was a very, very low
factor, as far as the merger was concerned. The merger was driven
much more by creating a large international company that would
be capable of giving our customers a much better service than
they had had before, very much driven by service.
Dr Kumar
10. Mr Bryant, Dr Edington is still the Group
Director of Research on the main board; when he was appointed
it was a great achievement, certainly, historically, for an executive
director to be on the board. Now that he is leaving, many would
say that your importance to research and development is being
downgraded, because his responsibilities are being transferred
to Mr van Duyne, and research and development is no longer seen
as important as it was once upon a time. What would you say to
those people?
(Mr Bryant) Factually, there is a slight difference,
I have to say. In the former British Steel, Dr Edington was on
the main board, but since the merger was formed he has not been
on the main board, he is on the executive committee and is an
executive director but he is not on the main board. And, in the
structure of the new company, at the time of the merger we had
only five executive directors on the new board, of whom two were
Mr van Duyne and myself, and it was our colleagues, John Rennocks,
the Finance Director, and Tony Pedder, and at the time Aad van
der Velden; now Aad van der Velden retired in the summer, and
so today we have only four executive directors on the board of
Corus. The second thing is, in relation to the position of technology,
when Dr Edington joined British Steel in 1992 he succeeded Dr
Fitzgerald, who retired, and Dr Fitzgerald was also on the main
board of British Steel, and Dr Edington remained on that until
the new merged company. And what we have done, we had ten people
on the executive team within Corus, we felt that we were a bit
more effective by reducing the numbers there and being more productive,
so that when Mr van der Velden retired in the summer we did not
replace him on the executive committee, and when Dr Edington retires
at the end of the year we will not replace him, so that the executive
committee will reduce to eight. But the responsibility for technology
and research and development is today the responsibility of a
man called Hans de Wit, and he reports to Dr Edington, and when
Dr Edington retires Hans de Wit will report to Mr van Duyne; so
that the position of R&D within the company is seen to be
reporting in at the highest level.
11. But, surely, the Corus merger that has gone
ahead, while the old British Steel had seen R&D far more important,
would you not say, than the Corus merger, because actually you
had taken out the position of Dr Edington compared with British
Steel, does not that demonstrate that actually you do not see
R&D as important as British Steel had seen it previously?
(Mr Bryant) I think my colleagues may both want to
come in, but what I say is, I think no, because, in an earlier
question, I think to Dr Clark, I referred to a move that I had
seen in British Steel and in Hoogovens, where you move closer
to the customer and you become an organisation that is much less
a manufacturing organisation and more a customer-driven organisation.
But if you went back to the old days of the nationalised industry
in British Steel, it was a very functional, manufacturing-driven
organisation, and so each of the functions tended to report in
at the board level. What has happened, I think, in our company,
as with others, is it is much more a business-driven thing, and
so that our company now is structured not with functional lines
but we have got a series of Business Units, which are profit centres
in themselves, for which research and development centrally is
a service which those businesses use. So I would say that, to
some extent, we are reflecting perhaps a more modern way of running
businesses with some devolved profit centres.
(Dr Edington) I am actually quite relaxed about it,
and I think it is a step forward; and my reasoning behind that
is, it is extremely important for technology to be embedded in
the business decision-making processes. And to have technology
reporting to Fokko, who is a CEO, and to have information technology
reporting to an executive director, and to have environment reporting
to an executive director, means that these technologies are deeply
embedded in the decision-making processes of the businesses. And
I think that is critically important when you are in a market-driven
company, which we are trying to become. I think, historically,
when we were process-driven, R&D sat there as a separate entity
and it was not deeply integrated with what went on in the business,
quite honestly, and I think that was a bad thing. So I am quite
relaxed about it. It is not perfect, I can think of ways to improve
it, but the fundamental reporting position of R&D and other
forms of technology, I think, is better like this, in our kind
of industry.
12. You would not say that R&D is a sinking
ship and it no longer matters?
(Dr Edington) No, absolutely not; absolutely not.
13. You would not say that; and that is not
the reason why you are leaving?
(Dr Edington) I get quite emotional about it; if I
thought that was happening, I would not be leaving.
14. You would stay?
(Dr Edington) Absolutely, and straighten these guys
out.
(Mr van Duyne) I would like to add one little thing,
and it is that the position of R&D within the Hoogovens organisation
was a very strong one, and the reason for that was that we have
combined the reserves from our aluminium activities and the steel
activities into one entity. And we felt that, in order to support
our customers better, we needed an enlargement of that, and that
was one of the reasons that we merged with British Steel; and
in the combination of the two the relationship to our sales went
up because of the combination of the two. And we, from Hoogovens,
have always had an enormous direction of reserves, and we found,
in British Steel, let us say, the strength which could push us
up in that relationship. So I would like really to stress that,
although Dr Edington is leaving the company because of his age,
I think that the focus of the company
Chairman
15. I would remind you, Mr van Duyne, he is
four years younger than I am; so you might like to phrase that
another way in the transcript?
(Mr van Duyne) I have to be careful, I know, because
it is very sensitive. I think what is really happening is that
the organisation of Corus is really more strongly committed towards
research and development than, as I say, in the separate position
of the two companies prior to that, because we were looking for
a broadening of the base instead of a reduction of the base. And
now what we are trying to do is to do that research more efficiently,
and that is what was described by John Bryant.
Dr Kumar
16. Mr Bryant, when the merger was first announced
between Hoogovens and British Steel, great claims were made; it
was in the press, a new dawn was going to emerge, great success,
and wonderful things were said, and everybody was delighted, up
and down the country. But would you say, since then, it has been
an absolute disaster, as far as R&D is concerned? And I know
what you said to the Chairman of the Committee earlier. Because
here we have a situation where three technology centres in the
UKthe Teesside, the Welsh and the one in South Yorkshireare
being merged together, and 230 jobs are being lost; scientists,
technologists, engineers, metallurgists, some of the most able
people in our country actually are being told to go and join the
dole queue. Now would you say that that is still a wonderful dawn?
It is a great beginning for R&D for a new company; given that
we are trying, as a Government, to say that education is our priority
and trying to educate our young people and to have more scientists
and engineers, would you see, six months down the road, that merger
as a great achievement?
(Mr Bryant) Certainly, the primary rationale for the
merger, which I think I recounted earlier, the conditions there
remain as valid today as they were then. I think one has to say
that the conditions, some 18 months on from when we announced
the merger, for manufacturing in the UK and for basic, primary
manufacturing that you recount, I would say, is not necessarily
the best place to be. For a company which does 90 to 95 per cent
of its business in Europe, we are exporting beyond that, but from
the UK in Europe, the continued strength of the pound and weakness
of the euro has massive significance, as far as the operations
in the UK are concerned, and that is something which we have said
repeatedly, publicly and privately, but it is a fact that cannot
be ignored. In common with other manufacturing industries which
rely on exporting products which consist, in the main, of materials
and labour from the UK, which do not in themselves contain a very
high level of knowledge, we are finding life extremely difficult
in the UK. That is my first point. The second is, in relation
specifically to R&D, our recruitment plans, the way in which
we recruit people, all the way through, has been that we look
to recruit the best technologists, materials scientists, who will
come and work for us. The rationalisation that we are making now,
in terms of creating one modern Technology Centre, is one where
we are looking to retain people who are prepared to move, and,
in realistic terms, if we are talking about having one centre
in Sheffield, it does mean that people in Wales, or for people
in Teesside, there is either an opportunity of moving to a new
Technology Centre, or there is an opportunity of moving into the
works which is alongside them, or then, for the individual, there
is a problem. But what I will say is that we are actively trying
to retain and encourage people to be mobile, and mobility, I think,
is at the core, as far as that is concerned. Can I also make just
one point, as far as when you referred to the Government; we are
at the heart of manufacturing, where it is the physical sciences
that mean a lot to us. And I have to say this as a source of concern,
there is a real concern that we have seen through the last ten
years, which is the progressive deterioration of the standards
as far as the physical sciences are concerned, both in the schools
and in the universities. We recruit, as I am sure you are aware,
at 16, at 18 and at 21, and even the basic core, as far as the
physical sciences are concerned, physics, is, for the company
and for me personally, a real source of concern for the future;
because without a firm foundation in physics, which is the core
of any engineering or manufacturing approach, then life will be
very tough in the future for other manufacturing concerns. And
I do not think people should pretend that the state of teaching
in physics in this country is anything to be proud of at the moment.
Where you have a situation where there is only one physics teacher
between two schools, which is the case in parts where we operate,
that is a serious problem.
17. But, you see, you say all these things,
Mr BryantI hear, but, you know, your closure of Teesside
labs hardly generates any confidence, in Teesside, in a company
like Corus, because you have actually closed a viable lab, which
was very successful. And I could say the same thing about the
Welsh Technology Centre, because that was a centre which was taken
out of research then it was put back in again, and nobody understands
to this day the logic of that. And now you are saying to me that
actually three technology centres are going to be merged into
one. Actually, you may have some sense of trying to put them together,
logically, because it may rationalise, it may reduce; 230 jobs
are going; you accept that as a fact, and well-skilled jobs as
well. But nobody understands; how does that generate confidence
in the areas where the businesses are, because if you are trying
to link in your business with your research, and yet close three
centres down, how does your strategy fit in with that, because
I fail to see it?
(Mr Bryant) I think that, if you look at what we have
at the moment, which is a company which has four Technology Centres
and we are bringing those down to two, there is huge scope to
use the accumulated expertise and the knowledge which exists in
Holland to spread across the UK. We are also looking to use what
we have in the UK, focused on one Technology Centre, to be used
across the whole of Corus. I think one of the things that Dr Edington
led, when he joined the company in 1992, British Steel that is,
was that we were much too focused on research for its own sake
and we were not using the skilled resources we had to develop
things within the works. And so what happened was, in the three
or four years immediately after Dr Edington joined, we had a substantial
movement of resources that were previously in Research Centres
that we moved in closely in support of manufacturing operations
and our customers. Which is one of the reasons why, in the narrow
field that we measure of R&D, we may come out with one measure,
but if you looked at what we have in the way of technical resources
and qualified technical resources that are now working on groups
within our manufacturing works, they are quite substantial. And
the other thing that I think we have found is that, if you look
at having three Research Centres, the technologists are a large
part of it, but the administration, the service costs and everything
else associated with it are also high, and so if you bring that
down to one unit you will have the same administration cost for
one as you previously had three times over with the three; so
that it is not all about getting a reduction in technologists.
I will say what I have said before, we will actively try to recruit
and retain skilled technologists; they are the life-blood as far
as a company like us are concerned.
18. Let me read to you what the Steel and Industrial
Managers Association said to us; they said the R&D personnel
are "forced to uproot their families and relocate, in many
cases to a foreign country . . . The choices they face cause stress,
desperately low morale, and the work output and quality is suffering
as a result." That is what the Steel and Industrial Managers
Association said to us. What have you got to say to that?
(Mr Bryant) I can imagine that that is a view that
people who are in a position
19. Do you share that view?
(Mr Bryant) The people who are in a position where
they are not able to move, or they do not have the ambition to
move, would take. I could give you the converse, which is that
when you are recruiting young, talented, able people in the UK,
the fact that they now have the prospect of working in a foreign
country, when they join the company that is called Corus, is attractive.
There are some people who are looking to work in the foreign parts
of the company that we have, in
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