House of Commons - Science and Technology

Select Committee on Science and Technology Second Report

SECOND REPORT

The Science and Technology Committee has agreed to the following Report:—

CORUS PLC - RESEARCH AND DEVELOPMENT

1. Corus plc was formed in October 1999 as a result of the merger between British Steel plc and the Dutch company Koninklijke Hoogovens NV. This created the world's third largest steel company,[7] producing over twenty-one million metric tonnes of crude steel every year and employing approximately 66,000 people worldwide.[8] Since its inception, however, Corus has faced severe difficulties, announcing a net loss of £249 million in September 2000 after its first year of trading.[9] It has also made a series of redundancies during the year, amounting to a total of around 4,500 in the UK. It had been expected that some jobs would be lost due to the merged companies' overlap in certain operational areas, especially the flat-rolled carbon steel business, but the scale of the redundancies was unanticipated.[10]

2. As part of its restructuring, the company announced in June 2000 that it intended to close its three existing UK technology centres in Port Talbot, Rotherham and Teesside, where the bulk of British Steel's research and development (R&D) had been carried out. They would be replaced by one new centre (later confirmed as to be in the Sheffield area[11]), which would form the British half of the R&D facilities, with the Dutch component based at the existing IJmuiden Technology Centre in the Netherlands. The job losses in R&D amounted to approximately 250 in the UK and 30 in the Netherlands.[12]

3. The Committee's concern in this matter centres on the effect that the merger in general, and this restructuring in particular, will have on the company's research and development capabilities and thus on the wider economy. Any changes would have a profound effect outside the company owing to the importance of Corus for steel R&D in the United Kingdom. British Steel had dominated the industry in the UK, accounting for almost 70% of those employed in the iron and steel industry in 1999.[13] It was by far the largest investor in steel and aluminium R&D, spending around £50m per annum, and accounted for more than 90% of all steel R&D carried out in the UK.[14] Such sectoral dominance by a single company makes any change in Corus' R&D an issue for considerable concern.

4. During the inquiry, an oral evidence session was held with the then Joint Chief Executives of Corus plc, Mr John Bryant and Mr Fokko van Duyne, and Dr Jeff Edington, the Executive Director of Technology. The Committee notes that, since their oral evidence session, Mr Bryant and Mr van Duyne have resigned.[15] Representatives of the Steel and Industrial Managers Association (SIMA) also gave oral evidence, and three written memoranda were received. We would like to thank our specialist advisers, Professor Derek Burke, former Vice-Chancellor of the University of East Anglia, and Professor Michael Elves, former Director of the Office of Scientific and Educational Affairs, Glaxo Wellcome plc, for their assistance.

Importance of research and development at Corus plc

5. In its first memorandum to the Committee, Corus stated that, "R&D is very important to Corus"[16] and this was reiterated in the company's oral evidence.[17] Corus' current annual expenditure on R&D, though, amounts to only 0.9% of revenue and is well below the 1.5% which Corus stated that metal industries companies typically spend, and lower even than Hoogoven's proportional spend prior to the merger, according to SIMA.[18] The table below illustrates British Steel/Corus' expenditure on R&D (as a percentage of sales) compared to international competitors. The Committee notes with interest that no US companies are included in the top five of the Scoreboard.[19]

Research and Development Investment in the Steel & Metals Industry

International Comparisons [20]

COMPANY	R&D
	Total spend (£ ,000)	as % of sales
Furukawa Electric (Japan)	137, 065	3.1%
Sumitomo Metal (Japan)	132, 392	1.7%
NKK (Japan)	130, 912	1.2%
Mitsubishi Metals (Japan)	108, 083	1.8%
Usinor (France)	96, 393	1.4%
British Steel, now Corus, (UK)[21]	44,000	0.7%

6. Corus stated that steel R&D is fundamentally less expensive than that needed in other industries, pharmaceuticals for example, owing to its dependence on the physical sciences, which are more theoretical and less experimental in nature.[22] Others would argue, though, that there should be scope for experimental research both in devising new materials and also in the development of better processes. Corus also seemed unwilling not only to consider increasing R&D expenditure but even to guarantee the current level of spend.[23] Such a low level of expenditure on R&D, as 0.9% of revenue, hardly seems compatible with Corus' claim to regard it as an important part of the business, and we urge it to reconsider this allocation of resources.

7. The Committee also heard that Dr Edington, who retired at the end of last year as the Executive Director of Technology, is not to be replaced by a director of similar seniority. Although prior to the merger he had been a member of British Steel's main board, he was not included on the Board of the merged company and neither will his successor as head of R&D.[24] Dr Edington assured us that he would not be leaving if he felt that it represented a downgrading of research and development, and that in future the head of R&D would report directly to one of the Chief Executives.[25] In our view it is a retrograde step to remove R&D from the boardroom. We would urge Corus, in line with all major companies, to give serious consideration to the benefits of having research, technology and development at the heart of its strategic decision-making and management structures.

8. Most significantly, Corus' commitment to R&D will undoubtedly be seriously affected by the large number of redundancies it has announced, reducing the number of scientific, engineering and technological personnel from 1,280 to 900 in the UK and the Netherlands.[26] Although we appreciate the severe difficulties Corus is experiencing at present, the Committee views the reduction in research and development personnel as extremely regrettable and indicative of a short-term attitude. Research and development represent vital areas of expenditure for all companies, as these activities are essential in ensuring a company's long-term success and providing innovative solutions to business problems.

Quality of research and development

9. In its evidence to the Committee, Corus assured us that the quality of its research would not suffer as a result of the merger, and would in fact become more effectively customer-orientated, rather than simply process-led.[27] SIMA also expressed its hopes to the Committee that merging with Hoogovens should be beneficial in achieving a more long-term approach to R&D and to 'blue skies' research in particular.[28] We were disappointed to learn, however, that much of the 'blue skies' research will apparently be done by a Benelux company, CRM, and that Corus will engage in less of this research itself. In relation to 'blue skies' research, Dr Edington told us that "the key thing for us is to monitor what is going on, to sponsor research in various universities as a means of doing that, but it is an integration activity now, not a steel research activity".[29] While the Committee strongly encourages both international and industrial-academic co-operation in R&D projects, we hope that Corus will not completely abandon its own speculative research, and basic research in particular. Without investment in basic research Corus cannot be an intelligent customer for the work it sponsors. We also regret that these R&D activities appear to be transferring abroad.

10. One of the most important factors in determining the quality of any company's research and development is the calibre of the staff, and the large number of redundancies at Corus' three technology centres is a matter of great concern. Corus assured the Committee that the cuts would not have a significant effect on its R&D capabilities and that, in considering the redundancies to be made, it had not used age as the sole criterion but was trying to combine the skills base needed now and that needed in the future.[30] SIMA on the other hand, told us that many personnel were unable or unwilling to move and that it would be mainly the senior, more experienced staff who would be lost to the industry.[31] We recognise that where redundancies have to be made it is perhaps inevitable that there will be a disproportionate loss of more senior staff. We urge Corus, and all companies, to consider the long-term damage which the loss of experienced staff can have on their ability to carry out effective research and development. We also deeply regret the job losses announced in research and development, and the loss of expertise they represent for R&D in the UK.

11. Poor morale will inevitably have a deleterious impact upon the quality of researchers' work. It is only too clear that most staff at the three technology centres feel extremely distressed by the restructuring and the uncertainty it has created in their lives. As one witness told us, "morale is desperately low at the moment. There is a feeling of not being wanted".[32] If this is the case, Corus may have been over-optimistic in its estimates of the number of people who would be willing or able to transfer. Mr Bryant's statement that some employees "are in a position where they are not able to move, or they do not have the ambition to move"[33] suggests a lack of understanding. We consider that Corus may have seriously under-estimated the number of R&D staff who will leave the company as a result of the restructuring, and urge the company to do everything possible to retain those with key skills.

12. There is also a strong feeling among the British staff that they have not been properly consulted about the redundancy process, and a perception that the Dutch staff have been treated with greater consideration.[34] Indeed, SIMA informed us that not only did the Dutch personnel receive longer and more professional notice of the restructuring but that any personnel made redundant from IJmuiden Technology Centre were to be absorbed within the site.[35] The Committee deeply regrets the human impact of these job losses upon the employees and their communities. It is also extremely concerned about their impact upon Corus' ability to attract new technologists into the company, and upon the appeal of careers in R&D generally.

The new technology centre

13. The three existing technology centres in South Wales, Teesside and Rotherham will close within the coming year and will be replaced by a new UK Technology Centre near Sheffield, due to open on 1^st January 2002. SIMA expressed its incomprehension of this apparent reversal of British Steel's former policy of concentrating technology within the business, close to its prime customer: the strip metal plants.[36] It perceives a danger in creating an R&D facility separate from the rest of the business and contrasts this to the location of the IJmuiden Technology Centre within a production plant.[37] Mr Bryant told us that the high administrative costs of having more than one R&D Centre and the increasing use of Dutch technology made it impossible to sustain a technology centre at each production plant.[38] We find this explanation—a reversal of previous policy—unconvincing. We sincerely hope that Corus will ensure that the creation of a new technology centre will not divorce R&D from production.

The UK as a base for research and development

14. In Corus' restructuring of its R&D facilities there has been a significant imbalance in the job losses between the British and Dutch halves of the company. The closure of the three technology centres in the UK will result in a decrease in 43% of Corus' British R&D staff, compared to only 6% for the Dutch part of the business.[39] This represents a very significant loss in terms of skilled technologists for the UK economy and skills base. The Committee notes with grave concern the imbalance of job losses between the UK and Netherlands, and what appears to be a downgrading of Corus' commitment to R&D in this country.

15. Corus provided the Committee with various reasons for the unequal division of job losses between the British and Dutch sections of the company, including the tax regime, changes in the energy market and the strength of the pound contrasted to the Euro.[40] SIMA implied that differences in employment legislation between the UK and the Netherlands were also significant.[41] Such issues are beyond the scope of this inquiry, but the Government must examine the underlying causes of the job losses in Corus R&D and act promptly upon their findings. We are concerned that Corus is taking long-term decisions on the basis of short-term exchange rate considerations.

The Trade and Industry Select Committee is currently undertaking an inquiry into the UK Steel Industry as a whole, and examining the difficulties it is currently facing. We await its Report with great interest.

16. One issue raised by Corus, which was of especial concern to the Committee, was the quality of science teaching, particularly physics, in the UK. Mr Bryant argued that the quality of physics students leaving schools and universities was declining noticeably and that Corus had long-term apprehensions regarding the scientific qualifications of future school leavers and the effect it would have on Corus' recruitment.[42] This reflects the view expressed to us by other industrialists and is not new to the Committee. We have commented in detail on this in earlier reports.[43] We remain deeply concerned about the current state of physical sciences teaching within UK schools, which, if unreformed, will inevitably damage industry in the long-term. We are pleased to note that the Science and Technology Committee of the House of Lords is currently holding an inquiry into Science and Schools.

Conclusion

17. While job losses in research and development are always to be regretted, it was apparent from both Corus' and SIMA's evidence that some restructuring of British Steel, and its research and development facilities, would almost inevitably have taken place with resultant redundancies, even had the company not merged with Hoogovens.[44] It is clear, however, that research and development at Corus has suffered deeply over the last year and will continue to do so until after the restructuring is complete. It is disappointing to note that the UK side of the business was required to bear more than its proportionate share of the cutbacks. If the company is to survive its current difficulties successfully, R&D must be given a higher priority. We would urge Corus to consider carefully its resource allocation for R&D and to do everything possible to maintain its commitment to the UK in this field. The opportunity to create a centre of excellence for steel R&D in the UK with modern, purpose-built facilities at its new Sheffield Technology Centre must not be wasted. We hope that the new centre will truly be a state of the art facility, attracting new investment and new science, engineering and technology recruits into steel R&D.

18. The Government must examine the fundamental reasons for Corus shifting the emphasis of its research and development activities to the Netherlands. The fiscal and economic problems identified by Corus (the currency issue, the tax regime and changes in the energy market), which clearly affect the other companies in this sector, need be addressed within the Government's policies. It is also imperative that the Government tackle the severe weaknesses identified by Corus in science teaching in the UK, if the country's technological future is to be guaranteed.

7 This was at the time of the merger; it is now the fourth largest. Q. 7. Back

8 Evidence, p. 1, paragraph 1. Back

9 Compared with a net profit of £226 million in 1998 and a net loss of £81 million in 1999 for British Steel. British Steel plc, British Steel Annual Report 1998/1999. Back

10 Qq. 4 & 23. Back

11 Q. 33. Back

12 Corus press release, 16th June 2000. Back

13 Office of National Statistics, Labour Force Survey; and British Steel, British Steel Annual Report 1998/99. Back

14 Evidence, p. 2, paragraph 8; and DTI, The UK R&D Scoreboard 1999, p. 19. Back

15 Corus press notice, 5th December 2000. Back

16 Evidence, p. 3, paragraph 19. Back

17 Q. 15. Back

18 Evidence, p. 3, paragraph 20; and Q. 57. Back