Examination of Witnesses (Questions 245
THURSDAY 11 JANUARY 2001
245. Can I first welcome you, Mr Reilly and
your colleague, Mr Warman. We have met in the not too distant
past, Mr Reilly, in what in those days were happier circumstances.
I think when we spoke to you in the early and late summer we were
at that time all under the impression that the new Vectra was
going to come to Luton. Could you perhaps explain to us the position
as regards the sales of Vectra? What is the significance of the
picture as far as sales are concerned? Maybe you could tell us
the position in continental Europe and in the UK in relation to
(Mr Reilly) The situation we are talking
about has got a lot to do with sales and particularly the segment
that the Vectra operates in as well as the Vectra itself. It is
certainly a pan-European situation, not just a UK situation here.
The Vectra segment has dropped by approximately five points of
the total market, from 22 per cent to around 17 per cent, across
Europe in a four year period, and within that the Vectra has obviously
also shared that loss across Europe. In fact the Vectra has lost
a little market share but the main story is in the overall period,
particularly just recently, the Vectra segment has significantly
shrunk. The reason for that is that people are moving to smaller
cars in most countries and they are also moving to different types
of vehiclespeople movers as they are sometimes calledbut
also the premium manufacturers, as they are referred to, such
as BMW and Mercedes, have brought out products which now compete
in that sort of segment. So the segment has shrunk and it has
become much more competitive.
246. But surely we would expect an ageing car
to fall in sales? This is something that you could have anticipated.
You do not really need a very clear crystal ball to realise the
demand for a car in the fifth or sixth year of its life, even
if it has had a minor re-vamp, would be reducing.
(Mr Reilly) Yes, I am not talking about the cyclical
demand for a product as it gets towards the end of its life when
of course it does tend to have lower sales, although actually
the Vectra in its segment has done quite well. Yes, that would
happen but that is not really pertinent to what we are talking
about here. We are talking about what has happened to the overall
segment and the future of that segment.
247. At one time we were talking not just about
the son-of-Vectra, the Epsilon, but also the Corsa coming to Luton.
What happened to that pipedream?
(Mr Reilly) That was actually before my time but there
was a consideration when the Corsa was being planned to potentially
bring it into this country, into Luton, because it would have
been desirable to have what we call a flex-plant, ie a plant with
two different models, and that was considered as well for the
derivative of the Corsa, which could quite possibly have come
here, but in the end the volumes for the Corsa did not require
another plant and it stayed in the plants which were already producing
248. Given, as you said, there was a shrinking
in your share of a shrinking sector, how do the third quarter
losses for GM Europe impact on the choice of a site for a new
car, in this case the Vectra? Can you explain to us how there
is this linkage? Am I correct in saying that we really have to
talk about it as a European operation rather than a European company,
because GM Europe does not really produce books as such and financial
returns? Is that correct?
(Mr Reilly) GM Europe does but it is essentially a
cost centre. Yes, you are right, it is made up of several legal
entities in different countries, of which Vauxhall is one. If
I can get to your question about losses and how they impact, the
major issue that we are dealing with here is a capacity issue
across Europe and there is over-capacity in the industry generally
and we have also over-capacity in GM Europe. When you are making
significant profits then you can afford to have some flexibility
in terms of your capacity and your capacity utilisation just in
case you are very successful in the market or the market suddenly
turns up, but clearly when you are in Europe making losses you
cannot afford to run plants at below capacity if you can avoid
it. The very severe deterioration in the automotive industry in
Europe which has caused most companies to go into losses therefore
calls for a different sort of action than might be appropriate
if there was a lot of money being made. That, together with the
decline in the segment of the Vectra, has meant that GM Europe
needed to look at where it put its capacity for the Vectra.
249. This seemed to happen overnight, this awareness
of the character of the problem. When we met it was probably late
September but the garden was looking fairly rosy then. It took
us virtually up to Christmas for things to change. The reason
we are here, frankly, is we would have had a report produced on
the car industry and in the case of GM we would have been reasonably
optimistic. The reason that stopped us producing the report was
the uncertainty over Nissan and we thought we should wait for
the main board decision about their new Micra vehicle. We just
cannot see how things changed so dramatically, and if they did
not change dramatically had you anticipated this earlier than
(Mr Reilly) No, we did not anticipate this earlier
than December, and it did change rapidly, although we had obviously
had signs that the segment was declining because the sales forecasts
are updated regularly not just for here but for the whole of Europe.
We had in fact already started to take some action a couple of
months before, which was to try to move some people from the Luton
Vectra plant to the neighbouring IBC plant, recognising this decline,
at least as a short-term measure, and it was actually during those
preparations that the data became clearer, and it was then clear
that GM Europe had gone from a state of needing two Vectra plants
to needing effectively one and a half, or one plus a flex-plant.
250. Could I press you on this decline in demand.
It has been put to us that the decline in demand in the UK for
the Vectra segment was much less than it was in the rest of Europe,
and that also the profitability in the UK operation was rather
better than it was elsewhere. If that is true, and perhaps you
could let us know whether it is, does it not seem ironic that
it is the UK plant which ends up suffering?
(Mr Reilly) If I can address the first question, it
is not true the UK is not feeling the reduction of this segment.
251. But not to the same extent.
(Mr Reilly) Yes, to the same extent, by about four
to five points of market share, from a somewhat higher level,
from about 25 per cent down, to about 20 per cent, but nevertheless
the same sort of decline in that same period. As for profitability,
the rapid decline in profitability in GM Europe has been mirrored
here in Vauxhall. I cannot give you the results yet because they
are going to be announced in the not too distant future, so obviously
I cannot indicate that, other than to say that we are not trading
profitably. So the picture of some time ago has deteriorated significantly,
for various different reasons.
252. You are a member of the board in Europe,
presumably you therefore were involved in these discussions which
culminated in this decision?
(Mr Reilly) I was.
253. Did you defend your patch here vigorously?
(Mr Reilly) I did, very vigorously, yes. In fact it
was my suggestion to try to move some people from the Luton passenger
plant to IBC to try to contribute towards an improvement in profitability
and a reduction in the costs for both Vauxhall and GM Europe.
The next thing we considered was to go to a single shift. But,
in the end, the data that I was presented with indicated that
the only way that GM Europe could take this sort of capacity out,
which it needed to do long-term, not just short-term, was this
move, and it was technically possibly to move the tools which
had been planned for Luton to another plant.
254. It seems extraordinary that the decision
was taken so late. Up until a month or two ago you were busy investing
huge sums of money in the Vauxhall plant and telling us everything
(Mr Reilly) I do not think I told you everything was
lovely. I have read the report I gave and it clearly said at any
time plants are vulnerable. We certainly thought we were bringing
the Vectra to Luton at that time but if you read what I said it
was pretty pessimistic about the industry in total, and we had
to fight very hard to maintain what we had. We still have to do
that for what we have got left. If I can come back to the earlier
part of your question, is this the UK paying for a problem in
Europe? First of all, as I said, the segment is declining here
as well but you have to take the swings and roundabouts unfortunately,
and we have been very successful in recent years. We have got,
going back some time, the Frontera investment here which we produce
for the whole of Europe in Luton, and in Luton also we have the
investment to produce a commercial van for the whole of Europe.
Both of those investments could have easily gone elsewhere which
would have meant we would have had 3,000 less jobs in Luton than
we are going to have. Very regrettably, this proposal we are talking
about is one we did not win.
255. Just looking at the profitability of GM
Europe, how big a factor was what I understand was a pretty hefty
fine levied against Opel in the Netherlands as a result of its
pricing policy in the loss of profitability for GM Europe?
(Mr Reilly) I am afraid I cannot remember the exact
amount of money but it is very minor in terms of the situation.
It is immaterial.
256. You said a moment ago you are not able
to give us any figures for profits either within GM Europe or
General Motors UK as yet.
(Mr Reilly) Well, we have not released them and obviously
the Stock Exchange rules mean we cannot indicate where we are,
other than to say that GM Europe lost 180 million dollars in the
third quarter of the year 2000 and has said that it will lose
more than that in the fourth quarter of the year 2000.
257. There have been some comments about what
is termed the transfer pricing policy of General Motors Europe
in terms of components. In other words, a premium price for components
being paid in the UK in comparison with the same components going
into plants in Germany. Is that accurate? Has that been happening
in terms of transfer pricing policy? Clearly, if that was to be
the case, that would have a pretty detrimental effect on the profitability
of plants here in the UK.
(Mr Reilly) No, not at all. What has happened though
is that we, as Vauxhall, tend to source rather more components
in the UK for the same car produced in Germany, for example, or
Belgium, because of local logistics. Those components are sourced
at the beginning of the model life and of course at the beginning
of the model life the pound was considerably lower than it is
today, so in relative terms as the pound has increased it means
some of those components have got relatively more expensive for
us than the same components being purchased in Deutschmarks or
indeed in euros. So we have been penalised a little in those component
costs by the high pound.
258. But there is no policy within General Motors
Europe of starting to have a transfer pricing policy that would
impact upon one country within Europe as opposed to another?
(Mr Reilly) Not at all, we have to have a very transparent
transfer pricing policy. The tax people in the tax authorities
in every country insist on that and we have not changed our transfer
259. To continue on this business about the
euro and the sterling rate, and you have just talked about the
components, has that been a real factor in the decision? If sterling
were not so high or if we were linked to the euro or in the ERM
would that have been a factor in the decision?
(Mr Reilly) Not in this particular decision, although
I have to say that investment sentiment towards the UK is not
as favourable as it would be if we were either in the euro or
if we declared we were going to get into the euro at some stage.