APPENDIX 4
Memorandum submitted by the Department
of Trade and Industry
1. INTRODUCTION
Vehicle manufacturing is one of the major UK
success stories of recent years. After a serious decline in the
1970s and early 1980s, vehicle manufacture is again a major part
of the UK's economy. Car production in 1999 was the highest since
1972, and exports, at 1.1 million, were the highest ever. Despite
events surrounding Rover and the intended changes at Ford's Dagenham
plant a total of more than £2.6 billion of new investment
has been committed since 1997. Several recent announcements have
confirmed that global manufacturers still see the UK as an excellent
location for their investments:
— Last month, GM announced £189
million of investment in its three main UK assembly plants, including
the production line at Luton for the new X83 van.
— Ford is to consolidate all European
production of Zetec engines at Bridgend: this £18 million
investment comes on top of £216 million invested in the plant
over the last three years.
— Bentley plans to increase its production
six fold over the next five years.
— Jaguar is continuing to increase
production due to its success in the USA, with the Halewood plant
switching to produce the new X400 model.
— Honda have announced £130 million
of investment in Swindon to prepare for the production of two
new models.
— BMW is investing £400 million
in its new engine factory at Hams Hall.
2. THE GOVERNMENT'S
GENERAL APPROACH
The industry in the UK has a number of strengths
which mean that the automotive sector will continue to play an
important role in employment and wealth generation for the foreseeable
future. The Government's overall policy is to build on these strengths.
There are some areas of vehicle manufacture in which the UK can
add significant value, and where we are developing centres of
excellence which can compete with the best in the world. Developments
in these areas, as well as our success with manufacturing process
improvements, can then benefit the rest of the sector, and the
rest of the economy. The UK also has significant ability in research
and technology in the automotive sector.
The Government seeks to: develop and sustain
relationships with vehicle and component manufacturers; to maintain
the UK's attractiveness as a location for investment; to facilitate
the spread of technology, know how and best practice across the
supply chain and the wider economy; to bring together often competing
players for the overall benefit of the industry; and to maintain
its competitiveness as a market for vehicles. Section 3 below
sets out the current situation in the sector, including the challenges
it faces. Section 4 describes the government's specific responses.
3. THE CURRENT
SITUATION IN
THE SECTOR
General
In 1998, the automotive sector employed over
220,000 people and had an estimated turnover of over £40
billion. The sector contributed over 11 per cent of total UK exports.
The UK has attracted the major share of inward investment in Europe,
with Japanese automotive companies alone planning total inward
investment of over £3 billion. Seven of the world's major
vehicle manufacturers have operations in the UK, more than in
any other country in Europe. These major manufacturing enterprises
provide a large amount of employment directly, but also have other
beneficial effects in the economy. They provide a significant
market for UK component manufacturers. They also have an important
role to play in improving the competitiveness of the supply chain,
for example through the spread of lean manufacturing techniques,
and in providing training.
As well as the vehicle manufacturers, 17 of
the world's top 20 automotive component companies also have investments
here. Components Business Europe has estimated that in 1997 the
UK had the third largest components industry in Europe, after
France and Germany, with 5.8 per cent of the world total supplier
sales. There are over 2,000 enterprises engaged principally in
the manufacture of parts and accessories for motor vehicles.
This high level of activity and inward investment
is a reflection of the positive competitive environment which
exists for vehicle manufacturing in the UK. As well as this general
attractiveness to investors, there are a number of more specific
activities and areas in which the UK has a global reputation for
outstanding excellence:
(a) Manufacturing Process Improvement
The advent of Japanese vehicle manufacturing
transplants in the UK, starting with the arrival of Nissan in
1986, had an important impact on the UK component sector and has
provided the opportunity for a whole generation of UK managers
to understand the principles and practice of lean manufacture.
A number of UK component companies are now acknowledged best practitioners
in lean techniques and continuous improvement. Unipart is a particularly
strong example of this. Indeed the UK is recognised, after the
US, as the leading practitioner of lean manufacturing in automotive.
Japanese vehicle manufacturers in the UK have
told the DTI that quality levels in their UK supply base generally
match those found elsewhere in Western Europe and one leading
company has said that it has found UK suppliers' management more
open and receptive to the need for change than some other European
countries. However there remains considerable room for improvement.
The UK has been able to make a good start on improving the competitiveness
of the automotive supply chain by developing the opportunity to
accelerate the spread of lean manufacturing and modern approaches
to manufacturing process improvement.
(b) Design Engineering
The modern automotive market requires a high
rate of model change and is fragmented into an increasing number
of different niches. By identifying a new niche early and developing
products to match it, vehicle manufacturers can, at least initially,
boost their returns. Major manufacturers have to offer a number
of different variants to exploit the full sales potential of their
product base eg sports utility variants, cabriolets, roadsters,
MPVs etc. As a result, even the most comprehensively resourced
vehicle manufacture is not sufficiently staffed to meet all its
design requirements and has to outsource.
The UK's Design Engineering sector has prospered
in these circumstances on the basis of a global reputation for
excellence. Sales almost doubled in the five years to 1999. It
has a wide range of capabilities covering the initial product
concept, vehicle design, design analysis, powertrain design and
development, prototype manufacture, safety analysis, the use of
materials and composite technologies, electronic system design,
testing and simulation and production. To this portfolio is added
the proven ability to integrate effectively with vehicle manufacturers
and first tier design and production teams.
The UK design engineering sector contains a
number of acknowledged world leaders in particular areas of vehicle
technology including power units and drivelines, chassis design
and vehicle dynamics, advanced materials and manufacturing methods.
The sector is also heavily engaged in seeking to improve the environmental
performance of its products. The Government seeks to encourage
this activity and to ensure that the UK maintains its global reputation
(see section 4).
(c) Technology and Skills
Within the UK there at least 37 university centres
of excellence covering every relevant automotive technology and
skill. Several have developed world class capabilities in technologies
including sound and vibration research, composites, vehicle and
pedestrian safety, aerodynamics, ergonomics, advanced electronics
materials science and lubricant research. There is a strong focus
on internal combustion engine research and 30 of these centres
collaborate with 30 companies in the Universities Internal Combustion
Engine Group. The UK is also the world leader in the education
of aesthetic and industrial design for vehicles, particularly
with the world-wide diaspora of students from the Royal College
of Art's unique course in this field. The majority of these centres
of excellence operate internationally and together they do work
for all the major international vehicle manufacturers. Our centres
of excellence in technology and skills, together with the Design
Engineering sector, are important elements in the synergy with
the UK's overall strength in high performance automotive engineering.
(d) Motorsport
British drivers, designers and engineers are
at the forefront of the international scene. For example, the
majority of Formula 1 cars are designed and built in Britain.
They use British gearboxes and transmissions all of which are
equipped with specialist components designed, developed and manufactured
in the UK. Our thriving high performance automotive engineering
network is a major UK asset in global automotive competition,
and is a sector where we excel in knowledge-based manufacturing.
It is estimated that the motorsports industry has an annual turnover
of £1.5 billion, of which 60 per cent is exports. It is also
a good example of how the principles of the "knowledge based
economy" can apply in a manufacturing sector. The developments
used to gain an advantage at this cutting edge of vehicle manufacture
often become standard in a few years for the mass-produced vehicles
driven on the roads.
Challenges
Despite the many strengths which the UK has
as a location for vehicle and component manufacture, there are
inevitably some areas where the country faces challenges in maintaining
and enhancing the current level of activity:
(a) Overall Productivity
Despite the improvements in productivity made
in recent years by vehicle manufacturers and by many component
suppliers, the UK's overall productivity (measured by Gross Value
Added per person) is lower than that of our main competitors in
the EU. This is a situation similar to that in some other sectors
of manufacturing. The reasons are complex but include issues such
as the macroeconomic instability of the past, which discouraged
long-term planning and investment (including in training); the
relative value of the products manufactured; capital intensity;
and labour productivity. However, productivity growth remains
steady and productivity in the UK is in general increasing more
rapidly than our competitors. Figures show that output per job
in automotive components was higher than manufacturing in general
each year from 1988-99.
(b) Position of UK Component Suppliers
Component companies face a particularly tough
agenda in competitiveness terms because of a number of industry
trends:
— vehicle manufacturer mergers and
joint development projects
— mergers within the supply base
— the move towards major module and
system sourcing
— the spread of global platforms
— the opportunities and threats of
e-commerce
One effect of these trends is to displace smaller
firms from the first tier of the supply chain to the second and
third tiers, where they need to develop a wider range of skills
to operate effectively and to be able to respond to new supply
chain relationships.
(c) Maintaining Levels of UK Content
It is becoming increasingly difficult in this
globalised sector to define exactly what counts as home country
production: very often a product will include components made
in the UK by a foreign-owned firm and components made abroad by
a UK owned firm. UK based manufacturers have traditionally had
a high level of UK content (60-70 per cent+), and they have often
built up very strong relationships with first tier suppliers,
which have had significant beneficial effects on productivity.
However, this benign state of affairs is now under unprecedented
pressure (as in other sectors) because of the ineluctable globalisation
of the automotive industry.
(d) Exchange Rate Pressures
The Government understands the concerns of vehicle
and component manufacturers over the weakness of the Euro. But
it is determined to take a long-term view: it would be wrong to
let short-term pressures lead back to the policies that produced
boom and bust in the past. Short-term fixes would be the biggest
threat of all to industry, with the illusion of temporary relief
followed by the reality of long-term damage.
The Government believes that its emphasis on
long-term macroeconomic stability will ensure the UK remains an
attractive location for investment. In the shorter term, the Government's
role is to encourage the spread of best practice to improve the
competitiveness of the UK supply chain so that it can survive
the current situation and be ready to respond when the exchange
rate improves. The long-term future of the sector will not be
secured by short-term manipulations of the exchange rate, but
by maintaining and building on the improvements in productivity
and competitiveness which the sector has already made.
(e) Provision of State Aids by Competitors for
Investment Projects
Companies facing major investment decisions
in the competitive global market place necessarily take into account
the potential availability of state aid in competing locations.
There are specific rules governing State aid for motor vehicles
in the EU, set out in the Community Framework for State aid in
the Motor Vehicle Industry (OJEC c 279 15.9.1997). Their purpose
and effect is to impose tighter limits on the amount of aid to
support investment. There are no aid schemes in the Community
specific to this sector. Aid that is granted comes from regional,
R&D, training and rescue and restructuring budgets. In comparing
figures over time, the European Commission uses a rolling three
year period, as this gives a more accurate indication of trends.
The most recent figures published by the Commission on aid to
this sector showed an 18 per cent decrease in the total amount
provided between the period 1994-96 and 1995-98. However this
figure reflects only a small number of cases. The annual figures
by country published by the European Commission for approved state
aid to the motor vehicle sector are:
MILLIONS OF EUROS
| |
1993 | 1994
| 1995 | 1996
| 1997 | 1998
|
| Austria | —
| — | 0
| 10 | 26
| 2 |
| Belgium | 0 |
0 | 32
| 0 | 0
| 6 |
| Germany | 106
| 298 | 3
| 340 | 59
| 163 |
| Spain | 43 |
36 | 318
| 202 | 1
| 9 |
| Finland | —
| — | 0
| 0 | 6
| 0 |
| France | 31 |
0 | 0
| 83 | 6
| 52 |
| Italy | 0 |
227 | 0
| 0 | 109
| 7 |
| Netherlands | 0
| 0 | 7
| 0 | 6
| 0 |
| Portugal | 0
| 0 | 0
| 103 | 0
| 0 |
| Sweden | —
| — | 0
| 0 | 1
| 0 |
| UK | 62 |
12 | 0
| 72 | 66
| 101 |
| TOTAL | 242
| 573 | 360
| 810 | 380
| 340 |
Sources: Commission. Seventh Survey on State aid
in the European Union May 1999, page 14. Eighth Survey on State
aid in the European Union May 2000, p 26.
(Note: Figures cited for particular years may
include offers made by member state governments in previous years.)
4. HOW THE
GOVERNMENT IS
RESPONDING
The Government's first priority on coming to office was to
secure long-term economic stability and put an end to the damaging
cycle of boom and bust, which in the late 1980s and early 1990s
saw interest rates rise to 15 per cent for a whole year. As a
result of the Government's efforts we now have a sound and credible
platform of stability: the economy is expected to expand 2¾
to 3¼ per cent this year, and to grow on trend in later years.
These developments will benefit the automotive sector as well
as the economy generally.
Relationships with UK-based manufacturers
As mentioned above, there is a significant number of vehicle
and component manufacturers located in the UK. The Government
is keen to encourage other manufacturers to locate in the UK,
as part of its general inward investment work, but it also has
a very important ongoing role in maintaining and deepening relationships
with the manufacturers already here. Government officials have
regular contacts at many levels with the companies. These contacts
enable the companies to make known any concerns they may have
with the UK as a base for manufacture, but also allow companies
and officials to explore ways in which Government can help improve
the situation, both overall, and for individual companies. The
Government sees these relationships as important in encouraging
the manufacturers to see the UK as a suitable location for on-going
investment. The Government also uses these relationships to help
achieve its aim of improving productivity in the sector and spreading
best practice down the supply chain. This has a particularly important
knock-on effect for supply companies which do not only supply
to the automotive sector: the improvements which vehicle manufacturers
are pioneering can thus improve productivity in other sectors.
Regional Selective Assistance (RSA)
In certain cases, the Government considers it appropriate
to offer RSA to secure investment for disadvantaged areas of Great
Britain. The amount of RSA offered to the vehicle sector in the
past five financial years is set out below. It should be pointed
out that the majority of the investment in the automotive sector
in the UK is not supported by any direct Government financial
assistance. There are strict EU rules governing offers of RSA
to those sectors defined by the EU as the motor vehicle industry
and in these sectors RSA may only be used to tip the balance in
Great Britain's favour where an area eligible for assistance (as
defined by the EU's assisted areas map) is in direct competition
with an overseas location for the investment, and where the jobs
involved, and overall benefit to the economy, are sufficient to
justify Government intervention. All projects must also meet the
criteria of the scheme. In the automotive sector, the Government
also uses RSA as part of its efforts to encourage consolidation
by manufacturers, and to improve productivity and to spread these
improvements down the supply chain.
RSA—OFFERS ACCEPTED IN GB BY MOTOR VEHICLE SECTOR
BETWEEN 1 APRIL 1995 AND 31 MARCH 2000
| Region | Number of
Offers
| RSA Grant
(£)
| Estimated Jobs
NewSafeguarded
| Project costs
(£)
|
| East | 7 |
483,000 | 107
| 18 | 2,525,550
|
| East Midlands | 14
| 1,520,000 | 264
| 37 | 13,706,000
|
| London | 3 |
54,000 | 8
| 9 | 638,000
|
| North East | 35
| 51,517,000 | 1,476
| 3,658 | 447,666,600
|
| North West | 33
| 63,828,500 | 1,967
| 7,503 | 488,027,747
|
| South East | 9
| 3,164,000 | 416
| 32 | 20,862,389
|
| South West | 2
| 35,000 | 15
| — | 205,750
|
| West Midlands | 44
| 104,220,000 | 4,991
| 6,823 | 747,256,704
|
| Yorkshire & Humberside | 17
| 3,541,700 | 751
| 79 | 69,936,238
|
| England | 164
| 228,363,200 | 9,995
| 18,159 | 1,790,824,978
|
| Scotland | 17
| 7,349,000 | 618
| 62 | 43,455,000
|
| Wales | 41 |
46,334,000 | 4,046
| 2,706 | 679,744,840
|
| GB | 222 |
282,046,200 | 14,659
| 20,927 | 2,514,024,818
|
Research and Technology
The automotive sector is under increasing pressure to improve
the environmental performance of its products. There is considerable
R&D activity in this area, as companies see there is competitive
advantage to be gained from this aspect of their products. However,
there is also a role for Government in supporting this activity.
This role includes accelerating the pace of development and of
commercial exploitation of new technologies; co-ordinating work,
particularly by encouraging links between industry and academia;
and focusing activity on areas where the UK can make real technological
advances. This work is mainly carried out under the banner of
the Foresight Vehicle programme.
Foresight Vehicle, the UK's national automotive R&D programme,
aims to realise new technology options which will underpin the
UK's future transport policy and our need for sustainable development.
It aims to stimulate suppliers to develop and demonstrate market
driven enabling technologies for future motor vehicles. Under
the Foresight Vehicle LINK programme over £12 million of
Government funding is being made available for research partnerships
that bring together UK resources and expertise to create components
and systems for vehicles of the future. The focus will be on developing
technologies for use in mass-market vehicles of 2020. To date
the Foresight Vehicle research portfolio is worth over £75
million.
The programme brings together representatives from UK, academia,
research and technology organisations, user groups, public sector
bodies and government departments in a network of over 400 organisations.
It aims to support the development and exploitation of innovative
technologies for mass market vehicles. It aims to focus resources
on areas where the UK can make real technological advances, and
to attract deep-rooted automotive R&D investment into the
UK.
SMMT-Industry Forum
The Industry Forum is the Society of Motor Manufacturers
and Trader's initiative, backed by the Government, to give the
UK a more competitive automotive industry for the 21st century.
Through the Industry Forum, the major vehicle manufacturers and
first tier suppliers are working together to improve the UK automotive
component supplier base—a world-unique collaboration amongst
competitors. One of its aims is to help UK suppliers come to terms
with the New supply chain relationships which are forming due
to the trends outlined in Section 3.
EU and WTO rules prohibit any agreements between governments
and OEMs regarding the level of home country content which there
should be in the final product. However, the Government aims to
maintain and where possible increase the level of UK content in
UK manufactured vehicles by helping British component manufacturers
to increase productivity and become more competitive. Of course,
any improvements will also increase the ability of UK companies
to export their products. The Industry Forum is one important
method for achieving this objective. The Industry Forum is industry-led
but works closely in partnership with the DTI. The work of the
Forum contains a number of strands.
(a) Process Improvement: Master Class
The Forum's main current activity is the "Process Improvement;
Master Class' project. This is targeted at improving single companies
within the supply chain, and brings to the SMMT expert engineers
skilled in shop floor improvement activities, two from each of
Nissan, Toyota and Honda in Japan, and one from each of VW and
GM in the UK. Together they have been developing a "common
approach" to shop-floor process improvement activities, based
on the best from each company. They are currently training over
30 young British engineers recruited by the SMMT, together with
secondees from the industry, in these techniques. At the same
time they are undertaking process improvement activities in mainly
second and third tier component companies. The DTI is giving financial
support (£6.5 million over five years). So far over 260 companies
have been involved in the Master Class activity, with often dramatic
results. (For example, value added per person increasing by up
to 100 per cent, people productivity increasing by an average
of 40 per cent).
(b) Supply Chain Improvement Activity
Besides the Master Class, this is Industry forum's other
main improvement activity. The aim is to eliminate "interface
waste" between the companies by improving communication and
working relationships along a supply chain. This is shop-floor
activity in which different companies in a supply chain provide
members of the work-shop team. The team-work is designed to improve
working relationships and communication, and give members an insight
into the shop-floor operations of suppliers and customers. The
results are measured using the same hard quantitative manufacturing
process measures of quality, cost and delivery performance as
for the Master Class, together with a more subjective set of measures
of partnership.
(c) New Products
One of the new products recently introduced by Industry Forum,
Team Leader Training takes a group of employees, usually from
one company, through three week long modules, mixing "hands-on"
and learning by doing with theoretical and classroom activities.
After each module the course members are left with a project to
complete, based around their work, relating to the teaching points
covered during the module. By the end of the third week course
members should be equipped with the skills necessary to develop,
implement and sustain the continuous improvement process.
New activities, such as Value Stream Mapping and Continuous
Improvement for very small companies are currently being developed
to add to Industry Forum's range of offerings to the industry.
5. THE FUTURE
The vehicle and component manufacturing sector has re-established
itself as an important part of the UK economy, and it looks set
to maintain this role. However, this is not a static sector, and
Government has a role to play in helping UK based manufacturers
and suppliers to adapt to future changes.
The trend amongst OEMs to reorganise their global and European
operations is creating another form of centre of excellence, which
will become increasingly important in the future. OEMs are now
looking to create centres of excellence for specific activities
to rationalise production. The UK is proving successful is securing
these, such as Ford's recent decision to move some of its engineering
from the USA to the UK, and to establish Dagenham as a global
centre of excellence for diesel engines. Activities such as these
tend to be in the higher-value added, knowledge based side of
the work. The UK's current strength in this side of the work,
and our attractiveness as a location for inward investment, should
prove to be assets in securing more of these centres.
Many observers report that the scale of the challenge facing
traditional SMEs in the UK automotive sector is not sufficiently
appreciated by the management of these firms. Raising awareness
and acting as a change agent must remain a key priority and to
do this DTI must continue to work with a wide range of national
and regional partners. The success of Industry Forum at helping
a wide range of companies to establish some elements of the modernisation
agenda for the components sector is a major asset. Consideration
is currently being given to how the forum might extend its range
of services to tackle more of the items on that agenda.
As the technological base to support the vehicle of the future
is expanded, then the focus of the Government's R&D support,
particularly as provided through the Foresight Vehicle programme,
will need to shift to issues of exploitation. This is likely to
involve a change of emphasis within the programme, further developing
the already extensive Foresight Vehicle network and collaboration
with a range of other programmes, policy instruments and partners.
A start has already been made on this by using the Foresight Vehicle
analysis to provide the Invest in Britain Bureau with knowledge
based inward investment priorities as part of its new strategy.
The advances in the automotive sector in manufacturing processes
are now setting a benchmark for other engineering sectors. For
example, the Industry Forum is now being duplicated in the aerospace
sector, which is a symptom of how that sector has started to take
advantage of the expertise in modern manufacturing processes which
the UK automotive sector has acquired. Encouraging this spread
of best practice within and between sectors is an important role
for the Government. The vehicle manufacturing sector has been
the pioneer for many modern advances in knowledge-based manufacturing,
which will become increasingly widespread in the future. The UK
has developed significant strengths in these modern techniques,
and these can provide the foundation for a flourishing manufacturing
sector in the future.
July 2000
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